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All these factors were crucial for thedevelopment and launching of the Russian voucher model /29/. So what werethe strategic goals Naturally, the goals were not those that had beenlaid down in the first and second state privatisation programmes. Itseems to me that the real goal was as follows: temporary massive redistribution and strengthening of privateproperty rights in Russian society with a minimum of social conflicts, hopingfor further transactions in favour of efficient responsible owners.

Taking into account the conditions in whichprivatisation was started in Russia and especially this real goal of theRussian version of mass privatisation, one can reconcile oneself to the issueof the voucher. And now let us look into the basic components of theRussian model

7.2. Voucher Programme

The conception of Russia's voucherprogramme was approved at the sitting of the Government of the RF on 11June 1992. Privatisation vouchers represented state federal (and onlyfederal) securities with a limited term of validity, each voucher with a facevalue of 10,000 rubles, and were issued to the bearer, with the right ofsale.

The documents issued later specified thegovernment's conception somewhat more fully: a rigid schedule of actionswas drawn up, a Special Co-ordination Committee was established, andterritorial commissions were set up in all the regions. From 1 October to31 January 1993 the overwhelming portion of the vouchers was issued tocitizens: 148 million vouchers. There were no serious problems(such as the panic in Czechoslovakia when coupon books were issued during thelast few days) in the course of handing out privatisation vouchers toindividuals. Yet there were some other problems.

In the course of implementation of thevoucher programme one of the key issues was that of the real purchasing powerand market price of a voucher. The initial position of GKI was that ithad to take into account the real value of state enterprises and other propertythat could be sold for vouchers (35% or 1.4 trillion rubles in old balancesheet prices). It was stressed that vouchers were for use to acquireproperty at the old prices of the last balance sheet valuation and for thatreason the actual purchasing power of the voucher should be considerably higherthan the equivalent sum in 1992 rubles, and that its market price wouldtherefore have a tendency to go up. So while in October 1992representatives of GKI gave an optimistic purchasing power estimate of200-300,000 rubles per voucher, in December that figure dropped only 12-13,000rubles.

Immediately (in the first days of October1992) an exchange and over-the-counter market in vouchers was formed and itshowed a price spread from 200 rubles to 70,000 rubles. The first stockexchange transactions were begun at the Russian Commodity and Raw MaterialsExchange, with a voucher value of 5000 - 10,000 rubles. During 1993 therate went up from half to twice the nominal rate and on average it stayed atthe level of 20,000 rubles during the first months of 1994 and finally, withall its fluctuations, reached some 40,000 rubles.

Up to the end of 1992 the commercial banksand other commercial structures were rather active in buying vouchers(primarily for tax considerations); after the crisis at the beginning ofFebruary 1993 another key `investor' began to dominate the market forvouchers: the enterprises being privatised (both work collectives andautonomous managers) were buying the vouchers for use in closed subscriptionand purchasing `their' shares at voucher auctions. Quite often bargainswere struck between brokerage houses and directors of enterprises buying thevouchers, so that both sides gained by exploiting the difference between thecash and non-cash rates. Isolated cases were reported when foreigninvestors also appeared in the market, usually through their branches andmiddlemen.

To a great extent the dynamics of thevoucher price were conditioned by the political situation, the rate ofinflation and speculative exchange and over-the-counter trading. To anextent a privatisation voucher acquired the characteristics of a security (itbecame a sort of financial instrument) that was considered by the ownerseparately from its real purpose. All the same, the price of the voucherremained related to the privatisation process.

To begin with, the current market price forthe voucher was taken as the basis of the preliminary `market' valuation ofshares and enterprises after voucher auctions. Obviously, however, theactual market price of the shares could only be determined on the secondarymarket, and this market, of course, is still in a rudimentarystage.

Secondly, it was the current market priceof the voucher (real expenditure for its purchase) that one considered toassess the profitability of purchase of any particular shares at voucherauctions. And yet again one has to make a reservation here: thevoucher price of shares is set not so much by the financial position ofenterprises, but rather by the number of shares offered for sale.

Thirdly, the current rate for the voucherinfluenced the volume of purchases of vouchers, especially by the enterprisesthemselves.

Because of this any attempt to measure thereal cost (statically or dynamically) is doomed to fail, if only one vouchervaluation is used. In our view, it is only if we take a range of voucherprices that we can give a real picture. In current conditions an attemptto value the voucher through the `profitability' of the enterprises (even in anindirect way - through the shares acquired) can hardly be fruitful and thusonly `quasi-market' and `property' approaches are possible:

- the current market rate inexchange and off-exchange trading (both cash and cashless);

- the market rate in terms of theissue value of vouchers in autumn 1992 with a corresponding inflationadjustment;

- a weighted average rate atvoucher auctions (the number of times the nominal value per voucher) as themost probable indicator of the true situation;

- a weighted average rate atvoucher auctions taking into account the revaluation of the fixed assets of theenterprises.

It is essential to note that in only 20% ofthe regions were the values of privatisation vouchers and fixed assetsestimated to be balanced. For example, while voucher coverage of assetswas only 53% in the North, 58% in Eastern Siberia, 76% in the Central and BlackEarth area, 78% in the Far East and 92% in the Povolzhie area, in the Urals thevoucher excess was 3%, in the North-West 8%, in Northern Siberia 21%, inVolga-Vyatka 22%, in the Central Area 25% and in the Caucasus 67%. As aresult there was a certain localisation of the voucher markets in some centralpoints and another characteristic feature is that it became quite profitable toplay on the differences in the rates. One could get as much as 200%profit in this way.

More than once the government took steps tosupport the voucher price on the market (considering it as a pledge of itsprestige): these included increasing quotas for voucher payment forproperty up to 35-90%, bringing land, housing and municipal property intovoucher sales, granting permission for enterprises to purchase vouchers out oftheir privatisation funds, mandatory payment of 50% of the closed subscriptionby means of vouchers and so on. However, accelerating the incorporationprocess has always remained the key issue to ensure further voucherauctions.

7.3. Incorporation of State-OwnedEnterprises

The Decree of the President of the RF, No.721, on obligatory incorporation of federal enterprises, issued on 1 July 1992,can be interpreted as the first radical step by the government in thisdirection. And although the quality of drafting of the standarddocumentation and the deliberately primitive nature of certain procedures ofincorporation can hardly be regarded very highly, nevertheless the very fact ofaccelerated transformation of some 6000 enterprises into joint stock companiesmay be justified by the following considerations:

- the issue of vouchers inconditions of a likely investment crisis was considered by GKI as a majoreffort to feed the `investment demand' of the population and, in this sense,turning a considerable number of enterprises into joint stock companies and theissue of shares were necessary measures to ensure adequate `investmentsupply';

- the corporate form of property(even if the owner was not changed) seemed to be more appropriate for creatingthe conditions for attracting capital and stimulating the flow of capital amongeconomic agents in a situation where there was a crisis with the sources offinance (problems with profits, the budget and loans from thebanks).

The incorporation of large state-ownedenterprises began practically at once after the decree of the President, No.721, came into force (see Table 7). The situation was as follows:by 1 January 1993 the register of enterprises subject to mandatoryincorporation included 4979 enterprises, while 674 enterprises were registeredas joint stock companies; by 1 July 1994 these figures had risen to 7121 and4368 enterprises. All in all by 1 July 1994 over 20,000 former stateenterprises were registered as joint stock companies with a total authorisedcapital of 1.1 trillion rubles (in old book values), and at various stages ofincorporation (and included in the All-Russia register of enterprises beingincorporated) there were over 30,000 enterprises with an estimated authorisedcapital of more than 1.3 trillion rubles. It is of interest to note thatabout 23,000 such enterprises joined the process of incorporation by their ownfree will. Thus, if we treat this phenomenon purely formally, it appearsthat the area of `supply' (within the terms of mass privatisation) was preparedwell enough.

Yet at this very time one could also seeone negative trend progressing: with the reduction in the proportionchoosing options 1 and 3 of privileges for workers in the course ofincorporation of enterprises, option 2 was becoming more and more dominant; by1 July 1994 as many as 75% had chosen it (see Appendix 1). This meansthat as many as three-quarters of the enterprises (against two-thirds in 1992)planned to buy the controlling interest with the help of the work collective,in spite of the coefficient of 1.7 times the nominal share value and the 90-dayterm for payment of the entire sum. The other motive for preferringoption 2 was the workers' aspiration to have total equality of rights for all,from the members of the management to the category of unskilled manualworkers.

From the medium-term perspective such atrend is dangerous: first of all the problem of corporate control may beexacerbated and, secondly, the mobilisation of investment resources maysuffer. And although in the course of incorporation (privatisation)closed joint stock companies are not to be formed, the very fact that thecontrolling interest rests with the work collective may well lead to asituation when the diktat of the worker-shareholders (or of a narrow group ofmanagers who are not controlled by a formal owner) will means the prevalence ofcurrent consumption at the expense of long-term development, or management maypursue its own policy to the detriment of the interests of shareholders.In other words, in the case of a closed subscription two equally negative waysof development of a new type of joint stock company are likely: theappearance of an `aggressive consumer majority' (the presence ofworker-shareholders) or the diktat of managers on the basis of dispersion ofproperty.

It goes without saying that in theforeseeable future a major portion of the shares will be held by the current`investors' (see Chapter 8). Yet any intervening period between themoment of the original distribution of shares and the appearance of a seriousowner of a large block of shares will certainly hinder effective control of ajoint stock company, with all the subsequent consequences. From thispoint of view it seems prudent if gradually the rights of the workers at theenterprise are diminished.

So far an outside Russian or foreigninvestor intending to buy at least a part of the block of shares that aredistributed through closed subscription will have to enter into negotiations(directly, through a branch in Russia or through a Russian intermediary) withthe workers on the subject of the immediate purchase of their shares (or buyingthese shares after the end of the subscription). Practice shows that thisis no problem, but it is hardly likely that this kind of approach will be ofinterest to a large investor who aims at a controlling interest.

Moreover, there are numerous technicalproblems associated with the sale of shares by closed subscription for theworkers. Firstly (Mikhailov, 1993) there is (a) a problem of payment forthe privileged shares of options 1 and 3 because of the indivisibility of thevoucher; (b) difficulty in concluding personal agreements on the acquisition(transfer) of shares at large enterprises, which leads to an increase in theperiod for subscription; (c) if the subscription period is tight, not all thepotential participants have enough time to exercise their rights; (d)additional purchase of vouchers in the market by large enterprises which havechosen option 2 generates some individual and financial problems. Therewere also many reports of direct violations of the Provisions on the conduct ofclosed subscriptions.

Finally, what is just as important, many ofthe stock companies that appeared in Russia have little similarity with the`classical' ones. This concerns both the joint stock companies set up onthe basis of state-owned enterprises and, above all, their organs ofmanagement. In particular, the principles of formation of the Board ofDirectors which are now in force, as applied to the newly created stockcompanies, make it quite possible for the local authorities to secure acontrolling interest (up to 20% of the voting shares belong to the localproperty fund, whose representative, together with a representative of thelocal authorities, are members of the Board of Directors, together with theGeneral Director and a representative of the workers).

In this connection the most importantcurrent and to an even larger extent medium-term problem to be analysed is thatof the post-privatisation existence of the newly instituted stockcompanies. It covers a broad spectrum of unsolved issues:management of the state blocks of shares, delegation of the rights to managethe shares, payment of dividends, the existing voting systems (voting trusts,powers of attorney, and so on) in large corporations, property trustoperations, registration of deals on the secondary markets (the latter isespecially important to ensure effective transfer of property rights) and soon.

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