Transcript Russian Privatization - Ohio State University

Russian Privatization
Jordan Ford
Outline
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Basic Information
Background Leading to Privatization
Definition
Stages of Privatization
– Mass Privatization (I)
– Loans for Shares (II)
– 1998 Financial Crisis (III)
• Overall Outcome
• Further Research
Russia
Basic Information
• Capitol: Moscow
• Current Govt. Structure : Federation
• Currently in Power: Vladimir Putin
http://www.cia.gov/cia/publications/factbook/geos/rs.html
Basic Info. (cont.)
• GDP (PPP): $1.535 trillion (2005 est.)
– Compared to USA: $12.37 trillion
(2005 est.)
• GDP Growth Rate: 5.9% (2005 est.)
• GDP per capita (PPP): $10,700 (2005 est.)
• Inflation Rate: 12.9% (2005 est.)
http://www.cia.gov/cia/publications/factbook/geos/rs.html
History Leading to Privatization
• Repeated devastating defeats of the Russian army in
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World War I
Overthrow in 1917 of the imperial household
The Communists under Vladimir Lenin seized power soon
after and formed the USSR.
Iosif Stalin (1928-53) strengthened Russian dominance
of the Soviet Union
History (cont.)
• 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
• Which leads us to why Russia privatized…
Definition
• 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
Prikhvatizatziya
Phase I: Mass Privatization
• 1991: First privatization laws passed
• October 1992: Voucher privatization
begins
• December 1992: Start of auctions
• Jan. 1992: Price Controls Lifted “Shock
Therapy”
• December 1993: New Constitution Ratified
• June 30, 1994: End of ‘Phase I’
http://www.pitt.edu/~gmmst11/russ0871/timeline.html
Prikhvatizatziya
Phase II
• July 22, 1994: Yeltsin announced ‘Phase II’
• 1995: Sales of larger, high-value enterprises to
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financial/industrial groups
Loans-for-Shares
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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
• 1996: Yeltsin elected to second term
• 1997: End of Phase II
http://www.cipe.org/publications/fs/ert/e32/e32_09.htm
1990-1996
Privatization and Employment
140000
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
120000
100000
80000
60000
40000
20000
0
1990
1991
1992
1993
1994
1995
Total Number of Enterprises Privatized Each Year
Private Sector Share
Number of Enterprises
Source: World Bank, Private Sector Development in Europe and Central Asia
1996
Private Sector Share of Employme
Prikhvatizatziya
Phase III
• 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
• Aug. 1998: Financial Crisis
– collapse of Russian markets
– currency (Ruble Collapse)
– economy
• 1999: High oil prices and cheap ruble help with economic rebound
• 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
Prikhvatizatziya
Phase III
• Russia ended 2005 with its seventh straight year
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of growth, averaging 6.4% annually since the
financial crisis of 1998.
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.
http://www.cia.gov/cia/publications/factbook/geos/rs.html
Poland GDP (current US$)
Russian GDP (current US$)
Ukraine GDP (current US$)
Poland GDP (PPP)
Russian GDP (PPP)
Ukraine GDP (PPP)
$1,600,000,000,000
GDP
$1,400,000,000,000
$1,200,000,000,000
$1,000,000,000,000
$800,000,000,000
$600,000,000,000
$400,000,000,000
$200,000,000,000
1989-2004
03
20
01
20
99
19
97
19
95
19
93
19
91
19
19
89
$0
Analysis
• Declining GDP up until the Financial Crisis of 1998
• Phase II had more decline was a result from the selling
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of firms and corruption
Relatively higher GDP compared to other transition
countries
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)
Comparison Between Other
Transitioning Countries
GDP Growth %
Infaltion
1800
1600
1400
Annual %
1200
1000
Inflation (consumer prices)
Inflation (food prices)
Inflation (GDP deflator)
800
600
400
200
0
1990
1991
1992
1993
1994
1995
1996
1997
1990-2004
1998
1999
2000
2001
2002
2003
2004
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.
– Russia accelerated the self-dealing process
– Which lead to Corruption
– Lack of Tax laws
• Labor productivity gain, 1989-1998
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Hungary (Gradual): 29%
Poland (Gradual): 36%
Czech Republic (Rapid): 6%
Russia (Rapid): 33%
Source: Economic Commission on Europe, Economic Survey of Europe, 1999
Outcome
• Developing the institutions to control self-dealing is
central to successful privatization of large firms.
• Privatization matters in the long run!
– Russia facilitated privatization politically
• 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.
Further Research
• 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
– Fueled corruption
• Vouchers
• Loans for Shares
• Analysis of corruption index with GDP and FDI
• Future of Russia?
– Time will tell
– FDI
– Analysis of GDP
Questions?!