NCPA - National Center for Policy Analysis

A Bizarre Tale Of Reverse Privatization In Russia

October 12, 1999

Russia is supposed to be embracing market economics. But you wouldn't know it from a recent court decision there.

A St. Petersburg arbitration court ruled yesterday that foreign investors must return to state control a porcelain manufacturing firm founded by Peter the Great's daughter in 1744. The court claimed that documents which paved the way for the company's privatization in 1993 were illegal -- a decision that appears to be a first in Russia since it began privatizations in 1992.

  • The foreign owners -- which include the U.S.-Russia Investment Fund, or Tusrif, and the investment firm Kohlberg Kravis Roberts -- say they will appeal the ruling.
  • Some of those involved warn that the ruling could set a precedent for reversing Russian privatization sales, but others claim the historic Lomonosov factory is a special case.
  • Russia's Ministry of State Property, which filed the suit, joined with workers to try to oust the foreign owners by seeking weaknesses in the privatization documents.
  • The foreign investors accuse Lomonosov managers of corrupt, inefficient management -- and say they have coerced some workers into opposing foreign investment.

Russia's Federal Securities Commission had asked in August that the property ministry withdraw its suit -- warning that a seizure would be "extremely dangerous for Russian capital markets."

A commission official went on to warn that the case "could create a vast, international scandal."

Source: Jeanne Whalen, "Russian Court Overturns Factory Privatization," Wall Street Journal, October 12, 1999.


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