President Rides Russia’s Wave of Privatization

Marx must be turning in his grave, Lenin revolving in his tomb. Because one big reason for Boris Yeltsin’s bloody confrontation with his opponents in the Russian Parliament was to protect a rising trend of private ownership in Russia.

The parliamentary rebels had tried to impose a hyper-inflationary budget and strip Yeltsin’s presidency of real power. They wanted to rule Russia as it has been ruled for centuries by czars and commissars--with an iron fist wielding absolute power.

But autocratic politics and careless economic policies no longer suit the Russian people. For the Russian Federation--and the Ukraine and some other former Soviet republics--are becoming societies of owners.

Almost unnoticed, the privatization of state companies and farms has become a flood in Russia. About 72,000 companies have been privatized, and several thousand more transfer to private ownership every month. More than 20% of the country’s 60-million-strong industrial labor force now works for private firms. Thanks to conversion of government-issued vouchers into common stock, there are 35 million shareholders among Russia’s 149.5 million people.

And the triumph of the bourgeoisie means progress. Yeltsin may be no economist, but he knows that private ownership makes for a materially advancing society, not only in the United States and Western Europe but in Japan, South Korea, Taiwan, Singapore and other countries of Asia.

He is determined to bring that kind of progress to Russia. That’s why he has pushed economic reforms, bringing free-market economists into his government and enraging those who would slow reform in favor of an imperial Russia dominating the former Soviet republics.

The privatization process began in earnest two years ago, shortly after Yeltsin gained power by defeating the coup against Mikhail Gorbachev. The government issued vouchers convertible into stock in newly privatizing businesses. But the move was a disaster because there were no companies to invest in. The vouchers quickly lost value in street trading, and the Russian people, already troubled by the ruble’s declining value, were ready to write off economic reform as a con job.

So as Lenin did in the 1920s, Yeltsin called in the capitalists for help. Credit Suisse First Boston, an investment banking firm, brought out the first major stock offering.

“We chose the Bolshevik Biscuit Factory because it was a proud old communist firm that had continued to produce biscuits right through the worst of World War II,” recalls Charles Harman, a CS First Boston managing director. “We hired a stadium and 150 Russians to act as tellers, and the response was terrific--20,000 people lined up in the snow to trade their vouchers for shares in Bolshevik Biscuit.”

Since then “privatization has exploded,” says Vladimir Kvint, a Russian economist who now consults for the Arthur Andersen accounting firm in New York and has recently published a book, “The Barefoot Shoemaker: Capitalizing on the New Russia.” So have partnerships with Western business. Russian firms have 12,000 joint ventures with foreign partners, Kvint reports. U.S. companies lead the parade with 15% of the ventures, followed by German firms with 14%.

U.S. companies are interested in oil and gas and mining projects, says Robert Draggon, vice president of finance a the U.S. government’s Overseas Private Investment Corp., which insures investments by U.S. companies.

OPIC is also overseeing a Russia Country Fund, which starts with equity from the Russian government and PaineWebber and could generate several hundred million dollars of investments.

The Russian economy can use a helping hand. The Soviet Union, which dissolved at the end of 1991, left the republics with $80 billion in international debt, says Charles Wolf Jr. of Rand Corp., which has just published a research paper on Russia and Ukraine. So far only Russia is paying interest and principal on that debt--a burden of more than $10 billion a year. It would be enlightened self-interest, suggests Wolf, for the West to forgive many of those loans, as was done in Latin America, or to turn some of them into equity in new ventures.

Doing business in Russia is no picnic. The threat of crime makes the simplest transaction seem like the Old West when riflemen rode shotgun on Wells Fargo stagecoaches. First Boston’s Harman tells of an entrepreneur trying to pay $20,000 to a parts supplier 500 miles east of Moscow.

“I want cash up front,” said the supplier.

“Fine, I’ll make a deposit in your bank,” said the entrepreneur.

“Don’t, the bank will only steal the money,” cautioned the supplier.

Neither wanted to risk an employee on such a hazardous errand, so the entrepreneur hired a security firm run by former Soviet military men.

“How much is in the package,” asked the security man.

“None of your business,” replied the entrepreneur.

“It is my business; we charge 5% or more of the amount carried,” said the security man.

Still, the Russian economy has improved lately. The value of the ruble has stabilized, at roughly 1,000 to $1. And even though unemployment rises as companies change, experts agree there is greater confidence among the people.

And the fact remains that Russia--with 40% the number of people in the United States but 15% of its gross product per capita--can be a great growth market. As rising private property attests, Russians are hungry for higher living standards.

What’s the political outlook? A more democratic Parliament will be elected in December, and Yeltsin will be reelected next year, predicts Kvint. “But within a year the two will be arguing again--although without bloodshed,” he says.

In other words, political turmoil and economic progress will continue side by side--although Marx and Lenin wouldn’t have believed it possible.

A Capitalist Russia

PRIVATIZATION HAS SOARED...

Number of privatized Russian enterprises:

(In the thousands)

March, 1992: 1,352

June, 1993: 71,791

AS HAVE JOINT VENTURES

Registered and actual joint ventures between U.S. companies and the former Soviet government or private Russian firms:

Registered Actual 1987 2 2 1992 1,015 1,640

Sources: Russian Institute; Vladimir L. Kvnit, senior consultant, Arthur Andersen Economic Consulting Division *Figures from January, 1992, through Aug. 1, 1993 Researched by ADAM S. BAUMAN / Los Angeles Times