TITLE : PRIVATIZATION IN RUSSIA : TRUE and FALSE AUTHOR: PETER RUTLAND Wesleyan University THE NATIONAL COUNCI L FOR SOVIET AND EAST EUROPEA N RESEARC H Title VIII Program 1755 Massachusetts Avenue, N .W . Washington, D .C. 20036 PROJECT INFORMATION :* CONTRACTOR : Wesleyan University PRINCIPAL INVESTIGATOR : Peter Rutlan d COUNCIL CONTRACT NUMBER : 808-27 DATE : December 20, 199 3 COPYRIGHT INFORMATION Individual researchers retain the copyright on work products derived from research funded b y Council Contract. The Council and the U.S. Government have the right to duplicate written reports and other materials submitted under Council Contract and to distribute such copies within th e Council and U.S. Government for their own use, and to draw upon such reports and materials for their own studies; but the Council and U.S. Government do not have the right to distribute, o r make such reports and materials available, outside the Council or U.S. Government without th e written consent of the authors, except as may be required under the provisions of the Freedom o f Information Act 5 U.S. C. 552, or other applicable law . The work leading to this report was supported in part by contract funds provided by the National Counci l for Soviet and East European Research, made available by the U. S. Department of State under Title VIII (th e Soviet-Eastern European Research and Training Act of 1983) . The analysis and interpretations contained in th e report are those of the author. CONTENTS Executive Summary i Introduction 2 The Shift to Privatization 2 The Voucher Program 7 Privatization and the Oil Industry 1 1 The Impact on the Behavior of Privatizing Enterprises 1 2 Progress in Small Privatization 1 4 Evaluation 1 6 Notes 19 Executive Summary . This analysis identifies a variety of particular aspects i n which the program of privatization has developed weaknesses and/or unanticipated consequences and distortions ; among thes e aspects are : • by forbidding any new leasing of state property i n preference for employee buyouts, the program halted one o f the most dynamic and entrepreneurial features of the Russia n economy in transition - the spinning off of new `smal l enterprises' such as cooperatives and leaseholds . • the worker buyouts characteristic of the program typicall y are manipulated by the current managers for their ow n benefit, resulting in their holding of a majority of share s (and control) of the new "Joint Stock Company ." The managers have thereby been able to consolidate thei r property rights and shield themselves from outsid e discipline - precisely the opposite of what the marke t transition is supposed to accomplish . • due to the structure, design and implementation of th e Russian voucher program, the pace of voucher investment o n JSC shares has been slow, and the prices paid for voucher s much lower than hoped for . The one exception has bee n voucher auctions involving firms which hold assets ripe fo r "stripping" (selling off of real estate, trucks, materials) , driven by investors seeking speculative short-term gain s rather than long term interest and control over th e enterprise . • based on the ruble/dollar exchange rate and the marke t price for vouchers at the time of this study (early autum n 1993) the implied dollar value of the entire Sovie t industrial sector is estimated at an absurdly lo w $5-10 billion . • although the privatization of the small retail sector ha s been relatively successful, its full potential has bee n hindered by much slower privatization of the cumbersome an d inefficient wholesale and transport network on which i t depends . This paper reflects events through early Autumn 1993 . The autho r provides an evaluation of his findings beginning on page 16 . For convenience, a copy of this evaluation immediately follows thi s summary . Prepared by NCSEER staff . i Evaluation The main criterion for judging the success of the program a t present seems to be the simple numerical score - how many firm s have been privatized, how many vouchers invested . 60 Large r questions such as are new owners emerging, and are they having a n impact on the operations of the plants, are dismissed as premature . At a press conference in August 1993, for example , Chubais declined to provide a single example of a privatized fir m which he considers a success story . Critics also argue that th e emphasis on the voucher program is keeping other capital source s (including foreigners) out of privatization . 61 Another majo r problem with privatization is that firms are shedding socia l services and local soviets cannot afford to maintain them . Leaving aside the privatization of small shops, in only a very few cases has privatization achieved its avowed goal o f putting new owners in control of enterprises . The process i s better described as `commercialization' than `privatization' , since what it involves is the conversion of state-owned an d centrally planned enterprises into profit-seeking, legall y independent companies, owned and controlled by their forme r managers and workers . This process is obscured by the bewildering variety of lega l forms now in existence, from holding companies owned by thei r members to firms in which a majority of shares are formally hel d by the work force . The latter has been the predominant form o f privatization thanks to the voucher method - contrary to th e intentions of those who introduced the scheme . What of the political goals of the privatization program ? The proponents of the scheme are now claiming that privatizatio n has successfully built a constituency of support for reform, an d has been partly responsible for Eltsin's victory in the 25 Apri l referendum . They also argue that privatization can claim at leas t ii partial credit for the depoliticization of Russian industria l enterprises - while conceding that allocation of credits is stil l a highly politicized process . However, one may question whether these political gains ca n really be attributed to the privatization program . The crucia l tests of Eltsin's popularity - his electoral victory as Presiden t in May 1991, his defiance of the August 1991 coup - predate th e launching of the privatization program . And the rea l depoliticization of Russian enterprises came long before the 199 2 law on privatization . The erosion of central authority set in a t least as early as 1983, when worker collectives were given th e right to elect directors . The 1987 Law on the State Enterpris e repealed this right, but went on to grant considerable autonom y to state firms, which they eagerly took advantage of amid th e mounting economic chaos of 1990 and 1991 . The break-up of th e central USSR ministries in the fall of 1991 was the final blow , but long before then local managers with the tacit cooperation o f their workforces had established de facto control over thei r factories . Thus one can argue that there has been a systemati c pattern of managers seeking autonomy from outside control, and i f they have merely utilized the privatization program t o consolidate their autonomy . If this is true, then it has worryin g implications for the impact of privatization, since managers wil l not be very amenable to seeing control flowing into the hands o f new outside investors . It is nevertheless true that the privatization program ha s enjoyed considerable public support - no small achievement in a land of massive public alienation from political institutions . However, a June 1993 poll showed that while 69% approved of th e idea of small private firms, only 27% favored large private firm s - and only 13% approved large private firms owned b y foreigners . 6 2 The economic transformation of Russia is proving to be a slow and painful process - more slow, and more painful, tha n anybody predicted . Nevertheless, it is moving forward - and step s iii towards the legal definition of property rights, even if they ar e enjoyed by the managers and workers, should be a positive ste p towards a market economy . On the other side, one could argue that focussing th e government's scarce political and administrative resources o n privatization has diverted attention away from other mor e pressing problems, such as the stabilization program, or th e acute need to resurrect some sort of payments system with th e neighbouring successor states . One can argue that the impact o n GNP of the collapse of inter-state trade has been far mor e devastating than the putative efficiency gains expected from th e privatization program . iv PRIVATIZATION IN RUSSIA : TRUE AND FALS E Peter Rutland Government Departmen t Wesleyan Universit y Middletown CT 0645 9 tel 203 347 941 1 fax 203 343 191 8 email PRUTLAND @ pacnet .pac .wesleyan .edu This paper was prepared as part of a project on `Th e Russian Construction Industry : from Plan to Market' , funded by the National Council of Soviet and Eas t European Research, contract no . 808-2 7 1 Introduction Against a background of political chaos and continuin g economic decline, privatization seems to be one of the fe w positive fruits of post-communist Russian economic policy . According to the Russian government's Western advisors, th e privatization now taking place is `the fastest in human history' , sweeping up 3-4% of state industry per month, and is `the mos t successful reform in Russia' .' Is this really the case, or i s the program a mere Potemkin village, disguising Russia' s continuing economic disintegration ? The shift to privatization Laws allowing for the privatization of housing, shops an d factories were introduced by the Russian Federation parliament i n July 1991, but were not seriously implemented because of th e confusion caused by the August coup and the collapse of th e USSR .