The demon of privatization

28.02.2014 — Analysis

Russian Prime Minister Dmitry Medvedev has announced that the plans for privatization of public property, which were elaborated a few years ago and then were put on the shelf, will be put into action. The government intends to sell shares of such large companies as Sovcomflot, Rostelecom, Aeroflot, Transneft, Russian Railways, United Grain Company and some other companies.

A number of economists qualified the upcoming transactions as "just another nail in the coffin of Russia". Their opponents, on the contrary, assumed that privately-held companies would be of greater benefit to the budget and the economy as a whole. The RusBusinessNews columnist listened to the experts and arrived at the conclusion that all the debates about privatization have no sense: the goal that causes business to grown is of importance, but not the type of ownership.

The economic system where companies and the state see financial indicators as their primary concern has become outdated. If it is not abandoned as soon as possible, it will sink both capitalism and society. Therefore, the Russian government should embark on defining a new system of values rather than glorify privatization.

Today, most of the experts rack their brains: "Why did Premier Medvedev decide to get back to the seemingly long-forgotten idea of privatization?"

First of all, financially, it makes no sense. Igor Nikolayev, Director of the Institute of Strategic Analysis of the FBK Company (Financial and Accounting Consultants), reckons that if shares are intended for sale solely for fiscal purposes, hopes are not destined to come true: inspired by the rumors about recession, would-be buyers expect that the prices will continue to go down. Today, there are no incentives that could encourage either those who sell or those who buy. The assumption that privatization is aimed at improvement of management in companies does not stand up to criticism. In the present-day economic environment, the goal will never be accomplished: the private businessman is concerned about saving his existing assets, having no interest in taking over any new ones.

Secondly, the conflict of interests between the controller-state and the proprietor-state, which is often expected to be dampened through privatization, can be resolved without any sale of the shares held by the state. For example, the report of the Russian Academy of Sciences – "Russia on the Way to Modern Dynamic and Efficient Economy" under the editorship of academicians Nekipelov, Ivanter and Glaziev – promulgates the idea of entrusting state shares to a specially created holding entity, which will not be functionally subordinate to the government. Being also a private investor, the holding entity will be interested in increasing the value of its assets.

Thirdly, rumors assuring that private companies are more efficient that state-owned enterprises are rather exaggerated. In the above report, the academicians assert that the global experience gives no proof of thesis. In Russia, the situation is also aggravated by ‘bad habits’ inherited from big business that acquired them back in the 1990s. Doing business through offshore companies and tax evasion, putting immediate interests over strategic ones, ignoring environment and society – all that is bred in the bone of most of the Russian oligarchs.

No doubt, there are exceptions among entrepreneurs; however, in some cases it is extremely difficult for private business to put forth its efficiency. For example, involvement of private companies in rail transportation slowed down cargo deliveries, let alone expedited them. The conflicting interests of numerous owners of the rolling stock resulted in chaos on railroads and in increased prices of transportation. Only after part of the railcars had been returned into operation of the state-owned company "Russian railways", the speed of cargo delivery picked up.

Undoubtedly, private flagship companies boasting fantastic work performance exist in this world. However, in the opinion of Alexey Baranov, the chairman of the council of the public movement "Lean Forum. Lean Production Professionals", it is these super-efficient companies that lay a highly destructive mine under the entire capitalist system.

A warning shot across the bow has already been fired: in 2008, Fannie Mae and Freddie Mac went broke and caused the detonation of economic explosion all over the world. It is interesting to note that just a few years before their burst-up, economists Robert Kaplan and David Norton named the future bankrupts among the best companies. At that time, these experts believed that the management system designed by them (the so-called Balanced Scorecard) can be efficiently used to achieve the highest financial results.

The reality, however, demonstrated that seeking bonuses (which was a logical result when the wages of key specialists directly depend on the financial performance of the company), Fannie Mae and Freddie Mac managers went all lengths, which was devastating for the business.

Yet, these are not the most spectacular examples of selfish behavior of private business. Irina Yermakova, doctor of biological sciences, told RusBusinessNews that starting from July 1, 2014 Russian companies are allowed to grow genetically modified crops at a large scale and to use GM foods. The attempts of scientists to find out the consequences of the impact such foods may have on people were tacitly stymied. That is why, over nine years only two research attempts have been made at two research institutes, and they were in line with the conclusions made by I. Yermakova: Using GM foods impairs development of the future generation, causes infertility and cancerous diseases.

American scientists Ignacio Chapela and David Quist, who published the findings of their studies of GM crops in the Nature journal, ran into problems. The group of Italian researchers who detected structural changes in the organs of the mice that were given GM soya containing food lost their grants.

The most famous companies that use genetically modified seeds and chemicals are Monsanto, Bayer and Syngenta. The first of them gained notoriety as a violent fighter against scientists. Monsanto made its contribution to the dismissal of renowned British scientist Árpád Pusztai from his institute; he reported about severe impairment in the development of the internal organs of the animals that were given food with GM-potatoes.

Foreign problems are ignored: the Russian government sticks to their privatization idea, as if it can help to defend national interests of the country and protect its citizens. Lyudmila Kravchenko, an expert of the Center for Scientific Political Thought and Ideology, brought back the bitter experience obtained from the previous privatization: Some strategic enterprises were acquired by foreign entrepreneurs and went bankrupt; a number of factories were closed down or had to change the line of their business. Top oligarchs became beneficiaries of the privatization; the most tangible accomplishments were the social split in society and inordinate corruptness of officials.

The experts suspect that today’s deregulation and state involvement limitation are again conceived for the benefit of the oligarch groups. Igor Yushkov, an expert of the National Energy Security Foundation, thinks that state shares most likely will be bought by the political groups, which operate these enterprises. They will have a better bargain, if they buy securities from the state now, when the market is in recession. Furthermore, they expect that the money they will pay for shares will leave their hands only for a while.

The similar arrangement was already tried during the privatization of RAO UES, when the joint-stock company advance the slogan of renovation of the fixed assets through investment and embarked on additional issue of shares and, as a result, the money received from the sale remained in the hand of those who acquired control over the company. Therefore, the expert is sure that very soon we will hear the voices of oligarchs who will talk about importance of attracting investment to the largest companies owned by the federal government. In fact, we can already hear these voices: Managers offer to issue additional shares of some state-owned companies to the benefit of other companies.

Alexey Baranov thinks that, keeping in mind the further development of mankind, business and the government should take into account a much larger number of indicators as compared to the number operated by the present-day management systems. Prevailing of financial indicators in the economic practices is beneficial only to business owners. However, today companies that are more far-sighted try to harmonize interests of the business and interests of the personnel, suppliers, society and social medium as a whole, including environment. They encounter more difficulties than unscrupulous companies, but they knowingly make investment in the future, as they do not want to trip a mind together with Fannie Mae.

The line of conduct, which is followed by advanced companies on the market, proves fundamental changes that took place in the mentality of their managers and owners. They may have understood the importance of this by themselves; however, it is the state, the Russian state among others, that must be responsible for changing the system of values.

Vladimir Terletsky