Russia's privatisation wars

Issue 

By Renfrey Clarke

MOSCOW — There was a time, about 1991, when only slightly drunk members of Moscow's liberal intelligentsia would exclaim to you across their kitchen tables that Russia was at last about to become a normal country. Enterprises would have real owners, who would manage them in civilised fashion instead of plundering them. Competition would promote efficiency. Economic stagnation would pass. A free, independent press would expose and condemn abuses. Laws would become a real force that even governments had to obey.

I haven't seen any of those friends recently. But I've thought of them often as corporate brawls have burst repeatedly into the open. Playing on prime-time television, these battles have provided an illuminating picture of the capitalism being created in Russia.

The first of these wrangles erupted in late July with the privatisation sale of a 25% stake in the giant telecommunications holding company Svyazinvest. A sealed auction was won by a consortium organised by the financial-industrial conglomerate Oneximbank.

The losing bid had been made by a rival consortium centred on the Alfa Bank financial empire and the banking and media-based MOST Bank group.

Media organs linked to the MOST group immediately began a vitriolic attack on Oneximbank and the conduct of the auction. Oneximbank's own media machine responded by accusing the MOST group chiefs of past corruption and political blackmail.

Agreement breached

Behind the ruckus, other sources reported, was the breach by the Oneximbank bosses of a "gentlemen's agreement" under which desirable firms would be privatised in favour of particular groups, with the prices kept at rock bottom.

"It was the turn of MOST Bank to step up to the trough and get its share", independent analyst Nikolai Zyubov was quoted as observing. "But they were cut out of the deal, and they are very, very angry."

Deputy Prime Minister Boris Nemtsov praised the Svyazinvest auction as a "model" sale. "From a bandit-like amassing of capital, the country is moving to a more or less civilised regime", Nemtsov declared. To outbid its rivals, the Oneximbank consortium had paid more than 50% above the government's reserve price.

However, the successful bidders still received an astonishingly generous deal. According to Leonid Rozhetskin, a board member of the Moscow investment bank Renaissance Capital, the value of the consortium's investment is likely to triple over the next two years.

Oneximbank scores again

And if the Svyazinvest sale appeared civilised compared to past giveaways, that was not the impression given a few days later by the sell-off of a controlling 38% stake in the company Norilsk Nickel. Centred in the Siberian Arctic, Norilsk is the world's largest nickel producer.

Again, the winner was Oneximbank. The price, according to the reported consensus of share dealers, was about 25% below the property's market value.

Oneximbank had clearly exploited the fact that it already exercised control over Norilsk Nickel, having been awarded the right to manage the firm in November 1995 in exchange for a loan to the government. The sell-off was organised, and the terms decided, by an Oneximbank subsidiary.

The London metals trader Trans-World Group protested publicly to the Russian government, arguing: "The conditions to be met for this auction and the incredibly short timetable make it impossible for anyone but the current owners to participate".

The Norilsk auction went ahead despite well-founded objections that it was illegal. During July the Accounting Chamber, the independent state body that audits government finances, sent a report to the prosecutor-general's office recommending that the Norilsk sell-off be blocked on the basis that it violated presidential decrees, government resolutions, the privatisation statute and the newly enacted Civil Code.

Shortly before the auction was due, Prime Minister Viktor Chernomyrdin called for postponement on the grounds that the rules violated the law. But after last-minute talks with government officials and Oneximbank head Vladimir Potanin, Chernomyrdin dropped his objections.

FIGs

One important lesson in these events is that the key role in the economy is coming rapidly to be played by huge financial-industrial conglomerates.

Another is that the dividing line between these so-called financial-industrial groups (FIGs) and the government is quite blurred. Top executives of the largest FIGs enjoy direct, frequent access to government ministers. These executives often become government ministers, passing from the FIGs to high state office and back again.

The Association of Financial-Industrial Groups, headed by former first deputy prime minister Oleg Soskovets, now has 62 registered members, uniting more than a thousand enterprises and organisations and more than 90 financial and credit institutions.

The rate of growth of the FIGs has been phenomenal; according to the government newspaper Rossiyskaya Gazeta, their share in GDP has increased from 2 to 10% over the past year. This does not reflect economic growth — no important sector has managed a significant increase in output during this period — but has occurred because of takeovers, voluntary acts of association and new privatisations.

The rise of the FIGs has flowed directly from government policy. Under the "loans for shares" program initiated in 1995, a small number of Kremlin-favoured banks were allowed to run state enterprises in return for granting loans to the government.

The enterprises handed over included some of Russia's most lucrative natural resources firms. When the time came for large shareholdings to be sold, the managing banks were allowed to rig the auctions, awarding themselves hugely valuable assets at laughable prices.

To make these purchases, the banks often used government money they were holding as "authorised banks".

Shattered dreams

Russia's economy thus has little in common with the dreams of the liberals of 1991. Instead of the expected flexible structures, there are huge, relatively centralised blocs.

Hopes that placing industry under the control of bankers would promote investment do not seem to have been borne out. The habit of Soviet economic managers, of living well by robbing increasingly run-down enterprises, evidently lives on.

As for the dreams of "vibrant competition" — if the FIGs could agree for years to divide up the state enterprises being privatised, they are quite capable of dividing up markets as well. Moreover, many of the FIGs are regional formations, and because of transport costs and links to local administrations, enjoy local monopolies.

The fact that a capitalist economy is centred on a small number of conglomerates does not guarantee stagnation. The emerging Russian economy has basic features in common with Japan and South Korea.

But the Japanese and South Korean conglomerates developed with a crucial orientation toward exporting manufactured goods to international markets where competition was intense.

The exports of the FIGS consist almost entirely of oil and other primary materials, for which competition is a much less central factor. In the Russian case, the impulse to invest, innovate and raise efficiency is far weaker.

In a depressed business environment, the FIGs depend heavily on government favours, above all cheap privatisations. Banding together early in 1996 to fund and organise Boris Yeltsin's re-election campaign, the largest FIGs were able to guarantee that the flow of property would continue.

But the understanding between the government and the FIGs — that everyone would continue getting their share, at minimal prices — has now broken down. The privatisation deals are still generous, but prices are no longer in the giveaway category.

In earlier years, the government's priority was to place as much property in private hands as quickly as possible, in order to undercut left-wing opponents.

But the Russian left is less and less regarded as a serious opposition. The main threat is now perceived as an intractable crisis of state finances. Privatisation, government leaders insist, will have to help top up the government coffers.

Meanwhile, tensions between the FIGs have become explosive. The supply of enterprises to be handed round is nowhere near exhausted; some 25 major enterprises are targeted for privatisation in 1998 and 1999. But especially in the lucrative resources sector, only a few really enticing titbits remain.

The fallings-out between the government and the oligarchs, and between the FIGs themselves have altered political life, introducing new elements of instability.

"The system of power in Russia is in danger of flying out of control because layers of corruption and dirty dealing are being exposed by warring groups", Andrei Piontkowski, director of the independent Centre for Strategic Studies in Moscow, warned recently.

"The handful of financiers who created the power system in this country are now battling each other for control, and this could continue to the point of mutual destruction."

The conflicts between the FIGs are now being carried into the government.

Prime Minister Chernomyrdin is considered to be aligned with Vladimir Gusinsky of MOST Bank and with LogoVAZ chief Boris Berezovsky, who doubles as deputy head of Yeltsin's Security Council.

First deputy premier Anatoly Chubais is regarded as standing with Oneximbank head Potanin — who until March held the post of first deputy premier himself.

The swapping of public accusations will no doubt continue, as will the panicked warnings from capitalist ideologues.

So far, ordinary Russians have watched this spectacle with indifference. If the country's great and powerful are calling one another swindlers and thieves, that is merely what everyone else has been calling them for years.