This is once again an old article
Large industrial concerns have proved much difficult to privatise than small shops or service companies. The Russian government is now trying to enlist commercial banks to manage many of these enterprises.
Communism - state control - nationalisation. Capitalism - free market control- privatisation. It all sounds pretty simple and indeed since 1990 and the collapse of communism, news reports from eastern Europe have often taken on the tone of evangelism. A country has 'made progress' in so far as it has privatised state companies, or it has 'stagnated' in so far as it hasn't.
But in Russia, at least, it's been a bit more complicated than that. Reforming officials like first Yegor Gaidar and then Anatoly Chubais identified at least two different kinds of privatisation from the beginning.
First, there was 'corner shop privatisation' which dealt with the hundreds of thousands of small enterprises such as neighbourhood shops, hair-dressing salons, petrol stations and so on.
Then there are the huge industrial concerns, the vast sprawling inefficient factories and industrial complexes became almost emblematic of communist eastern Europe.
The first has been much easier than the second.
In the middle of 1992, the State Committee for the Management of State Property started to sell off small-scale enterprises, which were defined as those having 200 or less employees. In most cases, these companies, usually shops or services were sold to their employees. One year later, some 72,000 firms had been privatised - over half of the country's small companies were in private hands.
Larger industrial ventures were much more difficult. The government started to sell them off in 1993, having issued late the previous year privatisation vouchers to all Russian citizens. Zil, the car and truck manufacturer and maker of the Soviet limousines, was among the first companies to be auctioned.
By 1995, 80% of the economy was estimated to have moved at least partly into the private sector.
But many of the larger concerns suffered what were called 'insider privatisations' where the former Soviet management and workforce combined to take a majority of the shares and to prevent real change.
These companies continued to operate in a web of mutual debt, producing things that wern't needed, selling to bankrupt customers and waiting for the bank system to bail them out by issuing them with cash to meet their obligations - such as salaries - against the value of debts owed to them that were never going to be repaid. That was the way it had always worked in the good old days.
Business academics and political scientists have been fascinated by the phenomenon of state enterprises going private and continuing to act the same way as they did before. In 1994 and 1995 some two thirds of the privatised large manufacturers were found to be in the hands of their former managers and workforce, who often together made sure, for example, that there were no lay-offs or modernisation that might cost jobs, and would limit the ability of any outsider to buy a stake in the business.
Managers typically held about 20 percent of the stock of these former companies, while workers held 40-50 percent. So between them, they could often keep a stranglehold on the direction of the company.
Recognising this, the government changed tack in 1995 and launched a cash-privatisation drive instead of the voucher scheme.
This involved bringing in Russia's new commercial banks, who could be guaranteed to be more sharkish than the previous management. Under the 1995 scheme, which is still being implemented, the government borrowed money from the banks in return for equity and the right to manage a given company for a three year period. The state would retain ownership of the company unless it defaulted on the loan it had from the banks, but the banks would get a share of any increase of value they created under their management - and often in practice first right of refusal to buy the shares when the companies were finally privatised.
The banks have also been sinking some of the enormous profits the made on foreign exchange and treasury markets into moulding new industrial and commercial groups.
So as with the official catastrophic decline in the Gross Domestic Product, the figures can be misleading. In theory, most of the Russian economy is now in private hands. In practise, there is a long way to go before industry is restructured and internationally competitive
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