State Power, Institutional Change, and the Politics of Privatization in Russia

In January 1992 Russia's first postcommunist government launched a comprehensive economic program to transform the Soviet command system into a market economy. Privatization was and remains the heart of this plan. The original program had a clearly defined objective, namely, to create profit-seeking corporations, privately owned by outside shareholders and not dependent on government subsidies for their survival. As of two years later, however, this objective had not been achieved. By the summer of 1993 insiders had acquired majority shares in two-thirds of Russia's privatized and privatizing firms, state subsidies accounted for 22% of Russia's GNP, little if any restructuring (bankruptcies, downsizing, unbundling) had taken place within enterprises, and few market institutions had been created. During the first two years of its existence, the Russian state simply did not manage to dismantle old Soviet institutional arrangements governing property rights of large enterprises. Specifically, the state failed to implement its original vision of privatization, enforce hard budget constraints for large enterprises, or stimulate the creation of market-supporting institutions such as a legal code regarding private property and corporate governance or a social safety net. In sum, the allocation of property rights according to market principles had not yet even begun to occur.