In my lecture on Transition Economics I talk briefly about Norilsk Nickel, a Russian mining company that was at the center of the loans-for-shares scandal. One of the chief claims I make in that lecture is that many of the biggest scandals were one of the following:
- Contrary to economic advice on the transition process
In the case of privatisation, I ask the question "What actually happened to the companies at the centre of the loans for shares scandal?" Without claiming to have a definitive (or even authoritative) answer, I do point out that in the case of Norilsk Nickel:
- Norilsk Nickel was a state owned mining company that was privatised in 1997
- Thoss involved in buying out the company became infamous oligarchs, such as Vladimir Potanin
- Within a year it had paid all salary debt, restructure outstanding debts (several billions dollars worth) and began a crisis-management process
- There had been no reinvestment for over 20 years
- Potanin invested $1bn back into the plant in the early 2000’s
So I read with interest this week's Economist confirming this narrative:
The privatisation was indefensible from almost any point of view—but it worked. Today Norilsk Nickel is more transparent, efficient and profitable than it has ever been. It has a proper board of directors, professional managers and is worth nearly $60 billion.
From a Coaseian perspective (focusing on efficiency outcomes rather than distribution effects) the loans-for-shares "scandal" was not an unambiguous failure of the transition process. But to what extent was it part of an economic transition process?
The loans-for-shares auctions took place in the politically charged run-up to the 1996 presidential elections when a deeply unpopular Yeltsin was badly trailing Communist challenger Gennadii Zyuganov. Organized by Berezovskii, the oligarchs contributed generously to Yeltsin's campaign and used their media empires to guarantee the president positive coverage - and frighten the public with the specter of a return to totalitarianism.
My claim is that Norilsk Nickel encapsulates the view that the greatest controversies in the transition process were either (i) overstated; or (ii) contrary to economic advice. In this case, it probably demonstrates both.