Privatization In Russia

For some, the privatization of Russian industry has been one of the great success stories of Russia’s painful economic transition: quick, firm and radical action was taken to shift the great bulk of Russian industry out of state hands, thereby laying the basis for a radical restructuring of enterprises and improvements in their performance. Others see privatization as a best a failure, at worst a catastrophe. Not surprisingly those opposed to the market and economic reform as a whole share this view. But many commentators who see themselves as supporters of reform find plenty in Russian privatization to criticize: the process led to the transfer of ownership to inappropriate people and as a consequence no beneficial restructuring of enterprises or the economy can be expected.
While this paper will attempt to cover the three key facets of privatization: that enterprises be transferred to private ownership; that the new owners be able de jure and de facto to exercise ownership rights; and, finally and ultimately most importantly, that the new owners exercise their ownership rights in such a way as to bring about improvements in enterprise performance. The key issues to be surveyed, therefore, are: who as a result of privatization obtained ownership of Russian industrial assets, and are they appropriate owners; can new owners, particularly if they are appropriate owners, exercise their ownership rights; and has privatization led to improvements in enterprise performance? The paper will deal with privatization only within the industrial sector; thereby ignoring the highly controversial privatization’s of the last twelve months or so in the energy and utility sectors.
Who are the new owners?
Global data showing about 70% of GNP being produced in the private sector reflects the high levels of privatization of industrial enterprises, with the great bulk of enterprises having been privatized by mid-1994. However privatization does not necessarily mean the complete removal of the state from an equity involvement in enterprises.
State ownership. The state retains shareholdings in a significant number of privatized enterprises on the basis of government decrees declaring the ‘strategic significance for national security’ of the enterprise. Shareholdings range from 20 to 51 per cent or a Golden Share (a single share giving veto rights over certain strategic issues of corporate development) retained by the state for up to three years. In late 1997 the state had shareholdings in 2900 enterprises. The shareholding consisted of a Golden Share in 1351 cases, of over 50% of shares in 128, of 25-50%, in 1037, of 20-25% in 228, and less than 20% in 303 of cases. By far the largest numbers of state holdings are in the energy sector (860). Not surprisingly the defense industry sector has a significant number (260). The rest are scattered across the economy.
This is a not insignificant state equity interest in Russian industry. There appears to be no particular trend towards either the strengthening or weakening of the state’s holdings, primarily because there are very differing views within government over which direction any trend should take. There is a continuing dribble of disposals, but decrees extending the period for which the state can retain parcels of shares in particular enterprises are also not rare. The number of enterprises deemed to require a ‘strategic’ state interest increased from the original 2700 set in the government’s 1995 decree, to over 3200 in early 1997, but had declined to 2900 by the end of 1997. It seems likely that a rump state presence will remain for some time to come, but not at a level that represents the basis for a significant rolling back of privatization.
Majority workforce shareholdings are seen as leading to two possible outcomes: collective ownership, in which the enterprise is owned and managed in a collective way by a workforce with common interests; or management ownership, in which management in various ways gains de facto if not de jure ownership rights over workforce shares and thereby gains effective ownership of the enterprise.
Collective ownership derives either from a natural alliance between managers and rank-and-file employees, probably based on Soviet traditions of paternalism and the ‘social contract’, or from the need of managers to pander to workers who control a majority of voting rights at shareholder meetings. Although some observers might find a collective