Millions of Russians are deeply dissatisfied with the process of market reforms that intended to introduce capitalism. According to one re...
Millions of Russians are deeply dissatisfied with the process of market reforms that intended to introduce capitalism. According to one recent opinion poll, 48 per cent of Russians believe that capitalism is bad for the Russian Federation, while only 30 per cent think it is good and 22 per cent don’t know (see figure II). When asked whether the Russian Federation should continue reforms or halt them, 39 per cent of respondents answered that they should be halted, while 33 answered that they should be continued and 28 per cent were uncertain (see figure III). Privatization on a massive scale has been a critical part of market reforms in the Russian Federation on its road to capitalism. From the outset it had priority over other components of reform, such as the creation of institutional and legal frameworks to regulate the markets. It was assumed that the fast creation of capitalists—property owners—was the first and critical step in building capitalism. It was hoped that inefficient Figure II Is capitalism good or bad for the Russian Federation? Source: Public Opinion Foundation polls (1,500 respondents) in Kommersant, 15 February 2000.
industries would be miraculously transformed by the new capitalists of the Russian Federation.22 Privatization did create the property owners in the Russian Federation— masses of small shareholders without any power to influence decisions over the enterprises they “own”. It also produced few “new Russians”, who have acquired enormous wealth by skilfully taking advantage of the weaknesses of the transition period, including the lack of transparent and clear rules and diminished law enforcement capacities of the State. In the absence of appropriate rules to regulate or mechanisms to monitor the developments, the market-oriented transformations, particularly privatization, stimulated an unprecedented rise in the legalization of criminal assets and property acquired by unlawful means. A popular Russian pun equates privatization to the grabbing of State assets. Privatisation is referred to as prihvatization (“hvatat” in Russian means to grab, which could be also understood as a robbery). Figure III Should the reforms in the Russian Federation be continued or discontinued? Source: Public Opinion Foundation polls (1,500 respondents) in Kommersant, 15 February 2000. Bad 48 per cent Don’t know 22 per cent Good 30 per cent Continued 33 per cent Discontinued 39 per cent Don’t know 28 per cent 7 Russian capitalism and money-laundering The mass privatization of 1992-1994 of over 15,000 medium and large enterprises shifted over 80 per cent of the industrial workforce into the private sector. During the same period, most prices were freed, the exchange rate was unified and foreign trade was liberalized. It was anticipated that these policies would help the newly created private sector to get on its feet and take off. By 1996, the private sector was already reported to account for 70 per cent of GDP. In 1998, only 6.1 per cent of firms were considered State-owned and only 7 per cent of retail trade turnover was accounted for by Stateowned enterprises. By the end of 1998 over 13,000 enterprises had been privatized. The desperately hoped-for benefits of privatization have yet to arrive while some of the privatization experiences and schemes have become targets of criticism. The mass privatization of 1992-1994 with its privatization vouchers represented an easy opportunity for legalization of criminal proceeds. Vouchers were issued for each Russian citizen and represented the share of national wealth to be divided among them. The vouchers entitled their owners to purchase a stake in a State property. The bearer nature of vouchers allowed safe money-laundering as nobody questioned how and using what means the vouchers were obtained. During this first phase of privatization, criminals were able to purchase unlimited amounts of privatization vouchers from the impoverished population and use them at tenders and privatization auctions to obtain controlling shares in existing State businesses.23 The scheme turned out to be a blessing for individuals with large amounts of hidden cash obtained through crime, and enabled them to become lawful, rich citizens. The loans-for-shares programme of 1995 has been widely criticized for its lack of transparency and for its fraudulent arrangements. Under this programme, the gems of the Russian economy—most promising companies in the industrial and energy sector—were in fact sold out to businesses in exchange for minimal loans to the Government. State shares in 12 profitable firms with strong potential for growth were used as collateral against major bank loans to the Government. It was specified that if the Government decided not to repay the credits— which totalled about $1 billion—the banks had the right to sell the shares held in trust and keep 30 per cent of the capital gains. The circumstances of the auctions, in which the same bank sometimes served as both an organizer and a bidder, and in which larger bids were disqualified on technicalities, aroused fierce criticism in the Russian Parliament and press. Nevertheless, the programme was continued and after the deadline passed in September 1996, banks began selling off the State share packages. Between November 1996 and February 1997, three such sales occurred—for shares of three companies—Yukos, Sidanko and Surgutneftegaz. In each of these cases, the trust holders themselves or an affiliated company bought the stock.24 It was widely commented that, as a result, a politically connected few were able to acquire large national assets in exchange for minimal sums, and that the programme may have been designed from the outset for the purpose of such a fraudulent redistribution. Even from the economic efficiency point of view, privatization has failed to meet its objectives. The incentive to seek short-term personal gains instead of long-term shareholder value has arisen even when the managers and owners were one and the same, as was commonly the case in the Russian Federation. Uncertainty about formal ownership rights and lack of trust in the legal system to uphold their rights continued to be widespread and prevented initiation of restructuring designed to ensure long-term sustainability of the enterprises. It became apparent that where no transparent, credible and fair rules of the market exist, none of the parties involved, including not only workers and managers, but also shareholders and creditors were interested in maintaining and increasing the value of assets. As a result, the enterprises acquired have been mostly used for quick short-term gains (going into the pockets of a few), such as their sale through fraudulent schemes or their use for various underground purposes. The rights of ordinary citizens—holders of minority blocks of shares—were universally violated, with the value of their shares falling to nothing. The Federal Commission for Securities Markets, established in 1996, has generally lacked the enforcement power needed to tackle the problem of violation of shareholder rights. In July 1998, the Government announced a Programme on Protection of Investors Rights which has yet to be implemented effectively. A new bankruptcy law, which took effect in March 1998, also has yet to see its effective implementation, as it is impeded by contradictory policy decisions. In January 1999, for example, the Government decided to cease initiating bankruptcy proceedings against tax debtors. This decision threatened to worsen tax compliance and delay constructively needed bankruptcies. The number of bankruptcy cases has grown sharply in recent years, to around 4,000 in 1998, but this is still low given that 50 per cent of firms were reported to be making losses in mid-1998.25 The State Anti-Monopoly Committee is responsible for the support of entrepreneurship and the promotion of competition. However, it has continuously suffered from underfunding and has had to close its 12 regional offices since 1994.
Moreover, regional branches were accused of 8 Russian capitalism and money-laundering bowing to local political pressure to protect established firms, which raised suspicions about widespread local corruption. The capture of critical businesses at the local level by individuals with criminal pasts have helped erode local power structures to a significant degree. Reports appear daily about criminal actions by the high-ranking elected or nominated officials with already tainted pasts.26 Russians quickly invented for these individuals a new pun, “blue mayors”,
which links the elected posts of politicians and blue tattoos of gangsters and former prisoners. Even renowned supporters of reforms in the Russian Federation began expressing their disappointment with the process of reforms in the Russian Federation, pointing at the absence of a normal market environment. In his new book,27 financier and famous philanthropist George Soros openly blames the members of the Russian political elite, including the media and oil magnate Boris Berezovsky,28 for getting involved in a selfish, deadly fight of oligarchs, hungry for power and money. The oligarchs, including those in power, continuously engaged in the fight among themselves that drew enormous resources. Meanwhile, grave economic and social problems of ordinary Russian citizens remained neglected. Mr. Soros describes how he personally witnessed the oligarchs’ attitudes when he purchased a telephone holding company Svyazinvest by auction. Mr. Soros reports repeated attempts by Mr. Berezovsky to acquire ownership before the auction using various means including political pressure because he considered the ownership of Svyazinvest to be critical in his power struggle against Prime Minister Chubais. Later, a failed attempt by Mr. Berezovsky to use Mr. Soros in his manipulations to obtain the Presidency of Gazprom ended their relationship. George Soros acknowledges with bitterness his failure to advocate and promote the creation of a law-abiding capitalism in the Russian Federation as opposed to the capitalism of robbers. In general,
privatization was a big disappointment for ordinary Russian people as well as for the many international supporters of reform. Many recognized with hindsight that institutional capacities and regulatory safeguards should have been put in place before embarking on privatization.29 In the Russian Federation, privatization as it evolved not only halted the trend towards fair, competitive and efficient markets, but also promoted inefficiency and wider acceptance of arbitrary rules and lawlessness. A rapid and extensive privatization process with its fraudulent schemes damaged the credibility of reform in the Russian Federation and further hindered efforts to create an appropriate legal and institutional framework to support a market economy. It facilitated the capture of the Government at various levels by groups whose critical mission was to use the State to legalize their fraudulent acquisition of wealth and mask their origins.
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