After the fall of communism and during the beginning of a new era in Russia, the principal goals of the government were the price liberalization and the control of the budget to become a real free-market economy; however, to accomplish those goals it was essential to restructure companies by the process of privatization, which supposed to give the control to the private sector but this control was not complete, the firms were not able to work “freely” because throughout the process, and even after, there was political intervention and many other interests involved to satisfy government goals.
People in favor of this process strongly believed that privatization of large firms would take them to the competitive environment of the market economy, and to achieve productivity and efficiency was necessary to be in hands of capable managers who could develop the restructure of firms successfully.
Boycko et al. (1993) present the steps of the plan that the Russian government developed to implement privatization; this plan separated firms first, into the ones that would be sold to investors for cash and the ones that have to enter into the “mass privatization program”. Russia had many firms which were quite profitable so they would not be part of the privatization.
Changing many of the firms into private was a hard task to achieve, so on the second step was important to define the companies that must become private, the ones that required permission, and finally which were not possible to acquire. Third, determine the firms that needed to be corporatized, which meant to list them as joint stock companies.
In the case of corporatization, the management of the firm had three different options to become private:
1. Workers could own 25 percent of the shares without any cost but they would be nonvoting and top managers were able to buy 5 percent of the shares paying the nominal price.
2. Both managers and workers could possess 51 percent of voting shares.
3. Managers could purchase 40 percent of equity at low prices with the condition that they would maintain the firm competitive without going bankrupt.
After managers and workers have decided which option was the best (first and second option were the most popular, few firms chose the third one), they were supposed to establish the mechanism by how the remaining shares were going to be sold. In many cases, mass privatization was chosen by them, this consisted in selling the shares through voucher investment funds. “The enterprises that were privatized through voucher privatization were large in number, but often small in value” (Black et al. 2000).
The voucher started to be distributed since October 1992 to the population in order to make it fast the process of privatization. By giving to citizens the opportunity to buy shares and make them feel as key elements in this important event, the government was avoiding any kind of social conflicts. Voucher “became the first liquid security in Russia” (Boycko et al.) and it had a nominal value of 10,000 rubles which could be tradable. This characteristic allowed big investors to easily acquire large amounts of vouchers not only from citizens who were not interested in shares maybe because of disinterest due to lack of transparency in every program implemented by government, but also from workers (Black et al. 2000) who were ignorants or were forced by managers to give up to their shares at low prices.
The reason of why some citizens were apathetic about privatization is related with culture, the social class they was part of, and also the age. People who felt they could receive a benefit from the economic reform as young people, managers and wealthy people were in favor of privatization; otherwise, those such as old people who had nothing to win, were indifferent (Desai et al. 2000).
Because of no strict law or regulation existed regarding privatization, managers were able to acquire shares for their own benefit in every possible way spending not only their own resources but also the capital of the company.
Mass privatization was a quick way to achieve privatization but it did not accomplish neither the goal of restructuring companies nor depoliticization. The power of companies went from state’s hands to managers’ either because of that mass privatization or because of concessions to stakeholders; the latter show us that the state still had power on the firms and that corruption was involved in the transactions.
“Rapid privatization buys enormous political benefits and thus allows reforms to deepen” (Boycko et al. 1993) but in Russia, that did not happen because it carried out another problems which interfered with the correct restructuring of firms and lead to the concentration of control in a small group of people who had both the money and close relationships with government, they were called kleptocrats.
Russian government believed that making privatization fast would result in benefits for everyone, as Boycko et al. stated, but due to the country did not have any kind of regulations and laws related with the concentration of power, it was impossible to develop an organized system on the firms. The government could not attract foreign investors because they were aware of the lack of protection for investors so the only action government could accomplish was to give to “reputedly honest managers” (Black et al. 2000) the firms.
Not only foreign investors knew about the lack of protection for shareholders, but also the government so the creation of laws would be implemented gradually to avoid problems such as “self-dealing”.
Self-dealing was the principal problem of privatization because managers suddenly had in their hands the power of the firm and instead of following the principles of the free-market economy which state the efficiency in the production to could afford the competition with other firms, kleptocrats just took the wealth of them because it was easier to loot firm’s value than to make them competitive (competition was difficult to achieve due to their few managerial skills). These people theft firm’s value and although some firms in the moment of the acquisition were running quite well, their lack of skill and greed lead them to bankrupt.
Kleptocrats were known to be the owners not only of firms but also of the media, they had in their control both newspapers and television stations which published manipulated information which was very useful in the career of politicians. But not just the latter were benefited with that relationship, after 1995 kleptocrats were becoming more powerful with the help of the corruption of the government by a mechanism known as “loans-for-shares” which consisted basically in selling the largest firms for a minimum fee that had nothing to do with their real value. Any kind of privatization was involved with corruption, “the bigger the stakes, the dirtier the deal” (Black et al. 2000).
Russian government needed some money; however due to that privatization with vouchers was done, “loans-for-shares” started by auctions managed by banks. Government would give voting shares to anyone who was willing to loan money. It is important to state that auctions were fake because they were already planned to give the shares to someone in particular, it is possible to mention this because in some cases there was someone willing to bid for a firm and that person just could not won because of any pretext.
Desai, Raj., Goldberg, Itzhak. (2000): Los intereses creados, la gestión pública y las empresas rusas. Finanzas y Desarrollo, 14-18.
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