Russia: The New Oligarchy

Kremlin Capitalism: The Privatization of the Russian Economy

by Joseph R. Blasi and Maya Kroumova and Douglas Kruse, foreword by Andrei Shleifer
ILR Press/Cornell University Press, 249 pp., $16.95 (paper)


The task of inventing a market economy for Russia would have daunted more experienced minds. But the economists to whom President Boris Yeltsin turned in 1991 were sure of themselves, and impatient. They believed they must destroy the principles on which the old Soviet economy had rested, so that a new, Russian one might rise in its place. They thought speed essential, lest chaos or reaction overtake them.

Chaos was not far away, the product both of inefficiencies that had been accumulating in the Soviet economy for decades and of spasmodic attempts at partial liberalization under Mikhail Gorbachev. The price system was a particularly appalling mess. Industries could no longer afford, or could no longer be compelled, to provide goods to the market at the arbitrarily low prices which the government had tried to impose, as it had in the past. But the government feared to free retail prices lest that make consumers even angrier than they were already.

Yegor Gaidar, a former economics editor of Pravda who at thirty-five was given charge of Russia’s economic policy, persuaded Mr. Yeltsin to let prices find their own level and to brave the consequences. A decree freeing prices was published on December 3, 1991, and took effect a month later, on January 2. It worked very much as predicted. Prices doubled or trebled. Producers, importers, distributors, and retailers found it worth their while to offer goods for sale again. There was no popular insurrection. Large quantities of previously scarce items went on sale in the shops and street markets. From this point on Russian retail prices were determined mainly by market mechanisms. One foundation of state control over the economy had been destroyed, almost literally overnight.

The state also controlled economic activity through its near-monopoly ownership of industry. Attacking this form of control was a longer, harder, and generally more contentious process. It was all very well deciding that state assets were to be sold off; but a buyer had also to be found, preferably one capable of making use of them. Yet the buyer of privatized assets was, by definition, the private sector; and one legacy of communism was that Russia scarcely had a private sector. Legerdemain was required. Mikhail Gorbachev’s remark, “When owners have appeared, private property will emerge,” turned out to be less fatuous than it had seemed at first hearing.

The formula eventually chosen by Gaidar and his associates for privatizing most of Russia’s larger state-owned firms and factories was roughly this: workers and managers would decide how much their firms were worth, and would be given the first chance to acquire a controlling interest when the shares were offered. So that the rest of the population had a stake in the process, any Russian citizen could claim, for next to nothing, a voucher that could be tendered for shares in any firm being privatized.

Privatization of industry began in earnest at the end of 1992, continued in 1993 and 1994, and declined at the start…

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