Russian PrivatizationRussian Privatization

Jordan FordJordan Ford

OutlineOutline

• Basic InformationBasic Information• Background Leading to PrivatizationBackground Leading to Privatization• DefinitionDefinition• Stages of PrivatizationStages of Privatization

– Mass Privatization (I)Mass Privatization (I)– Loans for Shares (II)Loans for Shares (II)– 1998 Financial Crisis (III)1998 Financial Crisis (III)

• Overall OutcomeOverall Outcome• Further ResearchFurther Research

RussiaRussia

Basic InformationBasic Information

• Capitol: MoscowCapitol: Moscow

• Current Govt. Structure : FederationCurrent Govt. Structure : Federation

• Currently in Power: Vladimir Putin Currently in Power: Vladimir Putin

http://www.cia.gov/cia/publications/factbook/geos/rs.html

Basic Info. (cont.)Basic Info. (cont.)

• GDP (PPP): $1.535 trillion GDP (PPP): $1.535 trillion (2005 est.)(2005 est.) – Compared to USA: $12.37 trillion Compared to USA: $12.37 trillion (2005 est.)(2005 est.)

• GDP Growth Rate: 5.9% GDP Growth Rate: 5.9% (2005 est.)(2005 est.)

• GDP per capita (PPP): $10,700 GDP per capita (PPP): $10,700 (2005 est.)(2005 est.)

• Inflation Rate: 12.9% Inflation Rate: 12.9% (2005 est.)(2005 est.) http://www.cia.gov/cia/publications/factbook/geos/rs.html

History Leading to History Leading to PrivatizationPrivatization

• Repeated devastating defeats of the Russian Repeated devastating defeats of the Russian army in World War I army in World War I

• Overthrow in 1917 of the imperial household Overthrow in 1917 of the imperial household

• The Communists under Vladimir Lenin seized The Communists under Vladimir Lenin seized power soon after and formed the USSR. power soon after and formed the USSR.

• Iosif Stalin (1928-53) strengthened Russian Iosif Stalin (1928-53) strengthened Russian

dominance of the Soviet Uniondominance of the Soviet Union

History (cont.)History (cont.)

• General Secretary Mikhail Gorbachev General Secretary Mikhail Gorbachev (1985-91) introduced openness and (1985-91) introduced openness and restructuring in an attempt to modernize restructuring in an attempt to modernize CommunismCommunism

• This openness splinter the USSR into 15 This openness splinter the USSR into 15 independent republics in December 1991 independent republics in December 1991

• Which leads us to why Russia Which leads us to why Russia privatized…privatized…

DefinitionDefinition

• PrivatizationPrivatization– Conversion of a state run company into Conversion of a state run company into

a public company, often accompanied a public company, often accompanied by a sale of its shares to the general by a sale of its shares to the general public.public.

– Also known as: Denationalization Also known as: Denationalization

PrikhvatizatziyaPrikhvatizatziya Phase I: Mass PrivatizationPhase I: Mass Privatization

• 1991: First privatization laws passed1991: First privatization laws passed• October 1992: Voucher privatization October 1992: Voucher privatization

beginsbegins• December 1992: Start of auctionsDecember 1992: Start of auctions• Jan. 1992: Price Controls Lifted “Shock Jan. 1992: Price Controls Lifted “Shock

Therapy” Therapy” • December 1993: New Constitution December 1993: New Constitution

RatifiedRatified• June 30, 1994: End of ‘Phase I’June 30, 1994: End of ‘Phase I’

http://www.pitt.edu/~gmmst11/russ0871/timeline.html

PrikhvatizatziyaPrikhvatizatziyaPhase IIPhase II

• July 22, 1994: Yeltsin announced ‘Phase II’July 22, 1994: Yeltsin announced ‘Phase II’• 1995: Sales of larger, high-value enterprises to 1995: Sales of larger, high-value enterprises to

financial/industrial groups financial/industrial groups • Loans-for-Shares Loans-for-Shares

– Govt. Need for RubleGovt. Need for Ruble– Banks loan Ruble to StateBanks loan Ruble to State– Collateral was shares in state-owned companiesCollateral was shares in state-owned companies– Auctions Auctions – Companies bought for fraction of worthCompanies bought for fraction of worth

• Yukos incidentYukos incident• 1996: Yeltsin elected to second term 1996: Yeltsin elected to second term • 1997: End of Phase II 1997: End of Phase II

http://www.cipe.org/publications/fs/ert/e32/e32_09.htm

1990-19961990-1996

Privatization and EmploymentSource: World Bank, Private Sector Development in Europe and Central Asia

0

20000

40000

60000

80000

100000

120000

140000

1990 1991 1992 1993 1994 1995 1996

Nu

mb

er o

f E

nte

rpri

ses

0.00%5.00%10.00%15.00%20.00%25.00%30.00%35.00%40.00%

Pri

vate

Sec

tor

Sh

are

Total Number of Enterprises Privatized Each Year Private Sector Share of Employment (percent)

PrikhvatizatziyaPrikhvatizatziyaPhase IIIPhase III

• 1998: Govt. tries various measures to make the process more fair1998: Govt. tries various measures to make the process more fair

• Drop restrictions on foreign participation and instituting the Drop restrictions on foreign participation and instituting the valuation of assets by international advisors valuation of assets by international advisors

• Aug. 1998: Financial CrisisAug. 1998: Financial Crisis– collapse of Russian marketscollapse of Russian markets– currency (Ruble Collapse)currency (Ruble Collapse)– economy economy

• 1999: High oil prices and cheap ruble help with economic rebound1999: High oil prices and cheap ruble help with economic rebound

• 2000: Investment and Consumer Demand2000: Investment and Consumer Demand– Real fixed capital investments have averaged gains greater than 10% Real fixed capital investments have averaged gains greater than 10%

over the last five years over the last five years

http://www.cipe.org/publications/fs/ert/e32/e32_09.htmhttp://library.findlaw.com/1998/Sep/1/128169.html

PrikhvatizatziyaPrikhvatizatziyaPhase IIIPhase III

• Russia ended 2005 with its seventh Russia ended 2005 with its seventh straight year of growth, averaging 6.4% straight year of growth, averaging 6.4% annually since the financial crisis of 1998. annually since the financial crisis of 1998.

• Russian foreign debt declining from 90% of Russian foreign debt declining from 90% of GDP to around 36%. GDP to around 36%.

• These achievements, along with a renewed These achievements, along with a renewed government effort to advance structural government effort to advance structural reforms, have raised business and investor reforms, have raised business and investor confidence in Russia's economic prospects. confidence in Russia's economic prospects.

http://www.cia.gov/cia/publications/factbook/geos/rs.html

GDP

$0

$200,000,000,000

$400,000,000,000

$600,000,000,000

$800,000,000,000

$1,000,000,000,000

$1,200,000,000,000

$1,400,000,000,000

$1,600,000,000,000

1989-2004

Poland GDP (current US$)Russian GDP (current US$)Ukraine GDP (current US$)Poland GDP (PPP)Russian GDP (PPP)Ukraine GDP (PPP)

Analysis Analysis

• Declining GDP up until the Financial Crisis of 1998Declining GDP up until the Financial Crisis of 1998• Phase II had more decline was a result from the Phase II had more decline was a result from the

selling of firms and corruption selling of firms and corruption • Relatively higher GDP compared to other Relatively higher GDP compared to other

transition countriestransition countries• Poland has a slowly increasing GDP from 1990-Poland has a slowly increasing GDP from 1990-

PresentPresent• Ukraine seems to be effected by the financial Ukraine seems to be effected by the financial

crisis of Russia (Their economy seems to crisis of Russia (Their economy seems to stagnate) stagnate)

Comparison Between Other Comparison Between Other Transitioning Countries Transitioning Countries

GDP Growth %GDP Growth %

Infaltion

0

200

400

600

800

1000

1200

1400

1600

1800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1990-2004

Ann

ual %

Inf lation (consumer prices)

Inf lation (food prices)

Inf lation (GDP deflator)

OutcomeOutcome

• Rapid mass privatization is likely to lead to Rapid mass privatization is likely to lead to massive corruption by managers and controlling massive corruption by managers and controlling shareholders unless a country has a good shareholders unless a country has a good infrastructure for controlling corruption.infrastructure for controlling corruption.– Russia accelerated the self-dealing process Russia accelerated the self-dealing process – Which lead to CorruptionWhich lead to Corruption– Lack of Tax lawsLack of Tax laws

• Labor productivity gain, 1989-1998Labor productivity gain, 1989-1998• Hungary (Gradual): 29%Hungary (Gradual): 29%• Poland (Gradual): 36%Poland (Gradual): 36%• Czech Republic (Rapid): 6%Czech Republic (Rapid): 6%• Russia (Rapid): 33%Russia (Rapid): 33%Source: Economic Commission on Europe, Economic Survey of Europe, 1999Source: Economic Commission on Europe, Economic Survey of Europe, 1999

OutcomeOutcome• Developing the institutions to control self-dealing Developing the institutions to control self-dealing

is central to successful privatization of large is central to successful privatization of large firms.firms.

• Privatization matters in the long run!Privatization matters in the long run!– Russia facilitated privatization politically Russia facilitated privatization politically

• However! Russia is not out of the woods yet! However! Russia is not out of the woods yet! – Economic growth slowed to 5.9% for 2005 while Economic growth slowed to 5.9% for 2005 while

unemployment and inflation remain high. unemployment and inflation remain high. – Russia's manufacturing base is decaying and must be Russia's manufacturing base is decaying and must be

replaced or modernized if the country is to achieve replaced or modernized if the country is to achieve broad-based economic growth. broad-based economic growth.

– weak banking systemweak banking system– a poor business climate that discourages both domestic a poor business climate that discourages both domestic

and foreign investorsand foreign investors– corruption and widespread lack of trust in institutions. corruption and widespread lack of trust in institutions.

Further ResearchFurther Research

• Do crisis’ fuel revival in a diminishing economy? Do crisis’ fuel revival in a diminishing economy? – More research on other struggling transition economiesMore research on other struggling transition economies– Unemployment rateUnemployment rate– Productivity ratesProductivity rates

• Actual intention of the Russian Government Actual intention of the Russian Government – Fueled corruptionFueled corruption

• VouchersVouchers• Loans for SharesLoans for Shares• Analysis of corruption index with GDP and FDIAnalysis of corruption index with GDP and FDI

• Future of Russia?Future of Russia?– Time will tellTime will tell– FDIFDI– Analysis of GDPAnalysis of GDP

Questions?!Questions?!