In: Economics
1- The Rise and Fall of the Russian Oligarchs I: List three oligarchs that were covered in the video we watched in class
2- The Rise and Fall of the Russian Oligarchs II: Explain the loansfor-shares scheme in Russia in the 1990s.
Answer 2 -
The "loans for shares" scheme of 1995-6—in which a handful of
well-connected businessmen bought stakes in major Russian
companies—is widely considered a scandal that slowed subsequent
Russian economic growth. Fifteen years later, I reexamine the
details of the program. In light of evidence available today, I
concur with the critics that the scheme’s execution appeared
corrupt. However, in most other regards the conventional wisdom was
wrong. The stakes involved represented a small fraction of the
market; the pricing in most cases was in line with international
practice; and the scheme can only explain a small part of Russia's
increasing wealth inequality. The biggest beneficiaries were not
the so-called "oligarchs," but Soviet era industrial managers.
After the oligarchs consolidated control, their firms performed far
better than comparable state enterprises and companies sold to
incumbent managers, and helped fuel Russia’s rapid growth after
1999.
In 1995, facing severe fiscal deficit and in desperate need of
funds for the 1996 presidential elections, the government of Boris
Yeltsinadopted a "loans-for-share" scheme proposed by banker
Vladimir Potanin and endorsed by Anatoly Chubais, then a deputy
prime minister, whereby some of the largest state industrial assets
(including state-owned shares in Norilsk Nickel, Yukos, Lukoil,
Sibneft, Surgutneftegas, Novolipetsk Steel, and Mechel) were leased
through auctions for money lent by commercial banks to the
government. The auctions were rigged and lacked competition, being
largely controlled by favored insiders with political connections
or used for the benefit of the commercial banks themselves. As
neither the loans nor the leased enterprises were returned in time,
this effectively became a form of selling, or privatizing, state
assets at very low prices.
A "less cynical" interpretation was proposed by Professor of political science and international studies, Russell Bova, who offered as an alternative, that Chubais may have been motivated by concerns that privatization would fail, that in the face of mid-1990s economic difficulty, the country might revert towards a Communist resurgence if progress was not maintained, and that in light of these concerns, the long term political goals of democratization and asset distribution from state hands to private ownership might have been deemed more important than possible short term gains from the asset sales: "[I]f that meant undervaluing State assets then so be it".
The scheme has been perceived by many as unfair, and it is the loans-for-shares scheme that gave rise to the class of Russian business oligarchs, who have concentrated enormous assets, further increasing the wealth gap in Russia and contributing to the political instability. Furthermore, in the medium-term, this scheme significantly hurt Russian growth since the oligarchs realized that their purchases could be seen as fraudulent by future governments and thus they attempted to strip assets from the government enterprises rather than build them up.