| San José State University
Department of Economics
& Tornado Alley
In the priorities of the reformers in Russia the privatization of state enterprises was near the top, perhaps only surpassed by the decontrol of prices. There could not be a market economy until the preponderance of economic enterprises had the incentives and the autonomy to achieve efficiency. This could not be achieved until the enterprises were privately owned and managed.
In achieving a transfer of control of the enterprises from the Communist Party network there were many considerations and objectives:
Some of these objectives involved problems. For example, the matter of getting as much revenue from the sale of state enterprises ran up against the objective of creating competitive industries. Most of the state enterprises had monopolies in their fields. The sale price of an enterprise would be highest if it retained its monopoly privilege. But the monopoly privilege would be bad for the economy in the long run. If the buyers of a state enterprise monopoly paid the market value of the monopoly right those buyers would thereafter only make a normal rate of return on their investment while operating as a monopoly. The privatized monopoly would thereafter need its monopoly privilege to just survive. Therefore the objective of the privatization program should have been to sell the state enterprises without perpetuating their monopoly.
The field of privatization in the early Yeltsin administration was put into the able hands of Anatoly Chubais.
Chubais decided that if there was to be any hope of breaking the power of the Soviet bureaucracy and the Communist Party to which the bureaucrats owed their allegiance there would have to be a mass privatization of State properties. He set his objective to transfer as much property from state control to private as possible and not to worry about whether the form of the privatization was as good as possible. The new owners, whatever their previous affiliation, would be supporters of privatization and would oppose the old system and its power structure.
Chubais chose Dmitry Vasiliev to be a major figure in managing the privatization program. Chubais set up a Russian bureau of privatization called GKI from its name in Russian. Vasiliev was given the job of drafting proposed legislation for privatization. It was a tough assignment because it had to be done very quickly and the support for such legislation in the legislative body, the Supreme Soviet, dominated as it was by Communist Party appointees was minimal. In other words, Vasiliev was given an assignment of running through a minefield. The task of getting the legislature to agree to any plan Vasiliev came up with fell to Chubais.
To gain support among the directors of state enterprises Chubais agreed to a provision that up to 40 percent of the share of privatized enterprises would go the management and workers of the enterprise. This was the first version of the plan, call it Option 1. This was an attractive deal for the directors of the enterprises but it fell short of giving those directors control of the privatized enterprises. Chubais had to accept a revision, called Option 2, which required that management and workers be allowed to buy 51 percent of their enterprise and artifically low prices.
There was a major problem for any privatization program that required payment for ownership shares. The problem was that very few people had any resources for buying ownership. Although most Russians had accumulated savings during the Comminist Era but the buying power of those ruble savings was reduced to insignficance by the inflation that followed the reforms. Chubais came up with the voucher system to give all Russians some means of participating in privatization. All Russians were entitled to a 10,000 ruble voucher which they could pick up at their local branch of the state savings bank, Sberbank, upon payment of a token fee of 25 rubles. One hundred forty four million Russians did so. At the time they were issued there were no privatized companies to purchase shares in using the vouchers. The voucher holders anxiously awaited the privatization process to start.
The voucher program created popular support for privatization. The problem was that there weren't any state enterprises that were willing to be privatized.
Chubais called in Western bankers to help with persuading an enterprise to undergo privatization and to help organize the privatization procedures. There was some urgency in the matter because the Supreme Soviet was making noises about firing Yegor Gaidar as prime minister and replacing the top leadership in the government. Any new government was not likely to initiate privatization.
Chubais' privatization team chose a Moscow cookie company as the target for being the first privatization. The products of the company were familiar throughout Russia so the case would be meaningful to the typical Russian. Although the company had been founded in the mid-19th century its name had been changed after the Revolution to Bolshevik Biscuit Factory so the name itself had a certain publicity value.
The management was finally persuaded that privatization would be to their benefit and would give the company access to new source of capital to upgrade the equipment.
The day arrived for the privatization and there was a good turn out of people seeking use their vouchers to buy shares in the Bolshevik Biscuit Factory, including many employees and the management. Of course many people throughout Russian had sold their vouchers long before there was the opportunity to use them.
The day after the privatization of Bolshevik Biscuit Factory, Yegor Gaidar was fired and the new prime minister, Viktor Chernomyrdin spoke of privatization as a crime. Nevertheless the privatization program moved along to that by 1994 nearly two third of the employment in Russia was in private or partially privatized enterprises. Chubais, justly proud of accomplishing a nearly impossible task, asserted that privatization was the first national program since 1917 that was completed on time and achieved more that it promised. Chubais' accomplishment was not so much privatization but instead breaking the stranglehold the network of Soviet bureaucrats and factory managers and Communist Party functionaries had on the economy of Russia. Privatization was a means to this end. That privatization did not achieve the a just division of state property among the people of Russia was regretable but unavoidable. Under the old system the workers were slaves in a system that provided the bare necessities of life and allowed no freedoms. The owners of the state property in the Soviet system was the Communist Party. Under the program of the reformers the people got their freedom but little else and the state property was taken away from the Communist Party per se and even though in many cases the state propery remained in the hands of the same people those people were now businessmen rather than Communist functionaries.
Chrystia Freeland, Sale of the Century, Crown Publishers, New York, 2000.
HOME PAGE OF Thayer Watkins