Russian President Vladimir Putin signaled that he might punish businesses owned by “unfriendly nations” that cease doing business in Russia by seizing their assets and possibly nationalizing their industries.
For foreign companies “planning to close business, we must act decisively” to “introduce external control and to transfer these business to those who want to work,” said Putin on Thursday. His comments were seconded by Dmitry Medvedev, vice chairman of Putin’s security council, who said businesses leaving Russia face “possible nationalization.”
“Back to the Soviet Union we go,” responded Visegrád 24, a news aggregation service that focuses on Central and Eastern Europe. Similarly, Russian businessman Vladimir Potanin said such a move would “bring us back 100 years, to 1917.”
If businesses cease operations in Russia and at least 25% of their stock belongs to any country designated an “unfriendly nation,” the government would place the business under the control of the VEB.RF, a state-owned development organization. If companies do not resume operations within five days or agree to sell, their business will be placed under external control for three months, then sold at auction.
“If no suitable buyer can be found, the state itself would act as the buyer,” wrote Kevin Rothrock, an editor with a news outlet covering Russia. “It’s going to be an absolute bonanza for corruption.”
It’s going to be an absolute bonanza for corruption.
— Kevin Rothrock (@KevinRothrock) March 10, 2022
Putin’s ruling United Russia Party said the move is necessary to “prevent bankruptcy and preserve jobs.”
More than 340 companies have halted operations in Russia since the outbreak of military hostilities with Ukraine late last month, according to the Yale School of Management. U.S.-based companies include Goldman Sachs, Apple, IBM, McDonald’s, Victoria’s Secret, and Nike.
Nationalization has a long history of turning a booming economy into one overrun by recession, not least in Russia, where successive “five-year plans” left Russian citizens without the necessities or luxuries of life.
Economic central planners lack the foresight and wisdom to anticipate the needs and desires of a whole country, whose economy turns on millions of individual actions. “Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance,” explained The Economist in 2017. “Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful.”
Nationalizing private businesses discourages entrepreneurs from investing in the country, for fear the government will one day confiscate their assets.
“Any lawless decision by Russia to seize the assets of these companies will ultimately … [send] the clear message to the global business community that Russia is not a safe place to invest and do business,” tweeted White House spokesperson Jen Psaki on Thursday night.
Nationalization of businesses similarly failed in Venezuela, which “wound up nationalizing more than 1,000 companies during Chavez’s 14 years in office. The moves eventually backfired by crippling domestic production and leaving the country more reliant on imports,” reported Bloomberg.
Among the industries the Bolivarian socialist revolution nationalized were the steel industry, electricity, agriculture, banking, Jon Miltimore of FEE reported that steel production subsequently reached an all-time low, Venezuelans have endured starvation and rolling blackouts, and Venezuela’s currency experienced an annual inflation rate of 10,398%.
Economists say government employees simply do not understand how businesses work, which will further damage Russia’s now-battered economy. Ikea “furniture is not growing inside the stores,” said Maxim Mironov, a Russian economist at Madrid’s IE Business School. “If you seize Ikea and Ikea isn’t going to ship you products, it’s not going to work!”