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Now, we'll pass on to another

pillar of market reforms.

Another side of privatization,

which is noncommercial buy outs and

that was another major way apart from

voucher privatization there was another

major way to privatize state assets.

So, let's follow the logic of the course and

let's make a preliminary thinking about the ideas

of how privatization could have achieved better results.

So if vouchers could not assure full privatization, then what?

How could reformers act in a different way to assure better results of privatization?

Some of them problems, some of the issues

should be added up to fully understand why

voucher privatization didn't work or

at least it didn't reach results reformers expected to be achieved.

One of the important points to remember was absence of information,

of adequate information, of sufficient information

about enterprises submitted for privatization.

Nowadays, we are all familiar with internet techniques, with one click.

We can have a full access to information about each and

every enterprise all over the world.

And that time, remember,

we talk about years 1991, 1992.

In that time, in the Soviet Union,

we had no internet, no computers.

We had no access to information about enterprises.

That meant that a lot of potential buyers of shares could not

make their right decision about an enterprise,

whether is was worth to invest their vouches in those enterprises.

They could not make proper judgement, just for

the simple reason of not having access to adequate information.

So the difficulty was all the more evident,

as the vast majority of enterprises allocated

outside of the most populated regions.

You know that in Russia, we always have that structure where most of

inhabitants live in big cities like in Moscow and St. Petersburg.

And most of the industries and industrial potential of the countries

is located in Urals, in the Urals, in Siberia and in the Far East.

So outside of the most populated regions does

the people could not feel those enterprises,

could not have access to that accurate information,

then they fear that they would not have any control.

Had they come into possession of shares of a certain enterprise distantly located.

So that was an additional very important reason why people

didn't want to buy shares of the vast majority of enterprises

located throughout the vast territory of the Russian Federation.

We have studied our discussion from the starting point

that Russia is the biggest country in the world by territory,

so you can imagine how many enterprises have been spread around

this vast territory and the access to physical access and

access to information about those enterprises

really was not sufficient for new owners.

So new owners seem to be not interested in buying the shares

of those far away distantly allocated enterprises,

so that was one more reason.

One more important reason why there was a lack of massive interest,

we talk about massive interest.

If we talk about massive privatization, massive honors,

there should have been massive interest, but there was not.

So if this method vouch a privatization

did not achieve the prescribed goals, then what?

Something else was necessary to be suggested to privatize enterprise.

So here, you can see the designer.

The great man who has provided a lot of ideas

about how privatization should be dressed up.

Tubisis is well-known as one of the reformer who designed it all.

So, I hear you can see the fragment from

a TV show when he described the way privatization should work.

So, just for you to have an idea how a lot of people have thought about ways and

means to privatize state owned enterprises.

So, what other idea came to

the reformer's brains?

And what other idea has been suggested to privatize the national economy?

That was an idea of selling shares.

First, issuing shares of an enterprises.

We choose to belong to the state in which had no shares at all and

then selling them to those who would wish to buy them.

Not against vouchers, but as such.

So you can see here, one of the orders that will several orders.

I will not call them all, you can easily have an access to all the orders of

the president about privatization.

They are all well-known, but here I make the reference to one

of the president's in July 92 order on transformation

of the state owned enterprises and to limited liability companies,

which permitted to sell, to issue and to sell shares.

And after that order, that other method

of privatization became very popular and

start to be massively used as a method

of state SS privatization.

According to the new Russian registration, all big enterprises

with asset failure of more 50 million rubles personal of more than 1,

000 people, which meant big relatively big enterprises

with big turnover and with relatively big personnel.

They were submitted under this method of privatization,

you can see the number of state owned enterprises

submitted to this form of privatization.

Roughly, slightly more than 30,000 such

big enterprises existed at that time within the national economy and

this method turned out to be quite popular and

had relatively success.

Because as you can see through the figures,

more than 70% of those enterprises

have been privatized til mid of the year 1994.

How was that done?

What were the particularities of this

methodology, because details matter.

A lot of important details I will put a special stress

on the analysis of some of the minor details,

which seem to be minor details.

But in fact, they do matter to explain a lot of major problems,

which arose eventually.

So, the method consisted in the non-market prices buy-outs.

Preference for those buy-outs was given to personnel

of those enterprises and they were lead to buy shares

of their appropriate units, units where they worked.

There were three options to privatize such enterprises.

But one of the most popular oceans

consisted in permission of buying

more than half, 51% of shares.

Exactly 51% of shares of a stake in an enterprise.

The price would be slightly different.

Because when a person opted for

to buy 25% of shares, for

example, the price was less.

It was really nominal.

It was really symbolic.

Well, 70% more from symbolic price was not agreed thing.

So a lot of personally, a lot of enterprises opted for this second method,

which lead them buying the controlling stake in the enterprise.

As you can see here, the figure as much as 80% for

all of the enterprises have selected that method of privatization.

If the person know will let to buy-out

shares of an enterprise where they work,

on which principle should they be authorized to do that?

That's a game, a question.

Well, if we are guided by the idea of the quality,

amount of people, amount of personnel,

then probably the logical thing would be to distribute

all the shares of an enterprise evenly among all

the personnel working for a certain enterprise.

Would it be just?

Probably not and the other logic was

chosen within this legislation.

Because the higher the standing of the management

within an enterprise, the more shares this management

were entitled to buy-out and that was the logic.

Well, it was not probably fair from an absolute

equality point of view, but there was a logic in that.

The more experienced you are,

the higher your position with an enterprise is.

The more knowledgeable you are in the business of a certain

enterprise, you should be entitled to more shares,

to buy more shares, to buy out more shares.

So, there was a certain logic to grant the top management

of an enterprise that privilege to buy the biggest share or shares of an enterprise.

So, that was it.

That was done in that way.

Again, same question, was it a good idea or not a good idea?

That's kind of a rhetoric question.

That's the way it was done.

I have explained already both ways of thinking why to a certain way,

the idea of granting directors and top management.

The privilege position to buy out more shares was justified.

There was a reason, because they could In theory by more useful to an enterprise and

more interested to have more shares, to better manage those enterprises.

So, that was done and there was a certain logic.

I always try to understand the logic of performers, logical reforms,

the logic of transition.

Because sometimes, it's easier to criticize something.

If you see that something was wrong,

if something went wrong its easier to say,

those reformers did not follow the rules in a proper way.

They have bad ideas, they have done other thing in the wrong way,

that's an easy way to criticize.

First, it's not my way of doing things.

First, you have to understand the logic of those who design reforms and

there was a logic as I explained it to you.

But on the other hand, there were a lot of problems links to that kind of logic and

we shall see what kind of problems eventually arose

after that kind of a concept or privatization has been accept it.

So, null market prices buyouts.

The idea of null markets prices buy-outs was

not a new one at that period of time.

Even at the time of the Soviet Union,

some of the personnel had already some rights to a certain extend,

control over the enterprises they worked at.

You can see how analysts describe the process,

they described it as a spontaneous privatization.

Meaning, the right to given to personal to purchase,

rented from the state enterprises and

that has been prescribed that has been provided for.

Or even at the time of the Soviet Union since the Law on

State Enterprises has been adopted in June of the year 1987.

So, three or four years before Russian privatization schemes were applied.

So, personal with privilege given to directors and

to managers obtained the rights of owners of the rented enterprises.

You can see more information on the particularities of that

process in Radygin paper, I give you the reference here.

It is called Privatisation in Russia, Hard Choices.

You can see here the reference.

If you are interested have a look into this paper,

which is quite an interesting one.

I would not spend too much time on this historic fact, I just mentioned

that it was a matter of fact even before Russian privatization started.

So, coming back to the issue of loan market prices buyouts.

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Another side of privatization.Buy-outs 1

Understanding Russian Economy. Problems of Transition

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