The complex and controversial formative process of the post-privatization structure of ownership in Russia had as its general positive outcome the gradual stabilization (streamlining of the structure) of the ownership rights: from an amorphous and dispersed structure to the appearance of the apparent (formal, based on the title to the property) or hidden (informal, based on the real authority within a corporation) hubs of the corporate control. According to the FCSM estimates in 1996 the struggle for control was over in 25% of the Russian corporations, in the beginning of 1998 – in 50%. Although it’s impossible to speak about the real economic effect of such stabilization even in 1997-1998 (especially since the redistribution was still going on and the system in general remained unstable), nevertheless, we believe that there were some preconditions for that. The financial crisis of 1998 significantly changed the situation. (see section 4).
2.1. Preconditions of the reforms and spontaneous privatization (1985-1991).
If the years 1985-1989 can be characterized as the period of cosmetic changes of the existing system when any alternative types of ownership were considered only in the context of the “based on the multiple economic models socialist economy” with the predominance of the public sector, the years 1990-1991 were the time of more systematic reforms or, to be more exact, of more systematic concepts of pro-market transformations. There was a noticeable change in the ideological approaches to the ownership issues in general and the reforming of the ownership patterns in particular. The latter could be seen both in the contents of the programs being considered and in the legislation which was adopted during this period.
At the same time, against the background of the continuing discussion about permissibility of the alternative types of ownership and methods of privatization, the spontaneous process sharply increased its momentum. The process which was referred to as the nomenclature, bureaucratic, nomenclature-territorial, “collective”, “managerial’ etc. privatization (see Radygin, 1992, 1996b). This was linked to the adoption of the leasing and cooperative legislation, the right of full business independence of the public enterprises, the lack of uniform and legal privatization procedures.
2.2. Privatization models of 1992-1998 as the basis of the corporate sector formation
Notwithstanding differing evaluations of the character of this process the year 1992 would remain in the Russian history as the year when the wide-scale reform of ownership took off on the basis of the elaborated privatization legislation. If the years 1993-1994 were the period of intensive growth of the “critical mass” of the relevant quantitative transformations, the period of 1995-1998 was characterized by the attempts (which actually failed) to move to the new, “money privatization model.3
`It’s a well-known fact that at the core of the Russian privatization program was the model of the mass privatization which encompassed the wide-scale corporatization (on the supply side) and distribution of the privatization vouchers among the Russian citizens (the demand side).
The important elements of the system were the closed subscription for the stocks among the insiders, the system of voucher auctions and network of intermediaries – voucher investment funds. It’s major outcome (as regards the prospects of the new system of ownership rights development) was the emergence of new institutions such as the corporate sector of the economy (more than 30,000 joint stock companies), corporate securities market, system of institutional investors, about 40 mln of formal shareholders as the result of the mass privatization.
According to the estimates of the RF Ministry of public property and Ministry of economy, in 1994 the share of the public sector in GDP was 38%, in 1996 – 23%. The share of the privatized enterprises (including the corporations with the government stake) – 37% and 39%, respectively, while the share of the originally private enterprises – 25% and 38%. In order to understand why the share of the privatized enterprises changed so insignificantly we should bear in mind that by the end of 1994 practically all the largest Russian enterprises were transformed into joint-stock companies therefore the share of the corporate sector in GDP could not have changed significantly in the following years. As it can be seen from Table 1 of the Addendum the privatization proceeded most intensively (or at least the applications were being submitted most actively) in 1993 while in 1994-1997 there was a stable and continuous decrease of the new enterprises participation. This tendency continued into 1998-1999.
The goals which were not achieved within the framework of 1992-1994 model, first of all, restructuring of the enterprises and mobilization of investments demanded formation of such a privatization model which might at least partially compensate the enterprises for the methods used during the sale of their stocks at the first stage of privatization – methods not based on economic considerations. At the same time as a result of mass privatization the government was left with an unprecedented number of shareholdings of privatized enterprises and the problem of selling them became the key issue both for the privatization policy in 1995-1998 and for the intensive lobbying in this field. By the beginning of 1998 the state still owned about 11,000 shareholdings (from the smallest ones to the controlling interests (which were not sold for one reason or another) and about 5,000 shareholdings (including the “golden share”) which were to remain federal property.
Nevertheless, after the beginning of the “money” stage the objective of maximizing the revenues of the federal budget became predominant therefore the dilemma “investment or budget” in 1995-1998 was resolved in favor of the latter. In general the privatization in 1995-1998 was characterized by the transformation of the uniform privatization policy into the spontaneous process of “discharge” of the residual shareholdings which descended to the regional level. Typical for this period was also the use of the quasi-privatization instruments for the purpose of recruiting political allies from among the regional elite and the largest financial groups. The process of consolidation and further intensive redistribution of property between the largest financial alliances and the natural monopolies was also continuing.
Some observers believe that the beginning of the third (after the voucher and the money) stage of privatization was linked to the “individual projects”. Although this term was not made new law on privatization4, the interest of the government toward the “individual projects” was formalized by the Governmental decision No. 363 of April 1, 1997 “On the procedure of implementation of individual projects during the privatization of federal property (as amended by the RF Government decision No. 564 of May 12, 1997). In accordance with this document an individual project of privatization of federal property was interpreted as a set of measures aimed at the privatization of the federally owned property of special importance for the country, region on branch of economy which envisaged the pre-sale preparatory activities involving the invitation of an independent financial advisor. The experience of the largest transactions and in general the privatization practices of 1997-1998, nevertheless, do not give any reasons to make any conclusions about the radical innovations.
It’s obvious that the above-described developments as well as the process of the struggle for control and post-privatization redistribution of ownership which already began in 1993 are of crucial importance for the formation of the national model of corporate governance.
2.3. Post-privatization redistribution of the ownership rights (1993-1998)
Major features, stages and tools of the establishment of corporate control
A. First of all its necessary to single out the major ways of the post-privatization redistribution of property which were identified in 1993-1998:
- aggressive or “coordinated” buying off of the shareholdings of different sizes at the secondary market (from employees, investment institutions, brokers, banks);
- lobbying of specific transactions with the stocks remaining under the ownership of the federal or regional authorities (residual privatization, trust management etc.);
- voluntary or administratively enforced joining of holdings and financial and industrial groups.
During the first years of the post-privatization redistribution of ownership (1993-1996) the most widely used were different methods involving transactions at the primary (privatization) and secondary markets. Although during 1997-1999 we still can’t speak about any significant improvement as regards the protection of shareholders rights, it was during the period of 1993-1996 when the violations of the corporate legislation resulting from the struggle for control were taking their most “savage” forms (undesirable shareholders were deleted from the registers, the voting during the general assembly was done by raising hands and not according to the principle “One share – one vote” etc.).5
It should be pointed out that these processes were typical mostly for that part of the Russian enterprises where, first, was a potential for competition between insiders and outsiders (that is, profit-making or those with good prospects) and, secondly, the managing board itself had concrete strategic plans for the future. If the managing board continued to lead a passive existence paying little attention to the future of the company, then, such a company in the best possible case could only expect a takeover by an outsider and in the worst – the use of its assets by the managers for their personal needs.
Actually the key conflict of all these years was the conflict between the old managers trying hard to defend their positions and the newcomers who could potentially seize control. This was true in case of the majority of the Russian enterprises although for different reasons (financial flows and profits, accounting, export orientation, the site or other real estate, segment of the market or branch specialization which is of interest to a foreign company with the same production profile etc.).
In Russia the managers in their fight for control resorted to the following methods (apart from the purely criminal ones):6
- options for 5% of the stock and closed subscription (1st type of benefits) or closed subscription (2nd type of benefits) in the process of privatization;7
- buying the shares of joint-stock companies during privatization tenders and auctions;
- purchase of the stock by the firms (funds) belonging to the management;
- redemption of the company’s stocks by the company itself, in particular for the subsequent sale to the employees and administration (or companies under the administration’s control) in order to increase the share of “insiders” as opposed to the outside shareholders;8
- control over a part or all the stock belonging to the employees (through a collective trust in the closed joint-stock companies etc.);
- trust for the management of the government shareholding;
- control over the register of shareholders (especially in case of the joint-stock companies with less than 500 shareholders) as well as limiting the access or manipulating the register;
- change in the capital of the company, in particular, through the targeted dilution of the share of specific “outsider” shareholders through the placement of newly issued shares on preferential terms among administration and employees as well as “friendly” outsiders and pseudo-outside shareholders;
- general strategy of dispersion of the share capital in order to make a potential take-over through buying up the shares more difficult;
- buying of “residual” shareholdings in the course of money privatization (many managers were increasing their stakes even if there was no competition from the outsiders);
- applying different material and administrative sanctions against the employee-shareholders if they were going to sell their shares to outsiders;
- forming an alliance between managers-shareholders and “friendly” outsiders;
- involvement of local authorities in introducing administrative limitations for the operation of “alien” middlemen and firms which were buying up employees’ shares;
- lawsuits “supported” by the local authorities;
- introducing limitations (quotas) for the size of a shareholding in the company’s charter;
- setting up control over the market of shares of this particular company (through infrastructure etc.);
- using asymmetrical information in the fight against “raiders” or already existing outside shareholders;
- organizing the placement of additional issues on the basis of the “bottleneck” principle (at inaccessible places within a limited period of time);
- fictitious bankruptcies with the subsequent buy-up of assets.
Obviously the strategy and motives may differ significantly depending upon who is interested in this particular shareholding. For example even in case of a few largest Russian oil and gas companies the strategies they resorted to at the initial stage in order to cut off outside shareholders were completely different: LUKoil tried to disperse the issued shares to the maximum possible extent with the subsequent buy-up through the affiliated and friendly companies, RAO Gazprom introduced rigid limits for outsiders and organized a dual (domestic and foreign) market for its stocks, Surgutneftegaz used its own pension fund for the “self-buy-out” and tried to dilute the outsiders’ stakes through new issues, oil company YUKOS resorted to a “friendly” take-over by the bank with the subsequent legalized dilution of the government stake using the debt restructuring schemes as regards its arrears to the federal budget.
Most of the described above ploys were also similarly used by the outsiders interested in taking over the control. If from the issuers’ standpoint the securities market first of all offers an opportunity to consolidate their own control the outsiders’ motivation may be considerably varied. For example, the motives for investment into the corporate securities of the commercial banks in 1992-1998 (given all known legal and financial limitations) can be grouped as follows: