Multinational Monitor: The initial plan for handling privatization in Russia was a voucher distribution system. What was the voucher plan, and how did it work Out?
Paul Klebnikov: The idea was that, since the vast majority of industrial assets in Russia were state-owned and hence every citizen had an equal piece of those assets, the vouchers [giving each citizen a proportionate stake in privatizing assets] would be the vehicle by which the state would promote equality in share ownership of those state-owned assets. On the face of it, it's a very noble idea. Theoretically, it could create a kind of Jeffersonian broad-based middle class of small property owners, who, in turn, would be the foundation for a democratic Russia.
It all went terribly wrong. Initially, it was simply a case of mismanagement and incompetence. The so-called young reformers in the Yeltsin government, led by Anatoly Chubais and Yegor Gaidar, decided to carry privatization out too quickly. They made the fundamental mistake of putting too much of Russia's state-owned industrial and natural resource wealth onto the market at once. It's an elementary mistake that could be predicted by anyone with even a minimal understanding of how a market works. If you throw a huge quantity of products onto the market at once, your price is going to be very low because there's not that much demand for it at that point. Moreover, the face value of the voucher was very low. All this meant that the average citizen, after having received the voucher, said to himself, "this thing isn't worth anything." So most people immediately sold their voucher on the street for about seven dollars. You could get two bottles of cheap vodka for the price of one voucher. At that price, all of Ru ssia's industrial and natural resource wealth was valued at $5 billion. You can see for yourself that something in this operation went horribly, horribly wrong.
The whole concept was a mistake. I don't think it was a cynical maneuver at that stage, but simply a product of incompetence. Of course, there was also a cynical calculation behind the decision to privatize one-third of Russia's national resource wealth in a single year. The young reformers were motivated not by economic considerations, not by considerations of how to get the most money into the government's coffers, not by a desire to promote the greatest efficiency of those enterprises that they were privatizing, but by purely political considerations. They saw that they needed to move very quickly to "break the back" of the power of the "red directors" who controlled the state-owned enterprises. These were the old industrial managers. Some were very competent; some were incompetent.
Gaidar and Chubais thought that they needed to act quickly, radically and dramatically to get these guys out of power. That's why they took this step.
As a result, ultimately the value of these enterprises shrank to almost meaningless amounts. The vast majority of the Russian population got nothing out of the voucher privatization. The people who did benefit - the insiders and financial operators who bought up all the vouchers - ended up buying up control of the main enterprises at a fraction of their market value.
MM: Who ended up with control of the vouchers?
Klebnikov: For the most part, they ended up in the hands of the directors themselves. The very thing that Chubais and Gaidar wanted to avoid happened in most of the enterprises.
Let's say there is a timber company. The general director, together with five or six of his closest subordinates, would get together and buy all the vouchers from their workers. They could do this because they had grown rich or moderately wealthy by embezzling funds from the enterprise in the preceding years. Because the market price was so low - seven dollars per voucher - the general director and his cronies would end up buying control of the company for almost nothing. …