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Nor could one expect any greater order froman organisational pattern of privatisation bodies resting on two parallelstructures - committees and property funds. Organisationally it was aparadoxical situation: in one and the same city one could have a numberof structures operation simultaneously (committees and property funds) in thename of city, region, national autonomous districts and so on. Naturallyenterprises whose privatisation projects did not fit into the existinglegislation took advantage of all this an sought the most `loyal' of all theseorgans. It was quite typical of the behaviour of the directors of manyenterprises to use such means of promotion of their goals as confidential talksin the backrooms of governmental agencies (in case of local authorities) orparliament, using personal channels of communication or `pushing' specialinstructions form the authorities on a specific enterprise when that enterprisedid not fit the framework of the standard legislation.

In the struggle for the division of property(in the course of dividing the property by levels and in general in the processof privatisation) the central bureaucracy was not slow to set up newdepartments, concerns, associations and so on, and a wealth of them appeared onthe stage as alternatives to the former Union and Russian departments. Atthis level the struggle was essentially for a dominant influence and for theright to dictate the terms of privatisation in a substantial sphere of theeconomy. In particular, that was the nature of contradictions between theGKI, the Ministry of Industry, the Ministry of Fuel and Energy and otherdepartments of the Russian Federation. Lack of coherence in legislationand in the distribution of powers and terms of reference only magnified thesecontradictions.

As to the local authorities, theconfrontation between the committees on the management of state property(operating under the executive bodies) and the property funds wasclassical. Because of the contradictions, lack of coherence andcontinuous changes in legislation and the various precedents set by Russia'ssupreme organs of power (which conferred power on some territories throughspecial enactments or invested certain organs of power with an exclusiveprivatisation right beyond the limits of the law), any of the opposing partiescould prove equally well that it had its rights and powers.

For example, in Moscow, after the law of theRF `On regional and Area Soviets of People's Deputies and regional and AreaAdminstration' came into force on 3 April 1992 the city property fund which wasactually left without rights, made some futile attempts to win back theseller's rights of the municipal property by citing the provisions on thetransfer of rights to the Soviets in the law.

Another problem ranking as high inimportance was the struggle between federal and local authorities for purely`departmental' property, as well as for a part of the potential revenue gainedin the course of privatisation. It is hardly necessary to comment on howsuch problems affect the prospects of participation in privatisation by anyserious investor `from outside'.

5.2.4. Privatisation and Restructuring ofEnterprises

Usually the process of privatisationincludes some operations that may be called `restructuring'. These mayinvolve legal restructuring (incorporation, commercialisation), financialrestructuring (debt), operational (managerial) restructuring and physicalrestructuring (investment in production), and demonopolisation [OECD, 1993,p.18].

Genuine market demands define therestructuring needs of enterprises and usually the best policy is to sell themand let the new owners carry out the necessary operations. Thisprinciple, adopted in many East European countries, is especially valid forRussia to effect operational or physical restructuring. However, thisapproach is also associated with some negative consequences. For example,because many privatised enterprises have an enormous burden of debts (and nointention to reduce their debts) investors may not be attracted. On theother hand, there will be no effective management and investment in thesituation when employees become shareholders of the major block of shares(according to option 2, for example).

As for demonopolisation, Russian lawstipulates that preparation of the enterprise for privatisation shallincorporate some reorganisation, including detachment of divisions of anenterprise to act as independent enterprises, including determination of theirauthorised capital. In practice this process (see Table 7) is now goingon quite spontaneously, with a minimal role of the competition authorities and,in many cases, to the detriment of industrial technologicalcomplexes.

However, there is also a reverse trend; acharacteristic of this is the formation of new holding structures or moreamorphous financial-industrial groups. The legislation that exists inthis area is not definite regarding the procedures for the creation of suchstructures and contains (often quite deliberately) many bans andlimitations. And yet this process (in addition to the objective needs ofenterprises in many cases) directly reflects the interests of certain layers ofthe nomenklatura and theteam of directors, and there is no doubt the process will go on. Now theholding companies are being set up on the basis of special decrees of theorgans of federal power, primarily in the `strategic' branches associated withhigh technologies, the fuel and energy complex and the defence sector. Asto the financial-industrial groups, by September 1994 only 4 such structureswere registered (also see Chapters 6 and 9).

In the course of reorganisation it isimportant to distinguish social infrastructure assets on the balance sheet ofan enterprise and have guidelines for using such assets. Should suchassets be included in the property for privatisation, the buyer must have theright to use them in any manner consistent with the requirements of legislationin force in the RF. the fact that the balance sheet of practically allmedium-size and large enterprises contains a variety of items in the socialsphere creates a multitude of problems, both from the point of view ofvaluation of the enterprise and from the point of view of conflict between theenterprise and the local authorities, and there is also a problem from thepoint of view of the social atmosphere in regions. One of the most acuteproblems is the substantial number of `enterprise towns', quite largesettlements whose social infrastructure depends entirely on the operations of asingle enterprise. Should the latter give up the idea of support of suchinfrastructure, social conflict is inevitable there, for it is too much for thelocal authorities to shoulder the burden /25/. So far no one has found akey to solve the problem.

As to legal restructuring, the processes ofincorporation carried out in Russia can hardly be included wholly in thiscategory of restructuring. Because of many objective factors, the Russianideology of mass privatisation favours speed of privatisation rather than thequality of individual projects and transforms this process into a unified andsimple procedure (see Chapter 7).

Many people reproach the advocates ofRussian privatisation, saying that privatisation actually ignored the issues ofrestructuring and attraction of investment. Indeed, one could hardlycombine this with the major goal of the first stage (see Chapter 7), but therewas also a political reason for this: to launch any kind of privatisationprogramme in Russia, it is essential to build in a political compromise betweenvarious social groups (interests), but it was that very compromise at the firststage (such things as vouchers and colossal privileges for work collectives)that excluded the possibility of immediate restructuring and actual investmentin production. It is to be hoped that this problem can be solved at thenext stage of operations.

5.2.5. Foreign Investors andPrivatisation

We shall survey here only the technicalaspect of foreign investment, abstracting from such problems as political risksand general property rights guarantees.

Formally, foreign investors may participatein privatisation on an equal footing with Russian entities and citizens inauctions and tenders or investment bidding. The legal regime for foreigninvestors `cannot be less favourable than the regime for the property, propertyrights and investment activity of juridical persons and citizens of the RF'(art. 6 of the Law on foreign Investment). Foreign banks may financeprivatisation transactions on commercial terms withoutrestrictions.

As for the objects of privatisation, thefollowing restrictions are imposed:

- foreign investors shall be allowed totake part in the privatisation of enterprises and facilities in public cateringand consumer services, as well as small-scale industry, construction and roadtransport, only at the decision of local authorities;

- decisions to allow foreign investors toparticipate in the privatisation of enterprises and facilities in the fuel andenergy complex, enterprises producing and processing precious metal ores,precious and semi-precious stones, precious metals and radioactive andrare-earth products shall be made by the RF Government (governments ofrepublics within Russia) at the time when the decision is made to allowprivatisation.

As for land, a few regulations declared theright of Russian and foreign individuals and legal entities to acquire landfollowing the privatisation of an enterprise and the right to acquire land inorder to expand production. Nevertheless, failure to recognise the rightof private ownership of land, the conflicts between the executive andlegislative authorities throughout Russia and the fact that the basic standardprice for land is set by administrators account for legal instability in thissphere. Experts believe that as domestic buyers are more interested inlong-term development, this will not scare them away. To foreigninvestors, however, such unsettled arrangements are not acceptable.

Should privatisation of a specific propertybe initiated, a foreign investor (just like a Russian one) shall be guided bythe regulation regarding the procedure for processing and filing an applicationfor the privatisation of public and municipal enterprises.

At the same time the purchase of stocks,shares, etc of a Russian enterprise by a foreign investor is treated by thelegislation (Law on Foreign Investment, Art. 13) as a manner of setting up aventure with foreign investment subject to the general conditions. Yetquite a few laws refer to the `peculiarities' of foreign investors'participation:

- Law on Foreign Investment (Art.37): `The terms of their (foreign investors') participation in thecompetitions and auctions for privatising public and municipal enterprisesshall comply with the effective law on the territory of the RF';

- Provisional regulations on privatisingpublic, municipal enterprises in Russia by auction competition): `Thepeculiarities of participation of foreign legal entities and foreign nationalsin auctions (competitions) shall comply with the law currently inforce'.

On balance, in the absence of the aforesaidpeculiarities, a foreign investor will be subject to the same simple proceduresas a participant. However, apart from the barriers that apply to allinvestors, including corruption, a foreign investor will have to fact thefollowing problems: (1) making copies of the statutory documents inRussian; (2) lack of required information on projects intended forprivatisation; (3) access to regional (local) publications and bulletins; (4)arrangement and principles of deposit and final payment in rubles by a foreigninvestor (despite the special provision that `mutual payments in transactionswith foreign investors shall be made in the currency of the RF taken fromspecial bank accounts', the foreign exchange aspect of foreigners'participation in privatisation is virtually omitted in the current law); (5)discrimination, compared with a Russian investor, regarding (a) direct contactswith the seller, (b) drafting of required papers, (c) opportunities to visitthe privatised enterprise, which are restricted by the need to obtain a visa,(d) making preliminary studies (for details see Radygin, 1993a).

If an enterprise that is of interest to aforeign investor is on one of the restricted lists provided by the StatePrivatisation Programme the investor will have to deal also with a host ofproblems arising from inter-agency conflicts in Russia. The point isthis: no single state body is capable of resolving the entire complex ofissues associated with the use of foreign investment. As a result ofthis, despite the recognition of the national regime for all the subjects ofthe privatisation process and the common rules of regulation, a foreigninvestor, within the framework of the effective procedures, is sure to findhimself at a disadvantage compared with the Russian participants.

Not touching upon the ideology as a whole,frequent changes in privatisation (and taxation) mechanisms are a strongdeterrent to any serious investor. The adverse effect will be especiallystrong on the organisational and technical side, in view of the heavyexpenditure foreign companies incur in terms of time and money at the earlystages of drawing up a major investment project report.

Orientation to a relatively fastprivatisation at a time of economic instability not only suggests but calls fora comprehensive system of privileges as payment by the state for investors'risk. For the time being, this is not in the plans; moreover, any mentionof privileges for foreign investors has been deleted from the StatePrivatisation Programme.

For more than two years draft amendments toan obsolete RSFSR law `On Foreign Investments' (of 4 July 19910 have beendiscussed. The draft decree (as tradition has it) has disappeared in themachinery of the government. It is a draft on how to provide incentivesfor foreign investment into the priority fields of the economy. On 24November 1992 an important and significant decree of the government, No. 908,`On Measures to be Taken to Provide Information for Russian and ForeignInvestors on the Privatisation of State-Owned Enterprises', was adopted.It provided for creation of a special State Information Centre for FacilitatingInvestment. However, at present we have no evidence that the organisationis in operation.

It goes without saying that there should andwill be certain restrictions on the operations of foreign companies from thepoint of view of national security and strategic interests of Russia. Butthe problem here is quite different: today, as in 1992-1993, there are nosigns that the GKI is serious about attracting foreign investment.

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