a product of the Socialist Economies Reform Unit, Country Economics Department - is ..... that it will bring swift improvement in the nation's economic fortunes is less certain. ... mas.ive divestiture onto the new political groups that came to dominate .... This o -paratory stage may include a number of needed improvements.
Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
PolicyReearch
l
l)
WORkING PAPERS SoclalistEconombiReform CovntryEconomicsDepartment The World Bank November1991 WPS805
Privatization in the Soviet Union The Beginnings of a Transition
Public Disclosure Authorized
SergeiShatalov
Economicinitiativehas passedfrom the center to the republics, some of which have alreadymoved from legislationto implementation of their own republic divestiture policies. In an optimisticscenario,this trendwill continue. But even under the most pessimisticscenario,it is unlikelythat privatizationprocesses identifiedin this study will be stopped. Policy Rescarh Working Papers disseniinate the findings of work in progress and cncouage the exchangeofideas marngBank staff and allothets interested in devlopnent issuealThesepapcrs,distributedby theRcsearchAdvisory Staff,anythenamesoftheauthors,retlect only tirviews,and shouldbe usedand iteds cordingly o efindings,ainteptions, ndconclusionsaretheauthot'own. They ghould not be attributed to the Wodd Bank. its Board of Ditestors, its managernent, or any of its mcmber countrias
m_
PolicyRemrch
lStist EoonamWs Rofonn
WPS805
This paper - a product of the Socialist Economies Reform Unit, Country Economics Department - is part of a larger effort in the Bank to study, in a comparative mode, the reform process under way in socialist and formerly socialist countries. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact CECSE, room N6-037, extension 37188 (28 pages). November 1991. Shatalov, a senior fellow at the USSR Academy of Sciences, completed this paper before the events of August 1991. But his analysis of recent modes of privatization in the Soviet lJnion is still important for understanding the evolving situation. The "present" All-Union regime, Shatalov explains, was the first regime to implement wide-scale privatization. The process may take different courses, being initiated from "above" (for example, by ministries) and from "below," by enterprises. Recent measures of the AllUnion authorities, he contends, had the effect of restricting any rmalrole in privatization to the social and economic elite because, in early 1991, monetary and price reform wiped out a significant part of household savings. Leading international corporations are still interested in getting a stake in such top Soviet
performers as KAMAZ; in those few cases it will be possible to negotiate terms more advantageous than those dictated by the dwindling value of the ruble. The All-Union government has been anxious to prevent "wild" foreign participation at any cost. That cost may prove excessive, however, as confidence in the ruble and in the Soviet economy weakens. In the meantime, the economic initiative has passed from the center to the republics. Some republics have already moved from legislation to implementation f their own divestiture policies. This trend appears likely to continue. But one cannot exclude other scenarios, for example, a collapse that provides an opportunity for some political force to try to reverse course and restore authoritarian rule under the slogan of "law and order." Ev'-n in such a case, however, it is unlikely that the processes of privatization identified in the study will be stopped.
The PolicyResearchWorkingPaperSeriesdisseminatesthe findingsof workunderwayin theBank.Anobjectiveofthe series is to get these findingsout quickly,even if presentationsare less than fuDypolished.The findings, interpretations,and conclusionsix.these papersdo not necessarilyrepresentofficialBankpolicy. Producedby the Policy ResearchDisseminationCenter
TABLEOF CONTENTS OVERVIEW ..................................................
1
Goals ......................................................
1
Scenarios..................................................... Basic AvailableOptions-Their Advantagesand Drawbacks..................... Major Impediments..............................................
2 2
4
POLICAL CONTEXT AND PUBLICDEBATE .............................
5
COMMERCIALIZATIONOF THE STATE SECTOR ...........................
8
PRI'ATIZATION IN THE ABSENCEOF OVERALLSTRATEGY -"SPONTANEOUS" PRIVATIZATION .......... ......................... Privatizationfrom Above ........................................... "Showcase"privatization . ........................................ "Ministerial"privatization ..... .......... ........................ Privatizationfrom Belew .................................... Buyouts ............................................
9 9
10 10 0 10
The Future of Larger Entities .................................... Perceptionsof Privatization.................................... AssessingPrevailingPrivatization ...................................
12 12 13
REGULATIVEAND LEGAL FRAMEWORK................................
14
Delineationof Authority ................................... InstitutionBuilding ................................... MakingModels or MakingTissue? ................................... Small-ScalePrivatization. ................................... Complexityand Future Needs ....................................
14 14 16 16 17
SOURCESAND MECHANISMSOF FINANCING ............. Funs from Within ........................................... Loan Sources ............................................ An Interesting Model ...................................
...............
18
18 18 20
VALUATIONOF STATE PROPERTY ...................................
20
DEMONOPOLIZATION...................................
21
SECTORSPECIFCS ...................................
23
THE GROWTHOF AN INDIGENOUSCAPITALISTCLASS .....................
26
CONCLUSIONS ..................................................
27
Sergei Shatalov Senior Fellow USSR Academyof Sciences
PRIVATIZATION IN THE SOVIET UNION: THE BEGINNINGS OF A TRANSITION, Sergei Shatoov2 Massivedivestitureof state-ownedenterprisesis widelyseen in the SovietUnion as the centerpieceof economicrestructuring. Many influentialpoliticiansand economistsregard quickprivatizationas the singlemost importantconditionfor the successof reform. Yet the road to privatizationisidifficult, and the size of the task is unprecedented. The Soviet Union is gearing up for major privatization later than other Eastern Europeannations. Similaritiesare already emerging: distortionsof "spontaneous"privatization,concernsabout social equality,difficultiesin valuationof enterprises, legal hurdles, and the like. The time is appropriateto study the process that will largely shape the country's economy. OVERVIEW No other Eastern European countryhas as centralizedan ownershipstructure as the USSR. Accordingto an early 1991estimate, 92 percent of all productivecapacityis in the hands of the state-7,000 industrial enterprisesand more than 800,000entities in trade and services. The nation's total capital assets are estimatedat 3 trillion rubles, of which 2 trillion rubles are in the productive sectors. Of these productiveassets, 45 percent are in industry, another 20 percent in agriculture, 18 percent in transport, and 5 percent in construction. When one considersthe amount of investiblesavings,privatizationof assets priced even at depreciatedbook value3 looks largely out of reach. Potentialtotal investordemand is estimatedat 150 billion rubles. With 2 trillion rubles in productiveasse's, divestituremay take decades. Recent moves by the central government,wiping out a significantpart of householdsavings, have strengthenedthis possibility. Goal First and foremost,privatizationis viewed as an instrumentto improveeconomicperformance. New private owners will strive to cut costs, increase profits, and target their productionstrategies on consumerneeds. The quality and choice of goods will be upgraded. The state will gain both from 1.
This paper was completedprior to the eventsof August 1991. Some of the areas dicussed in the paper, notably in the area of legislation, are therefore rapidly being outdated. However, analysesof recent modes of privatizationin thc Soviet Union are still consideredto be important in increasingunderstandingof the evolvingsituation.
2.
The author wishes to acknowledge CECSE (World Bank) support for this study. The author had benefitted from the incisivediscussion during special seminar at the World Bank in April 1991 wbere this paper was first presented and from Alan Gelb's helpful comments on the earlier drafts. The completion of the study was assisted by a grant from the University of Iowa, where the author was a VisitingScholar in Spring 1991.
3.
Depreciation is estimated at 45 percent in industry and 33 percent in the economy as a whole.
4.
Here only key "consensuspoints" are outlined. Perceptions of different political groups vary greatly, up to the mutually exclusive. For analysissee the section on political context.
Privauzation
in the Soviet Union
2
part of its gains can be used for monetarystabilization. Enterprises, unable to rely further on subsidies,will face mountingcompetitionand will have to improve performance. This picture is, of course, idealistic. Not all these goals will be achievedquickly-and they may contradicteach other. Overall macroeconomicimprovementwill be attained only in the long term and is dependenton othe- 3spectsof policy. In the deterioratingmacroeconomicenvironmenteven efficiententerprisesmay faiter. Politicaltensionsmay prevent the state from using its sale proceeds to cut its deficit. The extreme monopolizationin the countrymeans that competitionand improvementin the quality of goods and serviceswill be slow to materialze. Sconarios Hardly a year has passed sincepublic debate droppedthe term "destatization,"which fit the socialisticinstinctsof some key politicalfigures, and beganto use the notion of "privatization." Definitionsvary but are graduallybecomingclearer. Judging from recent discussions,privatizationis often perceivedas a very broad process that should lead from tightly centralizedstructuresof ownershipand economicdecisionmakingto more diversifiedand decentralizedones. Gennadiy Melikvan5 indicatedthat the packageof All-Unionlaws, passed in June 1991, embracesthree consecutiveprocesses: eliminationof direct administrativecontrol over enterprises;transformationof state-ownedenterprises into entitiesbased on other forms of asset ownershp; and passing of ownershiprights to private individuals,collectives,and nonofficiallegal entities. Only the two last processes representprivatizationproper. Even before the adoptionof relevant legislationby the All-Union and republicanparliaments, "spontaneous"privatizationbecamewidespread-that is, privatizationnot conductedin accordance with any general policy. Authorssympatheticto the process usually call it privatizationand use no adjectives. Some critics prefer to use the term "ministerial"privatization. This term seems too narrow and overstatesthe influenceof sectoral ministries. The transformationreally includesscenariosthat differ in their driving forces. Some are directed "from above" by ministries ("ministerial"privatization)and/or central governmentagencies ("showcase"privatization). Others arc '.nplemented"from below" by the enterprisesthemselves. (Only this form can be really character. .; as "spontaneous.") Distinctionmust also be made betweenbig enterprises, which usually *- rganize as open joint-stock companies, and smaller ones, which undertake buyoutsto become collectivelyowned entities. Moreover, to denote a special mode of privatizationin trade, services, and small industry, there is the term "small-scale-privatization." Basic Available Options-7heir Advantagesand Drawbacks In any scenario, regardlessof its drivirg force, three basic options exist. T'eir relative advantagesand drawbacks cause muchpublic debate, summarizedin the next section. Here we attempt to assess options in the contextof the current inflation-riddensituation.
5.
Head, Working Group for the drafting of the All-Union privatization legislation, USSR State Committee for Economic Reform. Quoted in Ekonomika i Zhizn', No. 7, 1991,p. 20.
3
Privatizationin the Soviet Union
The first one is the transfer of ownershipInto the hands of employees, This can be achieved either by selling the state property (with discountor not) or, less likely, by giving it away. This model has similaritiesto employeestock ownershipplans (ESOPs)in the West. In the standard ESOP-typearrangenent, bank credit is used by employeesto finance a buyout of the enterprise. Workers receiveparticipationshares, usuallyproportionalto their lengthof employment. In this option, privatizationcan be achievedquickly, especiallywhen property is sold at a discount. Ownershipby those employedin the enterprise creates strong motivationfor improvements. Buyoutspromise some budgetarygains and may help limit inflation. However, such operationsare socially unequal. The capital/workforceratio in Soviet industry varies from 200 rubles to half a millionrubles per employee. Many social groups will be bypassed-retired persons, children, students, those employedin entities of strategicimportance(thus not slated for privatization),most workers in social services, and so on. The potentialof such buyoutsto improve efficiencyand contract disciplineis doubtful. The probabilityis high that workers will put job security first, thus compromisingfurther restructuringand modernization. And normally, workers get significantwage increases, which fuels inflation. Across-the-boarddivision of state property (thevoucherscheme) is a second option. Free distributionof shares in divestedcompaniescan be politicallyappealing-but only before technical issues are reviewed. Several alternativesare suggested(equal allotments,in proportionto career duration or qualification,average householdincome). Of all options, this one involvesthe strongest possibilityof spurring inflation. It will not contributeto easingthe budgetdeficitproblem. And a more elaborate voucher schemebrings few additionaladvantages. Judged by the yardstickcf increasedefficiency,this model applied on a wide scale is undesirable. Widely dispersed ownershipcreates few incentivesto better performance. A host of small shareownersknow nothingabout businessstrategyand cannot influenceenterprise decisions. Vouchersprovide no guaranteesagainstthe purchaseof controllinginterest in attractiveprivatized companiesby the wealthy few using "smokescreenfigures." Most small shareholderswill quickly sell their stock to supplementdwindlingreal incomes. The procedure will not ease social tensions and may create extensiveopportunitiesfor corrupt officialsto exploit. The third option-selling productiveassets at the marketprice-is especiallyattractivefrom the officialpoint of view. It will strengthenthe budgetand provide opportunitiesto sterilizeexcess liquidity, if the central governmentdemonstratesrestraint. It could strengthenthe ruble. The option of sellingshares has support amongmanagersof enterprisesthat have implementedbuyouts. Only the sale of shares-not their distribution-creates strong stimuli to overcome indifferenceand low-qualitywork. The sale of state property in auctionsis a logicaloption for small-scaleprivatizationof trade and services. This promises almost immediateimprovementson the consumermarket. Judging from the country's first trial auctions, the budgetarygain can be substantial,even if beneficialprimarily to local authorities. Privatizationprovides hope for limitingor ending the corruptive atmosphereof centralizeddistribution. The drawbacksto selling assets are several. This option works slowly for major industry, thus efficiencygains will come only in the medium term. Social equalityis compromised,especiallysince much of public saving has been wiped out in 1991by price reform and subsequentrapid inflation.
Privatizationin the Soviet Union
4
There also is strong concernthat laundered "blackeconomy"money is being used to purchase productiveassets. In re lity, a combinationof all three options is being implementedin current pr'vatization and is incorporatedin the latest legislation. The third option is clearly favored in the All-Unionpackage of 6 In both laws. In contrast, the voucher schemefigures prominentlyin the republicanlegislation. sets of legislation,workers' collectiveshave substantialprivileges (the right to apply first, discounts and soft loans for the purchaseof shares). Local authoritiesare given significantpowers to conduc. small-scaleprivatizationand in certain cases even to influencethe restructuringof large industry. Major Impediments Different forms of privatizationencountervaried obstacles, of which four stand out: - Lack of investiblesavings in the countryand reservationsor, the part of foreign investors, which grow as political tensionsmount. - Undevelopedvaluationprocedures, nascentwholesalecapital markets and stock exchanges. lack of mechanismto accomurrdateall parties concerned. -
Negative public attitudes-toward the market and hired labor in general and toward certain groups that might benefit from privatizationin particular. Concernthat privatizationmay perpetuate the corruptionof public servants is already a major problem.
- The oppositionof intermediatelayers of governmentbureaucracy(ministries, state induslCal associations, and other bodies that exert direct control over productiveentities). Bureaucraticoppositionseems to be the most important;more than 60 percent of enterprisesthat attemptedor completeddifferent "divorceprocedures"with their ministriesand were surveyed in March l991' Miudi.Aed such problems. Lack of own funds and the high price of borrowed funds is also very damagingto privatizationmoves. (Some "cheaper" intermediatesolutionsare described in the section on "spontaneous' privatization.) Public rejectionof "capitalisticvehicleis,"however, seems to be a myth perpetuatedby the traditionalpoliticalforces for their own advantage. A survey conductedin February 1991by the All-UnionCenter for Public Opinion Surveysof the USSR Academyof Scienceshas shown that the majorityof those polled had nothingagainst working for a private employer.
6.
Basedon the informationavailableon August 1, 1991, the followingrepublicshave alreadypassed legislationbased on the voucher scheme: Russia, Kazakhstan,Lithuania, Moldavia and Latvia. Ukraine mayjoin them in September.
7.
EkonomikaiZJdzn, No. 10, 1991,0.11.
S
Privatizationin the Soviet Ucion
POLITICALCONTEXTAND PUBLICDEBATE All significantpolitical groups agree that the old, overcentralizedeconomicstructure is not viable. Even hardline Communistforces admit that enterprisesmust have greater autonomyand that "total statizationof all spheres e. life, includingeconomy" was ruinous. Consensus, however, ends here. The reformist wing of the CPSU has moved step by step toward the notionof privatization. Its euphemism-"destatization"-was first used in documentsof the October 1990Plenumof the Central Conmnittee. The term privatizationproper was first mentionedin the so-calledPresidentialreform program of October 1990, apparentlyincorporatedfrom the "500-days"plan. In the Presidential Decrees drafted in March 1991, privatization"without adjectives"was used for the first time. In June 1991 the Permanent Commissionof the CPSU Central Committeeon Economicand Social problemshad developedrecommendationson destatizationpolicy that largely conthiuethis reformist trend." The Communistconservativewing was slow to formulateits own vision of privatization. It clearly rejects denationalization,labelingit a betrayalof the socialist ideal. As one spokesmanhas said: "Privatization,both as a notion and as a policy, should be eradicatedboth from the documents and the strategyof the CommunistParty and the State. Only partial privatizationcan be accepted, and only as a tacticalslogan, for the sake of economicrenewal".'° The then Russian Communist Party (RCP) leader, Ivan Polozkov, stated "We may not permit the transfer of enterprises into private ownership... under a privatizationslogan." " The same positionis echoedby some less influentialconservativepolitical forces, imongthem the UnitedWorkers' Front (UWF) and the officialtrade unions. The latter are currently formulating their own program of "shieldingthe toilers from unbridledcapitalism." The vocal if politically insignificantUWF calls for creation of 'committees for defenseagainstprivatization"in all enterprises.1 2
Total rejection of privatizationbeing impossible,conservativeforces have identifiedworkers' collectiveownership as the least evil. They play an elaborategame of words, proclaimingthat only this form of property offers a socialist course. They view the priority of socializedproperty (proclaimedin the 1977USSR Constitution)as essential. The USSR Law on Property, adopted in 1990, and consecutiveconstitutionalamendmentsthat have acceptedthe priority of individual propertyover socializedproperty are condemnedas deviationsfrom socialistprinciples.
8.
Ekonomika iZhzn', No. 10,1991,p. 11.
9.
Ekonomikai ZJuizn',No. 26, 1991, p.13 .
10. Professor V. Cherkovets, MoscowState University,in Ekonomika iZhizn, No. 10, 1991,p. 11. 11. Ekonomika i Zzn',
No. 9, 1991,p. 6.
12. Delovoi mir, No. 8, 1991,p. 1.
Privatizaionin the Soviet Union
6
It is difficultto assess the relative influenceof the two contestingwings in the CommunistParty. The hard-line wing and its allies are increasinglyvocal but still unwillingto ^hallengetraditionalparty disciplineand break with the top leadership;more probably, they will contin ie to maneuverto try to gain leverage. These conservativeshave failed to block radical, market-orientedlegislationin the Russian Parliament. The new USSR Cabinet neadedby Prime MinisterValentinPavlov and strongly backed by the Presidentseems ready to shift irom the "benevolentnegligence"of former Prime Minister NikolaiRyzhkov to a stance of actively fosteringprivate enterprise. In doing this, the Cabinet will probablycontinueto employ a subtle, "soft" vocabularyabout economicchange, to pacify the hard-liners. The most influentialnon-Communistforce in the Russian Republic,the DemocraticRussia movement,displays a wide spectrumof opinions, with some groups favoring worker buyouts, some the voucherscheme, and some a full reversal to private property. With the support of the reformist CPSU wing, it had enough influencein Parliamet..to push the program through. The implementation of this program will bring the real test, but DemocraticRussia seems to be romanticizing privatization. While it is correct to view privatizationas the centerpieceof all reform, the possibility that it will bring swift improvementin the nation's economicfortunes is less certain. Thus, over the past year or so, the political environmenthas changedsignificantly-from inattentionthrough heated debate to widespreadacceptanceof privatizationas an importantcomponent in economicrestructuring. During most of the Ryzhkovperiod the issue was effectively circumvented. Since public reactionwas not clear at the start, the finsttrial moves had to be carefully phrased. (In the case of the BUTEKexperiment,which involvedthe formationof a consortiumof many firms, the movewas not calledprivatizationbut the creationof a "people's concern." ) Gradually,first steps were taken towa4rddevelopingkey pieces of legislation. During Autumn 1990, the "500-Days"program and the Presidentialprogramboth stressed the urgent need to divest state property and the technicaldifficultiesthat wouldbe involved. The differencebetween the two programs was in details: the Presidentialprogram was very short on specifics. As 1990 drew to a close, the compositionof the political landscapechanged. Some republicanauthoritiesmovedfaster than the All-Unionones to establishlegal norms for small-scaleprivatizationand the privatizationof land and real estate. This was especiallyclear in the RussianRepublic and the Baltics. The central governmentreadily yieldedthe initiative. The center's reaction was probably an attempt to shift blame for the negativesocial aspectsof mas.ive divestitureonto the new politicalgroups that came to dominaterebelliousrepublic governments. The center's move was also a reasonablestep from the bureaucraticpoint of view, since privatizationproceduresare very time-onsuming. The same line was obvious in All-Union governmentattitudes toward local initiativessuch as the program of real estate privatizationdeveloped by the Moscowand LeningradCity Councils. Under the Russian Republicaneconomicprogramof spring 1991, privatizationis expectedto proceed at full speed. The April 1991All-Unionanticrisisprogram, largely developedunder the direct control of Prime MinisterPavlov, seems keen on rapid privatization,along with creationof a more attractiveenvironmentfor foreign investors, liberalizationof trade, and stabilizationof the ruble. There are justifiable doubts, however, about the abilityof either level of governmentto implementits proclaimedgoals.
7
Privatizationin the Soviet Union
Real debate over privatizationdevelopedonly in 1990. The public did not become engageduntil some key institutions-such as the USSR State Property Fund-were outlined (see the section on institution-buildingbelew). Much debate even now appears isolatedfrom economicreality, with experts disregardingreal processesof ownershipand industrialorganizationrestructuringand speakingin general terms. The broader public is not much interestedin "theoretical"issues like gains in efficiencyderived from privatization,but it quickly respondsto discussionof the "threat groups" that are believedto benefit. Both ends of the polidicalspectrumfan public emotions. Hard-line conservativesin the Communistapparatus,their press, and the official trade unions are intimidatingthe public with talk of massivelayoffs and otlhervices of unbridled capitalism. To quote Ivan Polozkovagain, "We shouldnot accept unemployment.... The party committeesshould create social security funds and implementsocial developmentprograms" to providejob security." The emergingpolitical forces, known under the loose term "democrats,"enthusiasticallyportray their adversariesas "neo-capitalistslaunderingthe party money" and plotting with local organized-crime groups to retain control over the Sovieteconomy. Both of these contendingperspectivesreflectsome reality. The capitalizationof large sectionsof the traditionalpolitical and economicelite is obvious and closely resemblesthe course observed in China in earlier years (see the sectionbelow on indigenouscapitalistclass). During the cooperative boom (1987-88),many cooperativeswere createdby managersof big industrialenterprises to conceal profits through inventivetransfer pricing. Not even a specialgovernmentregulationadopted in December 1990restrained this process. As to changesabout economicmanipulationby "black economy"dealers, mafiosi, and racketeers, here too there is truth. The authoritieshave been unable to cope with mountingcrime; there are widespreadchargesof corruption and links betweenthe elites and criminal elements. Recent presidentialdecrees try to address these issues. But with investible money in the hands of criminal elements,such decrees may only hamper what is clearlyan important source of financing for privatization. The specter of foreign investors "buyingup Russia" is a popular propagandatheme among Communisthard-linersand among the weak but vocal Russian nationalists. Negative attitudestoward foreigners do exist amongthe public. However, the situationvaries from region to region; those most in contactwith foreign investorsdisplaymore receptivenesstoward them. In Leningrad's suburb Vyborg and in the Far Eastern city of Nakhodka,free enterprise zones are ready to be launched with broad public support. By contrast, the citizensof Novgorod,the historicalcenter of the Russianheartland, have tried to block a similar project on grounds that it would open the area to the "corruptinginfluenceof foreigners." This theme will be used further in political battles and will lead to sharp differencesin the privatizationspeedsof various regions. Employeebuyoutshave receivedless attentionin debate than they deserve. In several cases, the general public has expressedresentmentaboutsuch buyouts, presumingthat they give the employees of privatized enterprisesunfair preference. Sharp criticismswere also reported when the huge KAMAZtruck factory was restructuredas a joint-stock company. For the time being, negative public attitudeshave limited influenceon the decisionmakers,but as privatizationgains speed and causes massivelayoffs, this may change.
13. Ekonomika i Zhizn', No. 9, 1991,p. 6.
Privatiation in the Soviet Union
8
Workers' attitudestoward buyoutsfrom withinhave evolvedover time. At first, the safety of state-controlledenterpriseslookednot so bad comparedwith the risks of independentbusiness. The reaction of manyworkers toward collectiveownershipwas lukewarm, especiallyif shares were to be purchased, and not gotten for free. With the declineof living standardsand the accumulationof positiveexperiencein early buyouts, however, more employeesrnowfocus their hopes on private enterprise. To judge from events elsewherein Eastern Europe, some politicalgroups in the USSR may be willingto provoke a stronglynegativepolitical reactionto privatization. This could conceivably derail the reform. COMMERCIALIZATIONOF THE STATE SECTOR Under the 1987-89policy of decentralization,the central authoritiesgranted enterprises.varying degrees of autonomy. This proved to be an importantpreparatory stage for privatizationproper; without such preparationobstacleswould likely be much bigger. But decentralizationhardly was viewed in this way when it was laui"hed; a traditional 'socialist campaign" mentalityprevailed. Forms of partial independencein decisionmakingfailed to improveperformanceand added to the frustrationof enterprisemanagers, however. Thus there was a buildup of commitmentto more radical moves. Decentralizationwill continuein the future. Even with massiveprivatization,the state will retain control over 20-30 percent of all productive assets. These will include entitiesof All-Union relevance-harbors, transrepublicanhighways,major power generationfacilities, significantparts of the armamentsindustry, and key establishmentsin the nonproductivesectors such as hospitals, universities, and the like. Thlesestate controlledenterpriseswill clearly fall into two groups. The first will be entities providingsocial services, utilities, and infrastructure. In their cases, decentralizationwill proceed. The second group will be huge industrialconcernswhose restructuringmay take years or even decadesto prepare; to enabletheir efficientoperationin the market environment,these concernswill be "commercialized'-reformed toward the proceduresand structure or a commercialentity. Republicanauthorities,includingthose with strong market leanings, have few differenceswith the All-Uniongovernmentover the issue of retainingsome state control. In December 1990the Estoniangovernmentidentified 11 big industrialentitiesthat it plans to retain under direct control; some, such as the Estonian sectionof the Balticrailway network, have already been transferredto republicanjurisdictionby All-Unionauthorities. In Armenia, 16 huge enterprises, all of them monopolistsin the republicanmarket, will remain under the state.14 For enterprises in which the state does not retain control, commercializationwill be the first step to the market environment. This o -paratorystage may includea numberof needed improvements. Financialsoundnessof the enterprise will be assessedand accountingradicallyupgraded. Proper
14. Izvestia, January 1 and 28, 1991.
9
Privatizationin the Soviet Union
accountingproceduresare rare even amongthe biggestenterprises." This makes it impossibleto carry out an independentand objectLveanalysisof a given company's credit standing. Company profitabilityand co ipetitivenesscannotbe deducedfrom availablefigures; potentiallythis can cause of a wave of financialcrimes and bankruptcies. Speedy conversionto Western balancesheet and valuationproceduresis imperativeso that companiescan assess their own cost and revenue positions. This will also give commercialibanksa reliable foundationfor independentloan decisions. In addition, supply and marketingwill have to be reorganized. In the supply system, direct contractsshould replace the collapsingsystem of state orders. Enterprise managementshouldbe retrainedto operate in a competitiveenvironment. PRIVATIZATIONIN THE ABSENCEOF OVERALLSTRATEGY -"SPONTANEOUS" PRIVATIZATION In mid-1990,cases of privatizationbegan to multiplyin 'be USSR. The preceding four years had offered enterprisesan opportunityto influencetheir own productiontargets, wage levels, and other elementsof business strategy. Yet the controllingministriesretainedthe right of direct administrative control; indeed, administrativereform in 1989-90even strengthenedtheir hold. The drop in the numberof All-Unionministr as led to a concentrationof decisionmakingauthority and weakenedthe leverageof even large enterprises in the administrativemachine. Frustrationover hesitant decentralizationand perceptionsof existingbusinessopportunitiespushed enterprisestoward cutting the strings of administrativecontrol. And the ministerialbureaucracy, aware of this and unwillingto yield, itself began to "mimic" privatization. "Spontaneous"privatization-that taking place in the absenceof an overall strategy-is now occurring all over the country, includingin regions where old political and economicstructuresare still in control (Siberia, the Central Asian republics). The sectoral compositionof privatizedentities is also disparate, with large industry clearly leading the way. All the fc..ns of this privatizationhave certain similaritiesas to enterprisesaffected. They are mostlybig (employeesnumber more than 1,000) and profita5le. Some two-thirdsof all cases surveyed by the author involveenterpriseswith five years of stable profits. A record of profit is definitein "showcase"and "ministerial" privatization. Often an enterprise is first leased out for a period, during which lessees may accumulatefunds for a buyout. Privatizationcan sometimestake place even in weaker and smaller enterprises, sinrcethe:r controllingministriesmay have little interest in retainingthem. It is difficultto estimatethe extent of all this "spontaneous"privatization. Dozens of cases are reported each month. Most probablythese are just a fraction of the total, since the media has lost its initial interest. No centralgovernmentbody has yet begun to compilesystematicdata on the process. Privatzationfrom Above "Showcase"and "ministerial"privatizationare the methodsof privatizationfrom above. They are similar in mode of ownershiptransformation. Normally, an enterprise is restructured as a joint-stock companyand the ministry retains the controllingshare in its stock. Legally, both types of
15. In the KAMAZ truck factory, such difficulties have substantially slowed down its shares subscriptionby foreign investors.
Privatizationin the Soviet Union
10
privatizationfrom above are made possibleby the USSR Law on Private Enterprise, which introduced the notion of enterprise owner and formulatedimportantlegal guaranteesof the latter's rights. The ministries, renaming themselvesconsortiumsor concerns, de facto claim full ownershiprights on the enterprisesthey control. "Showcase"privatizatior.. The KAMAZtruck factory was the first and the most widely 6 The plant employs about 140,000people, and the book publicizedcase of showcaseprivatization." value of its assets is estimatedat 4.5 billion rubles. Physicalamortizationis high, probably40 perceni, but this was not taken into accountin its valuation. Its capital is split into shares of 100ruble denominationwith 25 percent of them offered to employees. The Ministry of Automotive Industry retains 26 percent of authorizedcapital. The rest is to be sold to the public and foreign investors. "Ministerial"privatization. A typicalexampleof ministerialprivatizationis the Agrokhim concern, recently formed on the basis of one of the elementsin the huge and inefficientAgroprom, the State Committeefor Agriculture. Prior to the creation of Agroprom, several dozen enterprises producingfertilizers and pesticideswere under the control of the USSR Ministry for Fertilizer Industry (MFI). During the brief experimentwith Agropromas a superstructure,MFI remainedas one of its subunits, still administeringits enterprises. In 1990, it becameclear that the top political iaders intendedto dissolveAgroprom, and the ex-ministerialapparatus quickly "innovated." It adoptedthe only available survivalstrategy-"mimick',i" privatization-and formed Agrokhim. The concern's central dir-ctorate has the same ministerialstaff and exerts the same degree of control over enterprises as previously. Privatiaionfirom Below Buyouts. As an option, employeebuyoutsclearly conflictwith "ministerial"privatization. In January 1991 a CoordinationCommitteeof CollectivelyOwnedEnterprises was formed by a group of such entitiesto spread the experienceand teach the tacticsof' "negotiatingout" of ministerialcontrol. In most cases of buyouts, managementis a driving force; employeesare attracted by promisesof guaranteedjobs and pay rises. The enterpriseis transformedinto a closedjoint-stock companywith participationshares distributed amongemployeesaccordingto the duration of their career - and with managementholdingthe controllingstake. More than 200 buyout cases are known. Almost all the entitiesare in industry and construction and are small or medium-sized. An exampleis the MoscowVentilatorPlant, which studiedthe ESOP model and applied it in September1990. The plant's combinedassets were valued at 6.5 million rubles; 32,500 participationshares of nominalvalue of 200 rubles each were issued and sold to employees, who had to put in only a 25 percent cash downpayment. The plant had enoughof its own funds to extend no-interestloans to employeesto financethe rest. This debt will be redeemedfrom ffutureprofits. Some 300 of 500 employeeschose to become shareowners,paying 3,000 rubles per person out of their own pockets.
16. KAMAZ was firs. called an example-settingprecedent in July 1990,a month after the new law on joint-stock companies. Financial lEmes, July 30, p. 17.
11
Puivatization in the Soviet Union
The collectiveas an ownershipform is unlikelyto dominatethe economy. The managementof most of the 23 enterprisessurveyedby the author' expressedinterest in openingsubscriptionto their capital to the wider public when that becomestechnicallyfeasible. The stock market is still embryonic,however, and specializedinstitutionslike investmentfunds are almost nonexistent. Some enterprisesmay try to sell shares directlyto the public. It is interestingto note thatjob security considerationsare not always paramountfor employees. In privatization,enterprise middle-leveladministrationcan be sacrificed(cuts on the order of twothirds are often reported), and workerswelcomethe process.'8 There are even possibilitiesfor sheddingsome on-floorjobs. Newly independententities seem to fare better than expectedon the score of efficiencyand inputs utilization. A recent survey of 30 buyouts showedthat immediatelyafter the buyout, productionshot up by 15 to 30 percent withoutretooling-simply through a strengtheningof disciplineand more efficientuse of resources. Salary increasedon the average by 160 percent during the first six months after the buyout.'9 Some enterprises considerit too burdensometo buy out all fixed assets (even at depreciatedbook value) in a short period. For their part, controllingministries are unwillingsimplyto transfer ownershipto collectivesfor free. A compromisepath has been advocatedby V. Tarasov, head of the private consultingfirm "ORGANIZER"(Tallinn). His model envisagesa stage-by-stageoperation, with only supplies and materialsbought in the first ye;r, and fixed assets remainingstate property. The loan needed in such a case is thus smaller and its repaymentmore manageable. The central authoritieswelcome most buyouts. Taking note of American practice, both the AllUnion and republicansets of legislationenvisagetax breaks and interest rate subsidizationas well as other forms of support. There are already samplecases. The enterprisesof the BUTEKconsortium, begun on the initiativeof the All-Uniongovernmentas the "model"for privatizingindustries,pay taxes of half or less of the industryaverage. KAMAZobtained a special tax rate of 36 percent before the tax reform of November 1990; most enterprisesin its range had to remit more than 80 percent of their profits in the centralizedministerialfund. Ministriesoften use their ability to distribute inputs to slow buyouts, althoughcases of cancellationof such initiativesare very few. Some ministriesappear less obstinatethan others. Flexible attitudesare reportedlydominant in the USSR Ministriesfor Shipbuilding,Civil Aviation, and Fishing. Some ministries, more powerful and confidentin their influence,are inclinedto shape privatizationto their own advantage-these includethe Ministriesof ElectricalEngineering Equipment,MachineBuildingand Heavy Industry.
17. Twenty-three industrialentities; Russian Republic;surveyconducted in January-March 1991with the help of private business school SAULEST. 18. Ekonomika i7Jdzn, 1991,No. 3, p. 6; No. 9, p. 5. 19. Ekonomika i 7fdzn, No. 3, p. 6, No. 9, p. 5.
Privatizationin the Soviet Union
12
The Future of Larger Entites As experiencewith biggerjoint-stockcompaniesaccumulatesand specializedinstitutionsemerge to advise enterpriseson restructuring, the attractivenessof buyouts fades. For larger enterprisesthe solutionlies either in direct transformationinto a joint-stockcompanyor in the joining of industrial association. An interestingcase is the privatizationof the VAZ car factory, with the employmentof over 100,000. It is unclear what mode of privatizationwill prevail. All interestedsides--theMinistry for AutomotiveIndustry, employees,management,and the USSRgovernment-lookat it as an important precedent. In February 1991a special conferenceof managementand employeesapprovedthe decisionto transform VAZ into an open joint-stockcompany, very much like KAMAZ. Employeesdemanded the controllingstake for themselves;this demandwas branded "egoistic," and a more guarded decisionwas taken. Regularshares will be distributed amongall employeesfor free, and each year on the VAZ payroll will give an employeethe right to get one 200-rubleshare. As a result, the employees' combinedshare in total capitalstock (book value, 11 billion rubles) will be less than 10 percent. The restructuringenvisagesshare subscriptionsamongthe general public and foreign partners, who might get up to 49 percent of the capital stock. The positionof the controllingministry is unclear, however. The VAZ initiativemay degenerateinto just another case of "ministerial" privatization. The overcentralizationof the Sovietindustrialstructure opens opportunitiesfor the biggest enterprisesto tear away from ministerialcontrol. For them, the legal aspectsof ownershipcan best be solved by appealingto the upper echelon of economicpower-by securingthe support of a key figure in the top leadership. Both the BUTEKand KAMAZschemeswere developedin 1989-90at the direct request of the then Prime MinisterRyzhkov. Becauseof the difficultyof gaining a "divorce"from a ministry, some big enterprisescreate
industrialassociadonsas a first step toward their privatization. Such structuresshould not be confused with those of the same name that existed withinthe old bureaucraticsystem to simplify centralizedcontrol. The new, independentassociationsunite big enterprisespreviouslycontrolledby one ministry and with a similar productionmix. Some call themselvesconcerns. Examplesof such structuresare Technokhim(fertilizersand plastics)and Energomash(power generationequipment). Industrial associationscan have enoughleverageand funds of their own to dictate the terms of "delinking"from a ministry. Their policies are similar to the BUTEKconsortium,which, being an institutiondirectly sponsoredby the All-Uniongovernment,was able to request valuationof assets at the depreciatedbook value. Big industrialassociationsare able to minimizebuyout sums and to finance buyouts easier through their own funds and cheap credit from the state-run banks. On several occasions, associationshave exerted leverageat a high level of central government,circumventing "their" ministry altogether. Perceptionsof Privatiztion Perceptionsof "spontaneous"privatizationvary greatly. Reformistexpertsas well as the liberal press demonstrateskepticismboth toward buyouts (allegingan uneven record in improvingefficiency)
13
Privatizationin the Soviet Union
and toward "ministerial"privatization. "Showcase"privatization,especiallythe creationof BUTEK, was initially hailed as the herald of transitionbut came to be questionedas yet another attemptto maintain elite control. The general public has reacted negativelyto certain widelypublicizedprivatizationcases, and local authoritieshave quickly exploitedthese sentiments. An examplewas providedby KAMAZ, a firm so large that it literally createdthe city of NaberezhniyeChelny. Even many local citizens not directly employedby KAMAZdependon it one way or another for their work. The denial of KAMAZ shareownershipto workers not directlyemployedby the factory yet serving its varied needs was thus perceived as grossly unjust. Public criticismhas had an impacton the developmentof officialprivatizationprograms at all levels. Thus, both the 500-daysprogram and the Spring 1991RussianRepublicanprogram coincide in their guarded attitudestoward buyouts. Employeepriority in decidingthe course of ownership transformationis required to be limited-in time and by type of shares. In part, this stems from fears that employeeswill get an amountof privilegedshares for free or at a discount. Such fears have grown in view of several scandalsinvolvingmanagerswho used a "people's ownership"slogan to grab enterprise control for themselves. AssessingPrevailingPrivatization It is difficultto assess the effectivenessof "spontaneous"privatizationin general and of its different forms in particular. The country's critical economicconditionprevents evaluationof real efficiencygains. Managersof large enterprisesnormally claim that independencehas boosted profits and enabled long-delayedretooling. It remainsto be seen whetherhigher profits are not purely inflationaryin nature. One must realisticallyjudge the alternatives,however. In the present politicalturmoil, there is little chance that a clear, concise, and nationwideprivatizationprogram can be developed, much less implemented. There is therefore some ground to believethat even cases of "mimicked"or "ministerial"privatizationmay not be a completewaste. From the political perspective,even "ministerial"privatizationcreates significantguarantees againstrolling back to a commandeconomy. The emerging class of quasi-capitalistshas real interest in keeping control and increasing it. For the first time in their lives, ministerial-bureaucratsturned managersare drawn into a real competitive world. Competitionmay be weak at the start, but it will intensifywith the right incentivesfrom the state. Even now, motivationto work better is stronger under privatizationthan in the state sector. The exampleof truly independentconcernsis already present, to study and adapt. The tactic of playing the All-Union and republicangovernmentsand sectoral ministriesagainst each other may work for many still-dependententerprises;thus, direct administrativecontrol can be overcome. One unknownis whetherthe majorityof enterpriseswill dare to risk losing their ministerialsafety net by venturingout on their own. In recent months many enterpriseshave indeedbeen ready to do just that.
14
PrivatizAtionin the Soviet Union
REGULATIVEAND LEGAL FRAMEWORK Delineationof Authority Blurred ownershipconstitutesthe most complicatedlegal hurdle in the Soviet economy. The problem is inheritedfrom the centrallyplannedsystem, where all productive and most other capital assets were the "propertyof the state." Everybody's property is, of course, nobody's property. In practice, there have been several levels of state ownership,closely reflectingthe pyramid of executivepower. The ultimate authoritylong rested with the top layer, yet the lower layers were not completelydevoidof authority. The Moscow region gives a typical picture of ownershipstructure (percentagesare given on the basis of annual turnoverand include industry, agriculture,trade and services, transport, and construction). About70 percent of all productive capacity(mostlyhuge enterprises)was under direct central control and managedby All-Unionministries. Another25 percent was managed by RussianRepublicgovernmentbodies. The rest was so-called 'local" industry, trade, and services-many small entities controlleddirectlyby the city and regional councils. When the pyramid structure began to change in the past two years, multiple conflictsappeared amongindividualentities. The most widelypublicizedand politicallychargedhave been conflicts betweenAll-Union and republicanlevels of government. But even city districts have tried to assert their control. An extremecase was the attemptby authoritiesof the district in centralLeningrad to claim exclusiverights of ownershipon the NevskyProspect-the city's main thoroughfareand commercialarea. Conflictsbetweenregional and city councilsover pieces of previouslyjointly controlledproperty have been common.' InstitutionBuilding TMework of two different sets of institutionsis importantfor the successof privatization. The activitiesof the officialones, createdby the authoritiesof different levels, are analyzedin this section. The other, no less importantgroup include market institutions-investmentcompanies, mutual funds and the like. Privatizationstrategies elaboratedby diverse political forces differ in the comparativerole of these two. Divestiturepolicy of the centralauthoritiesrelies heavily on the creationof additionallayers of governmentbureaucracy;private-sectorschemespay more attentionto the independentinstitutions. Ideally, the two sets of institutionsshould complementeach other-with central agenciesoverseeingthe process and ensuring an environmentconduciveto privatization,and private and mixed institutionsdoing the groundwork. Three blocks of legislationprovide cornerstonesfor the process of transition to a market economy: laws on entrepreneurship,antimonopolylaws, and privatizationlaws proper. The reform effort was officiallylaunchedwith the creationof the USSRState Property Fund (SPF) on August9, 1990. In June 1991the basic principlesof the privatizationprogram were laid out in the All-Union law on privatization. Most importantof these principlesare the freedomof choice and the voluntary characterof ownershiptransformation;equalityof all forms of ownership, includingprivate; and the open and competitivecharacter of transformation. Employeesof an enterprise are given priority in
20. Delovoi mir, January 5, 1991.
1S
Privaizaton in the Soviet Union
share subscription,though the amountof priority is constrainedby the competitivenature of the process. The possibilityof foreign ownershipis accepted;it is unclear whether full legal equalitywill be granted to foreign investors. The USSRState Property Fund and the AntimonopolyCommitteewill be authorizedto develop technical regulations. A financialmechanism,includingthe state-controlledlending scheme for privatizingentities, will be developedjointly by the SPF and the USSR Gosbank. The delineationof SPF and AMC mandatesbecameclear in February-March 1991. The SPF is empoweredby the SupremeSoviet to exert ultimate propertyrights on all enterprisesof All-Union importance. The SPF has no direct role in the managementof enterprises; its task is to develop and implementnationwideprivatizationin cooperationwith counterpartinstitutionsin the republics. To prevent "mimicked"privatization,the SPF can overrule decisionsof the ministriesand other lower-levelauthoritiesin restructuringownershiprights. The SPF will develop expertise and valuationproceduresand issue recommendationson the preferred course of privatization(distribution, lease, or sale of assets). For enterprisesof strategicrelevancenot liable for privatization,the SPF will remain the ultimateowner and prepare their commercialization. Chairmen of both the SPF and AMC are appointedby the SupremeSoviet. In most republics similar committeesfor the managementof state property and antimonopolycommitteeswere cre.ted in late 1990and early 1991. At present, differencesexist betweenAll-Unionand republicanlegislation, which may perpetuate a "war of laws." These differences reflectthe rapid polarizationof the political scene. Let us take a closer look to the difference between the RussianRepublicanand All-Unionlaws and first list ideologicalfactors. -
Prior to adoptionof the Law on Private Enterprise in April 1991, USSR laws evadedthe notion of private property, continuingthe tradition of the 1977 Constitution(which referred to individualrather than private property). RussianRepublicanlegislationuses the term private property and, no less important,permits private ownershipof land.
- All-UnionLaws therefore still assume the priority of socializedforms of property ownership, includingcollectiveproperty. In the Russian laws collectiveproperty is treated as part of private property and all forms of property ownershipare proclaimedequal. - The substanceof privatization,as treated by the Russian Republicanlegislation,is real transition to the economicmodel based on private enterprise and the negationof "socialist choice." The Russian Republicanlaws seem to be more comprehensivethan the All-Union ones, which still try to reconcile two incompatibleidoologies. In implementationprocedures, differencesbetween All-Unionand Russian conceptsare no less important: - Russian Republicanlaws aim at forcing the process and at embracingas wide an array of entitiesas possible, includinglarge industry. All-Unionlaws envisagea slow process of "graduation."
Privatizationin the Soviet Union
16
- In agriculture,the RussianRepublicanlaws envisage rapid privatizationof big state-owned farms (sovkhoz). - The Russian laws also providerepublicanbodies with a much wider array of instrumentsto speed up privatization. The All-Union laws reflect stronger positionsof hard-linepolitical forces in the All-Union SupremeSovietthan in the Russianparliament. Yet our tentativejudgment is that the All-Union laws, althoughmore guardedin styling, will have largely the same consequencesas the Republican ones. Indeed, since April 1991one can see convergencein the two sets of legislation,with the AllUnion laws dropping some of the above-mentionedcharacteristicsand moving closer to the model of private ownershipand entrepreneurship. The most contentiousissue which has to be addressedin privatizationlaws is the delineationof ownership rights. Most republics, includingRussia, claim that these rights belong to them and that the "delegation"of ownershipfrom the republicto the All-Unionbodies is derivative. Events may take various courses, and examplesof both confrontationand compromiseexist. In stimulatingthe restructuringof big industry, republicandemonopolizationcommitteeswill enter into open conflictwith sectoral ministries. These ministrieshave significantleveragein the All-Uniongovernment, which rarely takes the side of enterprisesopenly. Current All-Union governmentpolicy can best be described as "benevolentnegligence,"with most enterprisesescaping ministerialcontrol being able to ignorethe directivesof yesterday's masters. The strengtheningof the State Property Fund mandateseems also to favor enterprisesagainstministries. Making Models or Making Tssue? All parties agree that it will take years and perhaps decadesto restructure big industry. In the near future the All-UnionSPF and its republicancounterpartsset a more modestaim of training professionalswho then will be able to advise enterpriseson specific aspectsof privatization (financing,industrialorganization,auditing, accounting). Two visionsof the process exist. Traditionalthinking in the central governmentbureaucracy is to choose one enterprise and make it a "model"so that all others will follow. This is the "socialistemulation"mentality,developedover decadesand now deemed appropriatefor the transition period. Needlessto say, the best performing enterpriseswould be chosen as models-and their experiencewould not be generalizable. A markedlydifferent approach appearsin the work of liberal economistssuch as the 500-days plan and the Russian Republicanplan of April 1991. A similar position is taken by the Sovietprivate sector. Their goal is to create a "markettissue" of specializedentities that will be able to provide financingand consultingservices, makingprivatizationself-sustaining. This progressionappearsto be taking place already, with more and more specializedprivate agenciescreated. Small-ScalePrlvatzation One of the points of the points of convergencebetweenthe All-Uniongovernmentvision and the liberal vision is the central role of local authoritiesin small-scaleprivatization. Hundredsof thousandsof tiny entities in trade, services,urban and communalservices, food processing, construction,and the like will be auctionedsoon. Rapid inclusionof these enterprisesin the
17
Privatization in the Soviet Union
emergingmarket system should create a cushionfor the inevitablejob losses in big industry and also produce visible improvementsin the consumermarket, thus lesseningpolitical tensions. Apart from these benefits, central authoritiesexpect little gain from small-scaleprivatization. The largest share of returns from auctionswill go to municipaland regional budgets. With proper legislationin place, the job can be done independentlyby special committeeson privatizationand demonopolizationdirected by the city and regional councils. Several dozensuch committeesare already active. Republicancommitteesfor property managementendorse only auctionrules. In February 1991 recommendationson privatizationfor local authoritieswere adoptedby the USSR Councilof Ministers. This document is remarkablyflexible, stating only broad principles of competitiveness, openness, and equalityof all bidders, and otherwisegiving city and regional councilspowers to tailor their own policies. Thus, in June 1991the MoscowCouncil ccnductedits first auction, selling ten little stores. The Leningrad Councilhas held several highly successfulauctionstoo, sellingmore than 100 stores to private owners. Both Republicanand local authoritieshave much independencein stylingtheir "own" regulative environmentfor joint-stock companiesand small businesses. In 1990and early 1991the right to issue licenses for such entitieswas transferred step by step to the lower levels of government. A small businessstarted by an individualis registered by the district council (the lowest level of authority). Companieswith limited liability as well as joint-stockcompanieswith capital under 50,000 rubles are registered by the city and regional councils. Both the latter and the republican governmentscan alter the tax regime and other aspectsof businessenvironment. For productive enterprises,being shifted from central to republicanjurisdictionoften brings few advantages. Republicanauthoritiescan become allies in the enterprisedrive to escape ministerial control-but contrarily,they can try to exert the same direct control with the same stifling consequences. The RussianRepublicangovermnentseems to have taken the first course with its recent regulationsprovidingincentives,includingloweredcorporate tax rates and more favorable administrativeprocedures,for enterprisesthat quit the All-Union "umbrella' for the republicanone. And with amendmentsto the penal code being within Republicanjurisdiction,the RussianRepublic has dropped Article 154 (on economiccrime) and proclaimedthe inviolabilityof property and ownershiprights. Complexityand Future Needs The traditional malaisesof the Soviet legislation-too generalizedlaws and weak implementation-have only gotten worse in recent years. Numerousregulations,issued decades ago by central authoritiesand sectoral ministries, are still in place and contradictnew legislation. Certain portions of the penal code, such as those on economiccrime, discriminateagainst entrepreneurship. Key pieces of legislation, like the bankruptcylaw, are not ready. The All-Uniongovernmentis still deterred by the high social costs of bankruptcyproceedingsthat would thin the ranks of unprofitable enterprises. This is thoroughlyunderstandable,but foot-draggingon reorganizationhas a negative impacton the economyand helps perpetuateanachronisticfeatures. Ideally, the legal frameworkshould start with amendmentsto the constitutionor with a new one stipulatingequalityof all forms of ownershipand the inviolabilityof property rights. (rhe draft Russian Republicanconstitutioncontainsexactlythis and has caused much fury amonghard-liners in the Russian CommunistParty.) Generalguaranteesfor all investors, includingforeign ones, should
Privatization in the Soviet Ut.;on
18
be strengthenedfurther. Normativedocumentsshouldbe reviewedto eliminatediscordanceswith newly adopted legislation. SOURCESAND MECHANISMSOF FINANCING Becauseof the USSR's continuingpolitical upheaval, massiveparticipationin privatizationby foreign investors is unlikely. In examiningdomesticsources of financing, it is importantto distinguishthe official and the shadow sectors of the economy. In the officialsector, investibleresourcesare scarce. The volume of household savingsis too low to finance a massiveone-timeprivatizationeffort. Regardlessof how the value of productiveassets is calculated,investiblesavings are hardly more than one-fifth. One can only guess the current volume of resources controlledby the "black economy" Some such resources were legalizedas early as 1988, through the emergingcooperativesector. . ,esty for "shadow capital" (black market money)is mentionedfrom time to time in public debat, Ae positionof the All-Uniongovernmentis typicallytwo-sided. On one side, there are recent decrees on "economiccrime;" on the other, certain moves to absorb key segmentsof the black market into the official economy. In most republics(Russia, the Baltics, Georgia, Armenia), authoritiesdisplay more readinessto legalize shadowcapital. Yet the atmosphereremains tense and most probably most such money will continueto operate undergroundor flee the country. Capital flight in 1990 is informally estimatedby governmentsources at 3-5 billion rubles; this year it will definitelygrow. Fundsfrom Within The major part of resourceflows into restructuredentities will thus be provided 'from within" the existingsystem, by funds accumulatedby enterprisesthemselvesand, probably in a lesser degree, by the traditional political institutes("the party money"). Bigger enterpriseshave the capacityto finance their ownershiprestructuring. The Sovietmonetary system traditionallyis characterizedby a divorce betweentwo componentsof the moneysupply. Cash circulation is regulatedmore tightly than noncash transactionsbetweenvarious economicentities. In 1987-90the accelerationof noncash circulationhas contributedmeasurablyto inflationarypressures. As these mounted, it has become even more difficult to convert moneyon current accountsof enterprises into cash. Since 1988the desire to use enterprisebalanceswas one of the importantdriving forces in the creation of cooperativesby state-ownedenterprises,and the USSR Council of Ministersregulation, passed in December 1990, has had little deterrent effect. The semi-legalexchange rate is 3.54 "non-cash rubles" per one real ruble. Most huge enterprises-even if chunks of profits have been appropriated by the central ministries-possess sizable resources in their accounts. Loan Sources The role of bank lending looms large in the case of smaller enterprisesbuyouts. A survey of 14 such cases in August-October199021showsthat on average, two-thirdsof transactionvolume was financed by borrowing; in only one case wu3the share of debt under 50 percent. In 1990 the biggest source of lending for buyouts was the Promstroibank(state-controlledBank for Industrial Construction). In late 1990major independentcommercialbanks began to follow. Buyoutsof
21. Survey by the author.
19
r.ivatization in the Soviet Union
enterprises formingthe BUTEKwere largely financed by its own in-housecommercialbank, KREDOBANK. With the breaking up of specializedstate-controlledbanks, commercialbanks very soon will come to dominatethe financingof such buyouts. Commercialcredit with maturitiesover one year is rare and available exclusivelyto big enterprises. Even these loans are expensive, with interest rates over 20 percent and rising. One cannot estimatethe real interest rate in today's rapidly accelerating inflation. Two immediatedangers are obvious. First, in the immediatefuture buyouts may become largely impossiblefor scores of smaller, less profitableenterprisesunless they join BUTEK-type consortiumsor succumbto ministerialprivatization. Second, and more important,there exists a real possibilitythat with many restructuredenterprisesunableto stay afloat in the economiccrisis, new commercialbanks will be saddledwith irrecoverabledebts and will themselvesgo bust. The major difficultyof mountinga massivebankingeffort to finance privatizationis the legacy of bad loans on the books of bigger state-controlledbanks. Mid-1991estimatesmade by the Institute for Bankingof the USSR Gosbankindicatethat the ratio of problem loans to capital for these banks is so overwhelmingthat their net worth is generallynegative. Unless the burden of problem loans is removed, the banks will never be able to let their behavior be guided properly by market principles. The shakinessof their balancesheets meansthat the capitalthey put at risk in new transactionsis not even their own but has to be chargedto governmentfunds. The legacy of the past must be kept separate from present activities. This is one of the axioms of successfulrestructuring. There must be a finn divisionbetweentroubled old loans and new lending. Loans outstandingthat are noncollectiblefrom public enterprisesshouldbe hived off to a special public find, and their extent must be made explicit. The governmentwill then have to decide how the burdens of the past are to be shared out. This is a governmentalresponsibility. it would be an illusion to think that private investors at home or abroad wouldbe willingto take on this debt load. Apart from the activity of commercialbanks, there is a dearth of specializedagenciesto promote privatization. Only in February 1991was the need addressedto create specializedinvestmentfunds to enable the launchingof joint-stock companiesin the market.' The first to arrive were consulting agencies, which offer completeservicesfor enterpriserestructuring, asset valuation,and buyout or conversionintojoint-stock companies. By mid-1991a dozen such agenciesoperated in Moscow alone. Almost all of them were started as brokeragehouses, dealing for their clients-big industrial enterprisesin the numerous recentlycreated exchanges. Offering privatizationand restructuring advice was a logical extensionof their relations with the clients.?3 A few of the biggestones, like Brokinvestservice,are getting ready to control the nascent stock exchange. However, none of them can yet offer financingfor such operations.
22. Concept developed by the Russian Broker Companyjointly with the Institute for USA and Cana45aof the USSR Academy of Sciences. Business and Banks, No. 3, 1991,pp. 1-2. 23. The author knows only one case when an agency specialized on privatization consulting was launched in Spring 1991 as a result of successfultransformationof GUM departnent store into a joint-stock trading house.
2rivatization in the Soviet Union
20
Some nichesare already being filled by foreign institutions. Of all specializedinstitutions, foreign consultingfirms with relevantexperienceare most urgentlyneeded. In the United States, Ernst & Youngand Price Waterhouseare preparing themselvesto enter this potentiallyprofitable sector of the Soviet market. An InterestingModel In an attempt to overcome this institutionalweakness,one of the big commercialbanks in the USSR-the MENATEPFinancialGroup-recently proposed an interestingmodel of a privatization consortium. It is based upon the creationof a specializedfinancialinstitution--aprivatization consortiumwith leading commercialbanks and the RussianRepublicanMinistry of the Economyas founders. To benefit from internationalexperience,the participationof internationalinvestors will be sought. The consortiumwill create a range of specializedinvestmentcompanies. These subsidiaries will deal directly with privatizedcompanies,buy their stock, and lend for enterprise restructuringand modernization. The investmentcompanieswill trade in the privatizedenterprise stock on the stock exchange and will search for foreign investorswilling to put moneyinto privatized Soviet industry. The Russian Committeefor the Managementof State Property will accumulatethe moneypaid by new shareownersto investmentbrokers. The model opens additionalopportunitiesfor commercialbanks to engage in the privatization process. Some of them may grasp this opportunityto evolve into specializedinvestmentbanks, leaving the sphere of short-termfinancing. The Russian monetaryauthoritieswill be able to control the divestitureprocess. Valuationin this model is based upon the real market value of the productive assets. The balancedownershipstructure of the consortiumis an importantelementto prevent the misallocationof funds and corruptionand the excessesof governmentcontrol over privatization. Monopolizationof share ownershipin the hands of insicerscan be also prevented. However, the model contravenesRussianrepublicanlegislationon stock exchanges,which explicitly forbidsthe banks to operate on stock markets. Chancesfor the implementationof this plan are unclear. Another option proposedrecentlyby V. Perlamutrov4envisagesthat certaindivisions within the USSR State Property Fund would operate semi-independentlyas investmentbanks, with resources equal to the combinedassets of state enterprisesthey control. These divisionswould issue shares for the amount equal to nominal (depreciated)value. Subscriptionwould then be open for employeesand the general public. If the employeeschose not to buy these shares, they would pzy dividendsto the SPF. Shares would be sold at auction, and later through the stock exchange,which would move the price closer to the real market level. The proposal has some similariLieswith the MENATEPmodel. It is unclear, though, that the SPF would indeed want to sell shares rather than keep them. VALUATIONOF STATE PROPERTY Two widely discussedalternativesfor valuing state property are (1) valuationon the basis of depreciatedbook value of productive assets and (2) valuationon the basis of current market value, calculatedfrom the capitalizedexpectedrate of return. A possible middle way is to value the productiveassets at the market level with a discount, which may vary for different types of investors. 24. Prof. Perlamutrov is the leading expert in the Central Econometric Institute of the USSR Academy of Sciences.
21
Privatizationin the Soviet Union
Enterprise managersclearly prefer the first form of valuation;official institutionspress for the second choice. Selling assets at the market price is the choice of most influentialreformist experts. The only officialdocumentnow availableto analyzethe All-Uniongovernmentviews on valuationwas issued in January 1991. It is called "Provisionalnorms for the valuationof state enterprisesand organizationsliable to buyoutsand sale" and was developedjointly by the Finance Ministry, Gosbank,Gosplan, and Goskomstat. The documentessentiallyblocks enterprise attemptsto value assets at depreciatedbook value. The valuationmethodproposed in it ignores relative depreciationaltogetherand in calculatingabsolute (physical)depreciationuses traditionalmethods based on the residualprinciple, as practicedsince the 1930s.5 All ratios used in the documentare adoptedfrom the traditionalcentralizedsystem. This means that valuation is not related at all to the potential future profitabilityof privatized assets. In reality a combinationof valuationoptions is in use today. Small-scaletrade and services outlets are sold at the auction price. The big industry assets are normally valued at the discounted market level. This is comparableto some publicizedprivatizationcases in Western Europe, where the discountwas usually 10 to 20 percent. If the governmenthopes to spread ownershipwidely, the discount should be significant. It seems unlikely, however, that the present All-Unionleadershipwill choose the paths of popular capitalism. In cases of "ministerial"privatization,depreciatedbook value can easily be used because funds are not paid to other parties. The same is true in most cases of "showcase"privatization. BUTEK easily obtainedthe government's approvalof the first option for all enterprisestaken under its umbrella. Big enterprisesforming concernsand associationscan usuallyinfluencethe valuation process and also purchase assets cheaply. In the b'iyouts of smaller companies,surveyed cases reveal complaintsabout the excessivesize of sums requested by the controllingministry. Even here, the burden is hardly unbearable,since inflationis taken into account only rarely and firms are undervalued. Another related issue is enterprise debt, normally assumedby the privatizedentity in full. However, most debts were contractedin years of very low interest rates; in the present inflationaryenvironmentthe debt load is rarely troublesomefor an enterprise. DEMONOPOLIZATION Overconcentrationof industry is inevitablein the centrallyplannedsystem. Industrialreforms implementedsince the early 1930shave greatly reduced the number of entities and boosted their average size. In 1951 Soviet industrialestablishmentsnumberedmore than 205,000; in 1990they steod at 47,000. Accordingto recent Goskomstatfigures, in 219 of 644 groups of industrial productionclassificationthe share of a leading enterprisewas more than 50 percent. One hundred
25. Total depreciation is calculated as the difference between equipment output minus supplies of new construction. The difference is then spread over the "normative"number of years. This rarely takes into account technical innovations and reflects solely the physicalwear. Normative period usually extends far beyond ten years.
Privatizationin the Soviet Union
22
and nine giant plants accountedfor 90 percent of all industrialoutput.26In all machine-building sectors 80 percent of productionis monopolizedby three or four enterprises. And as reported by Gossnab, 2,000 industrialproducts with combinedproductionvolume of 11 billion rubles were producedin 1990 in only one enterpriseeach. This level of concentrationbecomeseven more spectacularif comparedwith the record in industrializedWestern countries. In the UnitedStates, industrialentitieswith more than 1,000 employedaccountedin 1990for 0.5 percent of the total numberof enterprisesand 31.6 percent of combinedindustrialproduction; for the USSR, respectivefigures were 17.3 percent and 74.5 percent. In five Western European countriesand Japan, such enterprisesaccountedfor 19 percent of all 27 industrialemployment,in the UnitedStates 25.2 percent, and in the USSR more than 74 percent. In studying "Soviet" monopolistsit is easy to take their formal likenesswith Western counterpartsfor substantivesimilarities. Under the market system, monopoliesemerged in a competitiveenvironment;even when they attemptto eliminatecompetition,they use market mechanismsand target their strategy on customerdemand. In the commandeconomy, huge monopoliesemergedas a result of administrativedecisions. Their growth dependedon the ability to 'overfulfillplan targets," regardlessof consumerneeds. Demonopolizationpolicy should take this into consideration. In Western antimonopolypractice, when there is political commitmentto break up huge concerns,the market usuallytakes care of the rest. In the current Sovietsituation, antimonopolylaw can remain just another nice political declaration. Without a grant of full independenceto basic producingunits, demonopolizationwill remain the field for ministerialgames. All other pieces of legislation(company,bankruptcy,property law, and the like) shouldbe permeated with antimonopolisticconsiderations. This is still not the case in either All-Union or Republicanlaws. It is not only productionstructuresthat are monopolized. Even more importantfor the present state of the economyis the monopolizationof distributionchannels. All-Unioninstitutionshave controlleddistributionchannelsuntil recently. Gosplanhad direct authority over 60 percent of the distributionof all production;sectoral ministriescontrolledanother 30 percen; and Gossnab most of the rest. The system, however, providedno guaranteesfor the punctualityof supplies, and enterpriseshave long relied on their own backup network of direct barter arrangements. Today, ministries manipulatethe distributionsystem to push privatizationin the desired direction. In almost all cases of buyouts, managersclaim that their former bosses use the supply lever to slow the process and to "punish" independententerprises. Yet the system is so inefficient now that this leverageis not very strong. And direct links betweenproducers and wholesalers (commodityexchangesand marketingfirms) promiseto ease the distributionproblem. Not all markets have been stifled by monopolies;some do have competition(the watch industry is an example). To spur competition,it would be logicalto open the economyto external
26. The 500-daysplan, draft version, October 1990. 27. Austria, Belgium, France, Sweden, and Italy. All data provided by Goskomstat. Delovoi mir, February 1991,pp. 64-65.
23
Privatizationin the Soviet Union
competition. The quality gap betweenimported and domesticproducts is significantand consumers prefer the former. But there are some serious obstacles. With the oresent weakeningof the ruble, imported products are out of reach for most consumers. And despite welcome changesin the investmentand exchangeregime, some recent moves by the All-Uniongovernmenthave scared off foreign investors. With external competitionunlikely, the authoritieshave begun to think about fosteringdomestic competition. The Russian Republicwas the first to create an AntimonopolyCommittee;relevant legislationis expectedto take effect in late 1991. The USSR AntimonopolyCommittee, jutlined in the draft of the President's decree in March 1991, has a similar mandate. It will developrelevant legislationand exercise direct control over implementation. Together with its republicancounterparts, the USSR Committeewill monitor markets, identify instancesof abuse of monopolypower, and impose sanctionsand penalties. Its prescriptionswill be bindingand can be overruled only by judicial bodies or the USSR ArbitrationCommittee. Antimonopolycommitteesaim to create the proper regulativeenvironmentfor industrial restructuring. Such committeesmust be alert for abuse of monopolypower by concernsof all types. At the same time, too strict an antimonopolypolicy is unjustifiedgiventhe seriousnessof the nation's economiccrisis. In 1991the RussianRepublic AntimonopolyCommitteeplans to review the policies of all big industrial entities(associations,consortiums,concerns, intersectoralproductiveamalgamations). Amongurgent practical steps contemplatedby the Russian AntimonopolyCommitteeare: - To developtrade and distributionnetworks,to foster direct horizontalties among enterprises,
to help create commercialfirms in distribution,storage capacity, and the like. -
To monitor the privatizationof larger industrialentities(the Committeehas the legal power to demandbreakup of huge enterprisesinto smaller ones).
If restructuringis excessivelycostly or impossiblebecauseof accountinglapses, to create a special regime that might include marketingof the monopolizedproduct via intermediaries, obligatory sale of some of the producton the externalmarket, and introductionof price ceilings - To develop a special regime for small-scaleenterprises;to stimulatenew entries into highly monopolizedmarkets by meansof tax breaks, cheap credit, and so on. -
Local antimonopolycommissionsin cities and regions will serve as outposts of the republican bodies, implementingtheir policies. The mandateof local bodies already active does not exceed monitoring/datacollectionand fosteringsmall-scaleenterprises. SECTORSPECIFICS Of all the details of privatization,sequenceseems to cause the least controversy. Only the timing of land reform remainshighly debated. The initial stage of privatizationwill witness quick auctioningof small and medium-sizedentities in trade and services. This has already begun through test auctionsconducted in several regions.
Privatization in the Soviet Union
24
Pricing reflects market value. In the optimalscenario, it will take two years to completethis privatizationstage. It is stimulatedby the emergenceof thousandsof private small-scaleenterprises. Moscow alone has 22,000 minor units in trade and services. Of these only 2,000 are department stores and service centers whoseprivatizationmight require an approachsimilar to that for bigger industrialestablishments. Another 2,000 units are service outlets and small shops. These and thousandsof microunits (stalls, kiosks)can be sold quicklyand profitab:y. In preparing for this stage, local authoritieswill eliminatethe "super-structure"that still controls such minor units. A precedenthas been set by the LeningradCity Council. In December 1990, it eliminatedLenagroprom-a regional subdivisionin the All-UnionAgropromresponsiblefor the production,distribution, and marketingof food in the city and suburban area. This hody owned more than 18,000eateries, food stores, storage facilities,and the like. In early 1991a much smaller 'nommitteeon food supply and retail trade was createdwith no direct administrativepower; its functionsare simplyto monitor quality of products and to help new entitiesenter business. An independentcommercialbank was created (in place of the financial arm of Lenagroprom)to support small-scaleenterprise in the city's food supply industry. Simultaneously,the Leningrad City Council auctionedthe first 100 food stores. Similar programs have been implementedby local councilsin Perm, Samara, Vologda, Khabarovsk,Saratov, and other regions. But there are also examplesof the oppositetype. In Nizhny Novgorodand Stavropol, local authoritieshave banned all forms of small privatizationas "state property grabbing by the mafia." The second stage of privatizationis the sale of small-scaleindustry, with special arrangements for employees. Along with this will come privatizationin constructionand transport (excludingmajor All-Unioncommunicationsfacilities, which will remain under state control). Pricing normallywill be close to market value (especiallyin the highlyprofitableconstructionindustry), with discountsto accommodatespecial demandsof employees. The privatizationof constructionis consideredto be vital, since it may radicallyincrease efficiency. As of January 1, 1991unfinishedconstructionequalled200 billion rubles-10 percent of all productive capital assets. The 500-daysplan envisagedprivatizationof one-thirdof all constructionwithin 18 months. In fact, sales may be even bigger and faster. Private enterpriseis flockingto constructionbecauseof great demandand quick returns. In early 1991the USSR State Committeeon Construction(Gosstroi)and the USSR Ministryof Finance developednorms for auctioningunfinishedconstructionprojects. About 10 percent of all such projects were selectedfor auction;an importantgoal is to direct the proceeds from auctions into the consumergoods industries. Foreign bidders are welcome. Privatizationtakes a peculiar course in the distributionand supply system, which for decadeshas been one of the key levers of central planning. The USSR State DistributionCommittee(Gossnab) has controlleda vast network of specializedand regional distributioncompanies(glavsnabs). In 1989 these glavsnabswere renaned marketingfirms and given more freedom; the expectationwas that they would be the foundationof the wholesalemarket for capital and consumergoods. In reality, the sphere fell victim to 'ministerial" privatizationin its purest forms.
25
Privatizationin the Soviet Union
The Moscow regional distributioncompany(Mosgorsnab)is a case in point. In 1990 it was reorganizedas the independentMoscowMarketingCompany(MMC). It retains controlover a score of huge specializedfirms with combinedannual turnoverexceeding6 billion rubles ail with customersthat are mostlybig industrialentities. Withoutrecourse to any legal procedure, the assets of the firms in MMC control were proclai ned the property of this companyand the firms themselves were "restructured"as its subsidiaries-they lost even the limitedproperty rights they had obtained in 1989. The Russian RepublicanDistributionCommnittee, in its turn, retains full control over MMC. This situation has close parallelsin other regionalstate distributioncommittees. Luckily, this is only part of the picture. Apart from 20 big regional firms like MMC, Gossnab controls 142 commercialtrading centers and dozens of mixed companiesthat continueto domninate the distributionsystem. Many of them are diversifying,and thus competitionwithin the Gossnabsystem grows. Compet;zionalso comes from fully independentbod:es. When the Moscow Universal CommodityExchangewas createdby Gossnabsubsidiariesin early 1991, it had to face the challenge of two strong independentexchanges,namely the Moscow CommodityExchangeand the Russian CommodityExchange (RTSB). The Gossnab-sponsoredexchangeis the smallest of three. Gossnabhas also launched specializedexchangesin major cities. For example,the Ryazan exchange specializesin grain, the Tuymenone in oil and gas, the Alma-Ataone in cotton, and so on. There are already over one hundred cor.ipletelyindependentexchanges,and about two dozen of them are big enough to competewith Gossnabstructures. Most likely, competitionin other regions will become as fierce as in Moscow. Privatizationhas taken similar course in the financialsystem. Here we shall look only at banking. Soviet bankingwas rudimentarybefore perestroika,due to Marxist credo that servicesdo not create surplus value. There was no autonomousbanking or financialsector; the economic functionsof money were preemptedby the Five-YearPlan. The commercialside of bankingwas split into two separate types of institutions,for householdsand for enterprises. In this breakdown, the role of the state-runsavings bank (Sberbank)was to take care of householdsavings. Lendingand investmnent banks were accessibleonly to the enterprise sector. There were three such banks: Promstroibank,the Bank for IndustrialConstruction,which financedlong-term industrialprojects; Agroprombank,which financed agricultureand food 9rocessing;and Zhilsotsbank,for housing construction. A foreign trade bank-Vneshekonombank-was also important,with a mandateto manage the country's foreign exchangeearnings. The past three years have witnessedrapid proliferationof independentbanks, in three distinct waves. First came cooperativeand commercialbanks. Some of these emergedas early as 1987, and in 1989-90hundreds appearedthroughoutthe country. The majority are still small; only a handful have assets in excess of 1 billion rubles. Somewhatlater sectoral ministriesdecided that they needed their "own" banks to smooth the transition to a decentralizedeconomy. The peak of such creation was in 1989-90. Most of these banks are big, with assets of over 1 billion rubles; they specializein serving their respective industries. They have little independencein setting their own business strategy, but that may change as they grow in strength. In 1989three specializedstate-runbanks were given much more freedom. This was called "commercialization"and had consequencesunexpectedby the government. In 1990all three beganto
Privatizationin the Soviet Union
26
split up; branches in various regions set themselvesup as fully independentcommercialbanks. They took new names but retainedtheir customers-big enterprises. It may soon be impossibleto distinguishthem from other commercialbanks except for their size (mostlylarge) and premises (old but better-than-averageoffices). A few of the biggest state-controlledand sectoral banks have already announcedthe intentionto spread outsidetheir traditional circle of customers. This signifies the adventof a new period, when competitionwill tear down artificialbarriers betweendifferent types of banking institutions. In the optimalcircumstances,distinctionsbetweenthree groups of banks will go, making way for normal specializationin various areas of the market. As of August 1, 1991, the commercialbanks of all three types numbered about 1,735-not many consideringthe size of the Soviet Union. Prior to the splittingup of the three specializedstate-run banks, new commercialfinancialinstitutionsaccountedfor slightly more than 5 percent of the consolidatedassets of the Soviet financialsystem;it is now closer to 15 percent. The final stage of economicreform will see the restructuringof big industry. Enterprisesof strategic importance(aerospaceand armaments,the All-Uniontransportsystem, the ocean fleet, telecommunications,advancedelectronics)will remain under direct state control, at least in the foreseeable future. This control may take new forms. The 500-daysplan, for example, envisioned transformationof such enterprisesinto "transrepublicanjoint-stock companies,"with shares distributedto the republicancommitteesfor propertymanagement. They would thus be collectively owned by all constituentrepublics. The future may see many conflictsas sovereignty-seekingrepublicstry to assume full control over installationsof All-Union importance. (The Klaipedaharbor in Lithuaniais amongthe most widelypublicizedcases.) In the past, all industrialand communicationsprojects of any importance were financed largely from the All-Unionbudget. Given that fact, there seems little hope for easy resolutionof conflictsover the strategicentities. In certain cases, the central authoritieshave used privatizationto counterbalancea republic's drive for independence. In Estonia, the industrialassociationINTEGRALwas created in 1990, uniting big, centrally controlledentities. As now structured, INTEGRALplants are joint-stock companieswith the controlling51 percent stake owned by the All-Union ministries. Employee support has been securedby sale to them of 49 percent of shares at a discount. INTEGRAL's leaders (and, seemingly, the majorityof employees)are deeply involved in the central authorities' conflict with the Estoniangovernmentseekingindependence. Estonian authoritieslabel INTEGRAL's actions "the directors' plot." THE GROWTHOF AN INDIGENOUSCAPITALISTCLASS With change in the structure of ownershipcomes the revival of the entrepreneurialclass. Modes of economicconduct, priorities, and workingstyles evolve. Ihis process is taking place both within state-dominatedentities and at the grass- roots level: recei't legislationopened the way to formation of literally thousandsof small businesses. These businessesafe different from the much criticized cooperatives;they are real private enterprisesand seek no disguises. At the sametime, we witness elite transformationinto a proto-entrepreneurialclass.
27
Privatization in the Soviet Union
The first saplings of a fully independentprivate sector appeared in spring 1988 and developed in several waves. The first to come (and quicklyto degrade into the economic"shadow" zone) were cooperatives. Joint venturesmultiplied,despite early skepticism. Since autumn 1989, several legal acts have strengthenedguaranteesfor foreign investors. Fully owned foreignsubsidiariescan be created in the USSR;joint venturesreceive importantbenefits such as tax breaks. Since spring 1990 small-scaleenterpriseshave proliferated. And with the adoptionof regulationson joint-stock companiesin June 1990has come the fourth wave, definitelythe strongest. Ideally, the alternativesector will create strong demand for jobs (especiallyin the services)and rehabilitatethe consumermarket. But this is conditionalon efficientantimonopolypolicies, which are still under consideration. In most sectors of the economy,private monopoliessubstitutefor public ones. It is too early to deliver a verdict on the emergingprivate sector. Its key instrumentsand segmentsare still lacking; some early successesmay turn into failuresfrom faulty government policies and adverse macroeconomicconditions. The macroeconomicenvironmentis hostile, so the sector is unable fully to demonstrateits strengths. Most private entitiesare less creditworthythan state-ownedones and have to pay much more for ruble loans, not to mention foreign-exchange financing. The "capitalization"of importantsectionsof the political and economicelite is another process under way. Competingpolitical forces echo each other in denouncingtheir opponentsfor "intertwiningwith criminalsand black-marketdealers." Both sides are correct in this verdict. Bureaucratsfrom the Communist-dominatedcentral apparatusare largely behavingthe same as non-Communistpolitical activists recentlyelected in regional and city councils. But the majority of neocapitalistsare from the economicelite--managersof big enterprisesand apparatchiksfrom sectoral ministries. All these aspects of capitalizationare inevitableand should be welcomed. If the present neocapitalistsare not the most competitivegroup of people, the market will eliminatethem. Attempts to roll this process back are sociallyundesirableand economicallycounterproductive. Most of today's neocapitalistshave at least two importantqualifications. First, they were the earliest to see the new opportunitiesand to grasp them. This businessinstinct is a vital aspectof success. Second, many ministerial bureaucrats,and especiallymanagersof enterprises,know their industrieswell. Their technical expertise can be helpful in devisingnew strategiesin the market environment. CONCLUSIONS The present All-Uniongovernmentis the first regime to implementwide-scaleprivatization. Its commitmentto the task seems sincere. But the process may take different courses, and different social groups may benefit from it. Recent measuresof the All-Unionauthoritiesseem to be aimed at denyinga real role in privatizationto any social group apart from the economicand political elite. In early 1991monetary and price reform wiped out a significantpart of householdsavings. It also scared off foreign investors. Leading internationalcorporationsare still interestedin getting a stake in such top Soviet performers as KAMAZ; in those few cases it will be possible to negotiateterms more advantageous
Privatizationin the Soviet Union
28
than the ones dictatedby the dwindlingruble. The All-Uniongovernmentis anxious at any cost to prevent "wild" foreignparticipation. That cost may prove excessiveas confidencein the ruble and in the Sovieteconomyweakens. In the meantime,the economicinitiativehad passed from the center to the republics. Some of them have already movedfrom legislationto implementationof their own republicandivestiture policies. In an optimisticscenario, this trend will continue. One cannot, of course, exclude other scenarios. The present regime may collapse, providing an opportunityfor some political force to attemptto reverse course and restore authoritarianrule under the slogan of "law and order." Even in such a case, however, it is unlikelythat the process of privatizationwill be stopped.
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