Russian Privatization Races Ahead

`Capitalistic' program is attracting controversy between supporters of reform and foes of Yeltsin government

AMERICAN Jeffrey Sweetbaum came to Russia in 1990 hoping that hockey sticks and ping-pong paddles would make him rich.

Within a few months, he bought tens of thousands of the inexpensive items from Soviet state-run stores and resold them back home. Soon, a woodworking factory was working for him, manufacturing the goods along with the stacked matryoshka dolls so popular in the West.

By early 1992, Mr. Sweetbaum was leasing out derelict Russian firms and converting them into warehouse space. Eventually, he founded Items, a storage company that caters primarily to Western firms in Moscow, including Colgate-Palmolive Company, Ralston Purina Company, and Eveready Battery Company. Business was good, but Sweetbaum wanted more. ``We were making money, but that wasn't the point. The point was to become a major industrial player.''

Sweetbaum became a beneficiary of Russia's disputed voucher privatization scheme, which is ending June 30. Russia has endorsed a second-stage program, but this, too, has become controversial, sparking public battles between reform supporters and foes of President Boris Yeltsin's government.

When the voucher plan was launched in October 1992, Sweetbaum raised almost $1.5 million in capital from a Western bank and venture-capital fund. His firm became Items Capital, which bought up vouchers to invest in Russian firms. ``We buy into companies that we know are good companies and can be made into good businesses,'' the native New Yorker says from his office. ``Then we find out what they need from us.''

Plan is moving along

In the last 18 months, more than 13,000 Russian industrial enterprises have been privatized by Russian and foreign investors under the voucher program. Almost 70 percent of the industrial workers are now employed in newly privatized businesses. As part of the scheme, every Russian citizen received an investment coupon with a face value of 10,000 rubles ($5), which they could exchange for shares in more than 100,000 formerly state-run companies.

The incentive to privatize under the program was largely political. In effect, the voucher worked as a tool to destroy the centralized Soviet system by allowing workers and managers to own their businesses. Employees were offered 25 percent of the shares virtually free, while 51 percent was available to them at 1.7 times the estimated book value.

In the second stage of the plan, or post-voucher privatization, the state will offer shares in companies for cash to the highest bidder, including 51 percent to individual investors. Over a three-year period, the government is also expected to sell off stakes it retained in privatized enterprises.

As additional motivation, money from sales will be distributed among the enterprises, their regions, and social programs. Land owned by the firms will be titled to the companies, and up to $3 billion in Western loans and equity investments will be available to firms that are at least 90 percent privatized.

``You don't have economic reform here, you have a new system: capitalism,'' Sweetbaum says. ``The second stage will make things a lot easier because we'll be able to buy bigger shares of companies.''

In a bid to attract more outside investment, Prime Minister Viktor Chernomyrdin on June 27 announced a five-year tax holiday for foreign-owned companies and an end to restrictions on their capital movements. Joint ventures will soon be able to retain hard-currency earnings from exports; their imports will be exempt from taxes or tariffs; and they will have a three-year - or longer - exemption from tax-legislation changes.

This could act as an added incentive to the Western investment funds with multimillion-dollar portfolios that are gearing up to invest in Russia. Last year, Privatization Minister Anatoly Chubais said $4 billion in portfolio investments could land in Russia by the end of 1994.

``There are very encouraging signs that there will be an influx of foreign investments,'' the head of the Russian Privatization Center, Maxim Boiko, said in an interview June 27, adding that $1 billion had been invested in privatization in the last three months.But privatization has its critics. Communists oppose the concept, and opponents of the first stage say it doesn't allow regions to decide the pace of privatization for themselves. Moscow Mayor Yuri Luzhkov, for example, won a victory earlier in June when Mr. Yeltsin gave him permission to privatize the capital at a slower pace and told Mr. Chubais to ``leave Moscow alone.'' ``Of course, all the regions were asking for autonomy and more decisionmaking power,'' Mr. Boiko said. ``It's a very challenging thing to strike the right balance between the need to have uniform rules and the need to give autonomy to the regions.''

Privatized firms lay off workers

Others say the voucher program has brought no changes to enterprises. But Boiko rejected such charges, pointing to a Western study that said 1 in 10 directors had been fired at newly privatized firms, and that 50 percent are laying off workers.

Sweetbaum is an example. Apart from real estate interests in Moscow, Items Capital has acquired shares in a forestry-service firm, plywood factory, and logging organization in central Russia. The firm plans to acquire an aluminum-bucket manufacturing plant next May, which, if turned into a warehouse, means half the employees will lose their jobs.

Such actions have raised concerns that encouraging foreigners to participate in the second stage could harm Russian interests. But Boiko says fears that foreigners are ``buying out'' Russia are largely groundless. Others say Russia's burgeoning Mafia-style economy could have negative consequences on the property market, as enterprises might find themselves in criminal hands.

But Boiko insisted that ``corruption-proof systems'' have been implemented to deter fraud. For example, it is now virtually impossible to rig voucher auctions because bids are collected simultaneously in 250 Russian cities. But Boiko did say counterfeit vouchers had popped up at auctions.