Impact of De-privatization on Privatized Firms
De-privatization will have damaging effects on investment by managers of privatized firms. De-privatization is more of a political measure rather than an economic remedy for Russian economy. Incompetent directors (of ex Soviet-era), who were supposed to lose their jobs may become in-charge again as a corrupt legal system would rule in their favor. These managers are supported by politicians and could damage interests of honest investors. Current privatization laws are vague when it comes to definition of violation, and courts and politicians could exploit this situation and rule in favor of de-privatizing previously privatized units (Coker, 1999).
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In a free market, decisions are taken by managers who are adept in the process of decision making, while in a centralized system (government owned) decision making rests with bureaucrats or state preferred managers who are not competent enough to make economically sound decisions. Therefore, de-privatization is toxic to the health of Russian economy.
According to Nobel laureate Friedrich Hayek, sound economic decisions are only achieved when they are made by a group of competent people who have the specific knowledge related to that decision. In contrast, in a centralized system, decisions are made by an individual who is unable to process large pieces of information and lacks the mental insight to make such decisions. De-privatization will lead Russian economy to function in that manner (Brickley, Zimmerman, Smith, 2006, p 79).
De-privatization and Foreign Investment
De-privatization would scare off foreign investors. Russian judicial system is notorious for being corrupt and in collusion with politicians, they rule in favor of de-privatization. The courts decide in favor of groups who are supported by politicians. A court ruled a five year acquisition of a porcelain factory by an American and Russian group as illegal, thereby giving back control to previous Soviet-era directors (Coker, 1999).
De-privatization is also aimed at snatching of assets. In November, a court annulled BP’s acquisition of a unit of Sidanko Oil Company. BP had invested 571 million $ in that unit but the court ruled in favor of a rival of Sidanko and reversed the privatization of the unit bought by BP. In such a hostile environment, it is very unlikely that foreign investors will put their money in Russian markets (Coker, 1999).
De-privatization and Future of Russian Economy
Mass de-privatization will seriously hamper growth of Russian economy. It will repel domestic and foreign investors. State intrusion into economic matters would lead to poor decision making and increase corruption. The risk of asset confiscation would increase chaos in an already fragile economic mechanism and diminish hopes of stability (Coker, 1999).
De-privatization- Winners and losers
De-privatization will open the doors of nepotism. Politicians, bureaucrats and judges stand to gain from de-privatization. It would also lead to support of certain industrial groups, just like court’s ruling in favor of Tyumen Oil Company in the Sidanko affair (Coker, 1999).
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Simultaneously, certain Russian citizens would become wealthy not due to sound industrial practices but due to good political connections. The citizens of Russia would suffer the most as they would be deprived of ownership rights (Herspring, 2007, p 140).
De-privatization and Russian Politics
Local politicians would support de-privatization because approximately three quarters of Russians believed that privatization was exploited by associates of Yeltsin to amass wealth. There is some substance to this view and majority of Russians want privatization to be rolled back. Therefore, politicians support the concept of de-privatization to gain public support (Herspring, 2007, p 139).
Brickley, J., Smith, C., & Zimmerman, J. (2006). Managerial economics and organizational architecture (4th ed.). New York: McGraw Hill.
Coker, M. (1999). That Russian Company You Bought? Maybe you Didn’t. BusinessWeek. Web.
Herspring, D. R. (2007). Putin’s Russia: past imperfect, future uncertain. New York: Rowman and Littlefield.