PRIVATISATION

Text by: Svetlana Lobovikova
September 2001

As a part of the early 1990s economic reforms, the privatisation process of state owned companies was started in November 1991. In addition to the two laws "On privatization" (dating from 7 July 1991 with amendments from 5 July 1992 and 1997), there are various presidential decrees, government resolutions, and three-year privatisation programmes regulating the process.

The economic reform started in this field of activity by lifting the restrictions on street trading. Then small businesses were allowed to be in private hands and were sold to the highest bidder with some restrictions attached or without. Many new firms were founded, especially in retail sales and in services. By 1993, some 700 medium and large firms were in private hands, but that was only about 7% of the total number of these firms.

The main goals of privatisation were the following:

forming a wide class of private owners, who would support the ongoing reforms;
raising the efficiency of firms through privatising;
encouraging competition;
reorganisation of the monopolies;
attraction of foreign investments.

There were so called voucher, cash and small privatisation schemes. Small enterprises were traded openly or sold directly to the employees. Large and medium sized state enterprises were to be converted into joint-stock companies, where government initially was retaining control by owning a stake of shares, which was to be sold later. Some shares were given away to the workers and management (three types of worker-management models). In the fall 1992 ''vouchers'' were distributed to the public to purchase shares in the state enterprises. A portion of the firms' stocks had to be sold only for these vouchers. Investment funds appeared on the market. However, the majority of the public did not receive any perceptible revenue or property rights for their vouchers regardless of the operations they made. The most worthwhile firms were taken over by their administration or management for a fairly symbolic price, because companies' values were well underestimated. In some cases, the administration or another interested party right from the beginning buy up enough vouchers to acquire the controlling stake, in some cases it was done afterwards. What in most cases were on sale were the ownership-management rights to the firm, if the firm was thought worth managing it, or the rights to get hold of its assets.

In 1994, the second part of privatization started, the so called "investment oriented shares sale". In August 1995 the President published the instructions for selling shares in the state owned companies to the most promising investors via a complicated scheme of credit-security-commission. These instructions were applied in the privatisation of oil, steel, and ship companies. Specific government decisions were required to proceed with companies, such as monopolies, large employers (more than 10.000 workers), military, alcohol, wine, tobacco, energy, and communications industries. The state bodies conduct their privatisation are the regional property committees.

In 1997, a new, so called individual, privatisation method was introduced to help increase revenues from the sale of the state property, attract investments and speed up the process. Financial consultants or other qualified and interested parties have been welcomed on a competitive basis to develop and present privatisation plans and carry out sales. Previously the State Property Committee and the Russian Federal Property Fund solely carried out those functions.

The new law "On Privatization" of July 21, 1997 has been implemented. The major changes concern the tender sales of large enterprises. Previously, large companies were privatized either through investment tenders (bidders promise to invest in the company were evaluated) or commercial tenders with investment conditions (minimal level of investments was established, then sold to the highest bidder). In 1997, the latter was abolished, and the concept of the former clarified. In addition, a new type, commercial tender with social conditions was introduced. It included the maintenance of certain level of employment, refrain from reducing workers benefits or changing the area of the enterprise operations, and/or implementation environmental programs.

According to the government programme of 2001, by the year 2004, only some 1.5-2.5 thousands enterprises will still be in the state property. The following major results are expected to be achieved:

Industries with growth and development potential will be fully privatized (except for some objects of the national security importance) such as food industry, transportation (except rail-road and pipe), metallurgy, oil, home appliances production. Both domestic and foreign investments will be employed. Shares are traded on the stock markets;
The number of state enterprises is reduced to the minimum. Those that are left, are financed directly from the budget or by placing state production orders;
New businesses will be established on the base of the liquidated state enterprises.

To realize the above, the new Law ''On privatization" is being currently developed. One of the main objectives is to regulate and set up a legal base for the involvement of foreign investments, to regulate the property rights for land and industrial estate.