The Selling of the State : As Russia Enters Phase Two of Privatization, Jury Still Out on Whether Economy Can Be Saved

Starting in 1917, they took it all away. In history textbooks of the future, 1994 will probably be marked as the year they gave it all back.

Russian reformers recently completed the first phase of the most colossal program in history to sell off state property to new private owners. The heirs to the Communist regime that snatched almost all private property after the 1917 Bolshevik Revolution are now on a crash program to create a new bourgeoisie.

The Kremlin handed out 148 million vouchers giving each Russian a piece of the country’s wealth; it turned 15,000 factories from state vassals into something approaching corporations; it transformed its smaller businesses into hundreds of thousands of mom-and-pop outlets.

The scale and complexity of the privatization program, seen as the best-run of the Kremlin’s reforms, are astounding.

One thing remains unclear. Did it succeed? Will this Gargantuan effort save Russia’s shattered economy?

The consensus among observers is that it is too early to tell. But if it doesn’t work for Iosif Bakaleynik, Harvard Business School honors grad, international finance maven and familiar face at the massive Vladimir Tractor Works, it won’t work for anybody.

Privatization has already shown its worth in that it brought Bakaleynik, a calm, bespectacled 42-year-old, back from a cushy job at International Finance Corp. in Washington. What drew him was the promise of a chance to buy a big chunk of the 10,000-worker factory if all goes well.

“I wouldn’t be interested in being here under the old system,” said Bakaleynik, at work despite a wicked head cold in his dim, spacious new office. “And I wouldn’t be needed.”

But the real test comes now, in the second phase, when the process shifts from a largely political sop to a drive to make Russia’s factories run efficiently and gain the investment they desperately need.

“It’s clear that privatization so far hasn’t done enough,” Bakaleynik said. “Even just to consolidate its political gains, it must bring economic gains.”

The great Russian selloff began in October, 1992, after Russian President Boris N. Yeltsin announced that every man, woman and child in Russia would receive a privatization voucher, a certificate with a face value of 10,000 rubles--then about $32--that could be sold or invested.

The vouchers were meant to make Russians feel as if they were getting a piece of the country they had helped build during the Communist years, when the state owned everything. They also aimed to widen the political base for Russia’s market reforms by making people feel like owners.

The voucher scheme was far from ideal. Even Anatoly Chubais, the privatization czar who has rammed the program through against great opposition from entrenched factory directors, said at one point that he himself opposed vouchers--but “you have to do what’s necessary, not what you feel like.”

What was necessary was to start the process fast even though there was little money floating around to buy up state enterprises, and to do it in a way that Russians, with their keen sense of social justice, saw as fair.

The selloff turned largely into a giveaway, the greatest bargain basement of all time.

Figures vary, but it appears that the 70% of Russian industry privatized in the last two years--sold in part for vouchers and in part at low prices to the personnel of the factories up for sale--has brought to state coffers the measly sum of about $1 billion.

Now the vouchers are no longer valid in most places, and the remaining 20% of Russian factories to be privatized--10% are considered too strategic to be let out of government hands--will go for cold cash. Also, workers and directors will no longer get special deals allowing them to grab a big chunk of their own factories.

This, Russian commentators say, will be the moment of truth.

“Only now will we see how much property is in the hands of directors,” columnist Vladimir Gurevich wrote in the Moscow News. “Who are the real, and not sham, owners? “

At Vladimir Tractor Works, Bakaleynik, too, is approaching a moment of truth. From the textbook case studies of troubled businesses he worked on at Harvard, he has moved to a whopper of a real-life problem, though he describes the challenge in mundane terms.

“We’re taking the standard procedures any Western company that hit problems would take: reorganization, looking at the balance sheet, deciding which assets are worth keeping and which are not,” he said.

Bakaleynik’s job would have been much easier if he had taken over a year ago, when the Tractor Works was not on the verge of bankruptcy.

When the new stockholders held their first meeting last year, workers voted to retain their old boss of 18 years, Anatoly Grishin, a classic “red director” who ran the factory Soviet-style, providing workers with cradle-to-grave guarantees of jobs, housing and medical care.

Bakaleynik, who had served for seven years as chief economist of the factory, was dismissed as a Westernized upstart who, Grishin claimed, did not know enough about production to run a factory.

But by January, the Tractor Works was deep in debt and hardly anyone wanted its mini-tractors. Grishin resigned in despair.

When the stockholders met last March, Bakaleynik won almost unanimous support. He agreed to return, warning that life would not be easy. Workers, now worried about whether the factory would survive at all, welcomed him back.

Bakaleynik is now working on refinancing the company’s incompetently managed debt at much lower interest, developing a marketing strategy aimed at small farmers across Russia and the world, and seeking millions of dollars in investments and loans.

One thing Bakaleynik is not doing, unlike the red directors, is moaning that the government must keep this flagship factory afloat with cheap credits. This is how privatization works in the ideal. The change in ownership leads to more rational economic behavior and takes the burden off the government Treasury.

Unfortunately, however, Vladimir Tractor Works appears to be more exception than rule at this point.

Certainly, stockholder behavior has changed, said Valentina Sadovnikova, privatization overseer for the Vladimir region some 120 miles east of Moscow. At first “everything was unanimous and there were no secret votes. Now meetings have more and more secret votes on directors and many other questions,” she said. Meetings that used to take an hour or two drag on for nine.

“Even if people have only a very small (portion), they’re interested in how things are being run,” Sadovnikova said.

But is that enough? Prominent economist Stanislav Shatalin and his think tank, known as Reforma, fear it may not be. In the most over-arching critique of the privatization program to date, the group’s report points out in capital letters the whole concept’s major flaw: “THERE IS NO CLEAR CORRELATION BETWEEN EFFICIENCY AND FORM OF PROPERTY.” In other words, private does not necessarily mean better-run.

“None of the large industrial enterprises has become more efficient due to privatization,” Shatalin said. However, Reforma allows that it may simply be too early to assess privatization’s effects.

Nevertheless, a loud “Did privatization succeed?” debate is under way in Russia.

As Chubais put it, privatization “has been crowned with unqualified victory. But since its completion, an equally important fight has started over the assessment of the results.”

Probably the loudest critic of Chubais’ program is Moscow Mayor Yuri Luzhkov, who denounced the program for selling off much too cheaply. He demanded that the capital sell shares in its businesses, many of which sit on prime real estate, for money rather than vouchers.

Others caution that Russians will feel duped when they realize that most of their vouchers, whether deposited in special investment funds or in factories, will not bring them any of the promised dividends.

In fact, the popular attitude from the start was relative skepticism toward the vouchers, and it remains so. While most people were happy to receive even a small gift from the government, they were also convinced that privatization would mainly lead to the enrichment only of the elite few.

A nationwide poll by the independent Mneniye service found that 26% of respondents had sold their vouchers for cash, while 30% deposited them in an investment fund and 13.6% held on to them. Only 25% agreed that the voucher would “give every person a share of state property.”

On the other hand, privatization backers say, at the very least the program has developed a capitalist mentality among Russians, bringing words such as dividend and share into the vernacular and giving a giant push to fledgling stock and capital markets.

They note too that privatized companies are far more attractive to foreign investors--who were allowed to purchase vouchers--and could even pull some of the billions of dollars in flown Russian capital back home.