The former Yugoslav Republic of Macedonia, supported by a World Bank policy-based loan, is trying a new approach to reform its enterprises. Enterprises will still be privatized as soon as possible, but the government frankly acknowledges that a few enterprises have considerable clout and must be subsidized for political, not economic reasons. These politically powerful enterprises are isolated from vulnerable banks, but given a direct subsidy in exchange for undertaking monitorable reforms. In exchange for the subsidies, the politically powerful enterprises have to end value-subtracting activities, break off their relations with banks, and immediately take steps to liquidate or privatize constituent units at a pace determined by the cabinet, where political tradeoffs are best made. Freezing the debts of the political enterprises frees banks from the pressure to make more bad loans. So far this isolation technique shows signs of success, and it could usefully be adapted by other transforming economies.