Privatization in Russia: Its Past, Present, and Future

By Kim, Ken I.; Yelkina, Anna | SAM Advanced Management Journal, Winter 2003 | Go to article overview

Privatization in Russia: Its Past, Present, and Future


Kim, Ken I., Yelkina, Anna, SAM Advanced Management Journal


Russia is extremely important to the U.S. both politically and economically. Politically, a stable and democratic Russia is crucial to the security

of the United States and the world. Economically, Russia's vast natural resources, particularly petroleum, and its population of 150 million, represent potentially lucrative business opportunities.

Yet, Russia presents many challenges. Politically, the first challenge is its sluggish progress toward full democracy. One of the key causes is the country's historical alienation from Western ideologies and experiences, as well as its long history of rule by dictatorships. Second, Russia's characteristic bravado and pride as a nation, especially as a recent superpower, appear to foster a stance in the global arena that worries and irritates the U.S. Third, Russia's stockpiles of nuclear weapons and the suspected lax security are continuous causes of concern. In the economic arena, business opportunities come with many risks, including a lack of rule of law, bureaucratic excesses, corruption, a lack of transparency and accountability, crime, and physical danger to expatriate managers.

Notwithstanding these challenges, much progress has been made in Russia. The country has become more stable, although many argue at the expense of democracy. Investment is growing, and key sectors such as oil are experiencing renewed vigor. Although criticism about the nature of Russian privatization abounds (e.g., Chazan, 2002; Stiglitz, 1999), progress has been made on this front as well. Since privatization entered the so-called case-by-case phase in 1997, it is proceeding in a more orderly, legal fashion. In addition, foreign investors can more easily access information on enterprises available for privatization.

The authors believe that privatization is the key to the ultimate economic prosperity and political reform of Russia. Therefore, for U.S. businesses, much of the prospects for doing business with and in Russia hinges on the success of privatization. The purpose of this article is to educate decision-makers in U.S. firms on the vital processes of Russian privatization, so that they will be able to make more informed and accurate business decisions. To this end, we review the past and present of Russian privatization and attempt some predictions on its future.

Stages of Russian Privatization

A review of literature on Russian privatization reveals that before it began on a large scale in 1992 there was a pre-privatization stage called the commercialization stage (late 1980s-1992). Privatization itself, which followed commercialization, consisted of three stages: mass privatization (1992-1994), cash privatization (1994-1997), and case-by-case privatization (1997-present) (Blasi, Kroumova, and Kruse, 1997; Puffer, McCarthy, and Naumov, 2000; Radygin, 1999)--see Table 1.

Commercialization (late 1980s-1992)

Having been state run for almost 70 years, the Russian economy in the mid-1980s was on the brink of collapse. Implemented by the former Communist Party Secretary Mikhail Gorbachev, the policies of glasnost (openness) and perestroika (political and economic restructuring) spearheaded profound changes in 1985, which were intensified during his term as president of the USSR from 1988 to 1991.

The main goal of the government at this time, now referred to as the commercialization stage, was building up capital to prepare the country for subsequent privatization. One of the key policies was the creation of cooperatives, small businesses, and joint ventures (Puffer et al., 2000). As a result, this stage gave rise to many semi-private enterprises and helped lay the foundation for real privatization.

Mass privatization (1992-1994)

Russian privatization was officially launched in October 1992, when the voucher investment funds, known in Russia as "Check" Investment Funds, were created under the Presidential Decree no.

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