Privatization in Russia

Table of Contents

1. Introduction

2. Democracy, Market Economy and Privatization

3. Soviet Legacy

4. Gorbachev’s Economic Modernization

5. Privatization under Yeltsin

6. The Opposition

7. Impacts on the Democratization Process

8. Bibliography

1. Introduction

Fragmentation of state authority, lack of a clear legislative base, unreliability of the legal system, collapse of the industry, bisection of the GDP, runaway inflation, capital flight, rises in crime and corruption, tremendous decline in life expectancy: the political, economic and social results of Russia’s transition from plan to market under Yeltsin are devastating. Within a few years the “mighty” Soviet Union fell back from a major power to a third world economy, dealing with problems like mass poverty and epidemics.

In light of these disastrous outcomes the question of what “went right” during the transition process seems to be even more appropriate then the question of what “went wrong”. However, while it seems to be obvious that the stabilization and liberalization attempts by the Russian government predominantly failed, privatization, the third core facet of transition^[1], “has been touted as a one of the major successes of the Russian government’s economic transformation policy. By the beginning of 1996 77.2% of medium-size and large enterprises had been privatised, accounting for 88.3% of total industrial output.”^[2] On the one hand, according to the Russian government’s Western advisers this privatization is the fastest in human history and “seems to be one of the few positive fruit of Russian economic policy since 1991”^[3]. On the other hand, a common point of view is that its implementation led to an unfair distribution of state assets and only benefited a minority of Russian population. This debate is going to be the main focus of my paper. By discussing the general importance of the private sector to a democracy, the aims of privatization, its subsequent reforms, and its results, I intend to assess the contribution of these reforms to the process of Russian democratization.

To avoid misunderstanding, the notion of privatization will be defined in the following as “the privatization of state assets” as opposed to “the privatization of the state” idea introduced by Brovkin in order to describe the abuse of authority and corruption. In terms of temporal delineation, “the process of privatization” will primarily refer to the reforms put in place by the Yeltsin administration between 1991 and 1997. Actions undertaken by Gorbachev and Putin will only be of marginal concern.

2. Democracy, Market Economy and Privatization

“Economic crisis represents one of the most common threats to democratic stability. Conversely, economic growth is conducive to the survival of democracy.”^[4] This relation also implies that economic stability could be understood as an almost necessary condition which forms the frame of a stable democracy. Since historically market economies seem to generate a higher level of welfare than other economic systems, most proponents of democracy would probably argue that capitalism and democracy should go hand in hand.

In the case of Russian transition the argumentation was similar. The main goal of economic reforms was to revive the stagnating industry, increase efficiency, growth rates and well-being of the population, thereby stabilizing the political changes. However, according to market theories, efficiency is deeply rooted in the existence of a strong private sector, which is dominated by motivation and an entrepreneurial spirit. Therefore, the creation of such a competitive sector which did not exist in the Soviet command economy, through privatization of state assets, became one of the high priorities in the Russian transition process.

Nonetheless, in order to give individuals the incentives to work efficiently within the private sector their property rights must be secured. This in turn requires “a strong state, capable of protecting owners’ rights … [and] strong institutions capable of constraining the state.”^[5]

3. Soviet Legacy

In the Soviet “Command – Administrative System” the market was set aside and the state exercised a virtual monopoly of control over all means of production in the economy. Numerous structures and institutions like Gosplan or Council of Ministers were put in place in order to define the goals, define the means of measuring the goals, monitoring the achievement of the goals and rewarding those who were successful in achieving the goals. Taking all the mechanisms of planning, administration, production and control together formed a large scale, highly bureaucratic, and vastly inefficient hierarchical structure which over the years developed special behaviour patterns to legitimize its own existence. Since the five-year-plans set by the top authorities were measured in physical outputs without consideration of financial requirements and market demand, systematic imperfections like price and information distortions or chronic bottlenecks and shortages were unavoidable. Nonetheless, officially the plan had to be fulfilled and various informal adjustive mechanisms made it possible. “Safety Factors” and “Eyewashing” as well as the development of personal relations served as a substitute for fulfilling the plan. Misleading reporting, “all – permeating corruption of management and officialdom of every stripe and rank”^[6], abuse of power, and personal enrichment became especially evident in the terminal decades of the USSR, a period marked by stagnation of the official economy and by rise of parallel markets. Driven by “Blat” and organized crime this shadow economy specialized in using state resources in production, distribution, and sales of products for private purposes. As a result “large illicit wealth [got] in private hands”^[7] and a new class known as the “Nomenklatura” arose. Those people were officials in top positions of organizations who could accumulate enough power and influence to play a crucial role in the privatization process after the breakdown of the Soviet Union.

4. Gorbachev’s Economic Modernization

Gorbachev’s vision of economic modernization was very limited, since he was thinking that many changes could be undergone within the existing system. However, given the immense economic problems USSR was confronted with the necessity for reforms became obvious. In order to overcome the enduring stagnation and to increase levels of efficiency new laws were introduced. Even through most of these reforms remained ineffective because of the strong resistance from the conservative opposition, some laws really brought upon a very important change which turned out to be crucial for the privatization process under Yeltsin:

“The new Law on the State Enterprise, introduced in 1987, was intended to reduce ministerial interference and increase managerial freedom.”^[8] It enabled managers to set up wage differentials as well as fire their workers and gave workers the right to elect the factory director. Nonetheless, these measures did not encourage the creation of incentives and private activity, since “without freedom to set their own prices, firms remained dependent on state subsidies.”^[9] The main result of the reform was a different one: “the ministries had effectively lost control of their enterprises to the managers. The seeds of the ‘insider control’ which dominated the later privatization programme had been sown.”^[10]

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^[1] P. Sutela, “Insider Privatisation in Russia: Speculations on Systemic Change”, Europe-Asia Studies, 46, 3, 1994, 417

^[2] J. Debardeleben, “Attitudes towards Privatization in Russia”, Europe-Asia Studies, 51, 3, 1999, 447

^[3] P. Rutland, “Privatization in Russia: One Step Forward: Two Steps Back?, Europe-Asia Studies, 46, 7, 1994, 1109

^[4] A. Przeworski, M. Alvarez, J. A. Cheibub , F. Limongi “What Makes Democracies Endure?”, Journal of Democracy 7.1, 1996: 39.

^[5] W. Tompson, “Putin and the ‘Oligarchs’: A Two-Sided Commitment Problem”, in A. Pravda (ed), Putin in Perspective, 14

^[6] Stephen S. Cohen, Andrew Schwartz, and John Zysman, “The tunnel at the end of the light: Privatization, Business Networks, and Economic Transformation in Russia”. Berkeley, 1998: 24.

^[7] Ibid.

^[8] P. Rutland, “The Rocky Road from Plan to Market” in S. White, et. al., Developments in Russian Politics, 4th edition, Chapter 8: 154.

^[9] Ibid.

^[10] Ibid.