Appendices

Appendix 1

Text of the 1992 Privatization Programme

The following is the text of the 1992 Privatization Programme passed by parliament in June of that year. This is the key document agreed both by the government and the parliament.

State privatization programme of state and municipal enterprises in the Russian Federation in 1992

JUDGMENT of the Supreme Council of the RSFSR, 11 June 1992, N 2980-I (EJ 92–29)

1 Introduction

The state privatization programme of state and municipal enterprises of the Russian Federation in 1992 (hereafter: the Programme), developed in accordance with the requirements of the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, sets out the objectives, tasks and order of privatization in 1992, and defines the limits of this area.

The main objectives of privatization in 1992 are:

• the formation of a layer of private owners to promote the creation of a socially oriented market economy;
• the improvement of the performance of enterprises through privatization;
• the social protection of the population and the development of social infrastructure through funds received from privatization;
• the promotion of stabilization of the financial situation of the Russian Federation;
• the creation of a competitive environment and the promotion of de-monopolization of the economy;
• the attraction of foreign investment;
• the creation of conditions and organizational structures to enhance the scale of privatization in 1993–1994.

The requirements established by the Programme are binding for execution by the organs of state power and the administrations of republics within the Russian Federation, by autonomous regions, autonomous districts, territories, regions, the cities of Moscow and St Petersburg, and local governments.

The facilities and state and municipal enterprise properties are distributed according to their possible privatization in 1992 into the following groups:

• those facilities and enterprises whose privatization is prohibited;
• those facilities and enterprises whose privatization may be carried out only by decision of the government of the Russian Federation or republics of the Russian Federation (depending on the type of state ownership);
• those facilities and enterprises whose privatization may be carried out only by the decision of the State Committee of the Russian Federation for the Management of State Property (hereafter the State Property Committee of Russia) in consideration of the opinion of the ministries;
• those facilities and enterprises whose privatization is allowed only in accordance with local programmes of privatization;
• those facilities, enterprises and structural subdivisions of enterprises privatized in cases stipulated by the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, with the consent of the labour collectives;
• those facilities and enterprises subject to mandatory privatization.

The privatization of property not included in the mandatory categories and where there are no restrictions on privatization may be carried out on the basis of local privatization programmes or applications for privatization.

The programme does not regulate the privatization of state farms, nor of land or housing funds.

2 Classification of facilities and businesses according to the possibility of privatization in 1992

2.1 Facilities and Enterprises whose Privatization is Prohibited

Note: Restrictions on the privatization of enterprises referred to in paragraphs 2.1.11, 2.1.12, 2.1.14, 2.1.21 apply only to enterprise units within direct operation and the contents of the facilities and systems indicated herein.

2.2 Facilities and Enterprises which may be Privatized only by Decision of the Government of the Russian Federation or Governments of the Republics of the Russian Federation (Depending on the Type of State Property)

Applications for the privatization of facilities and enterprises listed in Section 2.2 of the Programme go to the territorial agencies of the State Property Committee of Russia, which send them to the State Committee for Management of State Property of the Russian Federation with mandatory notification of the applicant. The decision on the application is taken by the Deputy Prime Minister of the Russian Federation by request of the State Property Committee of Russia and the relevant ministry. Decisions on such applications must be made within one month of their submission to the territorial agency of the State Property Committee of Russia.

The above procedure applies to those facilities and enterprises included in Section 2.2, which cannot be attributed to Section 2.1 of the Programme.

2.3 Facilities and Enterprises which may be Privatized only by Decision of the State Property Committee of Russia in Consultation with the Relevant Ministries

Decisions on the privatization of the facilities and enterprises included in Section 2.3 of the Programme shall be taken by the State Property Committee of Russia. Ministries and departments of the Russian Federation may give their opinion on these draft decisions if asked to do so by the committee.

The above procedure applies to those facilities and enterprises included in Section 2.3, which cannot be brought under Sections 2.1 and 2.2 of the Programme.

Under the privatization of these facilities and enterprises indicated in Sections 2.2 and 2.3 of the Programme, the State Property Committee of Russia may decide to maintain controlling interests in federal ownership for up to three years.

2.4 Facilities and Enterprises whose Privatization is Allowed only in Accordance with Local Programmes of Privatization

Decisions on the privatization of facilities and enterprises included in Section 2.4 of the Programme shall be adopted by the committee on property management in accordance with the requirements of local programmes of privatization.

Restrictions on privatization as described in the Programme are binding on all organs of state power and administration and organs of local self-government. The introduction by these bodies of additional restrictions on privatization is not allowed.

Privatization of facilities and enterprises that are subject to the restrictions imposed by the Programme is not allowed without the permission of the corresponding organs.

Restrictions on privatization are established in Sections 2.2–2.4 of the Programme. Their application does not imply a ban on the transformation of state (municipal) enterprises into joint stock companies of the open type that are held among state (municipal) property.

The Programme prohibits the purchase and sale, transfer and exchange of shares (shares or parts of shares, stocks) between legal entities in their share of capital (fund) of which the share of state and municipal property is 25 per cent or more, unless otherwise established by legislative acts of the Russian Federation.

2.5 Facilities and Enterprises Subject to Mandatory Privatization

Facilities and enterprises subject to mandatory privatization are those that have the greatest influence on the formation and operation of the market infrastructure of the Russian economy, as well as facilities and enterprises whose ineffective operation constrains the pace of economic development in Russia and the formation of the market.

These facilities and enterprises are:

3 Estimated figures (indicators) of privatization for organs of state power and management

3.1 Estimates figures for privatization in 1992 for the republics of the Russian Federation are contained in Table 1; those for territories [kray], regions [oblast], and the cities of Moscow and St Petersburg are in Table 2; and for autonomous regions and autonomous areas in Table 3.

3.2 Targets are defined in relative terms (the proportion of facilities being privatized as a percentage of the total number of facilities of the industry subject to privatization) and are minimal for the development of local privatization programmes.

Targets for the privatization of enterprises listed in paragraphs 2.5.6 and 2.5.7 are not to be established.

3.3 On the basis of the targets of the Programme, management committees for the property of the republics of the Russian Federation, autonomous regions [oblast], autonomous areas [okrug], territories [kray], regions [oblast] and the cities of Moscow and St Petersburg are to develop local programmes of privatization and forecast the consequent proceeds from privatization.

Approved relevant councils of people’s deputies of the programme of privatization are to be submitted to the State Property Committee of Russia.

Personal responsibility for the fulfilment of the tasks of the Programme is assigned to the chairmen of the councils of people’s deputies, heads of administrations, and chairmen of the asset management and property funds at all levels.

4 Norms of distribution of funds from privatization in 1992 and forecast of their revenues from 1992 to–1994

4.1 From 1992 to 1994 the privatization of state and municipal enterprises will be conducted on both a paid and an unpaid basis.

Forecast revenue from privatization on a paid basis in 1992 by sector is shown in Table 4, calculated on the basis of estimates of effective demand for the facilities of privatization in various sectors and regions of the Russian Federation. Income amounts to 72 billion roubles, including that:

• from personal means of citizens – 15 billion roubles;
• of funds for economic incentives (stimulation) of enterprises – 32 billion roubles;
• from the funds of enterprises, whose purchase is acknowledged in accordance with the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation – 15 billion roubles;
• of funds from foreign investors – 10 billion roubles.

In the fourth quarter of 1992 the additional effective demand of the population will be provided with the introduction of personal privatization of accounts (privatization checks).

4.2 The forecast of revenue from privatization in 1993–94 is calculated on the basis of the effective demand for the facilities of privatization in various sectors and regions. Proceeds will consist of: 350 billion roubles in 1993; 470 billion roubles in 1994.

The main source of funds for the purchase of privatized facilities in this period will be personal privatization deposits (privatization checks) and the privatization funds of the enterprises.

4.3 The funds received from privatization are subject to distribution to the appropriate budgets and state organs according to the norms given in Table 5.

This distribution is to be made after the disbursement of funds to employees of privatized enterprises in accordance with the established Programme.

4.4 The Russian Federation has the right to adjust indicators for privatization (in consultation with the governments of the republics of the Russian Federation) and the norms of the distribution of funds accruing from privatization, in accordance with the state of the financial system of the Russian Federation and the market conditions for the facilities property.

4.5 All funds received from privatization are exempt from taxation.

4.6 The property management committee and property funds at all levels are exempt from taxation.

4.7 State duties are not charged on any acts and transactions of privatization.

5 Methods of privatization and the benefits provided by privatization in 1992

5.1 The particular method of privatization of an enterprise is determined by the committee on management of property based on the findings of the commission on privatization in accordance with requirements of the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, state and local privatization programmes, and normative acts of the State Property Committee of Russia, taking into account the views of the labour collective of the privatized enterprise.

Upon the transformation of state and municipal enterprises, joint stock companies of the closed type are not allowed.

It is not permitted to create joint stock companies (including holding enterprises), either by corporations, unions, associations or other groups of enterprises, including state (municipal) enterprises, except when bringing their organizational-legal form into compliance with the laws of the Russian Federation.

The property contributions made by state (municipal) enterprises to the authorized capital stock (fund) of enterprises created in any organizational-legal form, including the form of a union of enterprises, is considered to be state (municipal) property. These enterprises are permitted to make the indicated deposits only with the permission of the corresponding property management committee, and the sale and disposal of such in any form – only in accordance with the corresponding Russian legislation on privatization.

It is not permitted for unions of state (municipal) enterprises to create enterprises in any organizational-legal form, and it is likewise not permitted for organs of state power and management or organs of local self-government, except for committees for property management and property funds operating in their competencies as defined by the legislation of the Russian Federation.

The rightful successors of the indicated legal entities in the capacity of founders and participants (stockholders, shareholders) of previously established enterprises are exclusively the relevant property funds.

Decisions on the allocation of the structural sub-units of the enterprises in the process of privatization are to be adopted by the corresponding property management committees in accordance with the requirements of anti-monopoly legislation of the Russian Federation. In this case, an accord with the labour collective of the enterprise is not required. If the allocated structural sub-units are converted into joint stock companies of the open type, the officials of the administrative units receive the full range of benefits provided by Section 5.4 of the Programme.

5.2 All state (municipal) enterprises in relation to the methods used in privatization are divided into three groups:

Small enterprises whose average number of employees is less than 200 and whose balance value of fixed assets as of 1 January 1992 is no less than 1 million roubles are to be sold at auction (by competition), in accordance with the requirements of the Programme;

Enterprises whose average number of employees is over 1,000 and whose balance value of fixed assets as of 1 January 1992 is over 50 million roubles are to be privatized by conversion into joint stock companies of the open type.

All other enterprises can be privatized by any of the established methods in accordance with the requirements of the Programme.

5.3 In 1992, the following privatization methods may be used in accordance with the Programme:

• the sale of shares in joint stock companies of the open type;
• the sale of enterprises by auction;
• the sale of enterprises in a commercial competition (including competitions with a limited number of participants);
• the sale of enterprises by non-commercial investment competition (investment tenders);
• the sale of property (assets) of liquidating and liquidated enterprises;
• the purchase of leased property.

5.4 Upon the sale of shares of joint stock companies of the open type, created through the transformation of state and municipal enterprises (including those previously converted into joint stock companies of the closed type), at the request of the labour collective of the enterprise, one of the following options for granting benefits to the members of the labour collective of the privatized enterprise is to be used, and these benefits are granted to:

• workers for whom the enterprise is the primary place of employment;
• persons entitled under the legislation of the Russian Federation to return to their previous work at the enterprise;
• pensioners who have retired or former employees who worked at the privatized enterprise for at least 10 years for men and seven years and six months for women, and those dismissed at their own request or in order to reduce staff or number of workers;
• those removed from the enterprise to reduce the number of employees after 1 January 1992 and who are registered as unemployed.

Option One

All members of the labour collective of the privatized enterprise are provided, simultaneously and free of charge, with personal, privileged (non-voting) shares, amounting to 25 per cent of the charter capital, but in total amounting to no more than 20 times the established minimum wage in accordance with the legislation of the Russian Federation as calculated for one worker.

Ordinary shares of up to 10 per cent of the charter capital, but in total amounting to no more than six times the minimum monthly wage per employee established by the legislation of the Russian Federation, are to be sold by subscription to members of the labour collective at a reduction of 30 per cent of their nominal value and in instalments of up to three years, with an estimated cash down payment of no less than 15 per cent of the nominal value of the shares.

Responsible officials of the administration of the privatized enterprise (the head manager, his deputies, the chief engineer, the chief accountant), under the conditions of the contracts concluded with them, have the right (option) to purchase ordinary shares at the nominal value, amounting to a total sum of all of the indicated responsible officials of up to 5 per cent of the charter capital, but no more than 2,000 times the minimum amount of monthly wages per employee established by the legislation of the Russian Federation.

Option Two

All members of the labour collective of the privatized enterprise are granted the right to purchase ordinary (voting) shares, comprising up to 51 per cent of the charter capital.

In this case:

• Free transfer of shares and the sale of shares on preferential terms is not carried out.
• The sale price of the shares is determined in accordance with the regulations approved by the State Property Committee of Russia.
• The transformation of state and municipal enterprises into joint stock companies of the open type the Property Committee, as proposed by the administration of the privatized enterprise and with the consent of the privatized enterprise’s workforce, can personally provide employees of the enterprises belonging to a single technological complex with the privatized enterprise the right to participate in a private subscription to shares conducted among the employees of privatized enterprises.
• The total number of shares to be sold to employees of the privatized enterprises and employees belonging to a unified technological complex cannot exceed 51 per cent of the value of charter capital of the joint stock company.

Option Three

If a group of employees of an enterprise takes responsibility for carrying out the plan of privatization of the enterprise to prevent its bankruptcy and with the consent of the general meeting of the labour collective to conclude the corresponding agreement, the period of which may not be more than one year (non-renewable), the members of the group have the right (option) at the conclusion of this period and in accordance with the conditions referred to in the agreement to purchase 20 per cent of the charter capital in the form of ordinary shares of the enterprise at nominal value. Should the group fail to meet the conditions of the agreement, the right (option) is lost and the stocks are sold in the established order.

During the period of effect of the agreement the indicated group shall be empowered to vote with 20 per cent of voting shares held by the relevant property fund.

The plan of privatization includes the terms of the agreement, the conclusion of which with the indicated group by the corresponding property fund is mandatory. The agreement specifies the obligations of the members of the group and limits their material liability of property belonging to them by the right of private property (to be contributed in the form of collateral), in an amount not less than 200 times the minimum monthly wage as established by the legislation of the Russian Federation for each member of the group.

Under this option, all employees of the enterprise (including members of the group) are sold ordinary shares constituting 20 per cent of the charter capital, but in an amount not more than 20 times the minimum monthly wage per employee as established by legislation of the Russian Federation, with a discount of 30 per cent of their nominal value and payment in instalments over three years.

In this arrangement the value of the initial contribution may not be less than 15 per cent of the nominal value of the shares.

Option Three can only be used in enterprises with employees numbering more than 200 and a balance value of fixed assets between 1 and 50 million roubles.

The decision to choose Option Two or Three for providing benefits is taken by the general meeting of the labour collective or is certified by the signatures of its members. The decision is considered adopted if it is voted for (signed) by not less than two-thirds of all the employees. In the absence of this decision, benefits are to be provided in accordance with the first of these options.

In all options, 10 per cent of the funds received from the sale of shares (excluding shares sold to members of the labour collective of the privatized enterprise) are credited to the private personal privatization accounts of its employees.

The order of distribution of shares transferred free of charge (by selecting the first version), and the distribution and transfer of funds to the personal privatization accounts, are determined by decision of the general meeting (conference) of the labour collective.

The sale of shares to employees within the limits of the benefits established by the Programme is carried out by private subscription in accordance with the regulations approved by the State Property Committee of Russia. If the subscription’s sum exceeds the amount provided for by the selected option, the commission on privatization of the enterprise reduces the shares of all employees in the same proportion, in order to comply with the above restriction.

Shares acquired or granted free of charge in the indicated order, as well as those acquired on other terms in accordance with the regulations on the sale of shares, as approved by the State Property Committee of Russia, may be sold by the shareholders without restriction.

5.5 Sale by auction means the purchase by real individuals or legal entities as private property in a trading session of the objects of privatization in cases where the buyer is not required to comply with any conditions in relation to the object of privatization.

In this case, ownership is transferred to the buyer who made the highest bid during the trading session.

In this case, employees of privatized enterprises, and individuals dismissed from an enterprise to reduce the number of employees after 1 January 1992 and registered as unemployed who do not hold the right to own property as a result of the auction, receive up to 30 per cent of the selling price of the facility, but not more than 20 per cent of the minimum monthly wage per employee as established by the legislation of the Russian Federation.

5.6 Sale by competition (commercial or non-commercial investment) is the purchase by an individual or legal entity as private property of the objects of privatization when the buyer is required to perform any of the following conditions in relation to the object of privatization (saving the profile of the enterprise or purpose of the object, the number of work positions, the funding of social facilities, the required amount of investment).

In this case, employees of privatized enterprises, as well as individuals dismissed from an enterprise to reduce the number of employees after 1 January 1992 and registered as unemployed, receive up to 20 per cent of the selling price of the object, but not more than 15 times the minimum monthly wage per employee as established by the legislation of the Russian Federation.

Commercial competition is held in the form of an open auction or private tender. In the case of commercial competition the right to the acquisition of the belongings goes to the buyer who offered the highest price.

Sale by commercial competition with restrictions on the number of participants is allowed (in accordance with local programmes of privatization) only for privatizations that are located in rural areas, small towns or the Far North, and which privatize enterprises of trade, public food services and consumer services, and enterprises that process agricultural products and provide production and maintenance for agricultural production. Participants in this competition must be employees of the privatized enterprise, residents of the area or people deported from the given area (including those outside the Russian Federation) during periods of mass repression.

During the investment competition (for investment tenders) state and municipal enterprises are sold when the buyer is required to implement investment programmes. The right ownership is hereby transferred to the buyer whose offer best fits the criteria established by the privatization plan.

The provision on investment competitions (investment trading) is to be approved by the State Property Committee of Russia.

Through the sale of state and municipal enterprises (and property of enterprises being liquidated) by competition or by auction, a partnership (joint stock company), including at least one-third of the employees on the payroll of the privatized enterprise (sub-units), when purchased (unless it is leased property being purchased) is provided a trade discount of 30 per cent interest and paid in instalments over up to three years. In this case the amount of the down payment may not be less than 25 per cent of the sale price.

5.7 Individuals and legal entities who are the owners of privatized state-owned and municipal enterprises by auction (by competition) shall be entitled to enter into long-term (at least 15 years) leases for state (municipal) non-residential premises and buildings, but which are not incorporated into the property acquired by them, and also the right to acquire ownership of the indicated premises and buildings (not earlier than one year after the entry into force of the agreement for the sale of the enterprise) and the land occupied by the enterprise, in the order established by the government of the Russian Federation. Changing the conditions in comparison with the agreements previously signed by enterprises for the leases of buildings and structures is allowed only by agreement of the parties, unless otherwise provided by the terms of the agreement.

5.8 In cases where, during the auction (competition) for the sale of privatized enterprises, an individual or legal entity, recognized by the buyer in accordance with Article 9 of the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, is the only bidder in the auction (competition), the enterprise is sold to the indicated person at a price determined in the manner prescribed by the State Property Committee of Russia. This sale is made within two weeks of the date of the auction (competition) by the associated property fund. In this case, employees of the enterprise who are now its buyers receive no benefits.

5.9 The sale of the property (assets) of liquidating and liquidated enterprises is conducted exclusively at auction.

In this case, employees of such an enterprise, as well as those discharged from it in order to reduce the number of employees after 1 January 1992 and registered as unemployed, are paid up to 30 per cent of the selling price of the property (assets), but not more than 20 per cent of the minimum monthly wage per employee according to the legislation of the Russian Federation.

5.10 The privatization of state and municipal property that is leased is conducted in various ways, depending on the availability of foreclosure in the lease agreement and the permission of the labour collective of the lease-holding enterprise, by decision of not less than half its members.

Leaseholders with right of redemption in accordance with the contract lease may buy out according to the following order:

• in accordance with the lease agreement entered into prior to the entry into force of the RSFSR law On the Privatization of State and Municipal Enterprises in the Russian Federation, if the size, timing, terms and conditions to make the redemption are set according to the lease agreement;
• by transforming the enterprise, acting on a rental basis of leasing state (municipal) property into a joint stock company of the open type where the leaseholders hold a priority right to purchase shares owned by the state or the local soviets of people’s deputies.

The staff of the structural sub-unit that is part of a trade, public food services, or a consumer service enterprise acting on the basis of the lease agreement with the option to purchase, shall be entitled to, if taking a decision to become an independent enterprise, buy out the enterprise’s leased state (municipal) property, proportionally to its share in the total production (sale) of goods and services at a discount of 30 per cent of the value stated in the contract of the lease.

The provisions of this paragraph shall apply to leasing enterprises and cooperatives only if they bring the organizational-legal form into compliance with the requirements of the legislation of the Russian Federation.

5.11 The right to purchase leased property is provided to associations created by labour collectives of structural sub-units that have separated from the enterprises created by labour collectives of state (municipal) enterprises prior to the entry into force of the RSFSR law On the Privatization of State and Municipal Enterprises in the Russian Federation on the basis of leasing the property of enterprises that do not have this right in accordance with the leasing agreement.

In these cases, the specified associations are also granted the preferential right to conclude a long-term lease agreement (for a period of not less than 15 years) for state (municipal) non-residential premises, buildings, structures, as well as the right to acquisition of the property, but not earlier than one year after the purchase of the leased property in the manner prescribed by the State Property Committee of Russia.

5.12 In 1992, state and municipal enterprises (irrespective of the limitations of their privatization) with remaining economic incentive funds in their balance and profit remaining at their disposal may create privatization funds by opening personal private privatization accounts for employees. The funds are credited to the personal private privatization accounts of the employees and are not taxable.

In 1992, all remaining economic incentive funds on balance as of 1 January 1992 and up to 50 per cent of the actual profits remaining at the disposal of the enterprise after payment of taxes and other obligatory payments may be sent to the privatization fund.

Profits derived from the sale of fixed assets of the enterprise and amortization deductions are not sent to the privatization fund.

After the privatization of state (municipal) enterprises, the funds credited to the personal private privatization accounts of workers remain in their possession. When an employee is dismissed the money may be listed on his application for another personal privatization account by request.

Ownership of the funds in the personal private privatization account of the employee may be transferred to other persons as inheritance and gifts. Funds of personal privatization accounts of workers are to be used only for the purchase of any state- and municipal-owned facilities in the process of privatization.

5.13 In order to protect the interests of employees of the privatized enterprises, upon taking the decision to file a bid for the privatization of state (municipal) enterprises (sub-unit) or from the time of application by another person or legal entity until the time when the buyer gains the right to the property (the first meeting of shareholders), it is prohibited without the consent of the associated property management committee:

• to reorganize, liquidate or restructure the enterprise;
• to modify or terminate the agreements concluded earlier for leasing non-residential premises, buildings and structures occupied by privatized enterprises.

During this period it is also prohibited to change the staffing of the enterprise or reduce the number of its employees without the consent of the labour collective of the enterprise (sub-unit) or its authorized organ.

5.14 In 1992 the following additional benefits are established under the privatization of state (municipal) enterprises:

A partnership created by employees of an enterprise where the number of disabled exceeds 50 per cent of the total number of employees has a priority right to purchase the enterprise at the residual value; if the number of people with disabilities is less than 50 per cent but more than 10 per cent of the total number of employees, the conditions of sale of the business must include the buyer’s obligation to preserve within the privatization plan the number of jobs for the disabled and provide them with special conditions.

A partnership created by at least two-thirds of the total number of workers in a state (municipal) enterprise of traditional arts and crafts of the peoples of the Far North (provided that at least half the members of the partnership belong to minority ethnic communities in relation to the indigenous population of the territory), and folk arts and crafts has a priority right to acquisition at the residual value.

Under the privatization of the mining industry located in the Far North and equivalent areas, the benefits of the Programme for the members of their labour collectives also apply to former employees of enterprises who had been with them for at least five years, and those members of prospectors’ teams that lease the property of the enterprise who had been with them for at least five seasons.

Under the privatization of enterprises for the primary processing of agricultural products and the production-technical provision of agricultural production, shares may be sold by private subscription to agricultural producers, recognized by buyers in accordance with the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, on the territory of the indicated republic of the Russian Federation, autonomous region [oblast], autonomous area [okrug], territory [kray]or region [oblast].

6 Conditions offering credit for privatization in 1992

Commercial banks of the Russian Federation and foreign banks can to provide credit transactions for privatization without restrictions.

The Central Bank of Russia does not allocate loans for these purposes.

Local programmes of privatization may provide allocation of credit resources for these purposes from the funds held at the disposal of the relevant councils (soviets) of people’s deputies.

7 The use ofpersonal privatization deposits of citizens in 1992

7.1 The system of personal privatization accounts (privatization checks) is to be introduced no later than 1 November 1992. The government of the Russian Federation shall no later than one month prior to the payment of personal privatization accounts (privatization checks) submit for approval by the Supreme Council of the Russian Federation the total amount to be paid in the form of personal privatization deposits (privatization checks), and the possible extent of payments to a single citizen.

7.2 For the provision of the circulation and the distribution of funds from the registered privatization accounts, the State Property Committee of Russia and asset funds of all levels shall create and contribute to the creation of financial institutions (investment enterprises, funds and others) and provide for extensive involvement in their business structures.

7.3 The State Property Committee of Russia and local property management committees, in order to allow citizens to acquire privatized property at the expense of personal privatization accounts (privatization checks) by 1 September 1992, shall provide enterprises with the balance value of fixed assets as of 1 January 1992 of more than 50 million roubles in the joint stock companies of the open type, with the exception of enterprises that cannot be privatized in accordance with Section 2.1 of the Programme. To this end, the leaders of the indicated enterprises are in charge of drafting documents for the establishment of joint stock companies of the open type and plans for their privatization, prepared in accordance with the law of the Russian Federation On the Privatization of State and Municipal Enterprises in the Russian Federation, the Programme, and the typical documents to be approved by the government of the Russian Federation. As agreed with labour collectives, the privatization plans are to be submitted by the leaders of the enterprises to the relevant committees of property management by 1 September 1992.

8 The use of foreign investment

8.1 The use of foreign investment under privatization of state (municipal) enterprises is permissible in the following conditions:

Foreign investors may participate in auctions, competitions and investment trades. Upon completion of transactions with foreign investors, the exclusive sellers of the privatized property are the relevant property funds.

If the foreign investor is the sole participant in an auction, competition or investment trade, the sale of the enterprise is allowed. In this case, the relevant property fund does a special evaluation of the enterprise’s property according to the method approved by the State Property Committee of Russia.

Participation of foreign investors in the privatization of facilities and trade enterprises, public food services and consumer services, as well as small enterprises (up to 200 workers on average with a balance value as of 1 January 1992 of up to 1 million roubles) and enterprises of industry and construction and automobile transport, is permitted only by decision of the local soviets of people’s deputies or organs authorized by them.

The decision on allowing foreign investors to participate in the privatization of facilities and enterprises of the fuel and energy complex, and enterprises for the mining and processing of ores, precious and semi-precious stones, precious metals, radioactive elements and rare earths is taken by the government of the Russian Federation or the government of the republics of the Russian Federation (depending on the kind of state ownership) simultaneously with the taking of the decision on the admissibility of the privatization of the facilities and enterprises.

Other restrictions on the participation of foreign investors in privatization are not imposed.

8.2 Reciprocal payments with foreign investors upon completing transactions are conducted in the currency of the Russian Federation with special accounts opened in banks in accordance with the legislation of the Russian Federation.

The use under privatization of rouble shares of foreign investors and enterprises with foreign is to be in accordance with the legislation of the Russian Federation.

8.3 Foreign individuals who are not registered as entrepreneurs in their country of origin are recognized as foreign investors with respect to their participation in privatization.

9 The order of interrelations of state privatization organs among themselves, with other organs of state management and budgets of all levels

9.1 The sellers of state (municipal) enterprises and other facilities of state (municipal) property are the respective property funds.

When making decisions about privatization, within their competency within the Programme, the government of the Russian Federation and the Russian State Property Committee represent the interests of the autonomous regions [oblast], autonomous areas [okrug], territories [kray], regions [oblast], and the cities of Moscow and St Petersburg, and provide for their defence.

Control of the implementation and legality of the privatization transactions is assigned to the appropriate standing committees of the various soviets of people’s deputies.

In regions where property funds (branches of the Russian Fund of federal property) are not set up, all of their functions given to the corresponding soviets of people’s deputies (Russian Foundation federal property) are temporarily performed by the appropriate committees for property management.

9.2 From the moment the decision is taken to privatize an enterprise, the powers delegated by the relevant committee on property management to the ministries, agencies or organs of local administrations are repealed.

9.3 The ministries and departments of the Russian Federation are developing and reaching an accord with the State Committee of the Russian Federation for Anti-monopoly Policy and Support of New Economic Structures and submitting to the State Property Committee of Russia and the Russian Fund of Federal Property recommendations for accounting for special characteristics of the enterprises of the sector taken into account in the implementation of privatization and the exercise of the powers of the owner.

9.4 For the exercise of the powers of the owner at meetings of the shareholders of joint stock companies, the majority of whose controlling shares are assigned to the state, property funds of corresponding levels may draw upon on a contract basis representatives of the relevant ministries and departments of the Russian Federation and the officials of the administration of the enterprises.

10 Formation of special-purpose financial funds using the revenue received from privatization

10.1 The funds received from privatization means all the cash proceeds from the sale of the objects of privatization and other revenues obtained in the course of privatization (including the registration fee, deposit and so on).

Dividends and rental payments being received by property funds and property management committees are not included in the composition of the revenues of privatization and are subject to being transferred to the appropriate budget, accounting for the expenses of the banking operations.

10.2 The funds received from privatization, except for those of personal privatization accounts (privatization checks), at the disposal of the various soviets of people’s deputies in accordance with the norms established by the Programme, shall be used for the formation of special purpose funds for:

• social security;
• implementation of environmental protection measures;
• de-monopolization and restructuring;
• development of the social and engineering infrastructure of cities and regions, as well as covering the budgetary deficit.

Using the funds received from the privatization of federal property held in the operational management of the Armed Forces of the Russian Federation, the Ministry of Security of the Russian Federation and Ministry of Internal Affairs of the Russian Federation, there shall be created a federal fund for the social security of military servicemen.

10.3 The order for the formation and consumption of the special purpose funds, as well as the amount of funds allocated for these purposes, are defined by the relevant councils of people’s deputies.

11 Requirements for local programmes of privatization

11.1 Local programmes of privatization are developed by the committees of property management of the republics of the Russian Federation, autonomous regions [oblast], autonomous districts [okrug], territories [kray], regions [oblast], cities (except for those cities of regional subordination), districts [raion] (excluding those in cities), and are undertaken by the appropriate councils of people’s deputies, who are free to establish for the lower organs of state power and management (organs of local self-governance) tasks of privatization in accordance with the Programme.

11.2 Local privatization programmes must be developed (revised) in accordance with the requirements of the Programme and approved (reinstated) no later than one month after its publication. After that the local programmes must be published in the organs of the press of the corresponding councils of people’s deputies and presented to the State Property Committee of Russia.

11.3 The local privatization programmes are approved for one year and must meet the following mandatory requirements:

They must not contradict the Programme, not include proposals for the privatization of facilities and enterprises which are not eligible for privatization or have restrictions (other than Section 2.4) in accordance with the Programme, and not impose additional restrictions on the privatization of facilities and enterprises.

They must ensure full compliance with mandatory requirements and tasks established by the Programme.

They must list concrete facilities (groups of facilities), subject to mandatory privatization, in providing for the enforcement of calculation indicators and the obligatory tasks of the Programme.

They must include projections of the funds to be received from privatization and the order and direction for their use.

They must contain a list of the restrictions on privatization, established in accordance with Section 2.4 of the Programme.

They must contain specific measures for de-monopolization and the creation of a concrete environment, by the use of special purpose non-budget funds and foreign investment.

11.4 Property management committees of the republics of the Russian Federation, the autonomous regions [oblast], autonomous areas [okrug], territories [kray], regions [oblast], cities and districts [raion] with the consent of the corresponding supreme soviets, and the councils of people’s deputies can make changes to republican and local privatization programmes.

11.5 The form and deadlines for reporting on the fulfilment of the tasks being established by the Programme are determined by the State Property Committee of Russia and the Russian Federal Property Fund by agreement with the State Committee of the Russian Federation Statistics.

11.6 Responsibility for the implementation of local programmes of privatization is given to representatives of the local councils of people’s deputies and property funds, to the heads of the administrations and the representatives of local committees for the management of property.

11.7 Control over the implementation of local programmes of privatization is the responsibility of the State Property Committee of Russia.

Appendix 2

The role of associations

As discussed in Chapter 4 above, a key objective of voucher privatization was to avoid the threat from “associations”. The following is the text of a memo from Bob Anderson and other consultants at GKI on the results of their investigations into these bodies.

Over the past few weeks we have visited 15 industry “associations”, meeting with their presidents or senior staff working on privatization. We wanted to know what an “association” is, what functions it performs, how it is paid for these services, and what its plans are for the future. Also of interest is the legal status of the firms within each association: are they state owned, leased, or joint-stock companies? This memo summarizes what we now know on the subject. For more details and information please turn to other memos (one was written for each association meeting)… .

An association is simply a group of enterprises. The enterprises delegate functions to the association and pay a fee for the services performed.

Normally, but not always, an association contains the enterprises that were once controlled by one of the former ministries. For instance, 90 per cent of the enterprises in the former ministry of construction materials are now part of the construction materials association, Rosstrom. However, when the ministry for construction of heavy machinery for the energy industry broke up at the end of 1990, no fewer than nine associations were formed in its place.

Associations exist in two forms. They are either a “voluntary association” or a “joint-stock company”. About half of our sample were joint-stock companies. They made transition to a JSC quite legally under the now famous “Statute 601” of December 1990. Some of the associations, while not JSC’s themselves, do contain JSC’s within them, such as banks or trading houses.

So what purpose do these structures serve? We give a list of the main functions and then go into each in more detail:

1. Representing the interests of the constituent firms
2. Supply coordination
3. Implementation of R&D
4. Marketing
5. Investment/financing
6. Production coordination

1 Representing the firms

This is perhaps the most important function. The associations act as a lobby in dealings with all kinds of organizations: the national government, governments of other republics, institutions abroad, and indeed the Ministry of State Property. For instance the transportation construction association Transstroi listed their most important role as representing the strength of the Russian construction industry on the world stage.

2 Supply coordination

What this involves is fairly clear: maintaining links between firms and their suppliers. There are two reasons why it is hard for the individual enterprises to do this themselves. First, some of the most important inter-firm links are those across republic boundaries. These have been breaking up recently leading to a large downturn in output in the Russian economy. It is difficult for an enterprise to conduct cross-republic negotiations and so it delegates this job to the association. For instance, the automobile construction association Avtoselkhozmash prides itself that it has managed to keep links across republics intact and thus kept the output level in the industry constant.

A second problem is that in this inflationary environment, suppliers do not want to receive money in return for their goods. Thus they engage in barter, and it falls to the association to arrange the complicated network of barter transactions.

3 Implementation of R&D

Associations often contain research institutes (which once belonged to the ministries) and so coordinate interaction between the firms and the institutes. However many of these institutes are independent and operate directly with the firms on a contract basis. Associations also have the technical expertise to advise firms whether they should receive R&D support from these institutes or others abroad. For example, the corporation of electrical technology and appliance building lists R&D support as one of their most important functions.

4 Marketing

This is taking on new importance as the government is no longer the sole customer. Some associations are actively seeking out foreign customers. They are also setting up so called “trading houses” within the association to act as an interface with the market. Marketing devices such as advertising are also dealt with by the association.

5 Investment/financing

Associations help their firms find investment partners for new projects, or, more often, projects which are unfinished through lack of funds. They often look abroad to do this.

Many associations are also attempting to set up “investment funds”. These are a way of pooling resources from the constituent enterprises and using them for the good of the industry, or to help some ailing firm. The association may know which are the most profitable investment opportunities (they are better informed) and therefore firms’ deposits could earn a good rate of return. In particular firms might do better this way than by turning to a bank. A more skeptical view is that the associations will squander deposits by supporting losing firms when it would be more efficient to liquidate them. In the new commercial environment, we doubt whether profitable enterprises will voluntarily agree to provide financial support to money-losing firms.

6 Production coordination

It is expected that over the next few years many firms will change their product mix to a more consumer-friendly one. Associations hope to organize such production within their industry so that the right amount of different kinds of output are produced to meet the prevailing level of demand.

At present these services are paid for in two ways, both based on a contract set-up: either a fixed fee is paid every year or the association takes a percentage of the deal. Some associations have a menu of services they offer; firms choose what they want and usually a combination of the two payment schemes is used.

The importance of associations is declining over time. Already the staff of these structures is often only a third of what it used to be when the former ministry existed. They correctly see their role as organizer of supplies diminishing over time, especially once the market system takes hold.

However they say that there will be a continuing role for them implementing R&D and as a lobby organization. They also claim their marketing and investment functions will grow in importance. In future they will advise firms on investment decisions and on their dealings with banks and the stock exchange. It is hard, however, to believe that these functions will remain with the associations beyond a few years.

One other function which we have not yet mentioned is helping the firms with the process of corporatization and privatization. This is closely tied up with the future structure of the associations, so we now turn to this topic.

Some of the “voluntary associations” are happy to remain as such. These are normally the associations that do not think they will be able to perform many useful functions in the future. Firms are free to leave them if they so wish, but at the moment, few of them are.

Other associations however have much more active plans, which almost always involve the formation of holding companies. It should be noted that GKI has no official policy on holding companies. We now describe how these companies might be formed.

First, each of the enterprises within the association will be corporatized and the usual initial distribution of shares made according to GKI plans: 35 per cent to the workers in total and 5 per cent to the managers. The remaining 60 per cent from each firm would be lumped together to form the founding capital of a holding company. But who will own shares in the holding company?

Many people misunderstand what the associations are really trying to do. They think that the associations want the government to own the holding company so that they can return to a ministerial style of governance i.e. of centralized planning. But it seems that this is mistaken. The real driving force behind the formation of these holding companies is the enterprises, in particular the managers. They want the holding company to be owned, not by the government, but by the enterprises. This may seem very strange, indeed meaningless, but to understand the motivation for their plans, we remind readers of the current ownership structure of firms.

Firms were once controlled by branch ministries, and owned by the government. As the branch ministries were phased out, although the government nominally remained the owner of the enterprises, the effective owners (in the sense of who had control rights) changed.

Managers, workers, and local governments began moving into the ownership vacuum created as the ministries declined. This distinction between nominal ownership and effective control is very important in what we discuss below. It means that the government is not now able to use its assets, the firms, as it sees fit. Others now have control rights as well. Thus the GKI programme of benefits to workers and managers can be interpreted as a “payment” or “bribe” to these parties so that they relinquish their control rights, enabling the government to sell the rest of the shares as it likes.

But let’s get back to those holding companies. The associations are proposing a bizarre (to westerners) plan. First, as we said before, the holding company would own 60 per cent of each of the constituent enterprises. Second, this holding company would be owned, not by the property funds, but by the enterprises themselves! But wait a minute! That means the holding company owns part of the enterprises, and the enterprises own the holding company! So no one actually owns 60 per cent of the enterprises. To us, this seems bizarre: the privatization process which is meant to define ownership rights is leaving the ownership of 60 per cent of the shares unclear.

The enterprises, however, rather like this idea. Just as the managers and workers gained effective control when the branch ministries collapsed, so they hope that effective control over this unclaimed 60 per cent defaults to them over time. This could easily happen, because under their plan, no one has clear control over these shares.

This incredible scheme occurs again in a very popular (with the enterprises) plan for privatization which has been presented by the minister of industry, Mr. Titkin. He has a different proposal. Remember that 60 per cent of shares that does not go to the workers or managers? Only a small amount of this, say 20 per cent, would go to forming a holding company. Of course, this holding company will be owned by the enterprises, in accordance with the little trick we saw above.

The remaining 40 per cent of each firm, however, would be distributed to other firms in the association, especially suppliers. Note that what this effectively means is that all the enterprises own shares in each other. The associations say that the point of this plan is to strengthen ties between firm and supplier, to establish a stable relationship. However, the most striking feature of the proposal is the extent to which the managers stand to gain. One way of thinking about this is the following. The suppliers and other enterprises who own 40 per cent of the shares are probably long-time business partners of the manager and would probably agree not to exercise the control rights represented by the shares they own. One can imagine an agreement of the kind: “Don’t meddle in my firm, and I won’t meddle in yours”. In this way the control rights of these shares would come straight back to the manager.

However, we have to think about this more carefully. For the ownership of these 40 per cent of shares is not defined. The supplier partly owns the firm, which partly owns the supplier etc. The ownership of the shares has been left open and again, managers hope that these unclaimed control rights default to them.

We repeat that we think it is the managers that support plans such as Titkin’s. These plans were not conjured up by the association staff. They merely lobby on behalf of the enterprises, and try to explain the system as a means of strengthening ties between firms and suppliers. A discussion of whether the latter is a good idea is beyond the scope of this paper.

An important issue concerning the associations’ activities and proposals for holding companies is their impact on competition. On the whole, associations no longer coordinate prices, though some do in external markets. The formation of holding companies, however, could easily lead to a monopoly in the industry and such structures are likely to come into conflict with future anti-trust legislation… . The majority of firms within each association are still government owned and would therefore go through the GKI programme. There are exceptions: in the Russian light industry association only 20 per cent of firms are still state owned. The rest are leased enterprises and joint-stock companies (closed type).

Another issue we discussed with the associations was their view of the GKI privatization programme. A number of comments emerged several times and we summarize them below:

• Associations varied in what they thought of the benefits given to workers in the programme. Some thought they were too generous, some not generous enough. We mentioned above that in the programme the government is effectively buying back control rights from the workers and it seems that the benefits given in the programme are a sufficient payment.
• The programme is not liked by very labor-intensive industries, nor by very capital-intensive industries. In the former, 25 per cent of the shares does not represent a very generous payment, because of the low capital stock. In very capital-intensive industries, the limitation of 20 monthly salaries worth of shares is binding and so employees cannot receive the full 25 per cent.
• There is also a general sentiment that managers do not get enough benefits: 5 per cent of the shares at book value. It is believed that the government has to offer a lot more to buy back control rights from the managers. We are very sympathetic to this view.
• Another problem arises with enterprises that are leased without the right to buy. Under the GKI programme it appears that such enterprises will be treated like state enterprises and will have to go through the process specified in the programme. However they want to be given the right to buy on favorable terms, and it may be easier for the government to allow them to do this.

Conclusion

Associations are an important structure in the Russian economy. Firms delegate certain important functions to the associations and usually pay for the services by a contract system. Some of the functions will die away, but others will remain and indeed grow in importance.

We emphasize again that it is the enterprises (workers, but mostly managers) that are behind the formation of holding companies and that this is largely driven by their dissatisfaction with the benefits offered to them in the GKI programme. It seems to us that GKI is not “bribing” the managers enough to persuade them to relinquish their control rights over the firm, which they acquired after the demise of the ministries. To check these conclusions we plan to visit some enterprises and talk to the managers.

Appendix 3

Inter-enterprise debt

The buildup of inter-enterprise debt was one feature of the chaotic situation which faced Russian companies following price liberalization in January 1992. The following memorandum describes the nature of Russia’s enterprise debt in summer 1992,¹ and describes the plans developed by GKI and its consultants, working under a presidential decree, to resolve them in a way which would minimize inflationary impact, and how those plans were frustrated. It is included here to illustrate the lack of coordination and planning which surrounded reforms, and the disorder of policy making in 1992–93.

Inter-enterprise debt background

At the end of June 1992, the indebtedness of state enterprises to each other had reached more than three trillion roubles. The main cause of this indebtedness was the failure of the banking settlement system.

There had been two methods of processing a payment between two enterprises through the banking system. The seller could send a payment demand to his bank, who forwards the demand through the banking system to the buyer’s bank. If the buyer has insufficient funds to meet the payment, the unpaid demand had traditionally been recorded in the buyer’s kartoteka 2 (K2) memo account. In general, no cash was credited to the seller’s account; the K2 is off the bank’s balance sheet. The K2 is therefore a partial listing of the buyer’s accounts payable.

Alternatively, the buyer could place a payment order with his own bank. If there are no funds to cover the order, it is returned to the seller and should not be recorded in the K2. It is believed that the system of payment demands predominated for payments before 1.7.92, but that it was discontinued on this date.

The K2 should record all unpaid payment demands for goods and services which have been processed through the banking system and reached the buyer’s account. It is not clear the extent to which the K2 also includes unpaid payment demands for other than goods and services.

The total value of items in K2 accounts had soared since January 1992, to represent a sum much greater than Russian GNP. The reasons for this growth are unclear, but are likely to include the following:

1. The number of unprofitable businesses, unable to meet their trading debts, has grown with price liberalization in January 1992, and with the removal of state subsidies to many firms.
2. The bank clearing system has fragmented with the break-up of the USSR and with the subsequent break-up of many banks.
3. Volumes passing through the clearing system have increased with the creation of more banks, the creation of small private enterprises, and with the decline of large single state orders for output.

Further reasons include the increased cost to enterprises of bank borrowing; inflation; and poor financial management at enterprises.

The direct consequences for the GKI of this growth of credit were twofold: the balance sheets of enterprises to be privatized are likely to include huge values of accounts payable and accounts receivable, sufficient to dissuade investors; and fundamentally unprofitable businesses, who should be bankrupt rather than privatized, survive. More broadly, the growth of credit undermines the strict macroeconomic monetary regime which is central to the reformists’ agenda, of which privatisation is a part.

The Central Bank has initiated two procedures designed to reduce the value of items in K2 accounts. The Act on the Settlement of Payments (ASP) summarized the net indebtedness of enterprises as on 1.7.92. The scope and implementation of the ASP is unclear; it appeared to have had little effect.

The implementation of the ASP was interrupted by the creation of “725” accounts, the second Central Bank initiative. It is believed that a 725 account was set up for each state enterprise, and that 725 accounts, together with “160” accounts at commercial banks, formed a closed system, administered entirely by the banks.

Each 725 account was then credited with an amount equal to the lesser of: the value of unpaid payment demands for goods and services from other state enterprises, recorded in K2 on 1.7.92; and the value of all debtors on the balance sheet of the firm on 1.7.92. Qualifying K2 items were then processed through the 725 accounts using the central bank opening credit. To the extent that the 725 accounts remained closed, the central bank credits were not money, but quasi-money. Each enterprise should end up with a positive, zero or negative balance on its 725 account. The sum of 725 balances across enterprises should be zero. The size and distribution of net balances on 725 accounts was for a long time unknown.

However, prior to these Central Bank initiatives, on 1 July 1992, by Decree No. 720, President Yeltsin made the GKI responsible for creating an Agency to “Normalise Payment and Accounting Relations in the Economy of Russia”, shifting responsibility for inter-enterprise debt onto the GKI.

In September, the Strategic Design group of the Consortium were asked to present a plan for handling the inter-enterprise debt in such a way as to minimize any inflationary impact there might be. Under the proposed plan, all 725 balances would be vested in the GKI Agency for Inter-enterprise Debt. The Agency would thereby have become the debtor or creditor of the enterprises. Creditors would only receive cash to the extent that debtors had paid cash to the Agency. If the Agency had no cash, it would have been empowered to issue long-term paper to the creditor enterprises which would represent assets of the enterprise. The total effect would therefore have been noninflationary.

Work Done

On October 15th, the Consortium were asked to set up such an agency. A team was rapidly assembled and detailed action plans drawn to establish the Agency.

The Central Bank, however, having not been consulted by the GKI, was proceeding to the next part of its plan to resolve the situation: it allowed credit balances to be used to pay indebtedness to the Government or to commercial banks. It also allowed commercial banks to lend money to enterprises for the settlement of debit balances, even making short term loans to the banks to facilitate this.

The ultimate effect of these actions was to reduce the Inter-enterprise Debt to an irreducible debit balance of 215 billion roubles by the end of October. (This balance represented only the debts which were on the books of banks and enterprises at the end of June 1992.) The Central Bank’s action injected nearly one trillion roubles into the economy.

Without the assistance of the Central Bank, it would be impossible to define the true extent of the remaining Inter-enterprise Debt, since all information about the debtor enterprises is held at the level of the commercial bank (accessible only through the Central Bank). Hence the role of the Agency was undermined; furthermore, hyperinflation was now threatening to reduce the remaining balances even further. Less than a month after giving the go ahead to the Agency, the GKI were forced to suspend its work. [Consulting] staff were reassigned to more pressing areas.

Next Steps

The Central Bank and the GKI still need to resolve the question of how to deal with the remaining balances. The GKI have not set up the Agency required by Yeltsin’s Decree, and take the position that Inter-Enterprise Debt is the Central Bank’s problem; the Central Bank have stated that the IED is the GKI’s problem…

Appendix 4

The conduct of voucher auctions in the Russian regions

This appendix consists of two notes written for this book by senior western consultants employed to monitor and assist with voucher auctions in Smolensk and Novosibirsk. Between them, they give a sense of the degree of control which the central Moscow authorities had over the privatization process, and how in practice they were carried out. For further discussion, see Chapter 4 above.

Nicola Ramsden

My diaries record 16 visits to the city of Smolensk between 28 February 1993 and 24 January 1994. Each visit was for two to four days. We cancelled visits in October 1993 during the siege of the White House but returned to Smolensk immediately following the elections in December 1993.

The first visit in February 1993 included a briefing from the western consultancy that had made first contacts for the EBRD there. They had already set up an office in the local administration’s building, staffed by two bright young languages graduates from Smolensk. A junior consultant from Deloitte & Touche moved to Smolensk shortly after. This team ensured continuity in between visits from me and other senior consultants based in Moscow. It’s easy to forget that we were still communicating mainly by phone and fax.

Subsequent visits over the following year went through the cycle of voucher auctions and follow-up work, such as advising on share registration systems. At an early stage we were asked to provide good computers for the auction process. It was difficult to buy modern PCs locally at that time, and bureaucracy and primitive payment systems meant that we had to use a colleague’s credit card to buy imported equipment in Moscow. The Smolensk administration sent a van with guards to drive the computers to Smolensk at the end of April. I drove my own car behind the convoy and remember thinking that the van’s flashing light was a good way of alerting highway robbers. When we added a laser printer to the equipment the following month, I drove it there myself without mentioning it to the local officials.

The Smolensk auctions were on a smaller scale than other regional cities. We had expected to be needed to help to run the auctions (we had been through earlier training on the Zil auction in Moscow) and were bemused to find ourselves kept generally at arm’s length from the auctions themselves.

In the nine-week gap between our first visit and delivering the computers we saw that the Property Fund staff had already set up the auction systems on their existing computers. After we delivered ours, expecting that they would replace the old ones, we never saw them again. When I mentioned this to the GKI in Moscow the response was that they would be just as useful as sweeteners for officials in the local GKI and Property Fund.

We received detailed reports of the auction outcomes after the event. The official in charge of these was keen to demonstrate that correct procedures were being followed, but was otherwise a master of stonewalling impassiveness. He gave the impression that it was insulting to suggest that he might need help – he’d had his instructions from Moscow and knew how to get on with them.

We asked a Russian member of the consultancy team to investigate whether there was any significant pattern to the auction results and he soon confirmed that the outcome in Smolensk was similar to that being reported elsewhere. The general directors of many of the firms being auctioned had bought or bartered vouchers from their employees so that by the time the auctions took place, they (and/or their family and friends) could bid for a controlling stake.

The GKI in Moscow and the EBRD seemed relaxed about this – by then they seemed to take the view that the existing managers were probably the best people to own as well as run local firms, and if an effective management buy-out was the result, it was not necessarily a bad thing. We found it hard to tell whether this had been the expected – even intended – outcome all along and whether models of share-owning democracy were never thought to be realistic at that stage. My recollection is that pragmatism prevailed and we moved quite quickly to projects connected with developing secondary markets. Perhaps it was hoped that the need for further capital would eventually result in more widespread share ownership.

Privatization in Novosibirsk

Joshua Bower Saul

“Do Moskvy daleko, do tsarja esche vyshe.” Moscow is far away and the Tsar still further.

The privatization process

The case of western Siberia is particularly instructive due to the close ties of the economic establishment with Moscow and its strategic importance as an R&D hub for the 50 years since the Akademgorodok was founded there to bring together the brightest minds of the USSR. Their original focus was to provide the military and the economic establishment with innovations and engineering capability.

The USAID in conjunction with the EBRD made the western Siberia effort a keystone in its experiments to support privatization. The hope was that by privatizing the Novosibirsk industrial R&D centres a plethora of innovative companies would arrive on the Russian market. In this framework, the programme envisaged not only a series of “Entrepreneurial Centres” in these provincial cities, but, in the case of Novosibirsk, likewise a new stock market linked electronically to Moscow, a separate privatization centre and an auction centre with several new banks providing the management of stocks, bonds, vouchers and financial support to the companies involved.

At the time the process began in western Siberia some 700 major enterprises were meant to come to auction and 1,000 lesser companies could be considered as well. Given that the rhythm that the GKI had set for what the privatization process was to achieve, including the entire corporatization within nine months, the 20 administrators and 50 consultants that cycled in and out of the region had to achieve a throughput of more than 20 businesses per week give or take. The task was clearly impossible and the region was left more or less on its own in terms of how it was to achieve the goal.

Given the 40 or more years that many of the officials and business officers of the corporatized entities had been working under a plan mentality, the plan to privatize was treated just the same as the old plan: “exaggerate the need for inputs and overstate the output, and keep the difference”. In this regard, the GKI at local levels blatantly told consultants what values they would expect or accept for this or that enterprise and charged the teams representing the case in Moscow to play the role of the Soviet era “Tolkach” (or “Fixer”). The fixer was meant to get ministries and Plan Officials to agree to “reality” and bring targets down or carry volumes over into the next plan period when production or supply issues menaced bonuses for plan completion.

Often, privatizations took place in a totally uncontrolled process even before a company was “listed” for auction. In the local jargon this was called “spontaneous privatization” and amounted to blatant administrative transfer of state assets to a small group of like-minded managers or cronies. This process again involved transfer of share packages and money to decision makers. Some of the organizers of spontaneous privatization openly became very rich.

Setting up a privatization centre

The pressure on local teams was high enough that when in 1993 a plan was developed to open a series of privatization centres and auction houses as a means of “industrializing” the process, regional officials jumped on the bandwagon. Such centres existed in Moscow and had been successful in channeling operations in such classic privatizations as the Red October Confectionary Factory and others. In Siberia, operating such a centre was not so clear cut. The local and regional administrators of the Novosibirsk region basically gave carte blanche to consultants to choose, design, build and operate the Auction Centre.

The best and only available building in the short term turned out to be the first floor grocery store that supplied dairy and meat products to the workers of the state engineering and design facility in the middle of downtown. This business was a supplier of ventilation systems to military factories and to some military vehicles and was classified top secret, meaning no foreigner could enter even the front door theoretically. The problem was resolved by the creation of a Russian identity card with top secret clearance for one of the consultants, allowing him to run the site and operate the auction centre. When it was determined that the second floor would also be required as a back office for managing vouchers and “blind auction” processes, the institute demurred at allowing foreigners up the stairs. When the western team recommended building a spiral staircase up from the auction floor toilets into the back office area, the welders were called within 24 hours. To the news that the auction house must open on 9 March in order for the plan to be fulfilled, the furniture first chosen by the team was cancelled and a local wood shop and designer engaged to conceive, source and deliver the auction centre’s furnishings within two weeks. The consultants worked alone with the carpenters many a long night and weekend gluing and painting the furniture. Delivery and installation was done on the March 8th women’s day holiday under driving snow – covered by the local television as a “milestone in privatization’s progress in the regions”. The holiday being traditionally quite a well-lubricated affair, the installation party went rather well.

This type of efficiency of decision making and execution was unheard of in Russia at that time, and translated the clear motivation of the officials to be seen fulfilling their privatization “plan”.

Voucher trading

With 150 million vouchers distributed, they soon became an instrument for speculation. At the outset prices for the voucher began to vary around the $9 mark in the key centres where considerable numbers of enterprises were up for sale. The most striking aspect was that very early discrepancies arose in the spot market for vouchers as a function of exactly what was being privatized where and by whom. Mixed cash and voucher schemes arose in Siberia in the auction houses to deal with the shortage of vouchers created by the concentration of the “most attractive” enterprises in the western part of the country. It was on this basis that a number of operators in the eastern reaches of Russia, and indeed some western investment banks managed the process of arbitration on voucher values.

In essence, the provincial rate of exchange of a voucher varied at about a 20 to 30 per cent discount to the Moscow or St Petersburg rates in dollars and these rates were carefully monitored by a few tech savvy boys in the East who built brokerages to buy and trade vouchers and later privatized company share blocks obtained with the vouchers. Their principal clients were the celebrated trusts. By buying up vouchers in the hinterland of Siberia these teams gathered considerable quantities of the vouchers and then flew them to Moscow or St Petersburg in time for key auctions taking place in those markets. The vouchers would then be sold on the grey market for dollars. Of course the dollar rate for roubles was better as well in the hinterland, so the double arbitration yielded profits of 20 to 30 per cent per week.