Since 1992, approximately 70,000 state-owned enterprises
in Russia were privatized. Many of the private
buyers were foreign companies and investors, for
example from the United States and Western Europe.
The idea was to move from a centrally planned
economy to a market system.
Yet in the late 1990s a weak economy caused
great concern among Russian voters. Politicians,
such as Moscow’s Mayor Yuri M. Luzhkov, began
promoting “deprivatization” or, as the locals put it,
deprivatizatsia. Under this policy certain past privatizations
would be declared illegal and the transactions
would be reversed. The company then would be
either run as a state-owned enterprise or sold to
another party. For example, in October 1999, a court
stripped Wall Street’s Kohlberg Kravis Roberts and
the U.S.-Russia Investment Fund of their majority
interest in the Lomonosov Porcelain Factory in
St. Petersburg. These companies had purchased
the factory in 1998, but the courts ruled that the
company’s initial privatization five years earlier was
illegal. Sources suggested that the company was likely
to be resold to Soviet-era managers who were set to lose
their jobs when the new investors entered the picture.
Politicians, such as Luzhkov, vow that not all
privatizations will be reversed—only the illegal ones.
But one current problem is that privatization legislation
is nebulous about what could be termed a violation.
Anything from a missing piece of paper in the original
tender offer to investment requirements not being
met might be ruled a violation. And virtually anyone
could file a complaint to trigger an inquiry into a
1. What impact will the prospect of deprivatization
have on investment by managers of privatized
2. What effect will deprivatization have on foreign
investment in Russia?
3. Do you think that mass deprivatization is in the
long-run best interests of Russia?
4. Who gains from deprivatization? Who loses?
5. Assuming more people are hurt by deprivatization
than helped, why would a local politician
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