/3605S Public Disclosure Authorized Russ uP OCC 14H Public Disclosure Authorized C,reating Phvate Enterpnses and Public Disclosure Authorized Eficient Markets Editeclbv Public Disclosure Authorized Ina WV.Lieherrnan land Joln Nellis with Enna Karlova, Joyita Mukheijee, and Suhail Rahuja Russia:Creating PrivateEnterprses and EfficientMarkets .,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The findings,interpretations, and conclusionsexpressed in this document are entirelythose of the authors and should not be attributed in any manner to the WorldBank, to its affiliatedorganizations, or to the members of the Executive Directors or the countries they represent. To order copies of this book, please contact: Rose Malcolm RoomG4127 The Private Sector DevelopmentDepartment The WorldBank 1818H Street NW WashingtonDC 20433 USA Telephone:202-473-7495 Fax: 202-522-3742 © 1994 The Private Sector DevelopmentDepartment The WobrldBank 1818 H Street NW WashingtonDC 20433 USA Contents 1 Introduction 1 John Nellis Part 1 Privatization 5 2 An Overview of Privatization in Russia 7 Ira W, Liebermanand SzehailRahbija 3 Privatization in the Regions: Primorsky Krai 35 AlexandraV¢croux 4 Investment Funds and Privatization 45 Mark St. Gilesand Sallv Buxton 5 Voucher Investment Funds 5-5 Andrei lolgmig and YbtnrMilner 6 Techniques of Mass Privatization: Implementing the Voucher Auction Program October 1992 to June 1994 63 Jei/;ev L. Schwartz and Zoanne L. Nelson 7 Next Steps in Privatization: Six Major Challenges 75 Andrel Shleijer and Maxim Boycko Part 2 Capital Market Development 87 8 Capital Markets Development and Financing Russia's Transformation 89 Claidia Mlorgenstern 9 Securities Market Development and Privatization 111 RogerLeeds and .AichaelHarman Part 3 Corporate Governance and Restructuring 123 10 Ownership, Governance, and Restructuring 125 Joseph Blasiwith assistance!%oni Darya Rinina and Katertna Grachova 11 Corporate Governance during the Transition to Private Ownership 141 Lerov P Jonesanozd Natalia TLkanova 12 Restructuring Large Enterprises in Preparation for Privatization: A Case Study I59 H akan J. Wilson 13 Newly-Privatized Enterprises: A Survey 171 Leila W'l}bsterwith JuerNentFranz, kor Artemiev,and Harold Wackman Co\ 11.NTS Part 4 The Emerging Private Sector: Constraints and Regulations 185 14 Constraints to Private Enterprise in the FSU:Approach and Application to Russia 187 MarieSheppard 15 Private Sector Manufacturing in St. Petersburg 203 LeilaW'ebster and Joshta Charap 16 CompetitionLaw and Policy 221 R. ShyamKhemani Synopsisof Conference Proceedings 229 GraceLao and John Nellzs Glossary 245 EnnaKarlova Contributors 251 RUSSIA:CREATING PRIVATE ENTERPRISES AND EFFICIENT MARKETS Acknowledgments The editorswish to acknowledgethe sup- Directorof the WorldBank's Private Sector port and assistanceof the manyofficials- Development Department, encouraged and in particularthe tirelessand dedicated and supportedthe idea of the conference support staff-of both the RussianState and the productionof the book. Editorial Committeefor the Managementof State assistancewas providedby Peter Fidler, Property (GKI) and the World Bank's BruceRoss-Larson, and Vmce McCullough, ResidentMission in Moscow,who greatly and desktop publishingwas handled by assistedthe authors in their work. Roger Heather Imboden. Gloria Orraca-Tetteh Gale, the IFC ResidentRepresentative in prepared the manuscripts,Susan Marcus Moscow,was consistently helpful in provid- designedthe cover,and Suzanne Smith pro- ing informationand interpretingevents for vided adviceon production. the editors and authors.Magdi Iskander, Ac KLNOXWlE DGMNtENTS I CHA PTER 1 Introduction John Nellis Stunning accomplishments About 40 million Russian citizens had becomeowners of sharesin privatized Privatization is the one bright spot in the firms. ... by the end of generally bleak Russian economic land- These achievements border on the June 1994, between scape. Starting from less than zero' in miraculous, having taken place in the ab- 12,000 and 14,000 November 1991, a small,determined, and sence of consensus on the desirability, often beleaguered group of Russian scope, and pace of liberalizing reform in medium-size and reformers-with some important external general, and privatization in particular, and large enterprises support'-has been able to: in the absence of what would normally be had been trans- * Devise and implement, in the face of considered the requisite adrinistrative and strong resistance, a "corporatization" financial resources to implement, monitor, ferred to private program that turned about half of and enforce a privatization program of this ownership... Russian state-owned enterprises into magnitude. Yet it was done. The onlv joint stock companies; potentially comparable privatization expe- * Persuade the most important 'insider" riences are those of the former East stakeholders who might have opposed Germany and the former Czechoslovakia. privatization-workers and man- agers-to take part in the process by Comparisons to Germany and the for- offering them shares in the firms in mer Czechoslovakia which thev work for free or at a low price; In Germany the Treuhandanstaltsucceeded * Conceive and implement a voucher in putting more than 10,000 enterprises in program, giving 144 million participat- private hands between 1991 and 1994. This ing Russians a chance to become, along achievement cannot and should not be with insiders, owners of enterprises; minimized. Nonetheless, German privati- * Create a national voucher auction sys- zation was a case of integration of a for- tem in more than 85 regions, with 750 merly socialist economy into a functioning, bid reception centers; and indeed flourishing, market economy, an ex- * Facilitate the creation of some 650 pri- ercise that differs sharply from the total vate investment funds that compete for transition that Russia confronted. In vouchers and convert them to diversi- Germany, an irreplicable combination of fied shareholdings in newly privatized West German legal and administrative in- enterprises. stitutions, West German managers, and The result is that bv the end of June West German money eased many of the 1994, problems of the integration. * Between 12,000 and 14,000 medium- The mass privatization program of the size and large enterprises had been former Czechoslovakia, which transferred transferred to private ownership; 1,491 firms into private ownership in 1992 * These firms employed more than 14 and 1993, with a "second wave" coming in million people, or about half of those both successor states that will touch an ad- employed in Russia's industrial sec- ditional 1,300 firms, is the best and per- tor; and haps only comparator to the Russian privatization program. The Czech and different initial conditions, the period of Slovak privatization programs are remark- "extraordinary politics"4 was both shorter able achievements. Indeed, a few Czechs lived and less intense than in other have suggested that their privatization economies in transition. This point must method is superior to Russia's since no spe- be grasped, both to comprehend how tru- cial inducements have been given to insid- ly impressive Russian privatization results ers. Outsiders, in the form of external have been, and to understand why the investors and investment funds, have Russian process has unfolded as it has, played a major ownership and governance with the defining characteristic being the role from the outset, and some Czech prac- provision of financial rewards or equity titioners and external observers now criti- stakes to all the various actors and agen- cize Russia for not having followed the cies involved-meaning that the approach Transfer of same course. was thoroughly decentralized.5 Had the ownership to Without disputing the impressive Russian reformers attempted to follow the Czechoslovakian achievements, it has to be Czechoslovak route of centralized admin- insiders was a stressed that Russia embarked on privatiza- istration of the process, and had they tried striking step.... tion in circumstances very different from to treat enterprise insiders as one poten- External investors those of the former Czechoslovakia. First, tial purchaser like any other, it is likely that complete pre-communist Russia in 1917 was marked- little privatization would have occurred. will complete the ly different from pre-communist Czech- restructuring of oslovakia in 1948; it was less industrialized What happens next firms begun by the and less capitalist. Second, the length of the communist period in Russia was almost The Russian privatization team thus opted transfer of double that in Czechoslovakia, meaning for the method that they judged would ownership. that in Russia collectivist approaches and yield results-and they got them. But as a habits had more time to take root and be- consequence, the results were tentative come deeplv ingrained. Third, and para- and partial. Transfer of ownership to in- doxically, Czechoslovakia benefitted from siders was a striking step, but only a first an absence of reform communism. Unlike step. It must now be followed by equally Hungary, Poland, and to some extent essential second steps opening ownership Russia, Czechoslovakia basicallv main- of privatized firms to external investors tained the central planning system until the and owners. These, in turn, will bring verv end. The successor governments thus needed capital, market access, managerial have not had to debate the scope and pace know-how, and a