Privatization is the one bright spot on the generally bleak Russian economic landscape
Starting from less than zero in November 1991, a small, determined, and often beleagured group of Russian reformers---with some important external support---has been able to:
The result is that by the end of June 1994, between 12,000 and 14,000 medium-size and large enterprises had been transferred to private ownership. These firms employed more than 14 million people, or about half of those employed in Russia's industrial sector. About 40 million Russian citizens had become owners of shares in privatized firms.
These achievements border on the miraculous, having taken place in the absence of consensus on the desirability, scope, and pace of liberalizing reform in general, and privatization in particular, and in the absence of what normally would be considered the requisite administrative and financial resources to implement, monitor, and enforce a privatization program of this magnitude. Yet it was done. The only potentially comparable privatization experiences are those of the former East Germany and the former Czechoslovakia.
In Germany the Treuhandanstalt put more than 10,000 enterprises in private hands between 1991 and 1994---an achievement that cannot and should not be minimized. But German privatization was a case of the integration of a formerly socialist economy into a functioning, indeed flourishing, market economy, an exercise that differs sharply from the total transition that Russia confronted. In Germany an irreplicable combination of West German legal and administrative institutions, West German managers, and West German money eased many of the problems of the integration.
The mass privatization program of the former Czechoslovakia, which transferred 1,491 firms into private ownership in 1992 and 1993, with a "second wave" coming in both successor states that will touch an additional 1,300 firms, is the best and perhaps only comparator to the Russian privatization program. The Czech and Slovak privatization programs are remarkable achievements. Indeed, a few Czechs have suggested that their privatization method is superior to Russia's since no special inducements have been given to insiders. Outsiders, in the form of external investors and investment funds, have played a major ownership and governance role from the outset, and some Czech practitioners and external observers now criticize Russia for not having followed the same course.
Without disputing the impressive Czechoslovakian achievements, it must be stressed that Russia embarked on privatization in circumstances very different from those of the former Czechoslovakia. First, precommunist Russia in 1917 was markedly different from precommunist Czechoslovakia in 1948. It was less industrialized and less capitalist. Second, the length of the communist period in Russia was almost twice that in Czechoslovakia, meaning that in Russia collectivist approaches and habits had more time to take root and become deeply ingrained. Third, and paradoxically, Czechoslovakia benefited from an absence of reform communism. Unlike Hungary, Poland, and to some extent Russia, Czechoslovakia basically maintained the central planning system until the very end. The successor governments thus have not had to debate the scope and pace of liberalizing reform with entrenched, decentralized stakeholders.
All in all, the obstacles to Russian privatization were more numerous and more daunting than those encountered in Germany and Czechoslovakia, or indeed in any other country that has seriously embarked on the process.
The Russian privatization team thus opted for the method that they judged would yield results---and they got them. But as a consequence, the results were tentative and partial. Transfer of ownership to insiders was a striking step, but only a first step. It must now be followed by equally essential second steps opening ownership of privatized firms to external investors and owners. These, in turn, will bring needed capital, market access, managerial know-how, and a bottom-line mentality to privatized companies. External investors will complete the restructuring of firms begun by the transfer of ownership. A significant percentage of restructured firms will become profitable as well as nationally and internationally competitive, and Russia will be well launched on the process of growth and integration into the global economy. Such is the hope.
To put it mildly, much stands in the way of the achievement of this grand aspiration. Ignoring the evident macroeconomic and macropolitical deficiencies of present-day Russia, and concentrating solely on the privatization process, one encounters a number of critical issues: