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The Reformers in Russia in the 1990's

The Reformers

The Nature of Feasible Reform in Russia in the 1990's

In the priorities of the reformers in Russia the privatization of state enterprises was near the top, perhaps only surpassed by the decontrol of prices. There could not be a market economy until the preponderance of economic enterprises had the incentives and the autonomy to achieve efficiency. This could not be achieved until the enterprises were privately owned and managed.

In achieving a transfer of control of the enterprises from the Communist Party network there were many considerations and objectives:

Some of these objectives involved problems. For example, the matter of getting as much revenue from the sale of state enterprises ran up against the objective of creating competitive industries. Most of the state enterprises had monopolies in their fields. The sale price of an enterprise would be highest if it retained its monopoly privilege. But the monopoly privilege would be bad for the economy in the long run. If the buyers of a state enterprise monopoly paid the market value of the monopoly right those buyers would thereafter only make a normal rate of return on their investment while operating as a monopoly. The privatized monopoly would thereafter need its monopoly privilege to just survive. Therefore the objective of the privatization program should have been to sell the state enterprises without perpetuating their monopoly.

Yegor Gaidar

Yegor Gaidar
The reformers, under the leadership of Yegor Gaidar, did drastically reduce subsidies to state enterprises and cut the the military budget by two-thirds in 1992. Gaidar also instituted a high value-added tax. GDP continued to decline but at a reduced rate.

Western economists attribute the ongoing and debilitating inflation in the early 1990's in Russia to the monetary policies of the dedicated Communist Viktor Gerashchenko who was the head of the Central Bank. Given Gerashchenko's political affiliations it would not be implausible that he would have deliberately sabotaged the reform, but it appears that the sabotage was not deliberate. Instead the inflation was generated as a result of Gerashchenko's coverage of the deficits of the state enterprises. He did not print up money to cover those deficits; instead he granted the enterprises accounts at the Central Bank. This had the effect of creating checking account money and generated the same inflation as the printing up of paper money would have. As the prices rose so did the deficits of the state enterprises and hence the size of the accounts Gerashchenko had to issue them. This process led to hyperinflation. Because pensions were not indexed the hyperinflation led to the pauperization of the retired people of the country.

When Gerashchenko was replaced at head of the Central Bank the rate of inflation was brought down from thousands of percent per year to about ten percent. Later, as a result of political bargaining between the President of Russia, Boris Yeltsin, and the legislature, the Duma, Gerashchenko was put back in charge of the Central Bank.

Yegor Gaidar, as the most prominent reformer, was blamed for the hyperinflation, but his removal of price controls in itself would have resulted in only a one time price rise. The chronic hyperinflation required an ongoing expansion of the money supply. The monetary policy of the time was largely or completely outside of his control. In his book, Days of Defeat and Victory, he makes some comments that indicate that he accepted the necessity of creating additional money to cover the deficits of the state enterprises.

Gaidar was removed from his prime ministership early. He was not the iron general that Chubais was and was not equiped to deal with the hurricane political movements of the time. He appears to be one of the most humane and sincere figures to appear on the political scene in human history. When he was asked by an interviewer years after he was out of the political limelight what he wanted for the future Gaidar replied, "I want to be a European without leaving Russia."

(To be continued.)

Anatoly Chubais

The field of privatization in the early Yeltsin administration was put into the able hands of Anatoly Chubais.

Anatoly Chubais
Chubais was widely recognized as a superb organizer. He was adept at recruiting people of talent and allowing them to fulfill their functions. Chubais understood the importance of not trying to micromanage or to second guess on the work of his subordinates. Gaidar said of Chubais that he was a friend whose loyalty was the supreme standard against which all others' friendships were measured.

There was good reason for Chubais to be refered to as the Iron General. One of Chubais' characterisitics was to choose a goal and devote his full energies to the achievement of that specific goal without being distracted by subsidiary goals.

Chubais decided that if there was to be any hope of breaking the power of the Soviet bureaucracy and the Communist Party to which the bureaucrats owed their allegiance there would have to be a mass privatization of State properties. He set his objective to transfer as much property from state control to private as possible and not to worry about whether the form of the privatization was as good as possible. The new owners, whatever their previous affiliation, would be supporters of privatization and would oppose the old system and its power structure.

Chubais chose Dmitry Vasiliev to be a major figure in managing the privatization program. Chubais set up a Russian bureau of privatization called GKI from its name in Russian. Vasiliev was given the job of drafting proposed legislation for privatization. It was a tough assignment because it had to be done very quickly and the support for such legislation in the legislative body, the Supreme Soviet dominated as it was by Communist Party appointees, was minimal. In other words, Vasiliev was given an assignment of running through a minefield. The task of getting the legislature to agree to any plan Vasiliev came up with fell to Chubais.

To gain support among the directors of state enterprises Chubais agreed to a provision that up to 40 percent of the shares of privatized enterprises would go the management and workers of the enterprise. This was the first version of the plan, call it Option 1. This was an attractive deal for the directors of the enterprises but it fell short of giving those directors control of the privatized enterprises. Chubais had to accept a revision, called Option 2, which required that management and workers be allowed to buy 51 percent of their enterprise at artifically low prices.

There was a major problem for any privatization program that required payment for ownership shares. The problem was that very few people had any resources for buying ownership. Although most Russians had accumulated savings during the Communist Era but the buying power of those ruble savings was reduced to insignficance by the inflation that followed the reforms. Chubais came up with the voucher system to give all Russians some means of participating in privatization. All Russians were entitled to a 10,000 ruble voucher which they could pick up at their local branch of the state savings bank, Sberbank, upon payment of a token fee of 25 rubles. One hundred forty four million Russians did so. At the time they were issued there were no privatized companies to purchase shares in using the vouchers. The voucher holders anxiously awaited the privatization process to start.

The voucher program created popular support for privatization. The problem was that there weren't any state enterprises that were willing to be privatized.

Chubais called in Western bankers to help with persuading an enterprise to undergo privatization and to help organize the privatization procedures. There was some urgency in the matter because the Supreme Soviet was making noises about firing Yegor Gaidar as prime minister and replacing the top leadership in the government. Any new government was not likely to initiate privatization.

Chubais' privatization team chose a Moscow cookie company as the target for being the first privatization. The products of the company were familiar throughout Russia so the case would be meaningful to the typical Russian. Although the company had been founded in the mid-19th century its name had been changed after the Revolution to Bolshevik Biscuit Factory so the name itself had a certain publicity value.

The management was finally persuaded that privatization would be to their benefit and would give the company access to new source of capital to upgrade the equipment.

The day arrived for the privatization and there was a good turn out of people seeking use their vouchers to buy shares in the Bolshevik Biscuit Factory, including many employees and the management. Of course many people throughout Russian had sold their vouchers long before there was the opportunity to use them.

The day after the privatization of Bolshevik Biscuit Factory, Yegor Gaidar was fired and the new prime minister, Viktor Chernomyrdin spoke of privatization as a crime. Nevertheless the privatization program moved along so that by 1994 nearly two third of the employment in Russia was in private or partially privatized enterprises. Chubais, justly proud of accomplishing a nearly impossible task, asserted that privatization was the first national program since 1917 that was completed on time and achieved more that it promised. Chubais' accomplishment was not so much privatization but instead breaking the stranglehold that the network of Soviet bureaucrats and factory managers and Communist Party functionaries had on the economy of Russia. Privatization was a means to this end. That privatization did not achieve the a just division of state property among the people of Russia was regretable but unavoidable. Under the old system the workers were slaves in a system that provided the bare necessities of life and allowed no freedoms. The owners of the state property in the Soviet system was the Communist Party. Under the program of the reformers the people got their freedom but little else and the state property was taken away from the Communist Party per se and even though in many cases the state propery remained in the hands of the same people those people were now businessmen rather than Communist functionaries.

Chubais later became the top executive of the Unified Energy System, the electric power monopoly of Russia. Although he could be considered one of the Russian Oligarchs of the 21st century he still maintains a role as a reformer. He has been trying to revise the rate schedule for electricity. The revisions would involve Russia's large enterprises paying more for electricity. In March of 2005 there was an attempt to assassinate Chubais and a top leader in the Unified Energy System charged that the plan to charge large enterprises more for their electricity was the motivation for the assassination attempt.

Chrystia Freeland, Sale of the Century, Crown Publishers, New York, 2000.

Grigory Yavlinsky

Grigory Yavlinsky is a figure that could have been one of the most important in Russian history. He was an important advisor to Mikhail Gorbachev and was working on his program of transition for the Soviet system. He had written a plan for a 500 day transition of the economy. Although relative cautious considering what actually took place in Russia in the 1990's it was considered too big of a step for the top leadership of the Soviet Union to undertake. Yavlinsky's plan got tabled and before it could be reconsidered the table and all else was swept away.

(To be continued.)

The Privatization Programs in Russia in the 1990's


Hyperinflation in Russia in the 1990's

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