Voucher Privatisation and the Rise of Oligarchs

How former communist countries transferred state firms to private hands, and how Russia's privatisation created a class of super-rich oligarchs.

Transition economies had thousands of state-owned enterprises. Transferring them to private ownership, privatisation, was one of the hardest and most controversial tasks.

Methods of privatisation

Sale to outside investors, often foreign companies. Hungary and Estonia used this approach extensively.
Management and employee buyouts, giving ownership to insiders.
Voucher privatisation: citizens received vouchers they could exchange for shares in companies. The Czech Republic and Russia used vouchers widely, aiming to spread ownership across the population.

Russia’s vouchers

In 1992 to 1994, Russia gave each citizen a voucher with a face value of 10,000 roubles. People could exchange vouchers for shares in privatised firms, invest them in funds or sell them. Many people, needing cash amid economic hardship, sold their vouchers cheaply. Managers and well-connected buyers gathered vouchers and gained control of many firms.

Loans for shares

In 1995 and 1996, the Russian government, short of money, ran a loans-for-shares scheme. Banks owned by a few businessmen lent money to the government, receiving shares in major state companies, such as oil and metals firms, as collateral. When the government did not repay, the banks kept the shares. The auctions were widely seen as rigged, and valuable companies passed to a handful of buyers at low prices. These buyers became known as oligarchs, extremely wealthy individuals with great political influence.

Consequences

Research found that privatisation to outside owners, especially foreign investors, tended to improve firm performance, while privatisation to insiders often did not. In Russia, concentrated ownership, weak courts and asset stripping contributed to inequality and public distrust of markets. In the 2000s, the Russian state reasserted control over key sectors, especially energy.

The voucher sold for a bottle of vodka

Stories from the 1990s describe Russian workers selling their privatisation vouchers for very little, sometimes for goods like a bottle of vodka, because they needed immediate cash and did not trust the value of shares. Buyers who assembled large numbers of vouchers gained ownership of valuable companies cheaply.

Thinking giving everyone shares guarantees fair ownership

Voucher schemes aimed to spread ownership widely, but without information, trust and strong institutions, ownership quickly concentrated among insiders and the well-connected.

Key takeaways

Privatisation methods included sales to outsiders, insider buyouts and vouchers.
Russia's voucher and loans-for-shares programmes concentrated ownership in a few hands.
The loans-for-shares scheme of 1995 to 1996 helped create the oligarchs.
Privatisation to outside owners generally improved firm performance more than insider privatisation.