While it probably saved it from complete economic collapse, privatization has been a mixed bag for Russia. The first wave featured rampant corruption, awarding the most valuable state enterprises to cronies at prices far below actual value. The results left Russia with a new class of oligarchs and rampant mismanagement. Corruption became further entrenched in the economic system, and government.

In his announcement of the new wave, Vladimir Putin promises things will be different this time. For the sake of Russia as well as the rest of the world, I hope he’s telling the truth.

Hopefully, the forthcoming wave of privatization in Russia will fare better than in the past. Last week, Putin went out of his way to stress that federal property should be sold at the real market price without any discount or privilege. Assuming that market conditions are favorable to the privatization of state holdings next year, how likely is it to happen? Here it is important to appreciate the underlying motive as well as the more obvious ones. The clear motives include the desire to raise revenue and future productivity. The underlying motive is more complex and specifically Russian. It is useful to recall that the initial strengthening of state control starting in 2004 seemed to be fueled more by strategy and personal interest than any ideology. Unlike Western Europe during earlier phases of nationalization, the move toward state ownership was devoid of any ideological baggage.

Now, the latest move toward privatization is likewise fueled by the same pragmatic elements. With the designation of strategic sectors in May 2008, the state can now logically divest of its not so strategic holdings or reduce the extent of holdings even in strategic sectors.

Perhaps one of the most potent reasons to move ahead now is that it would clearly be in the personal interests of those who, purportedly acting on behalf of the state, grabbed the assets in the first place. These officials and their associates now occupy senior management positions and directorships as a result of state control in a wide range of companies and banks. However, their positions — and the associated wealth and power — are only secure as long as they personally occupy those functions. What better way to ensure that these new-style silovarchs and their families enjoy their newfound wealth than to receive shares on a personal basis as a result of a market IPO of all or part of the state holding in compensation for services rendered? It is much more remunerative than any pension plan.

If I am right that many siloviki and their associates are seeking to make permanent the benefits of their power grab, then the timing of the forthcoming IPOs could be meaningful. If they collectively start to think that Russia may become a more normal country with transparent corporate governance and the rule of law, then it may be time to cash in. (Russia beyond the headlines)

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