Russian City Starts Model Program Western Economists Hope Success of Privatization Effort Will Encourage Other Cities

Article excerpt

DURING the years of Soviet power this ancient Russian city on the Volga River was shrouded in secrecy, sealed off from the outside world because of its high concentration of defense-related industry.

Now, this city of 1.4 million inhabitants finds itself under a microscope, receiving attention from all over Russia, as well as the world, because of a radical privatization program that aims to auction off 2,000 small, state-run stores in just six months. Hundreds of potential buyers and interested observers attended a weekend auction, the third sale of its kind, during which 21 stores were sold for a total of 46.5 million rubles (about $465,000 at the Russian Central Bank's exchange rate).

Bidding was brisk, as the entire slate of stores was auctioned off in only an hour and a half. A slick-talking auctioneer wearing a red bow tie kept the event running smoothly.

The Nizhny Novgorod privatization scheme, worked out by Western experts from the International Finance Corporation (IFC), is one of the few bright spots so far in Russia's effort to transform its economy into a market system after more than 70 years of communism. Privatization in other cities, particularly Moscow, is not going as well as hoped. And Deputy Prime Minister Yegor Gaidar, who is in charge of the government's crash marketization program, is hard-pressed to keep reforms on track.

"I consider what has been done here to be wonderful work, a model which could be repeated throughout Russia," said Mr. Gaidar, who attended the weekend auction.

The IFC, an organization similar to the International Monetary Fund and the World Bank, targeted Nizhny Novgorod for its privatization project in late January, says Anthony Doran, IFC chief for Commonwealth of Independent States operations. The city was chosen because the IFC felt it had the strong, reform-minded leaders needed to make privatization work.

IFC experts also viewed it as a typical Russian city that officials in other cities could easily identify with, hopefully fostering a "mushroom effect" of privatization throughout Russia. "In Nizhny we have something that will put some body and soul to all the talk about reform," IFC Vice President Wilfried Kaffenberger says.

Drawing on experience gained in Eastern European privatization efforts, the IFC came up with the Nizhny Novgorod blueprint in just six weeks. In the end it was decided auctioning off state-owned shops was the best method of privatization, Mr. Doran says. Anyone is able to bid on shops, although the auction system is weighted slightly to favor employees seeking to buy out the state. There is a limit of five stores per buyer to prevent monopolization, and for now foreigners are excluded from participating. At the weekend auction nine of the 21 properties were bought by employee groups. …