PROPERTY RIGHT SECURITY IN RUSSIAN DEPRIVATIZATION
- What impact will the prospect of deprivatization have on investment by the managers of privatized firms?
Managers of privatized firms will realize that additional investments will be more risky in terms of potential payback. The additional risk is political risk, which is brought about by political or governmental actions (Dlabay & Scott, 2006).The required time frame for returns on investments will be severely shortened. The longer the time frame, the more uncertain managers will be about being in business as a private firm. If deprivatization is forced upon their firm, private owners will lose all of their investments.
- What effect will deprivatization have on foreign investments in Russia?
Foreign investors will understand that the political risk of deprivatization in Russia is paramount. They will be hesitant to make capital investments in Russian businesses because there will be no guarantee that there will be any return, regardless of the prospect of economic success. Private businesses owned (even in part) by foreigners will likely be primary targets for deprivatization because profits from those businesses could be transferred back to the investors’ home countries, thereby reducing the benefits to Russia (Sullivan, 2004). A more recent example of this effect is the deprivatization of the oil industry in Venezuela in 2007 (Economides & Sangronis, 2007).
- Do you think that deprivatization is in the long-term best interests of Russia?
Overall, the Russian economy could benefit from having some industries and businesses deprivatized. Russia’s economy has benefitted from its move toward more of a free market, but a large segment of its population is poor, and the poor could suffer if adequate supply – a critical aspect of free market efficiency – is not available in the marketplace. In that case (as also seen in India and China), central control of some basic industries that provide for the well-being of the population is warranted (EconomyWatch, 2010).
However, the selection method for which businesses to deprivatize has been biased toward foreign-owned businesses, and thelegal basis for deprivatizing some businesses has been suspect. Deprivatization will return Russia to a more centrally planned and government controlled economy. The primary benefits of a market economy (e.g., competition, lower prices, adequate supply of goods, efficiency, and product innovation) will be reduced in deprivatized industries. The uncertainty for foreign investors will inhibit Russia’s ability to attract additional capital investment and slow its growth (Sullivan, 2004).
- Who gains from deprivatization? Who loses?
Since deprivatization is a political decision, friends and families of politicians and the politicians themselves are often the beneficiaries. As a firm is deprivatized many jobs held by the former private owners become available, and those jobs can be filled with people favored by the politicians. In basic commodity industries, the poor are likely to benefit because governmental ownership usually leads to rationing of scarce commodities, regardless of price.
Immediate losers in deprivatization efforts are usually foreign investors. Their stake in the deprivatized firms is lost as their ownership is usurped. Long-term, unless the firms and industries that are privatized are selected and managed carefully, the population of Russia could suffer with a lower standard of living and scarcity of products.
- Assuming more people are hurt by deprivatization than helped, why would a local politician support such a policy?
Local politicians want to portray an image that shows they are protecting the best interests of the people they represent. It is easy to spin a story about how private owners of firms are raking in excessive profits, taking expensive vacations, and living in luxurious homes while the consumers of their firm’s products are paying high prices. Foreign investors in local businesses can also be the target of a politician’s criticism because the profits from those businesses may be transferred back to the owner’s home country and not be re-invested locally, where the profits are actually made.
Politicians may also believe that a controlled economy, or a controlled segment of the economy, will benefit their particular constituency even if will not benefit the population as a whole.
References
Dlabay, Les R. & Scott, James Calvert (2006) International Business 3E. Mason, OH: Thomson South-Western.
Economides, Michael J. & Sangronis, Xiomara Sangronis (2007). The End of Privatization for Venezuela’s Oil. Retrieved from
EconomyWatch (2010). Advantages of Market Economy. Retrieved from
Sullivan, Jeremiah J. (2004) Exploring International Business Environments, Third Edition. Boston, MA: Pearson Custom Publishing.