Deprivatization Since 1992, Approximately 70,000

¶ … Deprivatization

Since 1992, approximately 70,000 state-owned enterprises in Russia were privatized. Many of the private buyers were foreign companies and investors, for example from the United States and Western Europe. The idea was to move from a centrally planned economy to a market system.

Yet in the late 1990s a weak economy caused great concern among Russian voters. Politicians, such as Moscow's Mayor Yuri M. Luzhkov began promoting deprivatization plioces - or as the locals put it, deprivatizatsia. Under this policy certain past privatizations would be declared illegal and the transactions would be reversed. The company then either would be run as a state-owned enterprise or sold to another party. For example, in October 1999, a court stripped Wall Street's Kohlberg Kravis Roberts and the U.S.-Russia Investment Fund of their majority interest in the Lomonosov Porcelain Factory in St. Petersburg. These companies had purchased the factory in 1998, but the courts ruled that the company's initial privatization five years earlier was illegal. Sources suggested that the company was likely to be resold to Soviet-era managers who were set to lose their jobs when the new investors entered the picture.

Politicians, such as Luzhkov, vow that not all privatizations will be reversed, only the illegal ones. But the current problem is that privatization legislation is nebulous about what could be termed a violation. Anything from a missing piece of paper in the original tender offer to investment requirements not being met might be ruled a violation. And virtually anyone could file a complaint to trigger an inquiry into a past deal. This essay is an analysis into the implicaitons of deprivitazation

By adopting a deprivatization base for its country, Russia seems to be returning to its old ways, setting off a future of economic liberalization in Russia that does not look propitious for its country.

Impact on investors of privatized firms

Investors of privatized firms would be less keen to continue investing in Russian companies not knowing whether Russia might assert control over these firms thus placing their assets into jeopardy. Once Russia's Federal Security Service (FSB) is involved- which Putin has threatened that it will -- investors could likely fear for their safety too.

Indeed, a cursory glance at the facts that Russia had already claimed close to half of industrial outputs, as well as issued further renationalization decrees, and implemented prospective laws that impose monitoring of financial transactions -- are enough to dissuade investors of privatized Russian firms to continue investing in those companies.

Deprivatization will also stifle the initiative of these government-owned firms to be innovative since these different firms will no longer operate under a market-run (consequently competitive) environment. This might likely have a negative impact on the company itself further dissuading private investors from investing in the company.

Impact on foreign investment in Russia

Russia's trend towards deprivatization worries many foreign investors who see a pattern of return towards Russia's former controlled economy. There are at least two major sign that indicate this: firstly, Russia's takeover of Gazprum Holdings which represents most of Russia's largest media outlets including her most famous paper Izvestia; secondly, Russia's takeover of large parts of the natural resource production of the nation.

Given the notorious reputation of the Russian government, foreign investors might be inhibited from getting involved in Russian companies, particularly since a proposed bill passed in 2008 states that:

A foreign company will only be able to buy more than 50% of the shares in a Russian company classified as 'strategic' with prior permission from the Russian government. State-owned foreign companies will be allowed to buy only small stakes of less than 25% of 'strategic' Russian companies. The Federal Security Service (FSB) will monitor the law's enforcement. If it finds that foreigners have been buying up shares in strategic enterprises via front firms, the Russian government will have the right to protest against such purchase in court. (Quoted by Anderson, 2008, 57)

If the FSB garners authority to monitor all cash flows and transactions allegedly in order to protect Russia from foreign control, implications could extend to Russia, seizing foreign-owned private property. The economic future does not look too propitious for foreign investors.

Most ominously, as Anderson (2008) points out, it is no longer the private company that will sell itself, but Russia that will now serve as its marketing agent. What this implies is that promotion of the firm will now transfer to promotion of the state, creating a potentially conflictual situation for the West where Russia will attempt to maximize its show of national power abroad, aside from potentially introducing opacity and corruption to its Western business partners. The Russian foreign policy perspective still sees undermining western influence as being the best way to raise its own. Such prospects are not encouraging for building business partnerships with Western governments.

Who gains from deprivation? Who loses?

In many instances, the government seems most likely to profit as 'Gazprom' illustrates. Gazprom accounts for approximately 25% of Russian tax revenue with its logo that it is "a global energy leader providing secure deliveries of natural gas and other fuels and raw materials to the world and domestic energy markets." (Quoted Anderson, 2008, 54). Russia also deprivatized the Gazprom Media Holding Company, which not only possess Russia's largest newspaper, the Izvestia, but also owns several large TV channels such as NTV, TNT and several radio stations. Obviously controlling the media would patently serve Russia's interests; it appears to be that she is returning to her old image.

This is particularly so with her assuming control of companies such as Rosoboronexport whose main outlay is finished defense products, auto exports, and raw materials. An analysis of the companies who have suffered under deprivations show that a majority of them represent the industrial activity, particularly in the natural resource segment, of the nation.