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The above facts point to a keyproblem: the creation of a favourable legal and economic environment forshaping a responsible and efficient owner, in the situation where the initialstructure of the property for such owners is only just being formed, in thecourse of privatisation (and here we mean both domestic and foreignowners). This structure does not promote the shaping of suchowners. That is why, while maintaining the stability of the currentlegislation, it is also essential to provide for reasonable revision of thecurrent regulation base (see Chapters 8-9).

6.2. General Privatisation Dynamics

Paradoxically, with all the tensions in thearea of political confrontation on the issues of Russian privatisation, both inthe `upper echelons' and `in the field', the actual process of privatisation in1992-1994 was quite dynamic (see Tables 5-6).

The quantitative success of theprivatisation programme is quite evident /26/. Within the framework ofsmall-scale privatisation, by 1 July 1994 Russia had already privatised 50% ofall small businesses. In the course of large-scale privatisation, by 1July 1994 more than 20,000 joint stock companies had been established on thebasis of the medium-size and large state enterprises. By the middle of1994 Russia had about 50 million shareholders in the new joint stock companiesor voucher investment funds.

By 1 July 1994 there were 100,000 privatisedenterprises or 74% of all state enterprises with a separate balance sheet atthe same period, while on 1 January 1993 the corresponding figure was 10%/27/. In relation to the total number of enterprises available at thestart of the privatisation programme (see Table 4, evaluation 3) as many as 40%have been privatised.

It is of interest to point out here thatwhereas in 1992 the number of state-owned enterprises with a separate balanceincreased (this was mainly due to the commercialisation of the sphere ofservices and commerce), the characteristic trend for 1993 was a steady declinecaused by the on-going privatisation process. Among the privatisedenterprises, compared with 1992, one can see a considerable growth in thenumber of enterprises in federal ownership that were converted into joint stockcompanies.

While in January 1992 there were about 1500applications for privatisation, by 1 July 1994 the figure was already 137,501,and of this figure some 74.8% have already been implemented (see Table5). As to the revenue from privatisation, the result (even if one takesinto consideration the rate of inflation, voucher payments and the delays inpayments from enterprises) needs no comment: while the selling price ofall the transactions carried out in 1992 amounted to 157 billion rubles, andthe total cost value of the privatised property 193 billion rubles, for theperiod 1993-1994 these indicators grew by 5 and 7 times respectively. Itis important here to stress that by September 1993 the selling price (543billion rubles) exceeded for the first time the cost value of the property (531billion rubles). It is quite certain that the reason for this is theintensive development of the system of voucher auctions and in particular theintensification of competition at these auctions from the summer of1993.

As reported by Goskomstat RF (Privatisation..., 1994), the mainsources of money from privatisation were the resources of enterprises that wererecognised by buyers (38.5%) and personal savings of citizens (11.3%).The balances on the accounts of economic incentive funds accounted for5.2%.

The means of foreign investors were as arule modest. For example, for the entire 1993 they comprised only 121million dollars and 570 million rubles, with 70.8% going for federalenterprises /28/. This should be considered against the total volume ofinvestment in the Russian economy (together with credits) of the order of 6.6billion dollars (Efremova, 1994). The major portion of foreign investmentwas from Germany and went into manufacturing industries, as well as from theUSA and Italy in other fields of industry as well.

As reported by Goskomstat RF, the sectoralstructure of foreign investment in 1993 was: mechanical engineering andmetal-working - 23.2%, fuel industry - 16.3%, commerce and the catering sector- 15.2%, construction - 5.3%, wood-working and paper and pulp industry - 4.5%,production of construction materials - 3.8% (Delyagin, 1994). The mostattractive regions were Moscow (which is at the same time a zone of risk anduncertainty from the point of view of investment), Krasnoyarsk, Omsk andArkhangelsk.

Experts' estimates (see Bolmatova &Evseev, 1994) show that Russia could absorb some 10-12 billion dollars ofprivate investment per year, and ideally the figure could be as high as 40-50billion dollars annually. And yet - and I share this viewpoint - duringthe last two years the investment climate for foreign capital in Russiadeteriorated. The privileges and guarantees provided by the law onforeign investment were eliminated, there were no more tax holidays, and noright to dispose of currency gains freely. Duty-free export of goods ofone's own production and customs benefits for the import of goods for one's ownproduction needs were also abolished. Probably what is happening is thatthe 1992 policy of creating a favourable investment climate for foreign capitalis giving way to a policy of protectionism with regard to domestic enterprises(major monopolists in production and state-owned enterprises).

It is a paradox but in these conditions (seealso Chapter 5) practically all observers report a surge of foreign investmentin the sphere of Russian privatisation from the end of 1993. As thepreliminary GKI data show, not less than 10% of the stock of the enterprisesprivatised in 1992-1993 now belongs to foreign-owned companies. Byvarious estimates the growth of foreign investment comprised from 138 to 400million dollars in the first quarter of 1994 (see also Chapter 8).

As far as small-scale privatisation isconcerned, by 1 July 1994 as many as 75% of the enterprises were privatised inthe field of trade (according to GKI statistics), 66% in public catering and76% in consumer services. If we take the calculations of Table 9, thefigures are somewhat more modest: 55%, 47% and 55% of privatisedenterprises respectively.

The most common method of small-scaleprivatisation in commerce and public catering is a lease with a buy-out right -approximately 46% and 52%, while the numbers of units privatised by contestwere 39% and 30%. In consumer services the prevailing form is salethrough a contest (46%). Some 12% of all small enterprises were convertedinto joint stock companies, and 10% were acquired by natural persons (not bythe workers). And although the majority of buyers of the units insmall-scale privatisation are the workers themselves (about 70% of all deals),nevertheless, as the estimates show (see Rubleva, 1994), only 10% of the workcollectives in St. Petersburg could go about it without any `sponsor'.The latter actually means the appearance of a large co-owner at the majority ofsmall privatised enterprises.

Among the major problems typical of most ofthe objects of small-scale privatisation, it is important to note therequirement for retention of the profile of the business after privatisation,access to credits, and relations with the distribution warehouses (`bases'),which became independent enterprises (Margolin, 1994). Whereas prior to1990 Russia had only 1400 commercial enterprises (since only wholesale andretail trade associations together with their `bases' operated as legalentities, by November 1991, as commerce became more and more commercialised,some 70,000 independent enterprises had appeared. In many respects thiscaused disruption of the former supply links.

However, in our view the main problemremains the fact that most of the enterprises are being privatised without thepremises, which are leased, and this is a kind of `hook' by which the localauthorities hold these enterprises.

The aggregate analytical data on theprivatisation process in Russia in 1993-1994 on the whole exceeded thecorresponding indicators for 1992 (see Table 6). Although some indicatorsof the rates of privatisation visibly fluctuated within the year, and this wasespecially noticeable in the regions, the rates of privatisation intensity wentup significantly (the number of applications implemented / the number ofenterprises subject to privatisation rose to 0.820 in June 1994 and averagefigures were of the order of 0.369 and 0.582 in 1992 and 1993).

Yet it should be noted that such apparentlysuccessful results of privatisation can be accounted for not only by theenthusiasm of the `microlevel' and the activities of GKI but also by thebuild-up of certain countertrends: the rates of submission ofapplications diminished, which led to high implementation figures. Inother words, by the end of 1993 we can say that the peak of the voluntary andinitiative privatisation had been passed at the microlevel, and thoseenterprises that were left can hardly be as active as in the period1992-1993.

Even at this stage of analysis the aboveinformation makes it possible to arrive at very important conclusions from thepoint of view of the prospects of further participation by `outsider' Russianand foreign investors in privatisation:

1) those enterprises that are alreadyinvolved in privatisation (from the act of application submission to thepost-privatisation stage), because of the existing methods of privatisation orlobbying by interested parties, have little interest in most cases or are noteasily accessible for a serious foreign investor, at least at the stage of theinitial placement of the shares (for greater detail see Chapters7-8);

2) those enterprises that have not yettravelled the path of privatisation may be divided into four groups:first of all, direct candidates for bankruptcy that do not have a strongmanagement or plans for development and cannot imagine life without statesubsidies; secondly, enterprises where the situation is the opposite, i.e. theyhave clear-cut plans and partners for transformation but tried by all possiblemeans to avoid voucher privatisation, hoping for a `money stage'; thirdly, agroup of enterprises on the prohibited list of the state privatisationprogramme; and fourthly, the `nomenklatura paradise spots', whichwill be privatised but where it will be privatisation `for our ownpeople'. So only the second group is likely to be of practical interestfor investors.

As to the prospects of development of theRussian privatisation process as a whole, the key task today is not so much theformal build-up of the rates of privatisation (this will require tremendouspolitical and administrative efforts) as the work with those who have alreadymade their intentions clear (and in this category we have more than half thetotal number of enterprises in Russia). Above all it concerns average andlarge enterprises which are at different stages of the incorporation andprivatisation process and correspondingly are in different degrees of readinessfor the sale of their shares in one form or another. Yet this does notmean that the issue of the privatisation rate is of secondary importance, forthe irreversibility of the privatisation process and the problem of economicreforms remains topical today.

Chapter 7. Mass Privatisation Modelin Russia

(October 1992 - June1994)

The very popular term `mass privatisation'combines two independent but closely related processes:

- corporatisation of medium-size andlarge state-owned enterprises with subsequent sale (transfer) of their sharesinto the hands of citizens and non-state legal entities;

- providing all (or part) of thepopulation with investment coupons (cheques, certificate, vouchers, etc) whichgive a right to a part of the property being privatised (voucherprivatisation).

In other words, within the model of massprivatisation corporatisation is the supply side and issuing the populationwith vouchers is the demand side. In the Russian version a policy of saleof shares by means of closed subscription and voucher auctions acts as a`synthesis' of these processes. A system of intermediary investmentinstitutions is also a necessary element in the model.

At the same time, a wide spread mistake isequation of large-scale privatisation with a voucher programme, while actuallyvoucher privatisation is just one of the many methods that may beemployed. Flexible use of these methods should provide a balance betweenattempts to accelerate privatisation and to achieve social justice and economiceffectiveness, the necessity of creation of an effective owner, and attractionof new capital. With all the shortcomings of the Russian model, the majortask of Russian mass privatisation, forming a broad layer of owners, wasnevertheless achieved by July 1994.

7.1. Reasons for the Launch of the Programme andIts Basic Conception

Both the critics and the advocates of thevoucher model which expired on 30 June 1994 agree on one thing: theformal, quantitative success of the programme of mass privatisation isindisputable and evident. As to the results of the programme which arebeyond simple quantitative measurement, they always were and are now a subjectof heated and meaningful discussions as well as of irrational speculations forpolitical purposes. So to attempt to sum up the results let us go back to1992 and try to understand the real situation and purposes of the privatisationvoucher.

Let me note at once that in the last andnow my own position regarding the introduction of a voucher model was and israther negative if we look upon the privatisation voucher - and the massprivatisation model as a whole - as a technical means of `immediate enhancementof economic efficiency', `ensuring social justice' and so on. Under thecircumstances there is nothing more naive (or dangerous) than an attempt toevaluate the actual qualitative results of the voucher privatisation bycomparing these results with the proclaimed goals.

Let us recall the conditions in which astrategic decision was taken to launch a voucher model (summer 1992) as amethod of stimulating the privatisation process in Russia:

- absence of effective demand ofthe population;

- zero interest in privatisationin Russia on the part of foreign investors;

- the presence of over 240,000state-owned and municipal enterprises (which required standard procedures forprivatisation);

- the necessity of the highestpossible rate of legal privatisation (at the first stage) to block intensivespontaneous privatisation and ensure an irreversible type of economicchange;

- the relatively favourablepublic opinion.

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