Kremlin capitalism : the privatization of the Russian economy

272 Pages·1997·23.496 MB·English

by  Joseph Blasi, Maya Kroumova, and Douglas Kruse

Advance praise for Kremlin capitalism
"Joseph Blasi and his colleagues have written a valuable and timely
account of the vital and often turbulent process of privatizing the old
Soviet economy in Russia. For the specialist, this book is larded with
useful facts, figures, and details, and makes the case that privatiza
tion has been a greater success than most Americans think."
-Hedrick L. Smith, author of The New Russians
"Kremlin Capitalism is required reading for business and govern
ment officials with economic interests in Russia."
-The Honorable Robert S. Strauss, former
U.S. Ambassador to Russia
"The stress of Western media on crime and corruption in contempo
rary Russia has diverted public attention from what the authors of
Kremlin Capitalism rightly call an unprecedented event in world
history: in the space of five years, the industrial economy of Russia,
once 100 percent state-run, has passed 80 percent into private hands.
Based on thorough study of the published sources and direct inspec
tion ofthe privatized firms across the vast country, this authoritative
book helps explain why in the recent elections Russians have rejected
a return to the communist past."
-Richard Pipes, Harvard University
"This perceptive, wonderfully well-informed investigation into the
doings and undoings of privatization is an illuminating voyage
through the Russian economy, whose epic transformation is shaping
Russia's entire future, and thus some part of our own."
-Edward N. Luttwak,
Center for Strategic and International Studies
"Kremlin Capitalism is about much more than privatizing the Rus
sian economy. It is a highly significant in-depth look at the prospects
for successful transition from communism to democratic capitalism.
Offering a rare glimpse of the process at work, this book is must
reading for those who wish to get beyond political rhetoric and super
ficial headlines."
-Jeffrey B. Garten, Dean, Yale School of Management, and former
Under Secretary of Commerce, Clinton Administration
"An innovative and informative study of the Russian privatization
program. The authors make a major contribution in showing how
Russian society really works. And no one can responsibly conduct
relations with Moscow without appreciating the true nature of Rus
sian capitalism."
-Dimitri K. Simes, Nixon Center for Peace and Freedom
"This account of Russia's privatization efforts during the last half
decade is comprehensive, lucid, and insightful. The revolutionary
transformation of Russia's economy is one of the great stories of the
twentieth century, and Joseph Blasi-as the expert insider-tells it
magnificently. A must read for business men and women and schol
ars alike."
-Eugene K. Lawson, President, U.S.-Russia Business Council
"This book provides significant new material for scholars, analysts,
and anyone who wants to understand the political and economic
foundations of post-communist Russia. An absorbing and well
written work."
-Stephen Handelman, author of
Comrade Criminal: Russia's New Mafiya
KREMLIN
CAPITALISM
KREMLIN
CAPITALISM
ILK Press
AN IMPRINT oF
Cornell University Press
ITHAcA AND LoNDoN
The Privatization of
the Russian Economy
Joseph K. Blasi,
Maya Kroumova,
and Douglas Kruse
Foreword by Andrei Shleifer
with the research assistance of
Daria Panina, Ekaterina Grachova,
Elena Zakrevskaya, Tatyana Voronina,
Aleksei Krivolapov, Joanne Mangels, Iuliia Cole,
and Ekaterina Dementieva
Copyright © 1997 by Cornell University
All rights reserved. Except for brief quotations in a review, this book, or parts
thereof, must not be reproduced in any form without permission in writing from
the publisher. For information, address Cornell University Press, Sage House,
512 East State Street, Ithaca, New York 14850.
First published 1997 by Cornell University Press
First printing, Cornell Paperbacks, 1997
Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
Blasi, Joseph R.
Kremlin capitalism : the privatization of the Russian economy I by Joseph
Blasi, Maya Kroumova, and Douglas Kruse ; with the research assistance of
Daria Panina. .. [et al.].
p. em.
Includes bibliographical references and index.
ISBN 0-8014-3351-7 (alk. paper).-ISBN 0-8014-8396-4 (pbk. : alk. paper)
1. Privatization-Russia (Federation) 2. Russia (Federation}--Economic
policy-1991- I. Kroumova, Maya. II. Kruse, Douglas. III. Title.
HD4215.15.B58 1997
338.947-dc20 96-33557
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Cloth printing 10 9 8 7 6 5 4 3 2 1
Paperback printing 10 9 8 7 6 5 4
Contents
Foreword Andrei Shleifer ix
Chronology of Major Events xili
Introduction: The Bolshevik Biscuit Company Goes Private 1
1 Privatization 13
Russia's Past: The Context for Economic Reforms 13
From Gorbachev to Yeltsin 17
Some Facts on Russia 23
The Starting and Ending Points for This Story 25
Why Was Privatization Necessary? 26
The Fight over Privatization 35
The Privatization Program 39
How the Program Worked 41
2 Ownership 50
The Initial Division of Ownership 51
Ownership in 1996 53
Russian Ownership in International Perspective 56
Majority Employee Ownership 58
Majority Management Ownership 61
Majority Outside Ownership 67
No Majority Ownership 70
The Struggle for Ownership 72
How Much Property Did Citizens Get? 76
Next Steps 82
3 Power 86
The Initial Transition, 1993 and 1994 88
Governance in 1996 96
Workers as Shareholders and Employees 105
The Mafia as a Corporate Power 114
vii
viii Contents
4 Restructuring 122
What Is True Restructuring? 124
The Companies' Initial Responses, 1993 and 1994 126
Restructuring in 1995 and 1996 133
Restructuring Management and Control 135
Restructuring Business Operations 137
Social Services for Employees 142
Access to Capital 143
Barriers to Restructuring 145
Restructuring Strategies 150
The Emerging Russian Stock Market 160
S The Future of Reform 167
Was There Another Way? 173
Will Russia Restructure? 176
The Next Reforms 181
The Reality from Which There Is No Escape 183
Russia after the 1996 Presidential Election 185
Tables: The Russian Business Economy and Companies 189
1. Number of private and privatized enterprises, 1991-1995 189
2. What has happened in the economy as a whole, 1991-1995 190
3. Voucher auctions, December 1992-June 1994 192
4. Inside and outside ownership of enterprises, 1994-1996 193
5. Majority owners of private-sector corporations,
1995 and 1996 193
6. Details of inside and outside shareholders in corporations,
1995 and 1996 194
7. Ownership of common stock in the United States, Japan,
and Germany, 1990 196
8. The top 100 Russian companies, by market capitalization,
1996 197
9. The important numbers on governance, 1994-1996 200
10. The important numbers on restructuring, 1996 203
11. Barriers to corporate governance in companies in which several
blockholders own a majority of shares, 1996 205
Notes 209
Acknowledgments 231
Contributors 234
Research on Russian Reform on the Internet 235
Index 237
Maps
Russian Federation 6
Russian Federation: Republics, krais, oblasts, okrugs 8
Foreword
Andrei Shleifer
Since 1991 the Russian economy and society have gone
through a major transformation, almost a revolution. Russia started
the last decade of the twentieth century as part of a declining Com
munist dictatorship called the USSR, unable to provide its people
with even basic consumer goods, facing a political crisis, and accumu
lating foreign debts at a breathtaking pace in a vain attempt to prop
up its moribund industry. By the middle of the decade, Russia was
an independent country, a transformed market economy, no longer a
threat to its neighbors, and holding a free democratic election for
president. The changes Russia went through during this period were
momentous, with many setbacks but many triumphs as well.
An essential part of transforming Russia was the radical economic
reform envisioned by President Boris Yeltsin. The four legs of this
reform were liberalization of prices, demilitarization of the economy,
reduction of inflation, and privatization. Price liberalization made
sure that markets rather than bureaucrats set prices; it had the
effect of ridding the Russian economy of its infamous queues. Demili
tarization ensured that Russia no longer spent its vast wealth on
building arms; it made Russia a safer place for both its citizens and
the rest of the world. The difficult fight against inflation forced the
Russian government to control its budget, and prevented it from
wasting the national wealth on subsidies to declining industries and
agriculture.
Last but not least, in a few short years, Russia managed to privat-
ix