Privatization, Conversion, And Enterprise Reform In Russia

Michael Mcfaul, Tova Perlmutter

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367284312
• eBook ISBN: 9781000308181
• Edition: 1
• Topic: History
• Subtopic: Comparative Economics
• Index: History

This volume provides an evaluation of initial efforts to convert post-Soviet Russian industry from that of a highly-centralized, military-oriented economy to that of a civilian economy with a stronger base in private enterprise. The authors address crucial issues of the embattled economic transformation at the level of particular enterprises and geographic regions as well as in the contexts of state policy, finance and planning. Their analyses offer readers an understanding of the various obstacles that impede post-Soviet economic restructuring and point to ways in which they may be overcome.

Part I
State Policies and the Context for Enterprise Reform

1
The Russian Model of Mass Privatization: Governmental Policy and First Results

Alexander Radygin

"And it should be known that there is no affair the settlement of which could be more difficult, the conduct more dangerous and the success more doubtful than the replacement of the old order with a new one."

Machiavelli, The Prince

Introduction

The wave of privatization that flooded the world in the 1980s reached the shores of Russia by the beginning of the 1990s. The term "privatization" became one of the most fashionable and indispensable attributes of proposed economic reform programs and discussions.

It is obvious that within the vast range of open or concealed interests, explicit political ambitions, and legal and spontaneous forms of privatization there can be no uniform interpretation of the process of privatization in Russia. This paper aims to describe, as much as possible, the state of privatization in Russia as of October 1993, with an emphasis on the main procedures and first results of mass privatization.

Alexander Radygin is the head of the Department of Privatization and Ownership Structure at the Institute for the Economy in Transition, Moscow, and has been an adviser to Yegor Gaidar, the former Acting Prime Minister of Russia.

One methodological note: in this paper, "privatization" is discussed in the narrowest sense of the word, i.e., as the process of complete or partial sale (transfer) of property (shares, assets) of state-owned enterprises to the private sector (both physical persons and legal entities). In the broader sense the notion of "privatization" also includes modification of management models for state-owned enterprises even without actual transfer of property rights, on the basis of leasing, franchising, contracting out, or other full or partial transformations of the legal status of state-owned enterprises.

The dominance of the public sector coupled with the long isolation of the Russian economy from the rest of the world make it inevitable that changes in property ownership will take place on an unprecedented scale. These two factors also mean that the privatization process will require intensive foreign investment. Foreign investment should not be used to achieve short-term objectives; it should help to establish effective economic units as an indispensable precondition for integrating the Russian economy into the world economy, thus making the economic reforms irreversible.

I. A General Overview, 1991-1993

In July 1991, well before the radical economic program of the Yeltsin-Gaidar government, the Russian parliament adopted two basic privatization laws, "On the privatization of state and municipal enterprises in the RSFSR" and "On personal privatization accounts and deposits in the RSFSR." These laws defined forms and methods of privatization in general terms: auctions, tenders, corporatization and sale of ownership interests (shares), sale of enterprises to their workers on preferential terms, free distribution of state property to all citizens, etc. Various political and economic factors, however, delayed the development of the necessary detailed regulations. Without these, actual privatization continued mainly in spontaneous forms.¹

With the beginning of Gaidar's reforms in November 1991, privatization was declared a key element of the transition to the free market. According to the new economic program, price liberalization and other measures of financial stabilization preceded large-scale official privatization. This was in conflict with the prevailing theoretical paradigm for transition to a market economy and with the experience of a number of other countries.

The Main Provision of the 1992 Program of Privatization adopted by presidential decree in December 1991 became the first document that actually regulated the process of privatization. In January 1992, the official, non-spontaneous privatization program began.

The final version of the State Program of Privatization of Public and Municipal Enterprises for 1992 was adopted by the Russian Federation Supreme Soviet only in June 1992, after some delay. (See "Summary of Privatization Programs," p.223.) This program was in fact a compromise on two interrelated issues. The first issue was the debate between those who advocated "paid" privatization, through which only the active part of the population would become property owners, and those who called for "free" privatization, under which vouchers would be granted to all citizens with privileges to labor groups. The second controversy was between the "people's privatization for all" model, which was advocated by the State Committee for the Management of State Property (GKI), and a model that would allocate property to enterprise employees, which was supported by Communists and trade unions.

The GKI's effort to make its program respond as much as possible to the interests of all Russian citizens made the document a hodgepodge of different privatization models. The program's inconsistencies may, in fact, be retarding the process of privatization significantly. Moreover, despite statements to the contrary by authors of the program, the interests of foreign investors appear to be last on the priority list.

Despite all the bitter political contention over privatization, the actual process moved fairly quickly in 1992 and 1993. By September 1, 1993, more than a third of all state and municipal enterprises had been privatized (77,810 enterprises, or 43.2 percent). About 1,500 applications for privatization were submitted in January, 1992; by September 1,1993, more than 120,991 applications had been submitted, of which 64.3 percent had been processed (see Table 1). Even though the actual rate of privatization lagged behind the planned rate, the overall number and pace of Russia's privatization was higher in 1993 than in 1992 (see Table 2).

By September 1,1993, more than 11,000 medium-sized firms not included in the list for compulsory corporatization set up working commissions to prepare for transformation into joint-stock companies. This is the best indicator of the actual response on a micro-level to the proposed "rules of the game." These data also suggest that if the current rate of privatization remains unchanged and no fundamental changes are made to the laws, the process of privatization is likely to become irreversible in 1994.

II. Mass Privatization

The widespread term "mass" privatization usually unites two independent but closely connected processes. The first is large-scale privatization, i.e. the transformation of large, state-owned enterprises (SOEs) into joint-stock companies (JSCs), with subsequent transfer of the companies' shares to citizens and other non-state legal entities. The second major process is the distribution more broadly through the population of vouchers or other similar certificates that give citizens the right to shares in these JSCs. In this framework, JSC shares represent supply, while the vouchers held by the population represent demand. The Russian privatization process joins the two processes together, mainly by selling shares both at open voucher auctions and by closed subscriptions for enterprise employees.

In fall and winter 1992 the implementation of Russia's model of "mass" privatization became one of the primary elements of the reform strategy. The development and launching of this model, notwithstanding all its drawbacks, can be regarded as the most favorable result of privatization in 1992 and 1993.

Corporatization

The Russian ideology of mass privatization values speed of privatization over quality of individual projects, and has therefore established one uniform, crude procedure.

There are at least two reasons for the GKI policy requiring compulsory transformation of a great number of large SOEs into open JSCs (about 5,000 in 1992 and 1993). First, the GKI sees vouchers as a means of maintaining "investment demand" on the part of the population. To provide a matching "supply" of potential investment it is essential that many enterprises turn into JSCs and issue shares. Second, property ownership in corporate form (even if the owner remains the same) is more successful at attracting and promoting the flow of capital among economic agents, given the crisis in financing whereby enterprises must rely primarily on their own profits, the state budget, and bank credits.

For large enterprises, the process of corporatization began without deiay after Presidential Decree #721 of July 1992 was put into effect. On September 1, 1992 the list of large enterprises required to become JSCs comprised 4,452 firms, and only two companies were already registered as JSCs; by September 1,1993 these numbers were respectively 5,056 and 2,118 (see Table 3). Including medium-sized enterprises and subdivisions of large enterprises that were incorporating separately from their parent firms, the figures for September 1,1993 were 20,000 structures in the process of forming corporations, and 7,500 registered JSCs with a total chartered capital of 575 billion rubles according to official valuations set at the end of 1991.

Close to one-quarter of corporatized enterprises (24.2 percent) went through the process according to Option One of the privatization program. The second option was selected by 74.2 percent, while only 1.6 percent used the third option (see glossary for a fuil description of the government privatization program). These figures show that enterprise employees preferred in general to obtain the controlling block of shares. Such a large degree of insider ownership will probably negatively affect mobilization of internal investment resources, reduce opportunities for secondary share issues, and deter significant Russian and foreign investors or investment institutions, including voucher funds.

At the same time, the dispersion of ownership among the workers (combined with the broad distribution through vouchers to many small investors) may lead to a serious problem, as noted by Manuel Hinds²: without strong or controlling shareholder blocks, management would have a free hand.

The voucher program

The concept underlying the voucher program was adopted by the Russian government in June 1992. The privatization vouchers are federal securities with a limited period of validity and a face value of 10,000 rubles. By the end of January, 1993 almost all of the vouchers were distributed (98 percent of the 150.5 million total).

Two Presidential Decrees, adopted October 14, 1992, have been extremely important for keeping up the price of the privatization vouchers: "On promoting the system of privatization vouchers in the Russian Federation" (#1229) and "On the sale of houses, plots of land, and municipal property for privatization vouchers" (#1228). The first of these establishes that at least 80 percent of the shares of a privatizing enterprise must be sold for vouchers (previously, the requirement was 35 percent). The second decree not only expands the sphere in which vouchers can be used, but also enables medium-sized enterprises (those with an evaluated capital between one and 50 million rubles) to become joint-stock companies following the procedure set out in Decree #721. Both decrees thus broaden the use of vouchers.

Experts believe, however, that an increase in the number of shares sold for vouchers may lengthen the sale process. Secondary issues of additional stock and buyout by the enterprise of the land on which it is located are allowed only after the sale is completed of all B-shares (all preferred shares, including those retained by the state). Increasing the mandatory percentage of enterprises' shares to be distributed through voucher auction thus may diminish the likelihood of a second issue and, consequently, of real investment.

The market price of vouchers rose steadily until mid-December, 1992, although it was still short of the face yalue; it then fell sharply to one-third of the face value by early February 1993. From mid-February, the rate increased again, and was relatively stable by May (4100-4200 rubies). Large-scale clearing operations of 10,000-30,000 vouchers at a time helped to stabilize the market as opposed to short-term speculations with cash payments. By September-October, 1993, the price was between 10,000 and 12,000 rubles, varying according to the political situation and fluctuation both on exchanges and in private sales. It should be noted that due to rapid inflation throughout 1992 and 1993, 10,000 rubles at the end of 1993 was worth less in real terms than 4,000 rubles in the fall of 1992.

It is also worthy of note that in only 20 percent of the regions does the number of vouchers correspond to the fixed assets to be purchased. Therefore the voucher's market price varies from region to region. One tangible result of this could be localization of voucher markets in several centers and high profits (up to 200 percent) for speculators on the price differences between markets.

The government has only one tool left to support the vouchers: mass voucher auctions. At the same time, this tactic may be counterproductive, if the shares of privatized enterprises suddenly flood the market and result in a slump in share prices.

In many respects, the dynamics of the voucher price were influenced by the political situation as well as by turnover on the exchanges. This does not mean, however, that the price of vouchers should be treated as independent of the privatization process.

In the first place, it is the current market price that serves as the basis for tentative "market" evaluation of shares and enterprises, following the voucher auctions. For example, the voucher auction price at the Bolshevik cake factory in Moscow last January was 0.1 (i.e., one 1,000-ruble share for each 10,000-ruble face-value voucher invested), while the voucher's market price was 6,000 rubles. Thus, a share with a nominal value of 1,000 rubles could be assessed at 6,000 rubles in terms of "voucher worth." The total capital equity of the enterprise, accordingly, would also be raised by a factor of at least six. This calculation is, however, quite crude; it is clear that the true market evaluation of the shares put out for sale can only be made by a secondary market of privatized firms' securities, which, for the time being, is still in its embryonic state.

Second, the current market price of a voucher (the actual cost to buy one) is the basis for comparing the opportunities to acquire shares at particular voucher auctions. This interpretation, however, is also subject to a reservation: the prices of shares per voucher depend not so much on the financial performance of enterprises as on the total number of securities put out for sale.

For this reason, any attempt to assess the true value of vouchers is doomed to failure if the evaluation is based on just one procedure. A real understanding must take into account the multiple nature of the value price at present. Under current conditions, an attempt to evaluate vouchers on the basis of "profitability" of enterprises (even through acquired shares) is unlikely to be productive; only "quasi-market" or "proprietary" approaches are possible. The various approaches that would be useful include: a) the current market price in turnover both on exchanges and outside them (clearing and cash); b) market prices at the moment a given voucher was issued (e.g. fall of 1992, weighted appropriately for inflation); c) share-purchasing power of vouchers at auctions (number of nominal prices per voucher), also weighted appropriately (this is perhaps the most accurate indicator of the true situation); and d) prices at voucher auctions, weighted according to the revaluation of enterprise assets (given an average coefficient multiple of 20-22).

Average market prices can be...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Foreword
• Preface
• Part I: State Policies and the Context for Enterprise Reform
• Part II: Management, Corporate Governance, and Enterprise Directors
• Part III: Regional Analysis of Defense Industry Issues
• Part IV: Transition to the Market at the Enterprise Level
• Acronyms
• Glossary of Terms
• Summary of Privatization Programs
• Soviet and Russian Legislation Relevant to Enterprise Reform