Academic journal article The George Washington Journal of International Law and Economics

The Rush for State Shares in the "Klondyke" of Wild East Capitalism: Loans-for-Shares Transactions in Russia

Academic journal article The George Washington Journal of International Law and Economics

The Rush for State Shares in the "Klondyke" of Wild East Capitalism: Loans-for-Shares Transactions in Russia

Article excerpt

THE RUSH FOR STATE SHARES IN THE "KLONDYKE" OF WILD EAST CAPITALISM: LOANS-FOR-SHARES TRANSACTIONS IN RUSSIA^

IRA W. LIEBERMAN & ROGI VEIMETRA*

PRESENTED TO THE SECOND ANNUAL INSTITUTE ON CURRENT ISSUES IN WORLD TRADE**

MARCH 28-29, 1996

I. INTRODUCTION

From mid-1992 through June 1994, Russia implemented one of the most successful privatization programs in Central and Eastern Europe (CEE) and the Former Soviet Union (FSU). The mass privatization (voucher) program (MPP),1 in only two years, successfully transformed over fifty percent of state-owned Russian industry into private ownership. While a number of criticisms were levelled at the MPP, the voucher auctions-which converted ownership from state to private hands-were always perceived as transparent because they were based on a set of clearly defined and strictly enforced rules. In fact, despite the voucher program's audacious complexity, scope, and speed, the program was never criticized as corrupt.

Following the success of its MPP, Russia began a second round of privatization. The objective of the second round was to sell the residual government share holdings2 from the MPP in order to raise cash for federal, oblast (the basic administrative territorial subdivision of the Russian Federation), and municipal budgets, and to distribute the revenue according to a revenue-sharing formula. The two main vehicles to meet this aim-cash auctions and investment tenders-lacked basic information disclosure standards and were poorly advertised, resulting in restricted access for potential bidders and deflated sale prices. The Russian government, therefore, failed to meet its target of collecting $1.9 billion in 1995.

In the last quarter of 1995, the government, desperate for cash to support its stabilization program, initiated a "loans-for-shares" (LFS) program. LFS was a pseudo- or quasi-privatization program, whereby banks served as trustees for shares in major Russian companies. The shares would revert to the banks if the government failed to repay the loans. Alternatively, the banks, after nine months, could divest the shares, extinguish the government's debt, and receive a thirty-percent margin from the sale.

This process, however, was nontransparent. The process involved clear conflicts of interest; the bank, acting as the government's agent for the sale, won the bid as a general rule, usually through proxy companies. The process created collusion; a consortium of four to five banks, supported by the government, won all of the auctions. It involved a nonlevel playing field, excluding foreign investors3and banks not favored by the government. In two years the Russian privatization program has moved from the outstanding accomplishments of the MPP to the point where the program is now widely regarded as collusive and corrupt, failing to meet any of its stated objectives. If Russia wishes to continue privatization of Russian enterprises, it must reformulate its policies and programs. For now, privatization efforts have stalled.

II. MASS (VOUCHER) PRIVATIZATION (JUNE 1992 - JUNE 1994)

Beginning in early 1992 and ending in June 1994, the Russian government-under the auspices of the Russian State Property Committee (GKI) and its chairman, Anatoly Chubais-designed and implemented one of the most successful privatization programs to date for medium and large enterprises in CEE and the FSU. The MPP was modelled after similar programs in the Czech Republic, Lithuania, and Poland. The Russian MPP, however, was sui generis and extraordinarily quick and complex. In just two years the Russian government was able to accomplish the follow ing: (1) corporatize and register over 24,000 medium and large state-owned enterprises as joint stock companies; (2) distribute vouchers to virtually the entire population in some 89 oblasts, territories, and autonomous republics; and (3) privatize over 16,500 enterprises, most of which were in the tradeables sector. …

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