Armageddon Averted: The Soviet Collapse, 1970-2000 (18 page)

Staggering fortunes were amassed, beginning at the top and extending down intricate ‘loot chains’ to the lowliest beneficiaries.

127

survival and cannibalism in the rust belt The lawlessness throughout officialdom was paralleled by an increase in lawlessness on the streets. In 1994 alone, more than 600 businessmen, journalists, and politicians were murdered in bombings and grenade attacks over ‘market share’. In effect, a mega-merger had taken place among the vast surpluses of Soviet-era ex-convicts, sports-men, and KGB operatives, who formed extortion rackets or private security forces—which were often the same thing.
17
But talk of ‘the mafia’ could be confused. Not the plentiful private criminal groups, but those working for the state engaged in the greatest extortion. For people in business, it was well nigh impossible to be honest even if they wanted to be. Much foreign trade involved not government-licensed grand larceny or gangland racket-eering, but un-licensed modest shuttle traders, who travelled abroad by passenger train, bus, private car, even chartered aeroplane, returning with suitcases of otherwise unavailable goods, which they resold to eager consumers.

The small-fry entrepreneurs struggled to avoid taxes, which were confiscatory, and to lessen customs duties by paying bribes. The more successful their business became, however, the greater the shakedowns by state officials.

Strictly speaking, this was not corruption, which presupposes the prevalence of rule-regulated behaviour, so that violators are identified and prosecuted. Rather, this was ‘pre-corrupt’, a condition whereby everyone to varying degrees was a violator, but only the weak were targeted.

Imagine Wall Street—corrupt as it is already—if regulation were non-existent. Or American business if regulations 128

survival and cannibalism in the rust belt functioned merely as a pretext for the petty to extract ‘fines’ and the powerful to crush competitors and those without connections. Try starting a business, and competing against other businesses, without publicly maintained roads, a government-overseen banking and credit system, a powerful state agency to curb monopolies, or a well-policed police force, to say nothing of safety for workers and protection for consumers against swindles and diseases. Capitalism without government regulation or with random and manipulated government was not pretty. But, like insider enrichment and conflation of the public and the private, it had a long, illustrious history, and it still predominated across the world. Russia, paradoxically, needed both far, far deeper economic liberalization, and much better government regulation.

The ambiguities of property . . .

In addition to Gaidar’s abortive monetary stabilization and partial price liberalization, the other lever for achieving the ‘transition’ from Soviet socialism was privatization.

Crafted by a different Young Turk political economist, Anatoly Chubais, and funded largely by relatively minor Western grants, Russia’s privatization programme wended through the full bureaucratic maze for suggestions and approvals, and then after considerable debate was passed in general form into law by the Supreme Soviet in mid-1992. Of course,
de facto
appropriation of state property 129

survival and cannibalism in the rust belt and asset stripping by factory directors were already very far advanced. Unable to reverse this mass opportunism of self-privatization, Chubais schemed to institutionalize and rationalize it. He also aimed to make regional and municipal governments self-interested beneficiaries by ‘delegating’ to them something he could not have overseen: privatization of hundreds of thousands of small-scale businesses. Chubais and his handful of associates concentrated on a ‘mass’ privatization of large firms—in a land with more than 15,000 such state enterprises, and without accumulations of private investor capital.

Between October 1992 and February 1993, a time of extreme catastrophic stagflation, every man, woman, and child in Russia, nearly 150 million people, received a voucher with a nominal value of 10,000 roubles—first worth $25, soon worth around $2—to be used in property auctions. In anticipation of public sale, all large state firms were compelled to become incorporated, but as open joint-stock companies, to pre-empt the formation by insiders of collective-farm-style closed partnerships resistant to economic modernization. Vouchers were made tradeable, permitting the acquisition of significant share blocks by ‘outsiders’, in the hope that they would pressure firms to become viable in market conditions. Tirelessly working through the myriad technicalities of history’s largest ever property re-registration and sale, the Chubais group was guided by political goals: to beat back anti-private property forces in the parliament and media; to win over existing stakeholders (the sticky-fingered 130

survival and cannibalism in the rust belt managers, many of whom opposed legal privatization for fear they would lose
de facto
ownership); and to create millions of new stakeholders in capitalism.

Shrewdly adapted to circumstances, privatization was also, by design, a mad rush. In the chaos that constituted the still forming Russian state, Chubais, like Gaidar, believed that he had a unique chance to knock out Soviet-era economic structures, and that such an opportunity was destined not to last.
18
The first auction held by the State Property Committee—of the Bolshevik Biscuit Company —took place in December 1992, only days before Gaidar’s government was forced to resign. Chubais survived into the new Chernomyrdin government, but most of the implementation of mass privatization was ahead. In 1993, when one province threatened to prohibit privatization on its territory, threatening a domino effect, Chubais flew there, perorated on regional television and at work collectives, and forced the authorities to back down. That same year the Property Committee’s offices in Moscow were stormed in a mêlée, but $55 million worth of spent vouchers, bundled together with unused condoms, went untouched. The intruders either did not notice the vouchers, or did not understand their value.
19

Foreign consultants on the privatization staff sought a very high profile, rendering the process vulnerable to charges of being a ‘Western plot’, but foreign investors were excluded from the bidding, in a supposed bow to nationalists who decried the sale of Russia’s ‘patrimony’.

That exclusion robbed Russia of a critical lever for 131

survival and cannibalism in the rust belt assessing, and perhaps raising the worth of, its patrimony.

The AvtoVAZ carmaker, for example, was purchased at voucher auction for $45 million, whereas in 1991 Fiat had offered $2 billion—and been turned away. Between 1992

and 1996, according to an investigation of hundreds of companies, on average factory management
admitted
paying about forty times less than their companies were supposedly worth. The investigators noted that the voucher value of
all
Russian industry—including some of the world’s richest deposits of natural resources—came to about $12 billion, less than the value at the time of Anheuser-Busch. Russian state property was given away for small beer, to make privatization an ‘irreversible’ political reality.
20

Another key aim, precluding a collective-farm-like ownership structure geared to blocking outsiders, was mostly subverted. Offered three models by which to proceed, almost three-quarters of large firms chose the option whereby management and workers purchased a 51 per cent controlling block of their company’s voting equity—a variant introduced by the parliament, and reluctantly accepted by Chubais to get the legislation through. True, the state—meaning federal, provincial, and/or municipal governments—kept substantial equity stakes in the economy, and in theory these shares could later be sold to ‘strategic investors’, who might demand painful restructuring even if work collectives and managers resisted. This was, perhaps unavoidably, an ambiguous outcome: the state was generally not a good owner (hence 132

survival and cannibalism in the rust belt the drive to privatize in the first place), while the main method of private incorporation (majority employee ownership) could hinder market-oriented restructuring that presupposed mass lay-offs. Nonetheless, within just a few years some 15,000 large and mid-sized enterprises had been legally registered as ‘privately owned’. In its sweep-ing scale and haste, the privatization was quintessentially Russian. But Russia had never had so much private property in its thousand-year existence.

A second stage of privatization (1995–8), involving enterprises in ‘strategic’ industries previously excluded, followed a very different approach. The central government, having difficulty collecting taxes and properly managing its finances, was running budget deficits, which newly established private banks offered to cover with ‘loans’ if, as collateral, the government would put up the shares it retained in oil, nickel manufacturing, and other coveted sectors. Only twenty-nine concerns were involved, but they were lucrative ones. Should the government fail to repay the loans—a sure bet—the shares would be sold at auction. Incredibly, Chubais allowed the private lenders themselves to run the auctions. Preserving the appearance of competition, the insider banks negotiated a division of spoils at fire-sale prices. Worse, they paid with capital acquired from their dubious commercial ‘management’

of government funds, such as federal tax receipts and federal customs duties, which should have been in government accounts. Thus, commercial interests were in effect ‘loaning’ the government its own money, and thereby 133

survival and cannibalism in the rust belt acquiring strategic industries for free. ‘Loans for shares’, a poorly disguised, cynical ploy to create a top business elite loyal to the Yeltsin regime (facing re-election), discredited privatization even among many of its defenders.
21

An even deeper problem than the perceived illegitim-acy of privatization was its frequent irrelevance. By gaining managerial control over a majority state-owned company, well-connected types could simply ‘privatize’ cash flow— that is, outsource the handling of cash receipts for exorbitant fees to private companies they themselves owned.

Another favourite trick was for managers to sell a firm’s products below wholesale to themselves, in the guise of a middleman firm, and retail the goods at substantial profit.

Managers at majority private-owned businesses did the same. Through such flimflam, thousands of Soviet-era firms were looted
independently
of their ownership status or the privatization process. Privatization did little to enable rank-and-file shareholders to defend their paper property rights. But larger institutional investors were winning some property rights battles, and the increasing public outcries over the need to guarantee property rights testified not only to the distance Russia still had to go, but also to how far it had come.

. . . and the barter of the bankrupt

Privatization was an end in itself but also a means to an end: economic renewal. Even the foreign consultants who 134

survival and cannibalism in the rust belt trumpeted privatization as a ‘rare success story of Russian economic reform’ acknowledged that success would ‘ultimately’ be determined by ‘the speed and scope of restructuring’ of industry, which they admitted had barely ‘begun’.
22
A later survey of Russian industry uncovered little evidence of restructuring, as well as negligible outsider influence over firms and substantial passive state ownership throughout the economy.
23
In ‘loans for shares’, privatized enterprises did get outside management, but they received virtually no new investment and were not significantly restructured (instead, their revenues were siphoned to fund other activities of the new owners). At the start of the 1990s, two-thirds of the factory equipment in Russia was judged obsolete, and one scholar, commenting in 1998, argued that the rate of capital stock obsolescence had since ‘speeded up dramatically’.
24
The upshot should have been unprecedented plant closure, even worse than in the Western rust belt back in the 1970s.

Russian GDP, in a mere half decade, did shrink an eye-popping 50 per cent, according to official measurements.

But Soviet economic output had been wildly over-reported to ‘meet’ plan targets. In post-Soviet Russia, it was under-reported to avoid taxes. No one knew the scope of post-1991 unregistered economic activity, which may have been equal to half the size, or more, of the measured economy. Electricity consumption did not decrease nearly as much as GDP. Unemployment was high (officially 12

per cent, probably closer to 20), but not commensurate with GDP decline. And employment patterns bespoke a 135

survival and cannibalism in the rust belt surprise. Unlike in the West, where small and medium business accounted for two-thirds of employment, in mid-1990s Russia legally registered smaller enterprises employed no more than a tenth of the workforce.
25

Instead, large firms (those with more than 500 workers), which had accounted for about 83 per cent of production and employment in 1991, accounted for 78 per cent of official production and 63 per cent of official employment in 1996
.26
In other words, Russia’s story was not just GDP

decline. It was also the depressingly paltry number (even taking into account the underground economy) of new small businesses—whose proliferation in Poland provided the key to growth—as well as a continued socio-economic dependence on obsolete industrial giants.

While bureaucratic and credit barriers to opening and operating small businesses, the country’s potential salva-tion, were inordinately high, thousands of Soviet-era factories, whose output was often worth
less
than the inputs they used, were somehow surviving. Tricking death, factories were shipping finished goods to their suppliers and customers even when not paid for, and their loss-making suppliers and customers cheerfully reciprocated. Such direct firm-to-firm dealings, sometimes in complex three-and four-way barter combinations, had helped Soviet enterprises illegally meet their plan targets. Now, mutual payment arrears, along with barter, held menacing market valuations at bay, and even allowed unprofitable enterprises to
expand
.
27
Worse, the circle of exchanging debts and in-kind payments entrapped potentially profitable 136