Does Nationalization Work?
Evidence from Russian State Takeovers
Carsten Sprenger
International College of Economics and Finance,
State University – Higher School of Economics Moscow
This draft: November 9, 2009
Abstract
There is the recent trend toward more state influence in certain sectors in the Russian
economy. We study the related incidence of nationalizations, in most cases the purchase of
previously privatized companies by state-owned enterprises and its effect on the performance of
the acquired firms. To this end, we construct a database of nationalization deals in Russia for the
years 2001-2008. Apart from the overall effect on performance we investigate some of the
mechanisms through which state ownership may affect company performance, in particular the
access to soft loans, changes in financial leverage, the composition of the board of directors, and
changes in the top management.
Introduction
Despite the mass privatization and subsequent privatization programs in Russian during
the 1990’s, state-owned enterprises (henceforth, SOEs) are still important in the Russian
economy. This phenomenon is not specific to Russia – one can observe in both developed and
developing countries that a number of oil firms, banks, and parts of the infrastructure sectors are
controlled by the government. A more specific feature of the Russian economy is the recent
trend toward more state influence in certain sectors in the economy and the related incidence of
nationalizations, in most cases the purchase of previously privatized companies by SOEs.
Neshadin et al. (2007) single out five sectors that are dominated by SOEs: infrastructure (railway
transport, pipelines, communication, nuclear energy), extraction of natural resources (oil and gas,
diamonds), the military-industrial complex, financial services, and mass media. The Russian
government gives several objectives of taking ownership positions in various sectors of the
economy: the modernization of infrastructure, the diversification of the economy by attracting
investments in high-technology sectors, innovation, and the creation of large vertically integrated
structures that can survive the international competition.
While there are several studies on the privatization process in Russia, there is almost no
systematic research about the performance of remaining and newly established SOEs in Russia.
The issue of performance of SOEs is however of great importance since it is a precondition to
achieve any of the above mentioned industrial policy goals.
This is paper is part of a research project on the relative performance of Russian stateowned enterprises. Such a performance evaluation can be done in three different ways:
1. One can estimate the effect of ownership on various measures of performance for a
large panel of Russian firms over several years (approx. from 1999-2008, subject to data
availability). To do this one can apply standard econometric methods such as multiple
1
regressions controlling for other potential impact factors such as industry affiliation and firm
size.
2. Alternatively, one can choose for each state-owned company in the sample a privatelyowned peer that matches the SOE as much as possible in its industry affiliation, size, location
and other parameters and compare their performance.
3. Another interesting approach is to look at nationalizations, i.e. changes in ownership
from private ownership to state ownership and compare the performance of the same company
before and after nationalization controlling for industry and macroeconomic variables that affect
all firms in the economy.
In this study we pursue the latter approach. It seems that since the beginning of this
century a sufficient number of state takeovers has taken place to employ the tools of econometric
analysis. Looking at nationalization transactions also seems interesting because this is a novel
approach to the study of the comparative performance of SOEs. In a first stage, we will present
descriptive statistics on the importance of the phenomenon of nationalization in several
industries.
Performance can be measured by a variety of indicators; both based on accounting
measures (e.g. return on assets), productivity (e.g. sales per employee, or if data allow to
estimate production functions, total factor productivity), and, where available, based on market
valuations (e.g. Tobin’s Q).
We use the definition of SOEs given in the OECD Guidelines on Corporate Governance
of State-owned Enterprises (OECD, 2005b): SOEs are enterprises where the state has significant
control, through full, majority, or significant minority ownership. We refer to state control at any
level of government and through pyramid structures, i.e. direct and indirect ownership of the
federal government, regional and municipal governments. Accordingly, under nationalization we
understand the transfer of control over a company from a private person or entity to the state or
an SOE.
Literature Review
In this section, we review the relevant empirical literature on the comparison of stateowned and privately owned enterprises. There are two main strands in this literature, one focuses
on the performance effects of privatization, and the other performs cross-sectional comparisons
of SOEs and private firms while controlling for other performance drivers. The literature on the
effects of privatization in Central and Eastern Europe and the former Soviet Union has been
summarized in two excellent surveys by Djankov and Murrell (2002) and Estrin et al. (2009).1
While in Central and Eastern Europe privatization typically brought improvements in technical
efficiency (labor productivity, total factor productivity) and financial performance, the effects for
the countries of the former Soviet Union are less clear. For example, Brown and Earle (2006)
find positive effects of privatization on total factor productivity in Romania, Hungary, Ukraine.
The effect for Russia is positive or negative depending on specifications, but in any case smaller
than in the other three countries. In addition, any positive performance effects of privatization
need more time to materialize than in the other countries.
1
For evidence on privatization around the world see the survey of Megginson and Netter (2001).
2
In a recent study on a large sample of privatization deals in China, Bai et al. (2009) find
that privatization of China’s SOEs had almost no effect on employment in the medium run, but it
increased labor productivity and firm profitability. These changes were more pronounced when
state ownership was reduced to a minority position.
Since there have not been any major privatization steps in Russia in recent years, the
study of the relative performance of the currently existing state-owned enterprises in Russia
compared to their private counterparts will necessarily have to draw heavily from the second
strand of research that uses a cross-sectional approach.
The comparative analysis of state-owned and private enterprises in developed countries has lead
in most cases to the conclusion of superior performance of private firms (e.g. Boardman and
Vining, 1989), but in some cases no significant difference has been found (e.g. Kole and
Mulherin, 1997). Recent studies for China however question the general conclusion of the
inferiority of state ownership. Both Tian and Estrin (2008) and Chen et al. (2009) conclude that
state ownership can have a positive effect on corporate performance. Tian and Estrin (2008) find
a positive effect of state ownership if it exceeds a certain threshold level (approx. 25% if
performance is measured by Tobin’s Q). Chen et al. (2009) show that SOEs affiliated to the
central government outperform private companies and companies with other forms of state
ownership. The authors conclude that the government may be an effective owner in countries
with a weak institutional environment.
What is clearly missing is a systematic study of the comparative performance of Russian
SOEs using recent data. There is some research on the related topic of corporate governance in
Russian SOEs based on survey data (Avdasheva et al., 2007 and Yakovlev, 2008). I will consider
corporate governance as one of the main mechanisms through which ownership can affect the
performance of a company. A cross-sectional comparison of SOEs and private companies can
benefit from the methodological advances in the papers cited above, while an analysis of
nationalization transactions as we aim to undertake it can mainly use the methodology of the
literature on the performance effects of privatization.
Work on a database on nationalization transactions
At the present stage we have dedicated our efforts mainly to the search of data on
nationalization deals in Russia for the period 2001-2008. One source of data on takeovers by
state-owned enterprises are articles in the business press and in Russian academic journals, for
example a series of articles in Kommersant Den’gi on nationalization efforts of the Russian
government in several sectors (Pappe and Drankina, 2007), as well as Neshadin et al. (2007) and
Radygin (2009). For the creation of a complete database of nationalization deals we use the data
bases Zephyr and Ruslana (Bureau van Dijk). Zephyr contains information on mergers and
acquisitions, IPOs and joint ventures around the globe. In Ruslana, there is information on more
than 1.5 million Russian and Ukrainian companies. We extracted a list of domestic acquisitions
by Russian companies from Zephyr and a list of SOEs from Ruslana. With the help of the list of
SOEs we filtered out all acquisitions that were made by SOEs. A practical problem here is that
the company names may slightly differ. Next, we exclude deals where also the target was an
SOE, i.e. pure consolidations of state property. As a result, we have a preliminary database of
around 100 nationalization deals, which is sufficiently diversified across sectors.
Conclusion
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Using our database and the analytical material of Russian business press and academic
journals, one can say that nationalization has been a quantitatively important feature of the
Russian economy in the last decade. For the analysis of its effects on company performance, we
need to collect also financial statements of target companies before and after the nationalization.
In addition, we would like to highlight some of the mechanisms through which state ownership
may affect the performance of companies, namely
- the size of the ownership stake of the state, which might be important for the actual
distribution of control within the firm,
- whether or not there has been a change in the top management around the
nationalization transaction (and whether the management kept a stake afterwards)
- the composition of the board of directors (independent directors vs. state
representatives voting according to previously determined directives),
- which state agency fulfills the ownership function of the state,
- whether a company has become a part of a state holding, e.g. one of the recently
created State Corporations
- whether financial leverage of nationalized companies increased, whether the sources
of financing change towards state-owned banks or whether firms receive direct
subsidies.
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