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By virtue of this very fact many potentialinvestors would rather choose other options to privatisation, such as settingup joint ventures, buying shares in an additional issue, awaiting thecompletion of the privatisation process and participating in the secondarysecurities market, and using the services of intermediaries (also see Chapters6-8).

5.3. The Second State Programme ofPrivatisation

The first version of this programme wasconsidered as early as 16 November 1992 at the collegium of the Government ofthe Russian Federation, for it was planned that that programme would beaccepted as the basic one for privatisation in 1993. However, because ofthe confrontation between the government and the Supreme Soviet, the programmewas adopted only on 24 December 1993 in the form of a special decree of thePresident of the Russian Federation. And up to that time it was the firstprogramme, of June 1992, that was in force.

In the area of privatisation policy theformal medium-term targets in the new State Programme were actually thesame: formation of a stratum of private owners, the completion of`small-scale privatisation' and privatisation of large and medium-sizeenterprises in industry and construction, improvement of enterprises'efficiency on the basis of after-privatisation support, creation of acompetitive environment and the development of the stock exchange, providinghelp for implementing the social protection measures, including the protectionof rights of shareholders.

Actually the programme boosted further theideology of the 1992 privatisation programme and incorporated the basicprovisions of the regulations of 1992-1993. The main methods ofprivatisation and the privileges for employees in the case of closedsubscription were practically unchanged. The special feature of thesecond programme may be emphasis on the conduct of the programme of voucherauctions, which was considered a central goal of privatisation at thattime. A positive feature is the increase in the quota for managers of thethird version of benefits to 30%. At the same time none of the methodsadvanced offered a final solution to the problem of investment.

The extremely large section on the sectoralpeculiarities of privatisation was quite hazardous, in our view. What itmeant in practice was that a large part of the Russian economy was actuallypulled out of the sphere of open sales for the benefit of an extremely limited(compared with the scale of the country) circle of individuals, in which therewas no room for citizens of Russia as a whole, nor for investors inparticular.

In our view, to include such details onparticular branches of the economy in the programme was erroneous and actuallyhas retarded the process of privatisation (and not only retarded the processbut may result in a complex intertwining of organisational and legal forms,shares, portions of shares, blocks of shares, etc, creating a situation thatwould be difficult to remedy). Some special features of incorporation andprivatisation should be provided only for a very narrow circle of trulystrategic branches, i.e. for the fuel and energy complex, the militaryindustrial complex and for some other such areas.

In May 1993 the President of the RF hadstated that the number of bans on privatisation must be limited - as applied tothe state programme, this primarily meant a revision of the lists of itemslimited by the programme. At the same time, if one takes all thesubdivisions, then one can see that that limitation list increased comparedwith the 1992 state programme. In our opinion, there was a sharpreinforcement of the `pro-sectoral' orientation of the GKI, to the detriment ofthe regional approach. So, in spite of numerous statements, the GKI hasnot advanced at all in the area of simplification of the procedure of decisionmaking as far as privatisation of enterprises is concerned. The lists oflimitations continued.

The main advantage of the programme is theintroduction of certain regulations on the privatisation of real estate (suchitems as non-residential premises and land of enterprises), as well as therights of shareholders in investment funds. The refusal of the GKI toimpose rigid and formal assignments on the regions (in the form of certainschedules) on privatisation can only be applauded. Instead it hasrecommended calculation procedures. It is also extremely important thatthe creation of the foundations for the general Russian stock market isstipulated in the programme.

As was a case with the first privatisationprogramme, a separate section of the second programme was devoted to the issueof foreign investment. And although the permission for foreign investorsto buy vouchers and participate in appropriate tenders and auctions without anylimitation (behind which lies a long struggle between the GKI and the Ministryof finance) should be regarded as positive, its significance can hardly berated as very great if one takes into account the real terms of the secondprivatisation programme.

In a similar fashion, despite all thestatements by top officials of the GKI on the removal of all restrictions forforeign investors, all the previous restrictions remained in force:permission is required from the local authorities to participate in asmall-scale privatisation (and one can mention here some decisions of the courtcancelling such deals), and, in the case of some industries, permission fromthe government is necessary. And a new form of restriction wasintroduced: foreign investors are prohibited from participating inprivatisation if it takes place within a closed territorial formation.The new programme backed up a foreign investor's right to act as a single buyerof an enterprise at an auction or at a tender (i.e. the right to effect adirect purchase) but so far there is no procedure by which this kind of salecan be carried out.

Because it came into force only in December1993, the second programme did not play any role at all in the development ofprivatisation in Russia. To begin with it represented only a compilationof the documents already adopted and in effect by that time. Secondly, itgave no orientations and stipulated no procedures to boost privatisation after1 July 1994 (the end of voucher privatisation). The definite necessity ofanew privatisation ideology in the post-voucher period required urgentelaboration and adoption of new approaches and correspondingly the adoption ofa new programme (see Chapter 9).

Chapter 6. Basic Features ofDevelopment of the Process of Privatisation in 1992-1994

6.1. Key Factors of Destabilisation

If we can characterise 1990-1991 as theyears of spontaneous privatisation, 1992 will enter the history of Russia asthe year of the start of large-scale reform in the area of property relationson the basis of privatisation legislation, and 1993-1993 are the years ofintensive build-up of `critical mass' of these transformations. At thesame time it seems prudent to single out some major factors which affected theprocess of privatisation in the most negative fashion (see also Krasnoselsky& Radygin, 1992; Radygin, 1993 (b)).

First of all, there is the extremely highpolitical instability in society. The ideology of privatisation and theprivatisation process itself (first of all the value of the privatisationvoucher, the rate of submission of applications and the dynamics of auctionsand in some cases the prices of shares on secondary markets) fell victim in1992-1993 and continue to fall victim to each political crisis, and thepolitical ambitions of the parties, factions and individual professionalpoliticians, including the politicians within the framework of the previousSupreme Soviet. All their usually unfounded declarations on `thestabilisation of the privatisation programme', revision of the privatisationlegislation, indexation or cancellation of vouchers, new privileges for workcollectives, or all-Russia holding companies, accompanied by traditionaldemagoguery about `universal justice' are aimed at one target: to halt orat least to discredit the policy of privatisation as such, for the new propertyrelations and rights (with all their distortions) create new rules of the gamewhich do not suit everyone.

Only political motives (and to some extentregional and nomenklaturainterests) can explain the scandal in Chelyabinsk which broke out on 18 March1993, when the regional Soviet took a decision `to temporarily suspend theconduct of voucher auctions in the region'. The same political motivescan account for the exceptionally irrational explanation offered by theregional Soviet: `the commercial structures from Russia and otherrepublics of the CIS will buy all the good things for a trifle'. Mostprobably from the point of view of halting the privatisation campaign (as wellas undermining the presidential power in Mordovia) Chelyabinsk (at that time)became a `regional test range' when it became impossible to push through aproposal on banning voucher auctions all over Russia at the level of theSupreme Soviet of the RF.

Though later on the decision was overruled,the chain reaction was the main danger left intact: similar decisionswere taken or were about to be taken in Novosibirsk, Voronezh, Bryansk andBarnaul. Analogous trends could be observed in Tula, Arkhangelsk andLipetsk regions, in the Northern Caucus, in Tartarstan and Bashkortostan, andall in all the trend affected one-third of the provinces of Russia. Localauthorities had a mercantile motive for ignoring the voucher auctions.For instance, up to the end of March 1993 the authorities of Nizhny-Novgorod(whose small-scale privatisation model was so much praised byGoskomimushchestvo as a real model to follow) were conducting only cashauctions, contrary to the current legislation.

Nor should we forget here the increasingimportance of the nomenklatura and sectoral interest in destabilising the Russian privatisationprocess. It is this factor that we can consider the dominant onethroughout 1993. This is not surprising for it was in 1993, when massprivatisation started, that large-scale sale (transfer) of shares, thoughformal to a great extent, became an all-around phenomenon, and this way theloss of leverage by the nomenklatura became irreversible. (And it should be emphasised herethat we mean nomenklaturaleverage and not the real power of the state.) At the same time what wehave today is an optimum version of turning state property over to privatehands. Practically no responsibility to superior organisations, almost noresponsibility for property, and an exceptionally thin line separating what is,from what is not one's own (Galkin & Privalov, 1993). So it was theinterest of the nomenklatura that caused a powerful attack on the principles of privatisationin 1993 within the government itself. These interests can be seen in thefollowing policy:

1) the desire of sectoral ministries tocancel decisions on privatisation already taken (The Baltic works);

2) attempts to introduce limitations onincorporation and privatisation from the sectoral point of view (estimates showthat in the first half of 1993 the fuel and energy complex saw 65% of stateproperty removed from the process of privatisation);

3) unjustified attempts to secureownership of federal property controlling blocks of shares of enterprises (as arule, delegating the authority to run them to the appropriate department oragency); for instance, by the end of 1993 controlling blocks of shares in 305enterprises were in federal ownership, while the authorised capital of 158enterprises included a `golden share';

4) formation of gigantic holdingstructures including the delegation of the controlling block of shares in theparent company to the corresponding departments (for example, in 1992-1993 GKIreceived as many as 100 applications, out of which 35 were accepted asapplications to be processed, including 5 in the area of atomic power, 2 in themilitary-industrial complex, 3 in communications, 5 in mechanical engineering,2 in instrumentation, 3 relating to raw materials extraction and 6 associatedwith construction materials).

Let us analyse one of the best knownexamples, which directly contracted many legal norms: RAO Gazprom,uniting 95% of the gas industry of Russia. The authorised capital of thisholding company (235 billion rubles without revaluation) is divided asfollows: 40% of the shares are in federal ownership (for a term of threeyears), 15% belong to the workers of the industry, and 10% of the shares may bebought for vouchers by RAO itself at the nominal value with subsequent sale onthe securities market, 33.9% are for closed voucher auctions nominally for the`peoples of the North' and actually for the workers of the enterprises, and1.1% is sold to the AO Rosgazofikatsiya.

But this is not the main point: it isquite possible that 35% of the shares that are now in federal ownership will bepassed over into trust to the RAO itself with the right of an irrevocableoption to buy at the nominal rate of 30%. This will actually mean a new`nomenklatura-bureaucratic' privatisation within the framework of the existinglegislation.

There is also a great danger of`localisation' of the privatisation process in regions and of the latterusurping the prerogatives of the central bodies of power which are responsiblefor the conduct of federal privatisation policy. A catalyst for this maybe, in particular, a reanimation of the idea of creation of super-holdingcompanies and, in general, reinforcement of the administrative and pro-sectoraltrends within the government.

Another major factor is the legalenvironment. By the time a full normative base for privatisation waselaborated and adopted (over 200 key documents in 1992-1994) certain documentsalready became obsolete,, while the agenda had some new items associated withthe post-privatisation experience of many enterprises.

There are many problems today associatedwith the mass violation of the privatisation legislation. In 1993 aloneas many as 7000 violations were detected by the Office of the PublicProsecutor, all of them relating to the issue of privatisation, while thecourts of arbitration received as many as 700 lawsuits. The most typicalcrimes are deliberate reduction of the book value of enterprises, forgery inlease contracts, sales of enterprises not authorised for privatisation (in theform of granting a lease with a subsequent buy-out right) and creation of closejoint stock companies by-passing the law, use of the services of `dummies' atauctions and contests and so on. It is inevitable that we shall face anew wave of crimes and law violations in connection with a policy of propertyredistribution.

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