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Now, because of the general politicalinstability and lack of coherence in the division of powers between variouslevels and branches of power, the whole schedule of privatisation was indisarray (the elaboration of the privatisation programme had been planned for 1September 1991) and the necessary regulations that would fill in the detail ofthe law on privatisation (planned for 1 August 1991) did not exist. Sowhat happened was that, up to the end of 1991 (with the law on privatisation inforce), there were no specific privatisation instruments or a privatisationconception as a whole, and as a result what one could observe were spontaneousprocesses of all kinds.

From November 1991, after the changes in thecomposition of the Russian Government, one can speak about a new stage in theideology of privatisation first of all, and an abrupt intensification ofefforts to ensure practical implementation of the privatisationmechanism. From the very outset, having stated that privatisation was oneof the key elements of the economic reform, the Eltsin and Gaidar governmentstepped up its efforts in the area of development of the legislation onprivatisation, but at the same time it had no real opportunity of operationalmonitoring of the process of privatisation. that is why one of thespecific features of the economic reform of that government was liberalisationof prices before a period of wide-scale privatisation which went beyond thedominating theoretical orthodoxy in the field of transition to the market andwas in contradiction with the experience of some foreign countries. Andthere were quite sound reasons for this /23/:

- it was impossible to wait for the endof the `large-scale privatisation' conducted in a>

- if prices were not liberalised, anystate-owned enterprise actually became a state entity, so as to ensureadministrative distribution of goods in short supply, which could ultimatelygrow (even without free prices) into a serious conflict;

- intensive spontaneousprivatisation.

On 29 December 1991 the President of theRussian Federation signed a decree `On Speeding Up the Privatisation of Stateand Municipal Enterprises', in accordance with which approval was given to the`Fundamental Provisions of the Privatisation Programme of State and MunicipalEnterprises in the RF for 1992', these provisions being elaborated on the basisof the `Draft of the State Programme of Privatisation for 1991'. Theimplementation of these provisions was begun on 1 January 1992. So theFundamental Provisions actually became the first document that providedpractical regulation for the privatisation process and gave a push toprogrammed privatisation (as opposed to spontaneous privatisation) inRussia.

On 29 January 1992 a Decree of the Presidentof the RF `On Speeding Up the Privatisation of State and Municipal Enterprises'contained some 7 normative departmental regulations that gave details on how togo about implementing the Law on Privatisation and the Fundamental Provisionsand set certain rules for the privatisation procedure (a procedure onapplication for privatisation, on the valuation of the property of anenterprise, on turning state enterprises into open joint stock companies, onauctions, on tenders, on the use of economic incentive funds and profit in theprivatisation process, as well as on the operation of commissions dealing withprivatisation). However, the experience of the first months of practicalimplementation of the package showed that all these regulations faced manyproblems. Delay was caused by poor operation (and poor coordination) ofthe privatisation bodies at various levels, poor professional training of thepersonnel, local red tape, the dominance of political methods over democraticones (in other words, bureaucrats tried to find out who was behind aprivatisation effort in each particular case and regarded that as decisive intaking a decision), as well as the complex nature of the technical detailsprovided by the package and certain defects in the documentationitself.

In the following sections of this chapter Ishall deal with the fundamental provisions and procedures of the stateprogrammes of privatisation which became core programmes for the Russianprivatisation process in 1992-1994. The statistical results of theseprogrammes, as well as the analysis of the model of mass privatisation, will betreated in subsequent chapters.

5.2. First State Programme of Privatisation (June1992)

The contradictory nature of theprivatisation process in Russia is evident in the debates and in the process ofadoption of the draft privatisation programme for 1992 in the Supreme Soviet,during which some of its provisions underwent gradual modification. Whilein November 1991-March 1992 the new top officials of the GKI managed to defendthe principles of privatisation drawn up without compromise, in April-June1992, under the pressure of multiple lobbies, they had to withdraw from somepositions at least partially.

As one could expect, criticism both from theright and the left was as controversial, multifaceted and politicised as theprocess of economic reform itself and the process of privatisation inparticular. The criticism led to both dilution of work collectives'management role and over-emphasis on their role in the process ofprivatisation. At the same time as the purely private nature of futureproperty ownership was stressed, no mechanisms were established for creation ofa private owner, no system of incentives to speed up the privatisation andencourage work collectives and managers to set up open stock companies.Other controversies concerned the forced or bureaucratic nature ofprivatisation based on the old institutional structures, the restraint of therole of the state, balancing the state budget and promoting a wide layer ofowners at the same time, banning closed joint stock companies, putting off orspeeding up the system of vouchers, the contradictions between the law and theprogramme, and the permissive attitude toward investors which did not take intoaccount the corruption among the officials, and many other things.

A final version of the first State Programmeof Privatisation of State-owned and municipal Enterprises in the RussianFederation for the year 1992 was not adopted by a decree of the Supreme Sovietof the RF until 11 June 1992. This programme, adopted after a series ofdelays, was actually a compromise, on the one hand between `paid' (for theactive part of the population) and free (with vouchers given to the entirepopulation and benefits given to work collectives) privatisation and, on theother hand, between a model of privatisation for all (GKI) and the division ofproperty among the workers of enterprises (communists and workers'unions). All the previous documents were thus taken into account and theresultant compromise - which was inevitable to launch the model - finallyturned into defeat of the pro-communist forces of the Parliament /24/. Itshould also be stressed that it was that very document which became a basicdocument for the subsequent large-scale privatisation in 1992-1994.

5.2.1. Primary goals and Methods Envisaged by theProgramme

According to the programme the privatisationobjectives were as follows: (a) emergence of a socially oriented marketeconomy on the basis of formation of the category of private owners; (b)enhancing the efficiency of enterprises; (c) social infrastructure developmentusing the revenue from privatisation; (d) contribution to financialstabilisation; (e) contribution to a competitive economy and demonopolisation;(f) attraction of foreign investors. However, in autumn and winter 1992the implementation of Russia's model of mass privatisation became the primarygoal of the privatisation policy, on which both the President and the Russiangovernment counted (see Chapter 7).

For 1992-1993, according to the programme,the following privatisation methods were envisaged:

- sale of ownership interests (shares) inthe capital of corporatised state-owned enterprises, including private offeringfor the management and employees (see Appendix 1) and going public throughvoucher and money auctions;

- sale of enterprises atauctions;

- sale of enterprises through commercialtenders (including those with a limited number of bidders);

- sale of enterprises throughnon-commercial investment tenders (investment bidding);

- sale of property (assets) ofenterprises being liquidated and already liquidated;

- buy-out of rented assets (redemption ofthe property of enterprises leased out fully or partially).

At the same time direct bargaining wasrejected in favour of auctions and tenders (although it is in conflict withworld practice, according to which direct sales in 1991 covered 50% of allprivatisation transactions, amounting to $50 billion). The top GKIofficials thought that: (1) competition facilitated fair prices andsimplified the valuation of enterprises, as the market value of enterprises wasdetermined by the buyers. In the absence of competition, complex andcontradictory methods of valuation had to be employed, which contributed todelays, arguments and corruption; (2) the highest bidders guaranteed thehighest budget revenue to the seller.

All state-owned enterprises were dividedinto three categories depending on the method of privatisationused:

- small businesses (with an averageworkforce of up to 200 employees and book value of fixed capital less than 1million rubles on 1 January 1992) would be sold at auctions andtenders;

- large enterprises (with an averageworkforce of more than 1000 employees or a book value of fixed capital of morethan 50 million rubles on 1 January 1992) would be privatised by beingtransformed into open joint stock companies;

- the remaining enterprises could beprivatised by any method laid down in the programme.

To understand correctly the adoption of themass privatisation course it is essential to take into account not only theabove >

5.2.2. Valuation of Assets

Hinds indicated that there were `threeserious problems that would hinder the sale of enterprises. first, sincecapital markets do not exist the value of the enterprises and therefore theprice of their shares is not known. Secondly, the sale of enterpriseswill have to wait for completion of liberalisation... And a third problemis the perception that population has not enough purchasing power to buy theenterprises...' [Hinds, 1990].

In this context valuation of assets is acrucial problem, at least theoretically. On the one hand, valuation couldbe based on the depreciated book value conditioned by the primitive stage ofthe Russian capital market, modest demand of the population and widespreadcorruption. On the other hand, the real needs of the federal and localbudgets stipulated that valuation principles be adopted that could providerelatively high revenue from the process. It should be also noted thatone can find almost anything on the balance sheets of Russian enterprises(housing, kindergartens, municipal services, etc) and it is quite difficult toforce anybody to take these privatisation assets, within or outside theprivatisation process (for details see Aleksashenko & Grigoriev, 1991,p.551).

The compromise was that the initial price ofan enterprise for sale by tender (or auction) or the amount of the authorisedcapital of a joint stock company may be determined on the basis of a fullinventory of its assets. The property to be valued includes fixed assetsand investments, reserves and inputs, money and other financial assets.Fixed assets are to be valued on the basis of residual value computed byreducing their initial (balance-sheet) value by depreciation. In order todetermine the size of the registered capital the following main items are to besubtracted: (1) the remaining money in economic incentive and profitfunds, channelled to create the enterprise's privatisation fund; (2) short,medium and long-term credits and loans extended and not repaid on time andshort and long-term borrowings; (3) value of property covered by specialprivatisation arrangements, as well as the cost of the social, cultural andother facilities to remain in state or municipal ownership.

5.2.3. Differentiation Between Levels ofProperty

As late as 27 December 1991 the SupremeSoviet of the Russian Federation adopted a decree `On the Differentiation ofState Property in the RF into federal property, the state property of therepublics within the Russian Federation, territories, regions, autonomousregions, autonomous districts, the cities of Moscow and St. Petersburg, andmunicipal property'. In line with this document all the property on theterritory of the RF was divided into several groups, by level of power, thoughthe federal government retained some control over the transferredproperty. Keeping in mind that the lack of such differentiation in 1991was one of the basic factors that retarded the process of privatisation at theofficial level, it is difficult to overestimate the significance of thisdocument. At the same time, and we can say here that it is one of theparadoxes of privatisation, the emergence of that differentiation, thoughconducive to the order of this process from the formal point of view, became anew source of conflicts at the same time (struggle between various levels ofpower for property) and a new brake on privatisation (for there was delay incompiling a list of enterprises by level of property).

In addition to this document the Presidentof the Russian Federation approved (on 18 march 1992) an order on thecomposition of federal, state and municipal property on an item by item basisand on the procedure for registration of property rights. This documentsets forth a rather complex procedure of compilation and approval of the listof items of property to be put under the control of various jurisdictions,which actually threatened new delays in the entire process and spelled anaggravation of the conflict situations surrounding the distribution ofproperty. Equally it affected the procedure of legal registration ofproperty rights. It is quite easy to imagine that in addition toeverything else it opened the door for extra corruption and made it possible tosquare accounts, and the lack of final guarantees for securing the appropriateitems of property on the list served only to prolong the uncertainty withreference to the authorised sellers of state property.

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