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Customer Review

5 of 6 people found the following review helpful
3.0 out of 5 stars Interesting, but Suffers From Major Omissions -, April 22, 2012
This review is from: Sale of the Century: Russia's Wild Ride from Communism to Capitalism (Hardcover)
Author Freeland describes her book as 'the story of Russia's capitalist revolution and how that revolution was betrayed.' It begins with Boris Yeltsin atop one of many tanks on 8/18/1991 surrounding main government buildings, talking down the occupants by declaring that their coup was illegal. By 1996, over 80% of Russian industry had been at least partially transferred to private hands. Seven years later, Russians had constructed a capitalist system, only to realize it was the wrong kind and they had to devalue the ruble, default on domestic treasury bills, and declare a moratorium on repayment of foreign commercial debt. By the end of 1999 the economy had shrunk to just over half its size a decade earlier - Russia now produced less than Belgium, average male life expectancy had fallen to 58, schools and hospitals regularly shut down because workers had not been paid for months, and power blackouts/water shortages were common. The fall was preceded by falling oil prices, the Asian crisis, and continued poor revenue collection.

Freeland's Russian heritage, ability to speak the language, and posting as the 'Financial Times' Moscow bureau chief were great assets to her reporting this important story. However, the book totally omits the role of U.S. advisers (Jeffrey Sachs et al), and is quite weak on the financial details of the values/costs of what the oligarchs acquired. (Another source estimates that management and workers received 51% of privatized SOEs at 1.7% of book value.) Further, its credibility is weakened by lack of footnotes - only general sources are listed.

Freeland's coverage divides the players into two groups (the new reformers [aka bureaucrats] and the oligarchs), and the privatization into three stages (shock therapy during 1991-92, voucher privatization during 1992-94, and loans for shares during 1995-96. The latter program easily became the most controversial.

In the early 1990s Russia's government deliberately set a goal of privatizing - both to obtain funds and to improve productivity/competitiveness. Shock therapy began after nearly a century of communism, only two months after Yeltsin took office. Most prices, except energy, transportation, some foods, and communications, were freed overnight. Import barriers on food were temporarily lifted. Private retail trade was liberalized. Prices shot up, inflation vaporized many people's savings, and there was wide discontent. Yeltsin's awareness of the unhappiness led to stalling further moves, and the reformers realizing that time was not in their favor.

Anatoly Chubais became the bureaucrat in charge and decided to use free vouchers (10,000 rubles/citizen - about $25) and competitive (eg. stock market) pricing. Side markets for buying and selling the vouchers quickly sprung up, and most vouchers/shares were acquired by enterprise managers. (About one-third were immediately sold for $5 - $20, another 25% were invested into fraudulent funds, another 11% were given away as presents, and 5% never invested at all.) Thus, insiders acquired most of the assets and the public eventually felt deceived. 'Insiders,' however, included few workers - most had no interest in becoming owners.

A few years later the government faced severe fiscal deficits, partly because of rampant tax avoidance. (Only 25% of firms met their tax obligations by the end of 1996.) Freeland reports that a 7/1/94 decree granted the small north Caucasus republic of Ingushetia the right to serve as a tax haven - registered privatized firms ($4,000) paid no local or regional taxes, only 20% of federal taxes, and also avoided half of normal import and export tariffs. The rationale - to create a bulwark vs. Chechnya and create some benefit vs. an existing tax treaty with Cyprus that already drained the Russian treasury.

Yeltsin also needed money for the 1996 elections. The two needs were met by a loans-for-share scheme proposed by banker Vladimir Potanin and endorsed by Chubais, then deputy prime minister. Some of the state's largest industrial assets (eg. Norilsk Nickel, YUKOS, LUKoil, Novolipetsk Steel) were leased through auctions for monies lent by banks to the government. The auctions, however, lacked full competition - eg. non-Russian participants were kept out via vague references to the firms as 'strategic companies,' and other acts taken such as blocking airports/roads to impede competitor participation. (Some were blocked by reformers angry at various parties, others blocked by fellow competitors.) Some existing 'Red Directors' were brought into the scheme by allowing them to join the original proposers. The loans were not repaid in time, and the assets retained - thus, this became a sale for a very low price. Some experts have further concluded that this significantly hurt Russia's growth since the oligarchs feared their purchases would be rescinded by future governments and they thus stripped assets from those firms and sent $100 - $150 billion in capital outside Russia.

Lessons Learned: 1)Russia lacked the infrastructure for controlling self-dealing (eg. issuing free new shares to insiders). Some got the funds to buy by skimming from the government (eg. sweetheart deals, theft), then looted the firms as well via skimming revenue, stiffing workers, not reinvesting and/or performing maintenance. (The firms were worth more to bad owners that looted them than good ones.) 2)Russia's corruption and bureaucracy impeded achievement of the envisioned benefits of privatization; regardless, existing managers didn't know how to run their companies in a market economy anyway. (Turned out that 'dirty privatization' was not better than no privatization.) 3)China also experienced similar, but lesser problems, due to its slower pace that allowed a)developing skill in prosecuting fraud, self-dealing, and government corruption, b)ensuring management for the national interest, not just the owners, and c)improved skill at valuing enterprises.
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Showing 1-1 of 1 posts in this discussion
Initial post: Jan 10, 2017, 6:05:22 PM PST
S_L says:
Very funny review/ In reality, this text have nothing do with the book. It's just reviewer's vision of Russian history. The difference with the author though is that the author spent some serious time in Russia as a reporter for Financial Times. I know for a fact that she was a very respectable (and very knowledgeable!) person in Moscow journalists circles. It means that she new what she witnessed. Sorry, I would rather trust a real witness like brilliant Христя Фриланд :)
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