Something Extraordinary is Happening in the Russian Federation

Nine decades after Lenin and his Bolsheviks imposed Communism on the Russian empire and two decades after the implosion of the USSR, some of the country's largest industrial conglomerates retained by the state are to be privatized.

Lenin must be twirling wildly in his mausoleum on Red Square.

The government has fulfilled the instruction of Russian Federation President Dmitrii Medvedev and prepared a more extensive privatization plan, with First Vice-Premier Igor Shuvalov sending Medvedev a report with proposals on expanding the country's privatization program.

Shuvalov is proposing to fully privatize 14 state companies and to partially privatize another four by the year 2017. According to Shuvalov's proposal, the Russian government will completely divest itself of VTB, OZK, Inter RAO, Sovkomflot, Sheremetyevo, Aeroflot, Alrosa,  Rostelekom, Rosselkhozbank, Rosagrolizing, and the State Transport Leasing Company.

The government will retain the controlling packet of shares in OAK and OSK, 75.1 percent of the shares in Uralvagonzavod, and 90 percent in Rosnano and retain an as yet indeterminate "gold share" in Rosneft, Rusgidro, Zarubezhneft, and the United Grain Company (OZK). The state intends to retain control only in infrastructure-related monopolies, which include RZhD (Russian Railroads), Transneft, and FSK, where the Russian government will retain 75.1 percent of the shares.

The screaming of Russian apparatchiks over the Shuvalov plan can already be heard from St. Petersburg to Vladivostok.

Pipeline monopoly Transneft had already vociferously spoken out against the sale of even 3.1 percent of its shares (the state currently owns 78.1 percent), and had gained the upper hand with the solid backing of Ministry of Energy until Medvedev intervened, demanding more large-scale privatization.

Russian economist analysts are already predicting that if the government's plans really begin to be implemented, then the main struggle may develop between three groups of investors: foreign companies, private Russian investors, and structures close to the state that are acting in the interests of the so-called "state oligarchs."

What is clear at this point is that the topic of further privatization has immense political significance, as it may fundamentally alter the balance of power within Russia's elites. The uneven and hugely corrupt privatization policies of President Yeltsin's administration during the 1990s created a class of "oligarchs," who took advantage of the disorganized nature of the newly post-Soviet state to provide cash to acquire state property at fire-sale prices while extending political support to the embryonic regime. These oligarchic "new Russians," bitterly resented by the mass of the population for their obscene wealth, have spent the last two decades attempting to legitimize the profits from their thievery. 

The situation now is fundamentally different, as the state is strong and its assets are managed by prominent public officials, who face major problems in "legitimizing" their financial resources and capacities. A system of "feeding" was formed whereby officials received opportunities for the real management of companies and access to their resources by means of the institution of boards and directors' councils. Accordingly, a powerful class of "state oligarchs" has arisen, who "steer" major state companies and for whom privatization is a fearful concept.

So, why has Medvedev embarked upon this path? No one knows for certain, but many of the state companies, the last vestiges of the Soviet industrial base, have proven remarkably resistant to change and the efficiencies that a free market and private investment inevitably entail.

It is also a truism that mammoth Soviet-era industrial dinosaurs like Transneft are not only in need of massive infusions of investment cash, but that many of the new Russia's customers, most notably China, are increasingly unwilling to let business go on as before, and now want "a piece of the action" with their partners.

While it remains to be seen whether Medvedev can overcome opposition to his progressive privatization program, one thing seems certain - this round of privatization will be conducted very different from the first round of state divestment of property in the early 1990s, and if the oligarchs are allowed to participate, it will be on a playing field very different from their "Snatch and grab" tactics of two decades ago. Their primary concern now is to legitimize their loot, and having the example of Mihkail Khodorkovsky and Yukos in front of them, moderation will most likely be the watchword as Privatization Pt.2 unfolds. It is worth remembering that Prime Minister Putin has a massive stick with which to keep them in line - the tax police. Over the past two decades it was simply impossible to become a Russian billionaire legitimately, and for the oligarchs, those seedy fiscal rocks concealing their shady business practices underneath are best left unturned.

So, who knows? In this next round of privatization, perhaps Ivan Sixpack will finally get a chance to own a piece of the Russian Dream. Don't expect Medvedev's plan to become reality without some fierce behind the scenes struggles - twenty years after Communism expired, "Kremlinology" remains a most useful word.

By. John C.K. Daly of OilPrice.com