INSTITUTIONAL CHANGES

The government's achievements are more than modest in areas which, in fact, form the very foundations of a new, market economy.

The Russian government's economic policy from the start has had no concept of institutional changes in the economy. Moreover, this concept was regarded, if not of minor importance, of secondary importance for sure. The government repeatedly said that "of course it would be better to first carry out privatization and, then, liberalization of prices; but we're short of time."

The government planned to commercialize trade and services by opening bank accounts for each store, service establishment or restaurant, to register them as independent legal entities that can sell their products and services at free prices. The Russian President's decree to this effect (on Nov. 25 and Nov. 28, 1991) obliged executive bodies to do that by January 1, 1992, the date when prices were to be freed.

The objective was rather moderate: primarily to help the price liberalization plan through the commercialization of trade, public catering, services and other socially important establishments. In addition, if possible, to privatize small industrial enterprises and to add to the budget through sales of state property. The guidelines of the programme of privatization of state-run and municipal enterprises in the Russian Federation in 1992 (the President's decree of December 29, 1991), however, gave local authorities rather ambitious compulsory tasks: to privatize between 50-70% of enterprises in several sectors and to get specified minimal sums (between 1.3 billion roubles from producers of farm equipment and 23.8 billion roubles from food industries) from privatization. The plan for "smaller" privatization provided for an overall number o roubles in terms of privatization receipts.

But the results of the first months were depressing. In January-February only a little more than 200 enterprises were privatized. The January-March receipts slightly exceeded 1.5 billion roubles. The number of newly commercialized enterprises fell short of one-third even at the end of the first three months of the year. Many enterprises (especially those in trade), despite having become independent legal entities, are still run by joint accounting offices, which rules out their independence. The speed of the "smaller" privatization is best described in the following table:

TABLE 1

COMMERCIALIZATION OF SMALLER ENTERPRISES IN RUSSIA

(as of April 1, 1992)

There are practically no instances of successful privatization of medium and large enterprises. There has been no breakthrough in regard to more foreign investments. Worse, the flow of Russian capital out of Russia has caused a major economic problem.

It, however, appears that Russia's leaders are not very worried over the failure of the institutional reforms "from the top". They say that the most important thing is to help "privatization from below". The government is relying primarily on a privatization brought about by issuing registrations and permissions, and says it is "ready" to balance the interests of various participants in the "divvying up" of state property (i.e. to make concessions when pressured by influential social forces).

What has this policy produced?

Despite the fact that the state still has retained almost all its formal ownership rights, to a large extent private individuals really control state property.

Traditionally state-run enterprises are now in many respects being run as commercial enterprises. Their staff control the net profit. Enterprises can virtually sell, exchange or lease buildings, structures, equipment, vehicles, and raw materials to other enterprises and individuals.

Despite the fact that the state has controlling interests in most non-government enterprises (more than 80% in corporations and nearly 60% in partnerships), the absence of proprietor control leaves these companies' managers virtually in full control.

The separation developed between the legal and actual status of property isn't as harmless as it appears at first. Managers of state enterprises who are independent of the state which owns them but who don't own the enterprises are not eager to invest in production development. This makes restructuring and technical modernization nearly impossible. The latter is important because, among other things, fixed assets in Russian industries have a nearly 50%-wear and tear. The position is even worse in some specific industries. In the oil refining industry, for example, the wear and tear of equipment constitutes 85%. At the same time, Russian legal entities and individuals have between from 5-7 up to 20 billion dollars (according to different estimations) in Western banks. Most of this money is of "state origin".

Crime has become a formidable problem, and is growing so fast that it constitutes the main reason deterring many people from founding private businesses. In a number of regions, crimes involving private property increased 20% a week during January and February.

It is not surprisingly, therefore, that the most preferred form of privatization is when employees own shares in their enterprises. This form of ownership corresponds more than any other to the "spontaneous" and "nomenklatura" privatization.

Most indicative in this respect were the first three months of Russia's first privatization programme. Nearly 90% of 16,000 official applications for privatization were submitted by employees of leased trading and industrial enterprises. All these, mainly small businesses, will be owned by their staffs.

The fact that privatization continues can only be attributed to the strong political influence and activism of some local officials. Real achievements are visible perhaps only in the Nizhny Novgorod Region. The region is the undisputed leader in the Russian privatization effort. Every week it auctions off 10-20 enterprises. But even there they only sell the leasing rights, not the actual property. As for Russia as a whole, there were as little as 20 auctions and competitive biddings.

Thus, out of the whole range of institutional changes (protection of owners, privatization of land, the designing of the bankruptcy procedure, the creation of a job market, reorganization of the monopolies, modification of the system of state property management, foreign investments), the government has opted for a spontaneous course of events and only issues title deeds. The outward variety of methods of privatization (direct sales, auctions, competitive biddings, closed stock companies, open stock companies, the issuing of vouchers) results from various pressures. It also attests to the government's no longer being in control of the process and its inability to balance the interests of the various political forces on the key issue of reform.

The presidential decree of December 27, 1991, "On Urgent Measures to Implement the Land Reform" and the government resolution "On the Procedure of Reorganization of Collective and State Farms", were supposed to speed up the land reform.

Early in 1992, in just two months, 26,500 private farms were registered with 1.1 million hectares of land, which was 3.2 times more than was registered during one month in 1991. Collective farms, too, started to reorganize themselves.

But despite the relatively great number of private farms so far (in absolute figures), they only own 2% of the land in Russia.

The creation of a new type of farms so far has no legal, organizational or financial backing. There is little that has been done to streamline and demonopolize the entire system that provides farmers with supplies and equipment, extends loans and purchases produce.

The liberalization of prices made the financial position of collective and state farms worse, and undermined the incentive to start private farms. Eighty per cent of the farms became unprofitable. The price of farm equipment went up 10-15 times, whereas prices of farm produce increased only 5-7 times over.

All these things make it almost impossible to speak of any great progress in the area of agrarian reform.

There is no reason to expect that institutional reforms may go faster during the next two or three months because they are low on the government's list of priorities.

The general conclusion is this: given the results of the first six months, one can only speak of limited progress towards liberalization of the economy. The larger part of the economic goals which the government itself set when it clamoured for support at the 5th Congress of People's Deputies and Russian MPs in the autumn of 1991, remain unmet. If one compares the present economic situation with the polic every reason to assess the results as failure.