Economic Impact of Privatization in Russia

In 1992, Russia began the process of privatizing many state enterprises, so as to convert them from inefficient businesses relying largely on the government to efficient and competitive businesses that were independent from the government.

Limited Success
The program was very controversial and was not particularly successful at achieving a number of its goals, such as the independence of many businesses and higher worker productivity. Aside from its being somewhat unsuccessful, Jones found that the privatization had little impact economically, in contrast with the privatization of some other nations' economies. In fact, he found that in many cases costs grew faster and revenues and sales grew slower in privatized firms than they did in firms that were still owned by the state. Brainerd found that, as of 2001, privatized firms still behaved quite similarly to those owned by the state. Brainerd also found "little evidence that wage setting in privatized firms [had] changed to provide greater rewards for more productive workers," possibly indicating that the privatization had not brought about the competitiveness that it was originally intended to, either.

Outside Ownership
According to Estrin et al., when Russian firms were privatized to outside domestic owners, "the performance effect [of the privatization]... [was] found to be negative or insignificant." This was not a very significant problem, however, since there was little outside ownership due to most of the firms either having been retained by the state or having already been obtained by people within the firms. Outside ownership was also less common due to certain legal restrictions that prohibited the acquisition of more than 10 percent of a company under certain conditions. According to Jones, however, outside domestic ownership tended to be beneficial for a firm if the firm's new owner was a bank.

Inside Ownership
The results of inside ownership following privatization varied wildly depending on whether a majority of the firm was owned by a manger, or whether it was dispersed among multiple employees that were not managers. If ownership was transferred from the state to a manager, costs increased, and labor productivity and sale decreased, with the latter falling by as much as 95% annually. If ownership was transferred to employees that were not managers, there was not much improvement relative to state firms, although Jones did find evidence that costs fell by 11% annually.