1. Russian Privatization Jordan Ford

2. Outline Basic Information Basic Information Background Leading to Privatization Background Leading to Privatization Definition Definition Stages of Privatization Stages of Privatization –Mass Privatization (I) –Loans for Shares (II) –1998 Financial Crisis (III) Overall Outcome Overall Outcome Further Research Further Research

3. Russia

4. Basic Information Capitol: Moscow Capitol: Moscow Current Govt. Structure : Federation Current Govt. Structure : Federation Currently in Power: Vladimir Putin Currently in Power: Vladimir Putin http://www.cia.gov/cia/publications/factbook/geos/rs.html

5. Basic Info. (cont.) GDP (PPP): $1.535 trillion (2005 est.) GDP (PPP): $1.535 trillion (2005 est.) –Compared to USA: $12.37 trillion (2005 est.) GDP Growth Rate: 5.9% (2005 est.) GDP Growth Rate: 5.9% (2005 est.) GDP per capita (PPP): $10,700 (2005 est.) GDP per capita (PPP): $10,700 (2005 est.) Inflation Rate: 12.9% (2005 est.) Inflation Rate: 12.9% (2005 est.) http://www.cia.gov/cia/publications/factbook/geos/rs.html

6. History Leading to Privatization Repeated devastating defeats of the Russian army in World War I Repeated devastating defeats of the Russian 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 power soon after and formed the USSR. The Communists under Vladimir Lenin seized power soon after and formed the USSR. Iosif Stalin (1928-53) strengthened Russian dominance of the Soviet Union Iosif Stalin (1928-53) strengthened Russian dominance of the Soviet Union

7. History (cont.) General Secretary Mikhail Gorbachev (1985-91) introduced openness and restructuring in an attempt to modernize Communism General Secretary Mikhail Gorbachev (1985-91) introduced openness and restructuring in an attempt to modernize Communism This openness splinter the USSR into 15 independent republics in December 1991 This openness splinter the USSR into 15 independent republics in December 1991 Which leads us to why Russia privatized… Which leads us to why Russia privatized…

8. Definition Privatization Privatization –Conversion of a state run company into a public company, often accompanied by a sale of its shares to the general public. –Also known as: Denationalization

9. Prikhvatizatziya Phase I: Mass Privatization 1991: First privatization laws passed 1991: First privatization laws passed October 1992: Voucher privatization begins October 1992: Voucher privatization begins December 1992: Start of auctions December 1992: Start of auctions Jan. 1992: Price Controls Lifted “Shock Therapy” Jan. 1992: Price Controls Lifted “Shock Therapy” December 1993: New Constitution Ratified December 1993: New Constitution Ratified June 30, 1994: End of ‘Phase I’ June 30, 1994: End of ‘Phase I’ http://www.pitt.edu/~gmmst11/russ0871/timeline.html

10. Prikhvatizatziya Phase II July 22, 1994: Yeltsin announced ‘Phase II’ July 22, 1994: Yeltsin announced ‘Phase II’ 1995: Sales of larger, high-value enterprises to financial/industrial groups 1995: Sales of larger, high-value enterprises to financial/industrial groups Loans-for-Shares Loans-for-Shares –Govt. Need for Ruble –Banks loan Ruble to State –Collateral was shares in state-owned companies –Auctions –Companies bought for fraction of worth Yukos incident Yukos 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

11. 1990-1996

12. Prikhvatizatziya Phase III 1998: Govt. tries various measures to make the process more fair 1998: Govt. tries various measures to make the process more fair Drop restrictions on foreign participation and instituting the valuation of assets by international advisors Drop restrictions on foreign participation and instituting the valuation of assets by international advisors Aug. 1998: Financial Crisis Aug. 1998: Financial Crisis –collapse of Russian markets –currency (Ruble Collapse) –economy 1999: High oil prices and cheap ruble help with economic rebound 1999: High oil prices and cheap ruble help with economic rebound 2000: Investment and Consumer Demand 2000: Investment and Consumer Demand –Real fixed capital investments have averaged gains greater than 10% over the last five years http://www.cipe.org/publications/fs/ert/e32/e32_09.htm http://library.findlaw.com/1998/Sep/1/128169.html

13. Prikhvatizatziya Phase III Russia ended 2005 with its seventh straight year of growth, averaging 6.4% annually since the financial crisis of 1998. Russia ended 2005 with its seventh straight year of growth, averaging 6.4% annually since the financial crisis of 1998. Russian foreign debt declining from 90% of GDP to around 36%. Russian foreign debt declining from 90% of GDP to around 36%. These achievements, along with a renewed government effort to advance structural reforms, have raised business and investor confidence in Russia's economic prospects. These achievements, along with a renewed government effort to advance structural reforms, have raised business and investor confidence in Russia's economic prospects. http://www.cia.gov/cia/publications/factbook/geos/rs.html

15. Analysis Declining GDP up until the Financial Crisis of 1998 Declining GDP up until the Financial Crisis of 1998 Phase II had more decline was a result from the selling of firms and corruption Phase II had more decline was a result from the selling of firms and corruption Relatively higher GDP compared to other transition countries Relatively higher GDP compared to other transition countries Poland has a slowly increasing GDP from 1990-Present Poland has a slowly increasing GDP from 1990-Present Ukraine seems to be effected by the financial crisis of Russia (Their economy seems to stagnate) Ukraine seems to be effected by the financial crisis of Russia (Their economy seems to stagnate)

16. Comparison Between Other Transitioning Countries GDP Growth %

18. Outcome Rapid mass privatization is likely to lead to massive corruption by managers and controlling shareholders unless a country has a good infrastructure for controlling corruption. Rapid mass privatization is likely to lead to massive corruption by managers and controlling shareholders unless a country has a good infrastructure for controlling corruption. –Russia accelerated the self-dealing process –Which lead to Corruption –Lack of Tax laws Labor productivity gain, 1989-1998 Labor 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, 1999

19. Outcome Developing the institutions to control self-dealing is central to successful privatization of large firms. Developing the institutions to control self-dealing is central to successful privatization of large firms. Privatization matters in the long run! Privatization matters in the long run! –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 unemployment and inflation remain high. –Russia's manufacturing base is decaying and must be replaced or modernized if the country is to achieve broad-based economic growth. –weak banking system –a poor business climate that discourages both domestic and foreign investors –corruption and widespread lack of trust in institutions.

20. Further Research Do crisis’ fuel revival in a diminishing economy? Do crisis’ fuel revival in a diminishing economy? –More research on other struggling transition economies –Unemployment rate –Productivity rates Actual intention of the Russian Government Actual intention of the Russian Government –Fueled corruption Vouchers Vouchers Loans for Shares Loans for Shares Analysis of corruption index with GDP and FDI Analysis of corruption index with GDP and FDI Future of Russia? Future of Russia? –Time will tell –FDI –Analysis of GDP

21. Questions?!