Process of the russian markets


Millions of Russians are deeply dissatisfied with the
process of market reforms that intended to introduce
capitalism. According to one recent opinion poll, 48 per
cent of Russians believe that capitalism is bad for the
Russian Federation, while only 30 per cent think it is
good and 22 per cent don’t know (see figure II). When
asked whether the Russian Federation should continue
reforms or halt them, 39 per cent of respondents answered
that they should be halted, while 33 answered that they
should be continued and 28 per cent were uncertain (see
figure III).
Privatization on a massive scale has been a critical
part of market reforms in the Russian Federation on its
road to capitalism. From the outset it had priority over
other components of reform, such as the creation of
institutional and legal frameworks to regulate the
markets. It was assumed that the fast creation of
capitalists—property owners—was the first and critical
step in building capitalism. It was hoped that inefficient
Figure II
Is capitalism good or bad for the Russian Federation?
Source: Public Opinion Foundation polls (1,500 respondents) in
Kommersant, 15 February 2000. 

industries would be miraculously transformed by the new
capitalists of the Russian Federation.22 Privatization did
create the property owners in the Russian Federation—
masses of small shareholders without any power to
influence decisions over the enterprises they “own”. It
also produced few “new Russians”, who have acquired
enormous wealth by skilfully taking advantage of the
weaknesses of the transition period, including the lack of
transparent and clear rules and diminished law
enforcement capacities of the State. In the absence of
appropriate rules to regulate or mechanisms to monitor
the developments, the market-oriented transformations,
particularly privatization, stimulated an unprecedented
rise in the legalization of criminal assets and property
acquired by unlawful means. A popular Russian pun
equates privatization to the grabbing of State assets.
Privatisation is referred to as prihvatization (“hvatat” in
Russian means to grab, which could be also understood as
a robbery).
Figure III
Should the reforms in the Russian Federation be
continued or discontinued?
Source: Public Opinion Foundation polls (1,500 respondents) in
Kommersant, 15 February 2000.
48 per cent Don’t know
22 per cent
30 per cent
33 per cent
39 per cent
Don’t know
28 per cent
Russian capitalism and money-laundering
The mass privatization of 1992-1994 of over
15,000 medium and large enterprises shifted over 80 per
cent of the industrial workforce into the private sector.
During the same period, most prices were freed, the
exchange rate was unified and foreign trade was
liberalized. It was anticipated that these policies would
help the newly created private sector to get on its feet and
take off. By 1996, the private sector was already reported
to account for 70 per cent of GDP. In 1998, only 6.1 per
cent of firms were considered State-owned and only 7 per
cent of retail trade turnover was accounted for by Stateowned enterprises. By the end of 1998 over
13,000 enterprises had been privatized.
The desperately hoped-for benefits of privatization
have yet to arrive while some of the privatization experiences and schemes have become targets of criticism. The
mass privatization of 1992-1994 with its privatization
vouchers represented an easy opportunity for legalization
of criminal proceeds. Vouchers were issued for each
Russian citizen and represented the share of national
wealth to be divided among them. The vouchers entitled
their owners to purchase a stake in a State property. The
bearer nature of vouchers allowed safe money-laundering
as nobody questioned how and using what means the
vouchers were obtained. During this first phase of privatization, criminals were able to purchase unlimited
amounts of privatization vouchers from the impoverished
population and use them at tenders and privatization
auctions to obtain controlling shares in existing State
businesses.23 The scheme turned out to be a blessing for
individuals with large amounts of hidden cash obtained
through crime, and enabled them to become lawful, rich
The loans-for-shares programme of 1995 has been
widely criticized for its lack of transparency and for its
fraudulent arrangements. Under this programme, the
gems of the Russian economy—most promising companies in the industrial and energy sector—were in fact
sold out to businesses in exchange for minimal loans to
the Government. State shares in 12 profitable firms with
strong potential for growth were used as collateral against
major bank loans to the Government. It was specified that
if the Government decided not to repay the credits—
which totalled about $1 billion—the banks had the right
to sell the shares held in trust and keep 30 per cent of the
capital gains. The circumstances of the auctions, in which
the same bank sometimes served as both an organizer and
a bidder, and in which larger bids were disqualified on
technicalities, aroused fierce criticism in the Russian
Parliament and press. Nevertheless, the programme was
continued and after the deadline passed in September
1996, banks began selling off the State share packages.
Between November 1996 and February 1997, three such
sales occurred—for shares of three companies—Yukos,
Sidanko and Surgutneftegaz. In each of these cases, the
trust holders themselves or an affiliated company bought
the stock.24 It was widely commented that, as a result, a
politically connected few were able to acquire large
national assets in exchange for minimal sums, and that
the programme may have been designed from the outset
for the purpose of such a fraudulent redistribution.
Even from the economic efficiency point of view,
privatization has failed to meet its objectives. The
incentive to seek short-term personal gains instead of
long-term shareholder value has arisen even when the
managers and owners were one and the same, as was
commonly the case in the Russian Federation. Uncertainty about formal ownership rights and lack of trust in
the legal system to uphold their rights continued to be
widespread and prevented initiation of restructuring
designed to ensure long-term sustainability of the enterprises. It became apparent that where no transparent,
credible and fair rules of the market exist, none of the
parties involved, including not only workers and managers, but also shareholders and creditors were interested
in maintaining and increasing the value of assets. As a
result, the enterprises acquired have been mostly used for
quick short-term gains (going into the pockets of a few),
such as their sale through fraudulent schemes or their use
for various underground purposes. The rights of ordinary
citizens—holders of minority blocks of shares—were
universally violated, with the value of their shares falling
to nothing.
The Federal Commission for Securities Markets,
established in 1996, has generally lacked the enforcement
power needed to tackle the problem of violation of shareholder rights. In July 1998, the Government announced a
Programme on Protection of Investors Rights which has
yet to be implemented effectively. A new bankruptcy law,
which took effect in March 1998, also has yet to see its
effective implementation, as it is impeded by contradictory policy decisions. In January 1999, for example,
the Government decided to cease initiating bankruptcy
proceedings against tax debtors. This decision threatened
to worsen tax compliance and delay constructively
needed bankruptcies. The number of bankruptcy cases
has grown sharply in recent years, to around 4,000 in
1998, but this is still low given that 50 per cent of firms
were reported to be making losses in mid-1998.25
The State Anti-Monopoly Committee is responsible
for the support of entrepreneurship and the promotion of
competition. However, it has continuously suffered from
underfunding and has had to close its 12 regional offices
since 1994.

 Moreover, regional branches were accused of
Russian capitalism and money-laundering
bowing to local political pressure to protect established
firms, which raised suspicions about widespread local
corruption. The capture of critical businesses at the local
level by individuals with criminal pasts have helped erode
local power structures to a significant degree. Reports
appear daily about criminal actions by the high-ranking
elected or nominated officials with already tainted
pasts.26 Russians quickly invented for these individuals a
new pun, “blue mayors”, 

which links the elected posts of
politicians and blue tattoos of gangsters and former
Even renowned supporters of reforms in the
Russian Federation began expressing their disappointment with the process of reforms in the Russian
Federation, pointing at the absence of a normal market
environment. In his new book,27 financier and famous
philanthropist George Soros openly blames the members
of the Russian political elite, including the media and oil
magnate Boris Berezovsky,28 for getting involved in a
selfish, deadly fight of oligarchs, hungry for power and
money. The oligarchs, including those in power,
continuously engaged in the fight among themselves that
drew enormous resources. Meanwhile, grave economic
and social problems of ordinary Russian citizens
remained neglected. Mr. Soros describes how he
personally witnessed the oligarchs’ attitudes when he
purchased a telephone holding company Svyazinvest by
auction. Mr. Soros reports repeated attempts by
Mr. Berezovsky to acquire ownership before the auction
using various means including political pressure because
he considered the ownership of Svyazinvest to be critical
in his power struggle against Prime Minister Chubais.
Later, a failed attempt by Mr. Berezovsky to use
Mr. Soros in his manipulations to obtain the Presidency of
Gazprom ended their relationship. George Soros acknowledges with bitterness his failure to advocate and promote
the creation of a law-abiding capitalism in the Russian
Federation as opposed to the capitalism of robbers.
In general, 

privatization was a big disappointment
for ordinary Russian people as well as for the many
international supporters of reform. Many recognized with
hindsight that institutional capacities and regulatory
safeguards should have been put in place before
embarking on privatization.29 In the Russian Federation,
privatization as it evolved not only halted the trend
towards fair, competitive and efficient markets, but also
promoted inefficiency and wider acceptance of arbitrary
rules and lawlessness. A rapid and extensive privatization
process with its fraudulent schemes damaged the
credibility of reform in the Russian Federation and further
hindered efforts to create an appropriate legal and
institutional framework to support a market economy. It
facilitated the capture of the Government at various levels
by groups whose critical mission was to use the State to
legalize their fraudulent acquisition of wealth and mask
their origins.

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