by Marta Cioci

In the aftermath of the collapse of the USSR, a series of reforms were carried out to privatize state-owned assets. The large-scale privatization program, which envisaged the transfer of state assets and shares in the industrial, energy and financial sectors issued to Russian citizens via a voucher scheme, was part of the transition from a planned economy to a market economy. In other Former Soviet Union countries such as the Czech Republic and Lithuania, the marketing and selling of vouchers was outlawed by the government specifically to avoid the concentration of wealth in the hands of the previous communist elite. On the contrary, in Russia, the government legally permitted the marketing of shares. The encouragement of privatization among citizens initially achieved widespread consensus and dispersal of wealth, but soon revealed its darker side as a nationalistic means to promote the concentration of ownership and national wealth into the hands of a few wealthy individuals in the medium-run. As it resulted in an increase of the wealth gap, it earned the name katastroika, often described as one of the most “cataclysmic peacetime economic collapse of an industrial country” throughout history.

Due to lack of time and access to information pertaining to real market value, workers and peasants sold their vouchers to the industrial managerial class at a market price well below the real or nominal market value of the share. These well-informed investors (who would then go on to be called the “new Russians,” alias oligarchs) were eager to exploit such an opportunity. After many Communist years of protectionism and nationalization, the door had finally opened for them to invest in capital and stocks. In such a scenario, businessmen and workers appealed to the same justifications to motivate their preference for voucher privatization, namely, that the selling of vouchers would strengthen the social safety net and protect the population. If it is true that vouchers represented state assets, it is also true that they could be retrieved for cash, thus providing short-term needs at a time of a shortage of basic essentials.

The Russian economy was on its knees in the early 1990s: its size was estimated to be half of its US counterpart, and its performance was lagging in all major fields, from consumer demand to computerization, innovation and social welfare. It might then seem acceptable to excuse voucher privatization on the basis of ignorance of its potential consequences. Nonetheless, these arguments fall short in that what was at stake (the state’s property and management) seems too valuable to merely cede to these explanations. Rather, it seems reasonable to complement these arguments with the explanation that businessmen were driven by the desire to concentrate corporate governance in their hands, and workers lacked the knowledge to understand what was at stake. The ignorance of not understanding the meaning of vouchers was a legacy of 70 years of communist rule, during which ownership was nationalized and the most urgent thought of many Russians was the procurement of bread to satisfy basic needs for the following day.

The political elite behind the voucher privatization program—Chairman of the State Property Committee Chubais—realized that the transfer of shares to employees would have been too costly, both politically and economically. Nonetheless, they observed that this move could serve their medium and long-term interests; the transfer of property rights to rank-and-file workers would not have necessarily meant the transfer of structurally embedded share ownership or corporate management to workers. Moreover, a similar move would have hardly been opposed by the Communist party, and, in enjoying widespread cross-party political support, would have thus been easily and quickly approved.  Chubais and his liberal team advanced the requirement that it should remain at the discretion of the worker (deprived of the intermediation of trade unions) to sell or market the vouchers at his or her will. Once again, the emphasis was on leaving open all possibilities for the transfer of vouchers from workers to the ruling economic elite.

As predicted, the transfer of vouchers and employees’ shares to the managerial class did not translate into de facto decision-making control, transfer of governance, or access to the executive board, and was not accompanied by the transfer of ownership rights. A rift was created between distribution of ownership and actual structural control of ownership. Paradoxically, despite their new position as owners, workers could not access decision-making processes and had no influence on their ownership. Workers lacked information on their rights, and often had no means by which to access judicial remedies to challenge their employers legally. Moreover, as a legacy of the Communist ideology, trade unions were still incorporated under the FNPR (Federation of Independent Trade Unions), which embedded in its structure the very industrial managerial classes that had long wielded power over the workers. Intuitively, there was no division of interests between the ruling class and the workers.

All industries in Russia had to liberalize the marketing of their shares. Only a few industrial complexes with governmental connections (including Gazprom) were exempted from this rule so that the movement of shares could be restricted and monitored. For an initial period following the inception of the voucher privatization program, the preference of the managerial and industrial class was indeed for a restriction of voucher sales, leaving them in the hands of the workers. In this way, Russian national wealth could be protected from outside buyers or foreign investors. The managerial class thought of controlling the individual shareholders who owned the shares so as to control the shares themselves. Their initial position changed when Chubais managed to persuade the industrial elite of the desirability of the full transferability of shares.

Chubais certainly knew how to play its cards and insisted on the full transferability of shares from Russian workers to any buyer, because he knew that for outside buyers it would have been difficult to enter the Russian share market; as a result of the strong control that the Russian managerial class was exerting over its workers, the managerial class itself would still have been the final recipient of vouchers sold. In this scenario, managers often cheated and persuaded workers to sell them their vouchers, warning that should they act otherwise, the enterprise would be taken over by foreign firms or, even worse, go bankrupt. Either due to coercion or workers’ free will, managerial ownership increased from 8% to 20% from the initial distribution of vouchers in the first months of the privatization program.

One way to subtly induce the selling of the voucher from the worker to the manager was to set up a pooling resource office in the factory where workers could pool their shares. This way, the worker remained the legal owner of the voucher-share, but could not exercise control over it; technically, the voucher no longer represented a share of the factory, but rather a share of the factory’s fund; hence, there was no way to redeem it. Similarly, another strategy to induce workers to sell their vouchers to the industrial elite was to suspend wage payments, so that workers, desperate to earn any amount of money, would sell their shares directly to the managers rather than to outside buyers. It was hard for workers to resist managers at a time when jobs were scarce, and the factory in which one worked was the only viable option for employment, because it often constituted the only industrial complex in a vast area, or because it provided housing. As a result of these considerations, the prospect of losing their job was daunting.

The Russian government also contributed to the reduction in public morale during the years of privatization. In the Czech Republic, privatization was championed by private companies rather than the government. The Czech government, which was worried about the accumulation of wealth in few hands, phrased public communications in such a way so as to minimize the attractiveness of shares. In such a process, the actual value of shares was diminished via rhetorical means, and private acquisitions were dissuaded. On the contrary, in Russia, the government rhetorically inflated the value of shares and adopted a populist approach, thus leading the public to become disillusioned when it was discovered that the proclaimed value of the shares was unrealistically inflated.

In property rights theory, it is well known that if a property right is protected and restricted in some way, then the value of that property is going to increase; conversely, if the share is fully and tradeable without restriction, then this implies less protection. Regardless of who is to blame for the role that privatization played in fostering wealth concentration, what is interesting to note is that paradoxically, the eventual preference of the managerial class for fully tradeable voucher privatization reveals a nationalistic mood aimed at restricting competition among bidders. Instead of raising privatization revenues by allowing foreign investments into the domestic market, a ban was imposed on competitive ownership at the expense of the public, which resulted in lower privatization prices and decreased efficiency. Especially when dealing with mass privatization programs in post-communist countries, the national wealth within the country is insufficient to assure a high price for the share.

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