Privatization In Russia Essay Paper Example For Students

Privatization In Russia Essay Paper For some, the privatization of Russian industry has been one of the great success stories of Russias painful economic transition: quick, firm and radical action was taken to shift the great bulk of Russian industry out of state hands, thereby laying the basis for a radical restructuring of enterprises and improvements in their performance. Others see privatization as a best a failure, at worst a catastrophe. Not surprisingly those opposed to the market and economic reform as a whole share this view. But many commentators who see themselves as supporters of reform find plenty in Russian privatization to criticize: the process led to the transfer of ownership to inappropriate people and as a consequence no beneficial restructuring of enterprises or the economy can be expected. While this paper will attempt to cover the three key facets of privatization: that enterprises be transferred to private ownership; that the new owners be able de jure and de facto to exercise ownership rights; and, finally and ultimately most importantly, that the new owners exercise their ownership rights in such a way as to bring about improvements in enterprise performance. The key issues to be surveyed, therefore, are: who as a result of privatization obtained ownership of Russian industrial assets, and are they appropriate owners; can new owners, particularly if they are appropriate owners, exercise their owne rship rights; and has privatization led to improvements in enterprise performance? The paper will deal with privatization only within the industrial sector; thereby ignoring the highly controversial privatizations of the last twelve months or so in the energy and utility sectors. Who are the new owners?Global data showing about 70% of GNP being produced in the private sector reflects the high levels of privatization of industrial enterprises, with the great bulk of enterprises having been privatized by mid-1994. However privatization does not necessarily mean the complete removal of the state from an equity involvement in enterprises. State ownership. The state retains shareholdings in a significant number of privatized enterprises on the basis of government decrees declaring the strategic significance for national security of the enterprise. Shareholdings range from 20 to 51 per cent or a Golden Share (a single share giving veto rights over certain strategic issues of corporate development) retained by the state for up to three years. In late 1997 the state had shareholdings in 2900 enterprises. The shareholding consisted of a Golden Share in 1351 cases, of over 50% of shares in 128, of 25-50%, in 1037, of 20-25% in 228, and less than 20% in 303 of cases. By far the largest numbers of state holdings are in the energy sector (860). Not surprisingly the defense industry sector has a significant number (260). The rest are scattered across the economy. This is a not insignificant state equity interest in Russian industry. There appears to be no particular trend towards either the strengthening or weakening of the states holdings, primarily because there are very differing views within government over which direction any trend should take. There is a continuing dribble of disposals, but decrees extending the period for which the state can retain parcels of shares in particular enterprises are also not rare. The number of enterprises deemed to require a strategic state interest increased from the original 2700 set in the governments 1995 decree, to over 3200 in early 1997, but had declined to 2900 by the end of 1997. It seems likely that a rump state presence will remain for some time to come, but not at a level that represents the basis for a significant rolling back of privatization. Majority workforce shareholdings are seen as leading to two possible outcomes: collective ownership, in which the enterprise is owned and managed in a collective way by a workforce with common interests; or management ownership, in which management in various ways gains de facto if not de jure ownership rights over workforce shares and thereby gains effective ownership of the enterprise. Collective ownership derives either from a natural alliance between managers and rank-and-file employees, probably based on Soviet traditions of paternalism and the social contract, or from the need of managers to pander to workers who control a majority of voting rights at shareholder meetings. Although some observers might find a collective ownership outcome desirable, on the grounds that it provides for workplace democracy and high-incentive work habits, reform-oriented commentators generally find it a form of ownership likely to lead to the maintenance of excessively high levels of underemployed staff and an over concentration on consumption at the expense of investment. The management ownership outcome derives from the ability of management to totally dominate divided, demoralized or indifferent rank-and-file employees. The argument that they do so by bribing employees with promises of secure employment and the maintenance of social welfare provisions is essentially the same as that presented in the previous paragraph on collective ownership. Korean War Essay Thesis The Law clearly responds to most of the abuses of shareholders rights, which littered the initial years of post-communist corporate governance. A summary of the legislation, especially the clauses most related to the protection of shareholders rights follows. Some of the examples of management behavior outlined above make it clear how important the rules on notification of meetings and quorums are. Regulations on notification are contained in Article 52. It is not essential that shareholders be informed directly and personally of shareholders meeting, although if a simple advertisement is to suffice the publication in which it is to appear must be specified in the Articles of Association. For larger AOs at least 30 days notice must be given of a meeting, with the Law containing a considerable degree of specification of the information that must be included in the notification. The board of directors of an AO with over 1,000 shareholders must have at least seven members; nine members are required for AOs with over 10,000 shareholders. Members of the management committee must be in a minority on the board, and the general director cannot simultaneously chair the board (Art. 66). Although the Law makes no provisions for the representation of minority shareholders on boards of directors, the requirement that cumulative voting be used in elections to boards is presumably designed to provide some protection (Art.59). The Federal Commission on the Capital Market reports an increase in outsider representation on boards since the first half of 1994, but also those outsiders are still underrepresented. One would be unwise to underestimate the ingenuity of Russian managers in finding ways around the Law, or their willingness to simply disobey it.61 Nevertheless the most obvious sources of abuse of shareholders rights have been dealt with. The fact that the Law one passed after all by a communist-dominated parliament has a pro-shareholder orientation is in itself worthy of note. As Dmitrii Vasilev, the head of the Federal Commission on the Capital Market, put it after the passage of the Law: As a result, we can say most violations of shareholders rights are now illegal in RussiaConclusionI am prepared nevertheless to venture, albeit tentatively, that the score card is not obviously against privatization. The suggestion that the designers of privatization were somehow conned into handing ownership over to managers does not stand up. The indications are that they knew what they were doing and judged that outside owners would eventually assert themselves. Gradually they are doing so, and gradually they are improving their ability to exercise and enforce their ownership rights. Sometimes they are doing so in ways that are no less reprehensible than the methods of the manager-owners. There are also reasons to be concerned about the long-term consequences of the sort of bank-dominated and highly integrated ownership that many of the outsiders have brought. The best that can be said at this stage is that all modern economies have at their peak a corporate sector dominated by large integrated institutions. Clearly the private sector, and thereby privatization, has to bear some responsibility for an economy in which it has a 70% share but which is unable to provide in anything like adequate proportions growth or welfare. But in this there are other factors also at work. Indeed there are some small indications, at both macro- and micro-levels, of a positive correlation between private ownership and good performance. With time that correlation could well become stronger and more evident. Business