Privatization In Russia

Sample essay topic, essay writing: Privatization In Russia - 1114 words

For some, the privatization of Russian industry has been one of the great success stories of Russia's painful economic transition: quick, firm and radical action was taken to shift the great bulk of Russian industry out of state hands, thereby laying the basis for a radical restructuring of enterprises and improvements in their performance. Others see privatization as a best a failure, at worst a catastrophe. Not surprisingly those opposed to the market and economic reform as a whole share this view. But many commentators who see themselves as supporters of reform find plenty in Russian privatization to criticize: the process led to the transfer of ownership to inappropriate people and as a consequence no beneficial restructuring of enterprises or the economy can be expected. While this paper will attempt to cover the three key facets of privatization: that enterprises be transferred to private ownership; that the new owners be able de jure and de facto to exercise ownership rights; and, finally and ultimately most importantly, that the new owners exercise their ownership rights in such a way as to bring about improvements in enterprise performance.

The key issues to be surveyed, therefore, are: who as a result of privatization obtained ownership of Russian industrial assets, and are they appropriate owners; can new owners, particularly if they are appropriate owners, exercise their ownership rights; and has privatization led to improvements in enterprise performance? The paper will deal with privatization only within the industrial sector; thereby ignoring the highly controversial privatization's of the last twelve months or so in the energy and utility sectors. Who are the new owners? Global data showing about 70% of GNP being produced in the private sector reflects the high levels of privatization of industrial enterprises, with the great bulk of enterprises having been privatized by mid-1994. However privatization does not necessarily mean the complete removal of the state from an equity involvement in enterprises. State ownership. The state retains shareholdings in a significant number of privatized enterprises on the basis of government decrees declaring the 'strategic significance for national security' of the enterprise. Shareholdings range from 20 to 51 per cent or a Golden Share (a single share giving veto rights over certain strategic issues of corporate development) retained by the state for up to three years. In late 1997 the state had shareholdings in 2900 enterprises

The shareholding consisted of a Golden Share in 1351 cases, of over 50% of shares in 128, of 25-50%, in 1037, of 20-25% in 228, and less than 20% in 303 of cases. By far the largest numbers of state holdings are in the energy sector (860). Not surprisingly the defense industry sector has a significant number (260). The rest are scattered across the economy. This is a not insignificant state equity interest in Russian industry.

There appears to be no particular trend towards either the strengthening or weakening of the state's holdings, primarily because there are very differing views within government over which direction any trend should take. There is a continuing dribble of disposals, but decrees extending the period for which the state can retain parcels of shares in particular enterprises are also not rare. The number of enterprises deemed to require a 'strategic' state interest increased from the original 2700 set in the government's 1995 decree, to over 3200 in early 1997, but had declined to 2900 by the end of 1997. It seems likely that a rump state presence will remain for some time to come, but not at a level that represents the basis for a significant rolling back of privatization. Majority workforce shareholdings are seen as leading to two possible outcomes: collective ownership, in which the enterprise is owned and managed in a collective way by a workforce with common interests; or management ownership, in which management in various ways gains de facto if not de jure ownership rights over workforce shares and thereby gains effective ownership of the enterprise. Collective ownership derives either from a natural alliance between managers and rank-and-file employees, probably based on Soviet traditions of paternalism and the 'social contract', or from the need of managers to pander to workers who control a majority of voting rights at shareholder meetings. Although some observers might find a collective ownership outcome desirable, on the grounds that it provides for workplace democracy and high-incentive work habits, reform-oriented commentators generally find it a form of ownership likely to lead to the maintenance of excessively high levels of underemployed staff and an over concentration on consumption at the expense of investment.

The management ownership outcome derives from the ability of management to totally dominate divided, demoralized or indifferent rank-and-file employees. The argument that they do so by bribing employees with promises of secure employment and the maintenance of social welfare provisions is essentially the same as that presented in the previous paragraph on collective ownership. However, there is an increasing awareness among commentators that any Soviet paternalism and coincidence of management-worker interests that might have once existed have not survived the rigors of the transition and the self-interest of managers. As A. S. Bim puts it: 'Given serious 'positional differences' between managers and other employees, it seemed reasonable as early as 1993 to draw attention to the quite peculiar nature of insider ownership in Russia and to argue against simplifications such as the statements common in 1993-1994 that privatization in Russia had proceeded de facto in favor of workers (employees) or insiders as a homogeneous group.' The rigors of the transition, difficult market conditions and something close to a hard budget constraint, have made it impossible for managers to maintain employment and social welfare provision.

The managers' self-interest, whether it be reflected in asset stripping or building up a profitable enterprise, pushes them in a similar direction. They then have two options. Once is to rely on coercion and manipulation, rather than bribery, to get worker owners to support them; the other is to get the workers to sell their shares to them. Coercion and manipulation have been much in evidence. The crudest approach is the threat of dismissal of those who vote against management. Another popular approach at least requires the initial support of a majority of workforce shareholders.

Management sets up a holding company type structure, the paid-in capital of which consists of all the workforce shares (or all those for which the management can get approval). The articles of association of the new structure are written in such a way that management controls it and through it the enterprise.15 Gurkov writes of individual managers building up their own 'cultivated plot' of workers over whom they have most direct work-based control and influence, and the managers then forming alliances and bringing their workers' shares with them into the alliance.16 But such arrangements cannot bring complet...

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