1995=Up for Debate: Privatization
Who Wins?
Russia's Reform Compromise
[Source]
SAC editor has introduced bold-face font,
introduced a LOOP on "oil",
and other [ID] and [EG] features significant for our course
Table of Contents listing the six "debaters" =
Yegor Gaidar
Grigorii Yavlinskii = "Loans-for-shares privatization [was] criminal capitalism"
Anatoly Chubais
Joseph Stiglitz on reason privatization failed
Jeffrey Sachs on corruption [mlf]
Liliia Shevtsova
Yegor Gaidar
Acting Prime Minister of Russia, 1992
Naive Capitalism
INTERVIEWER: [Reform advisor and entrepreneur] Boris Jordan says that a lot of
your team were naive, that you didn't really have a plan at the time. How do you
feel about that?
YEGOR GAIDAR: You know, without any doubt, we were naive, first of all because
the whole country for 75 years didn't have the experience of working in market
conditions, and there wasn't anywhere to import [this experience] from. The
whole of society was endlessly naive about everything that concerned the market.
Now the level of understanding of the realities of the market in [the Russian]
society is qualitatively different from the 1990s. And in this connection, what
Boris says, of course, is true. We, of course, were rather naive concerning the
many problems and realities of the market economy, in the underestimation of the
many risks connected with loans-for-shares, and in many other areas as well.
The loans-for-shares deals took place at a time when I hadn't worked in the
government for a long time. There were people with more authority who were
responsible for that question. That would be Yeltsin, Chernomyrdin, Anatoly
Chubais. But I discussed that subject, at least with Chubais, many times, and I
had my own understanding of the situation. In my opinion, the major motive at
that moment was a political one, connected with providing stability and not
allowing the return of communists to power. In 1995 a large portion of the
property in
INTERVIEWER: A necessary evil?
YEGOR GAIDAR: I think so. In any case, I wouldn't have attempted, relying on all
the subsequent experience, to say, "Well, friends, let's not undertake it, even
if the price for it would be still another communist experiment in
INTERVIEWER: What kind of capitalism will we eventually see in
YEGOR GAIDAR: Socialism leaves a long birthmark. In a normally functioning
market economy, in the first place, you need a system of tradition, which is
formed over the passage of generations and centuries, and you can't import such
a system of traditions. It can only grow gradually. And without this system of
traditions, capitalism is very wild and very ugly. This is an objective problem;
it isn't a question of choice. In Russia,
socialism was much more implanted than in Eastern Europe.
It had larger roots, and they went much deeper. There was a very weak respect
for property, a very weak respect for carrying out contracts, inefficient
bureaucracy, and many, many other things. [These] may change, but only with time
and with sensible policies. So in this connection, strictly speaking, for the
present, Russia
is not going to be a country of orderly and calm capitalism backed by a mountain
of traditions. Russia
will be a country of young capitalism.
See Complete Interview of Yegor Gaidar
Grigorii Yavlinskii
Deputy Prime Minister of Russia, 1990
Criminal Capitalism?
GRIGORY YAVLINSKY: Loans-for-shares privatization was a way of creating criminal
capitalism in Russia.
We learned a very important lesson [in the process], by the way. Karl Polanyi
[sic! Popper], as you know, wrote a book Open Society and Its Enemies,
and he described two main enemies of the open society: fascism and communism. In
the last 10 years Russia
has found out that open society has one more enemy. That enemy is capitalism
that is not limited by laws, by civil institutions, by tradition, by belief, by
trade unions, by anything -- simply the wild will for profit at any price. That
was the key idea of privatization here; that was the key of all changes here.
INTERVIEWER: Yegor Gaidar believes that loans-for-shares privatization was a
necessary evil that helped save the country from the surging Communist Party.
GRIGORY YAVLINSKY: It's not true, because it's very likely that [those behind
the scheme] were paying the Communists to [reinforce this point of view]. It
would have been much better not to pay the Communists and to take a different
approach. The mob of Communists in the country was growing together with the
poverty. Communism is a social disease coming from poverty. You can have a lot
of disease from poverty. For example, if you have no soap you have a lot of
disease. Communism is something like that. If you have a poor society and
poverty in the country, you have Communists. The reform as these guys were doing
it was creating more and more poverty, and the poverty was producing more and
more Communists. So it was absolutely possible to use a different approach and
not to distribute the property between 10 personal friends. There was no need
for that. The task was to give the property to millions of people. The [privatizers]
were not doing anything for small and middle businesses, and that was one of the
key issues. They were all the party of big business. But the big business in
Russia
was [corrupt] business.
INTERVIEWER: [Businessman
GRIGORY YAVLINSKY: This is a different story. The businesspeople who were using
the [situation] -- this is no subject for our discussion. Business in every
country takes on the behavior which is formulated by the state. If you're giving
[the businesspeople] such rules of the game, they are going to move [according
to these rules]. If you had loans-for-shares in the
The key issue that came from [Russian reform], for example, was that the sources
[of your money] are not important. What's important is to have money and to have
property; the sources are not important. That's an approach that says that goals
justify the means. But that's how Bolsheviks had made the revolution in
Russia, and that is why [the country] is a
disaster. Always when you are using the formula that the goals are justifying
the means you are destroying the goals.
The Russian Experience vs. the Experience of Eastern Europe
INTERVIEWER: Considering everything that you just said, what do you think will
be the nature of capitalism in
Russia? And why has it been so different from
the experience of Eastern Europe?
GRIGORY YAVLINSKY: The economic side of this shows that there are two different
types of countries. One type of countries is like
South Korea or Poland
or the
One of the main reasons why in Eastern Europe the reforms were very successful
and in Russia they were not
was that in 1991 in Eastern Europe the real
democratic revolutions happened. New people came to power. It was a real
replacement of the political elite, like it was after the war in
For sure, capitalism is the future for
See Complete Interview of Grigory Yavlinsky
Anatoly Chubais
First Deputy Prime Minister of Russia, 1994-1996
Russian Capitalism
INTERVIEWER: Some have said that you started out as a
market economist and an idealist and sold your soul in the process of
privatization. What's your response?
ANATOLY CHUBAIS: Well, the answer could be very simple. You can never please
everybody, especially when you are transforming a country like
INTERVIEWER: Looking to the future, what kind of capitalism do you think
ANATOLY CHUBAIS: I think that that there are no two countries with the same
economic mechanism or the same capitalism. American capitalism differs from
British or French or Austrian capitalism. I don't think that
[We've had] only 10 years of noncommunist history. That's a small historic time.
We had four generations of people who grew in the communist era. We need to have
at least one generation who've grown up after communism. It takes time, and it
will bring us a lot of problems. But I believe that the strategy is determined.
I believe that there is the irreversibility. I believe that there is no way
back; that's for sure.
See Complete Interview of Anatoly Chubais
Joseph Stiglitz
World Bank Senior Vice President and Chief Economist,
1997-2000
The Russian Road
INTERVIEWER: What went wrong in Russia's case?
JOSPEH STIGLITZ: Well, there [were] an enormous number of mistakes, one after
the other. They began with the shock therapy of liberalization, of eliminating
price controls for most of the commodities. The result of that was that there
was a massive inflation. So the high levels of inflation were, in fact, a
consequence of the shock-therapy strategy in the beginning. That wiped out the
savings of an enormous number of people. You didn't at that point have any basis
of people having wealth to have a legitimate privatization process. They then
had a privatization process that was corrupt and in which the country's assets
were turned over to a few, to the oligarchs. The strategy was privatization at
any cost. Do it quickly, is what the IMF kept telling them. [ID
World Bank and IMF] The IMF kept a score
card -- how many privatizations had you done? But it's easy to privatize, give
away the state assets to your friends. And in fact, it's not only easy; it's
rewarding, because then they give a little bit of money back to you. So that was
the strategy that was advocated and pushed. They then had policies like
capital-market liberalization before they were ready.
So what did that mean? You had an illegitimate privatization. The people who had
been able to use their political influence to get these billions and billions of
dollars of natural resources for a pittance were then told, "Well, you have a
choice: Keep your money inside Russia or take it to the United States." The
United States was having a boom; Russia,
because of the policies, was in a depression. Well, if you were smart enough to
persuade Yeltsin to give these billions of dollars, you were smart enough to
figure out it's better to take your money to the United States
[EG] or, even better,
to Cyprus, to secret bank accounts, to Switzerland, knowing full well that
there'll be a change in government. When there's a change of government,
there'll be a questioning of whether those privatizations were legitimate. If
you had your money in Russia,
people might say, "We want to do that over again; you effectively stole the
country's assets." So the experiences in
INTERVIEWER: So what would have been a better road?
JOSEPH STIGLITZ: Well, the better road were the roads that
INTERVIEWER: How did this affect the poor in
STIGLITZ: A number of things happened that contributed to the increase in
poverty. Poverty increased from around 2 percent to 40 percent or more,
depending on how you calculate it. [It was] one the most rapid increases in
poverty that the world would have seen in that short span of time, apart from a
natural disaster. With the tight monetary policies that were pursued and the
other policies, firms didn't have the money to even pay their employees. What
was tragic about it is while they didn't have enough money to pay their
pensioners, to pay their workers, they were giving away the valuable state
assets to a few rich people. So in a way, resources were leaving
And so by not getting the sequencing right [sequence = domestic political
institutions in place, then
marketization of economy], by not pacing right, they led to the
impoverishment of massive amounts of their people. Then, with the government not
having enough revenue, other aspects of life started to deteriorate. They didn't
have enough money for hospitals, schools.
Jeffrey Sachs
Professor of Economics, Harvard University
Three Roots of Corruption
JEFFREY SACHS: I feel that it was tragic how we in the West
with our power and our wealth failed to contribute to more satisfactory change
in Russia.
And of course I feel deeply unhappy about how Russian elites were even more
irresponsible, in general, than I could have imagined, allowing such massive
corruption to take place, for example. There were stars in this period, people I
admired tremendously. Yegor Gaidar [ID], I think, gave it his heart and his
extraordinary brains. He's brilliant, and he had a vision, and maybe in the end
that vision will triumph, although the path there has been so much more painful,
unnecessarily, than it ever had to be. I believe that the 1990s in
There's no doubt that after Gaidar was thrown out of the prime ministership at
the end of 1992, the level of corruption rose tremendously after most of the
reformers left at the end of 1993, and the oil and the gas resources started to
be distributed to cronies of the government. In a sense, the floodgates were
open for massive corruption.
Russia
experienced a level of corruption really rare in the world. A lot of societies
have corruption, but Russia
had three things that I think were quite a rare combination. First, it had no
organized opposition to government that could discipline government, that could
keep it honest. So you had elites that were free to act, in a sense, without the
restraining hand of judiciary or the bar association or religious groups or
other organized groups [?government?].
The second thing you had was an elite that had grown up in such an amoral, and I
think one should say immoral, environment under the Soviet system that they
really did believe that property is theft: "Okay, now we're in a
private-property system; we'll steal it."
The third thing that Russia had was a lot to steal. There are a lot of corrupt
places that don't have that much to steal, but Russia
had this extraordinary combination of huge natural resource reserves, and they
were in state hands. So they were privately defended. So you had all of these
elements -- the oil, the gas, the nickel, the chromium, the diamonds, the gold.
They were in state hands for the taking, as it were. There weren't the
restraining influences of civil society, and there wasn't the ethic within
government itself that you don't touch that stuff. So what happened was that in
1994, and even more in 1995 and '96, some of the most valuable natural resource
deposits were simply given away to those people we now call the oligarchs, who
became billionaires overnight. They were on the inside circle of the Kremlin and
were able to grab one of these resource companies.
[?Is there possibly a "fourth thing" missing in Sach's list? (EG) ] [LOOP on "oil"]
See Complete Interview of Jeffrey Sachs
Lilia Shevtsova
Senior Associate, Carnegie Moscow Center
Roots of a New Revolution?
LILIA SHEVTSOVA: The emergence of oligarchy meant the introduction of the unequal rules of the game in the economic field. And in fact, their emergence suppressed the initiative of the grassroots and entrepreneurial movement. The oligarchs, the tycoons are big fish. They swallow. They simply erase the possibility for the small fish to emerge.
I didn't anticipate [when fighting for reform] that I would see such
accumulation of wealth in the hands of such a narrow group of people. My
prediction was that there would be disparities, there would be conflicts, but I
never imagined this kind of disparities. This is very dangerous for the
stability of society. I never imagined that part of the Russian establishment,
especially top of the top, would be so unconscious of society's needs and
unconscious of the imminent danger [inherent in the inequality]. In fact, what
they are creating [are] prerequisites for a new revolution. They don't even
think about their own safety. They're reckless; they're aggressive; they enjoy
themselves. But in the end, they're digging their own grave, because revolutions
were made by people who got too frustrated, and in the societies that resemble
the Egyptian pyramid that has emerged in Russia; very rich and very few at the
top, and a lot of frustrated people at the bottom.
INTERVIEWER: How long will it take for Russia to become a real democracy and real market economy?
LILIA SHEVTSOVA: It seems to me that we should wait until the new generation comes to the power: the young kids who are now 20, 25 years old, who don't know what the word Marxism is; who are absolutely free of any complexes -- of the complex of superiority and of the complex of inferiority; who are longing to live in a normal country. A normal country means a return back to the European civilization, because for the time being, unfortunately, we are stuck between the floors. We are stuck between the past and the future.
INTERVIEWER: A decade after the collapse of communism, do you feel that Russia is moving in the right direction and Putin recognizes the rule of law and the fair playing field as something that is vital for Russia's economic success?
LILIA SHEVTSOVA: What I see in reality is the emergence of a new illusion within the establishment and within the society itself, an illusion that, in order to overcome Yeltsin's decay and in order to bring a strong state and, in fact, a strong regime, we need to have a new personified power. In fact, we are moving towards [the myth of] a new savior. And unfortunately, when Putin talks about the so-called dictatorship of law, what he's doing in reality is to create rules of the game that are much more [beneficial] for some people. He's attacking Gusinsky and Beresovsky, because these oligarchs and tycoons are his own personal enemies. And in fact, perhaps very soon we'll understand that this selective approach to justice would result in the emergence of new injustice.
The New Generation
INTERVIEWER: Does the legacy of communism mean a lot to the
younger generation? Are they prepared to be living in a global market economy?
LILIA SHEVTSOVA: Well, I'm looking at my son who is 19 years old, and I'm
looking at other people who are 20, 24, 25 years old, and I am amazed. These are
people who are absolutely free of old stereotypes. They don't remember
communism. They don't know what Marxism is. They don't have fear. They're
absolutely free and liberated of any complexes of inferiority. It seems to me
they are ready to live in this global environment. They live in the Internet
every day. They have a lot of friends abroad in all countries. My son has
friends in the Philippines
and in the U.S. and in