Conclusion

Introduction

In previous chapters we describe in some detail the background, objectives and implementation of the 1992 Russian Privatization Programme, as well as the subsequent waves of privatization.

We emphasize, in an effort to provide a precise narrative, that the 1992 Programme was designed for implementation of a prior law passed almost a year earlier by the Russian Supreme Soviet. This background is better known in Russian than in western literature on the subject. The programme itself was a compromise, not a unified construct. The sponsors of the Privatization Programme of 1992 had only a limited ability to ensure that it was implemented in spirit and letter, in part because Yeltsin’s “rule by decree” gave reformers power only in regard to “economic reform”, in part because of their lack of long and clearly established authority, in part because of conflicts with the parliament, and in part because privatization was a decentralized reform, and much lay at the discretion of local authorities and enterprise managers.

We also observe that privatization was unlikely to achieve its goal of creating efficient markets or do much to help Russian industry to become effective and efficient, since the structure of the Russian economy meant that these goals were not possible through privatization alone. No market economist would suggest that efficiency is likely to result from the privatization of monopoly companies where there is immobile labour, inadequate transport systems and ineffective capital markets and even payment systems. What was true for voucher privatization was equally true for the subsequent cash privatization. We trace the implementation of the 1992 and subsequent programmes, including the apparently successful voucher privatization and the subsequently flawed loans-for-shares and later cash privatizations.

We use findings from existing literature on the topic and contemporary sources. We establish a clear timeline of events, separating different phases of the privatization programme. Some chapters rely on the archives of western advisers to the international lending institutions and to the Russian government at that time, which have not previously been consulted in assessments of privatization. Our writing is informed by a conference held in Oxford¹ on 12–13 November 2010, which brought together a number of experts and participants in the privatization process. We have supplemented standard sources with interviews with people including Petr Mostovoi² and Maxim Boycko,³ who were closely involved in the drafting and implementation, and also individuals often portrayed as hostile to aspects of radical reform: Ruslan Khasbulatov, the chairman of the Supreme Soviet, and Viktor Gerashchenko, head of the Central Bank.

We believe that our analysis suggests the following.

1. There needs to be a close historical reappraisal, at least of the Russian mass privatization, if not of the subsequent cash sales. In particular, there is considerable distortion in the way its short-term effects and medium-term outcomes are often portrayed. Privatization was not the only, or even possibly the major, change to the Russian economy at the time. It did not meet the expectations that were raised by information campaigns and policy pronouncements. But, equally, those who condemn the programme need to offer a credible policy option that would have better served the chaotic conditions of Russia in 1992.
2. The debate about privatization in the 1990s keeps in clear view still important questions about how realistic the economic understandings behind the policy were for Russia. This is a theme frequently raised in writing critical of privatization.⁴ We speak from a somewhat different perspective from that criticism, however. We do not argue, as some of the literature insists, that mass privatization was the wrong policy for the time.

   Economic policy in Russia was influenced by models of privatization elsewhere in the transition region, albeit on a much smaller scale, and we underscore that such models are inevitably used as the basis for policy development and advocacy. However, effective policy will also be shaped by institutional specificity, requiring compromise with stakeholders. In Russia, the political calculus, perhaps the single most important part of preparation for reform, had to be carried out on the spot, with time constraints. Expectations exaggerated the transformative power of property rights as a political instrument – without accompanying and facilitating market-based reforms – given Russian circumstances. Thus, experiments in Latin America and the Czech model may have provided insight for policy makers at the time of transition, but they offered no guarantee of success.

   Across the transition region, the degree of success of privatization depended upon the range of legal and social support for competition, contestability, open markets and ownership. In Russia, institutional complexity was magnified by the scale of the country and by different and outmoded legal, institutional, political and social arrangements by sector and by jurisdiction. The Civil Code from the previous regime (1964) somehow remained in force in 1991–92, for example.⁵ If there was ever a need for economic policy based, in the words of Ronald Coase, on “the world that exists”,⁶ it was at that time in Russia.

   In the Yeltsin regime, economic reformers were isolated in large part because their role in legislation was confined by law to the economic sphere, and, thus, their policy formation was divorced from the politics and culture of the society it affected – conducted as if it were exogenous to the rest of the political system. It is ironic that even the most fundamental objective of privatization, which was to secure undisputed legal title, was done in a fashion so isolated from political reforms that its own legitimacy can be, and still is, called into question.

3. The economic debate calls into question some of the language used. For example, to talk of two paradigms, those of public and private “ownership”, requires clarification of what is implied by those descriptions. Private ownership encompasses many types of legal forms, each of which may be expected to create a different outcome. In our conclusion, we address the ongoing philosophical debate in the literature about the degree to which simple paradigms, or expectations for the short run based on those paradigms, were useful in building an effective political economy in Russia.

These three considerations, politics, economics and philosophy, are of course at the core of public policy making. In concluding, we treat each in turn. We suggest that even a short history such as this can illustrate how, in the disordered circumstances of policy making in the early 1990s in Russia, the three interacted with one another to influence the ultimate outcome.

Let us take each of these observations in turn.

Politics

The 1992 Privatization Programme in Russia emerged during a period of economic and political chaos in the country. Within only a few months, reformers found it necessary to develop a “programme” based on the general mandate passed in the 3 July 1991 Russian Federation law.⁷ They found it necessary to forge an agreement on the programme so that it could be approved by both the executive and the sharply divided parliament. Finally, they were constrained by confused responsibilities assigned to the former Union and Republican agencies and, perhaps most of all, by the lack of implementation capacity. Few today would argue it was a perfect reform. However, the context of its implementation is of fundamental importance to what was and was not achieved.

Criticism of the reform coming from those who generally supported it finds fault with its failure as a comprehensive package of economic reforms to do more than it did.⁸ One critic, for example Marek Dąbrowski,⁹ an economist sympathetic to the reformers, writes that they could have and ought to have seen the importance of certain supplementary reforms: the Russian government rejected, he argues, the full programme offered by Central European experience and foreign advisers there (Dąbrowski 1997: 47). Criticism of the exact path taken in economic reform is standard in the literature about Russia’s early years of transition.¹⁰

To some extent, this literature is insufficiently appreciative of the political context of Russian privatization.¹¹ Reflecting on conditions and constraints, the director of the Russian Privatization Center (1993–96), Maxim Boycko, who wrote about the design of privatization in his co-authored “Privatizing Russia” (1993), said in an interview:

There may be many criticisms of privatization. But some that I reject are those made from the assumption that there was a government of the quality, of the stability, of the sophistication of the British or the US governments. Had that been the case these would have been very questionable things to do… . Given that the government did not control anything, given that these enterprises were quite bad, given that nothing was going on except a lot of stealing … getting enterprises privatized as quickly as possible was the priority.

In terms of implementation capacity, the government could do nothing, had no control. It was political. There was no political base at all, it’s mindboggling.¹²

The point Boycko is making is one that Chubais has also made in interviews: the key choices made in the Mass Privatization Programme were political, not economic.¹³ Presented with the opportunity to establish comprehensive market-based “rules of the game”, it is likely that the reformers would have chosen a different path. But they were constrained. They both lacked consensus on what a more comprehensive package of reform would look like and they lacked implementation capacity.

What we note here is the constraints forcing that political choice. Illustrating this point, we again cite Boycko, who spoke of the difficulties of achieving a consensus on most other issues. Indeed, the privatization reform was unique in the sense that it was the one policy on which the government not only had a specific objective but was also able to reach consensus, and could get it enforced. Whatever else might not be done, privatization was a way in which private property rights could be established as the basis for whatever economy was to emerge in the future. It symbolized as well as brought about Russia’s move towards a market economy.

The problem plaguing privatization originated from the fact that many corollary policies, and institutional changes necessary for the establishment of a productive, competitive and pluralistic Russian economy, were not put in place because of this lack of consensus on the broader reform programme. To summarize, the failure was not really one of economics; many analysts and policy makers understood the need for a more comprehensive reform. It was one of politics; such a reform programme was being drafted through diverse legislative projects with limited coordination, only some of which made their way successfully through the parliament in the 1990s.

Why did it prove so difficult to create political consensus? For those who opposed the reformers, the issue sometimes seemed to be the lack of experience, as evoked in Vice-President Rutskoi’s disparagement of them as “little boys in pink pants”.¹⁴ Gaidar, Chubais and some of the others were indeed much younger than those who ruled Russia in the communist era, and they were appointed for their economic understanding,¹⁵ rather than their political experience. However, by the end of 1992, the Russian prime minister was Chernomyrdin, a man of considerable experience as head of Gazprom. His appointment did not result in a transformation in the capacity of the government. As Mau¹⁶ drily observed in 2012:

In November 1991, there was no one who wanted to be premier of the government. In November 1992, there was a line of those who wanted to be. And this is such an important indicator that there had appeared a country in which one could govern.¹⁷

So Yeltsin himself was effectively the prime minister in November 1991, with Gennady Burbulis appointed “state secretary” and his effective deputy (Yeltsin 1994: 152). It was Burbulis who introduced Yeltsin to Gaidar. There were few others so confident in economic reform and Yeltsin’s leadership.¹⁸ Gaidar and the other reformers shared an optimistic, even kamikaze, attitude that was required in the era following the ambitious, though somewhat vague, “500 days” programme.¹⁹

Khasbulatov, who was not selected as premier, expressed frustration that the government failed to introduce as many reforms as he wanted to parliament. “When Gaidar was in charge, I asked him ‘which laws would you like us to adopt? What are your projected laws?’ But they were unable to develop them … they wouldn’t give me any legislation.”²⁰ In that the parliament was developing and passing its own legislation, he went as far as to suggest that parliament was “doing the government’s and the President’s job”.²¹ One might take this view with a pinch of salt, not least because, as mentioned above, by the end of 1992, the highly experienced industrialist and politician Chernomyrdin had become prime minister, and that did not demonstrably result in comprehensive and integrated reform being introduced.

Some critics of the reform, aware of its limitations and lack of supportive political reform, have suggested that the privatization ought to have been delayed (Kolodko 2000: 156; Roland 2000; Cornia and Popov 2001; Åslund 2007: 43–4). Indeed, some advisers considered and even promoted this option.²² But if that option had been pursued, when should privatization have happened? Should a more modest 1992 Programme have been put before parliament? If so, a rare moment of consensus would have slipped by. Should the programme have been passed but its timing delayed? If so, the government risked losing momentum and control of the process.

In any such counterfactual analysis, it is difficult to be confident that any better path was available. Given that spontaneous privatization was already taking place, it is hard to envisage that such delay would have resulted in a better outcome. Contemporary documents demonstrate that the limitations of the programme were understood by reformers and their advisers, but their judgement was that delay would have worse consequences than a decision to proceed.

Given this background, it is surprising that privatization has been blamed for so many of the subsequent ills of the Russian economy. Those who make this argument must surely place themselves in the position of those at the time, and propose, even with hindsight, what alternative path was available to Russia which would have had better consequences.

To summarize, the political objective of the reformers was to prevent a return in future years to the old communist structures, even if privatization could not, on its own, create an effective market economy. Privatization could bring Russia to a point of no return. Such an argument may or may not hold water; a failed reform effort might equally have been likely to generate a desire to return to the old system. Reformers in Russia may well have believed that they had a short time to make reform irreversible and to revive the Russian economy, which was viewed as a “corpse”. Given their political as well as economic objectives, one might ask why Yeltsin and his coalition of ministers did not proceed simultaneously with as uncompromising a political agenda as well. To be sure, they did not have powers to “rule by edict” in political affairs. Still, it is evident that there is no one document that outlines in broad terms the reformers’ political, economic and social roadmaps. Had there existed a consensus to implement such a programme, it would surely have been hugely valuable for the government to have had an indicative plan of what reform was needed and when. The absence of such a document speaks volumes about the lack of agreement and coordination within the government.

This in turn raises the question of why Yeltsin did not try to establish a broader political legitimacy for economic reform, once his powers to rule by decree ended. For example, in early 1992, he could have tried to pass a new constitution or could have called for a parliamentary election. For such a strategy to have succeeded, Yeltsin would have needed to be sure that the subsequent elections would return a more unified body of legislators. He could have had little confidence of this, since, even in December 1993, when, after the coup attempt, parliamentary elections did not result in the same kind of mandate Yeltsin had secured earlier (Russia’s Choice, the party closest to Yeltsin, gained only 15 per cent (McFaul 2004: 38–9)). In short, neither the elections nor the constitutional change in 1993 created the kind of consensus that would have strengthened the reform base. Reform parties were fractionalized, and the social base, around which support for Yeltsin could coalesce, was not yet present (Moser and Thames 2003; Troxel 2003; Treisman 2009).

And finally, had there been consensus, there would still be a question of Yeltsin’s willingness/mandate to proceed by edict with political, as well as economic, reforms. To repeat, there was only a certain range of reforms over which his executive decree powers extended. Equally important, although in the early, active years of his presidency, it was clear that he strongly supported change towards a more liberal society and democratic structure, Yeltsin was not an institutional economist, or any kind of economist for that matter. Even later, he failed to develop a “grand plan” or manifesto of social and political change to which he and his supporters could subscribe.

Mass privatization was one policy that, with great fanfare, appeared to have positioned Russia to take a bold step in the right direction. The scale and complexity of the operation would have been impressive in any country. In the disorderly conditions of early 1990s Russia, it was doubly so. It was a very pragmatic reform, however, and by most accounts, it did not result in the ownership structure the reformers had, in concept, wanted.²³ Yet initially it seemed to have been a success, appearing to create a remarkable bridgehead to a market economy. But it was only, and could only have been, a bridgehead.

There is little doubt that from a political point of view, the privatization reforms were a critical element in Russia’s crossing the Rubicon towards a market economy. But, throughout the 1990s, the nature and success of that market economy were still very much in doubt.

Economics

The economic reforms needed to transform Russia into a market economy were profound, with privatization being only one of them. Privatization, per se, was not the ultimate goal, but rather a means towards the creation of a more prosperous economy. The reformers in the Privatization Ministry may well have understood the dilemma, however; the world they faced was not one where they were in control of creating broader reform. The questions they needed to address were immediate ones: how to get a programme implemented against what seemed like impossible time scales.²⁴ Like soldiers in a battle, they had been given their objective. If the battle was to be won, they had to focus on that goal, not on the strategy for winning the war.

Contemporary and subsequent evaluations by economists, as discussed in previous chapters, tend to agree that the ultimate goal of privatization was the creation of markets, where competition for capital, labour and resources would encourage efficiency and help underpin political pluralism. Indeed, the political imperative for accepting economic transformation ultimately rested on the ability of a market economy to deliver these benefits. However, the structure of the Russian economy meant that this goal was not possible through privatization alone. As we have argued, no market economist would suggest that efficiency was likely to result from the privatization of monopoly companies in that environment.

For the reformers at the Privatization Ministry, as Boycko et al. (1995: 19) write, the main objective in this battle was to clarify property rights: “When property rights over a productive asset are clearly specified, and the person who decides how to employ this asset bears full costs and enjoys full benefits of such employment, he puts the asset to most productive use.” The aim, in theory, was to unify “control rights and cash flow rights” (ibid.: 22).

Yet even here there was a gap between theory and action. The reformers backed a privatization Option One that would have distributed shares to outsiders. It was as a concession to the industrial lobby that they agreed on Option Two, which gave ownership to workers and managers. Much discussion has taken place about the decision to allow Option Two. Yet it is this option that best unifies cash flow and control rights. In Option One, which was supported by the reformers, insiders, including both workers and directors, acquired a minority stake with the rest of the shares distributed to outsiders in part through the voucher programme and in part through state targeting of preferred outsider owners. This model aimed to produce a separation of management from ownership, which is one classic objective of the firm, although the reformers’ economic theory might actually prescribe avoiding it.

More broadly, in the absence of other profound reforms, privatization did not, and could not, play its part in the creation of efficient market structures. It is therefore unremarkable that the review of the findings for all transition countries thus far by Estrin et al. (2009) finds little relationship between ownership structure and efficiency, except in regard to new and foreign-owned firms. But, at least, privatization did go some way to define the ownership of companies; it may have helped put a stop to “spontaneous privatization” and, in its voucher phase, skewed that ownership towards the more pluralistic worker and manager control, rather than the re-creation of Soviet ministries through the “associations”. These are significant achievements. However, they were never likely to create an efficient market economy alone. Nor can they be blamed for all the features of the Russian economy that emerged in the late 1990s.

This brings us once again to the political significance of the reform. Privatization was a symbolic policy. Communism in the Soviet Union was based on state ownership of productive assets. Privatization was the clearest possible demonstration that this economic regime was at an end. The private ownership of assets therefore had to be at the heart of the new market economy.

But the complex institutions required to run a successful market economy, and the variety of ownership models available, were, perhaps out of necessity, often overlooked. In part this was because there was little political room for them to be discussed. But in part also, it was because Russia had little practical experience of how capitalist financial institutions worked. Insofar as policy makers or even enterprise managers had any training in the workings of a market economy, it would by necessity have been from academic study rather than from direct experience.

Was there an alternative reform agenda that emerged at that time? One might examine the writings of Yavlinsky, an early reformer who had helped draw up the 500-Day Plan during the Gorbachev era. He had been a reform politician and therefore his position, which we discuss below, might be taken to represent an alternative reform programme to that of the Gaidar government.

Braguinsky and Yavlinsky (2000: 191) recognize the need to build institutions found in developed market economies, call for a “new social contract”, and attack the architects of Russian reform, “as well as many Western advisors”, for “simplistic prescriptions which derive their strength from an a priori ideal scheme”. They consider the Russian privatization programme one of the most spectacular failures in the history of economic reform (ibid.: 10, 123).

Yet their alternative proposal for reform is not a blueprint for a comprehensive set of market institutions. Rather, it is a plan that involves the extension of markets into law enforcement. The state, they write, should offer its services to the highest bidder and “commercialise the most important economic function played by the government, that of protecting property rights” (ibid.: 224). Reformers should, in their view, create a Federal Property Protection Service (FPPS) “as a kind of ‘supermafia’” (ibid.: 232), such that privatization of services provides economic incentives to ensure the rule of law.

We underscore, in response to Braguinsky and Yavlinsky, that Russian reformers understood the need for institutions that protect property rights. However, they reasoned that the enforcement of property rights naturally followed from their establishment. It was assumed that privatization would foster the new owners’ defence of those rights; that is, demand for law enforcement would naturally emerge. Goldman (2004: 74) criticizes them for this assumption:

[Reformers] took for granted that the existence of property rights automatically guaranteed that the state would enforce those rights. This assumed that there was something like the “rule of law” and that the state would not be in a condition of near anarchy.

But Goldman does not have it quite right. The reformers anticipated that the defence of property rights would follow from the entitlement. Thus, both the reformers’ views and those of Braguinsky and Yavlinsky on this issue seem to have rested on the belief that economic forces would create the law and institutions needed to enforce property rights and efficient markets. The former anticipated that privatization would naturally result in enforcement; the latter assumed that the enforcement of property rights could be sold to the highest bidder. Neither explicitly considered the institutions, incentives and cultures needed for the effective functioning of a market economy, or how variations in these elements would change the nature of the economy and society that were created.

These assumptions, at least as expressed in their published works, take economic incentives as their starting point, and assume that political, social and legal change will follow. In complex political and policy situations, such as those that confronted Russia, understanding the interplay of politics and institutions which are rooted in history and culture is also critical for effective policy.

Philosophy

The Russian privatization process, as virtually every critical commentary on privatization has observed, raises questions about the way economists sometimes apply conceptually useful models to more complex public policy. In particular, classifications for conceptually simple models can be inappropriate for the more disorderly reality. Much of the theoretical economic literature tends to distinguish between private and state-owned enterprises, for example. Among supporters of Russian privatization, the former were to be promoted, since private enterprises were expected to encourage efficiency, restructuring and pluralism in both economic and political terms.

In Chapter 3 we argued that the likelihood of privatization achieving the government’s goals was low, given the circumstances of Russia in the early 1990s. Privatization can only create economic benefits when other market mechanisms are in place. In circumstances where a country lacks capital, competition and the rule of law, privatization is likely to fail in delivering those benefits. Indeed, it may have the reverse effects. In Russia, there was a great need for broader reform.

However, there is also a deeper conceptual question that needs to be addressed. In economic taxonomy, private companies are assumed to have a certain structure, which will deliver positive behaviour: they respond to market forces; they are constrained by capital; those who own shares have ownership and control rights that are exercised. But although Russian companies approximated the legal structures of private companies, empirical studies show that they did not, either individually or collectively, create the desired behaviours (Estrin et al. 2009).

The notion that there is one paradigm legal structure which will foster similar outcomes in all markets is a considerable simplification of the actual world, as is well known in the literature on accountability and ownership and on corporate governance in different forms of ownership (Berle 1931–32; Alchian and Demsetz 1972; Jensen and Meckling 1976; Williamson 1979, 1985; Milgrom and Roberts 1992; Hansmann 2000).²⁵ This is particularly the case in countries where market mechanisms are not in place. Even in the West, if we look at the universe of non-state organizations, we may find some of the features of the paradigm private company, but only to a limited extent. In many private companies capital may not, except in extremis, be a constraining factor on management action. In large public companies, shareholders often exercise little influence. Private enterprises are of many different legal types: companies, partnerships, charities, non-governmental organizations. Even within each of these classifications, constitutions, governance and the legal duties of officers vary markedly between and within countries.²⁶ It has been found that for different activities and at different times all these different forms of ownership can prove effective (Marshall 1946: 596).

This raises a fundamental question for those who discuss, advocate or oppose privatization policies: What does it mean, and why is it helpful, to classify a company as “private”? In other words, what are the characteristics that apply to all members of the class of “private” companies? If the response is that they are, by definition, ones which are responding to market forces in an efficient fashion, then privatization policy is tautologous: advocates are simply demanding that we create “good companies”. If it is that they have a particular legal form, then it must be acknowledged that productive structures have many different legal forms in successful economies around the world.

Perhaps an example can help illustrate the point. We noted in Chapter 5 that following the extension of a loan to the Russian government, Oneximbank claimed to have found mismanagement at Norilsk Nickel. The bank sought to remove the board, and it was successful in doing so because it received the support of the government. Let us assume that these were the facts of the matter, and that the action taken was a positive one. However, it is not clear that these events took place because Norilsk Nickel was a private company. In fact, the government still owned the shares, and was critical in getting change to happen. The fact that better management had been applied to the enterprise was independent of who owned the shares.

Systems of exchange based on self-interest can prove enormously productive if that exchange is governed by competitive markets with no transaction costs. From that theoretical model, however, rules have been made for the real world: for example, one might be that private companies are more productive than public companies (although in some sectors, this cannot be demonstrated).

Thus, the definition of “private company” in reality embraces a variety of forms: not all firms are “owned” in the same way; what ownership means depends on context. Therefore, in pursuing privatization policies, the simpler bi-modal classification may not produce the desired result. One may ask what are, and from where are derived, the characteristics of the standards to be created. To summarize, where, for policy purposes, there is a need to establish what is meant by “private ownership”, it is important to be clear that the standards are not tautologous; for example, that private companies are not simply defined as those which give the economic outcomes which the policy maker seeks.

Applying this argument to Russia in the early 1990s suggests that different forms of ownership, as well as different methods for transfer of control and economic rights, could be appropriate in different situations. The transfer of small enterprises to their workers was deemed effective; the sale of oil and natural resource companies less so.

From a policy point of view, the question to be asked is not “Is this company private, or is it state-controlled?” That was the question posed by the Soviet communist government, which always erred on the side of state ownership. That same question can be answered equally simplistically in the other direction. But if the question asked is one of policy, rather than simply economics, surely the issue is whether, in a pragmatic sense, the distribution of (an often limited set of) ownership and control rights helps create the outcomes sought. For example, will those rights be effectively used; will they promote the fair and efficient distribution of resources, and the incentive to innovation? The policy question will have a different answer depending on the other economic institutions that shape incentives affecting enterprise behaviour.

What matters is what works well, what creates the best behaviours. And what will work well depends on the economy and society to which it is applied.

This observation about thinking on privatization applies equally to other economic paradigms, for example ownership, as Hansmann (2000), in his extensive exploration, shows. He emphasizes the importance of analysis of ownership results that are well grounded in observation. What, for example, do we mean when we say that someone “owns” an asset? Who, for example, “owns” British Petroleum (BP), one of the world’s largest oil companies? Is it the fund managers whose names appear on the share register? Is it the pension funds whose assets they manage, or the trustees of those pension funds? Is it the beneficiaries, whose savings have been set aside, or the institution (usually their employer) which has established and contributes to the pension? Or is it the board of directors, which appoints the chief executive and oversees the strategy? Or the employees without whose collective labour the company would collapse? Or is it the governments of the various jurisdictions in which BP operates who can intervene in its operations? And if so, what part of the government?

The answer to all these problems is that they all do, albeit in different ways. If a fund manager owns 100 per cent of the shares s/he will enjoy different ownership rights than 100 fund managers with 1 per cent each. If the company is protected by a “poison pill”, the board will have greater control. If the board is incompetent, ill-informed or under the influence²⁷ of another party, they will exert fewer ownership rights.²⁸ If workers are difficult to find, if they act as a body, they will have greater influence than if they do not. The point is that the economic concept of “ownership” cannot be divorced from the politics and power relations that affect the owned asset. The notion that there is some paradigm where there is a “unification of control rights and cash flow rights” is not one that is often found in the management of large companies. These rights are constrained by different checks and balances in the system.

We emphasize here that, if it is to be successful, economic reform, particularly something as fundamental as the Russian Privatization Programme, requires both pragmatic considerations regarding what is effective and what is not in privatization policies as well as planned coordination with other policies.

We do not here discuss, as would be appropriate in a longer or deeper book, the taxonomy used in Russian privatization. We merely comment that it is important to carefully define objectives and links between prescribed policy and expected outcome.

The work of economist Ronald Coase on property rights was cited in support of privatization (Boycko et al. 1995: 20–5). This is ironic. Coase specified that his concepts applied only where there were “zero transaction costs” (which is a general assumption of economic analysis). He writes that under these conditions, if ownership rights are clearly distributed, then efficient outcomes result. Known as the Coase Theorem (Coase 1988: 13), its expectations of property rights reform were cited as the key theoretical underpinning of the need to establish “ownership” in Russia (Boycko et al. 1995: 20–5).

Coase himself has been critical of the policy use of his writings, however. An extensive discussion in journals of the Coase Theorem, a proposition about the world of zero transaction costs, he writes, is a disappointing, if understandable, result of his theorizing. The theory poses many intellectual problems, but, as he insists, these are remote from the real world.²⁹ “That much of the discussion has been critical of my argument is also quite understandable since, if I am right, current economic analysis is incapable of handling many of the problems to which it purports to give answers” (Coase 1988: 15).

To emphasize again, in conclusion, our larger concern has been to recognize that despite its many imperfections, the Mass Privatization Programme in Russia contributed to the limiting of the “contested agenda” about the direction of economic transformation. Shops and factories were moving out of the hands of the state. An economic transition had begun. We also suggest that those who criticize the programme because of poor outcomes in the Russian economy need to suggest what alternative policy should have been adopted: What policy would not only have worked in theory (there are many of these), but would have worked in the circumstances in which the country found itself in the early 1990s? We have not found any such alternatives that appear convincing. There is therefore much to be said for the mass Privatization Programme in practice.

In regard to the LFS, in our view, economic theory used to justify practice sailed dangerously close to the rocks. As privatization moved from vouchers to cash, as the government used ever more creative devices to avoid parliamentary opposition, it may even have come to the view that ownership structure does not matter for the eventual outcome. If so, economic analysis will have become so remote from the real world that it will scarcely have a direct policy application.

Summary

It is now over 20 years since the passage of the Russian 1992 Privatization Programme. Few would argue that it succeeded in achieving the lofty goals set for it. We have attempted to provide some insight into why this was the case. However, if we can understand what failed in the past, are we better equipped to address the question of how this history might be useful to scholars and policy makers in the future?

We argue that privatization resolved a highly contested agenda, and in that sense was an effective political reform. It is also the case, however, that alone, without political, economic and cultural transformation, it could not have produced an efficient market economy, since the economic institutions Russia inherited were unfavourable for such an outcome. We further argue that expectations about the economic benefits of change in “ownership” were therefore unrealistic, perhaps because of a strictly disciplinary vision of key changes both by the reformers and by the parliamentarians who restricted rule by decree to economic policy. We see that the three disciplines, politics, economics and philosophy, are inter-related, and all are relevant for successful economic policy development.³⁰

In this book we have aimed to write a history of decision making during the privatization of Russia in the early 1990s. We hope it is one upon which other scholars can build. We also hope it will be useful to policy makers more generally, in particular the architects of fundamental changes in economic structures.

And finally, we hope it may be of interest to students of Russian history, and to those who wish to understand how the country was shaped during those eventful years.