First of two parts


Russia's ambitious voucher-privatization program ended this week the same way it began: in a whirl of confusion and compromises that reflected the deep schism in this country over what is the correct path to market reforms.


That is the way it has been since October 1992 when 148 million vouchers were first offered to each of Russia's citizens to be used as currency in the largest sell-off of government property in world history.


The program was a compromise between those who supported a rapid change to a market economy and those reluctant to abandon the communist past. But if nothing else, it was also the most successful of all Russian reform efforts.


The voucher was to have been retired Thursday, but that deadline has been fudged at the last minute. President Boris Yeltsin has allowed the voucher to be used until July 31 at auctions where workers buy shares in their enterprises, while Moscow mayor Yury Luzhkov has decreed that the voucher remains valid in the capital until the end of the year.


Nevertheless, Russia is now at a crucial turning point, moving from the voucher program, in which state property was essentially given away for free, to a cash program, in which enterprises not privatized will be sold to the highest bidder. Given Russians' strong reactions to voucher privatization, the new program promises to be no less controversial.


For the 75 years before the program began, the state owned nearly all the country's property and most Russians owned little if any. Now the government boasts of 15,000 privatized enterprises, 1 million small private shops, and 70 percent of the industrial workforce employed at a privatized firm.


More than 40 million Russians hold shares in enterprises or in one of the 600 investment funds that have sprung up to invest vouchers, a larger number than in the United States.


But many state enterprises, because of political necessity, remain in government hands and the state and workers hold large stakes in many so-called privatized companies, raising questions about how successful the program has really been.


Opponents contend that privatization failed to enrich the people, brought little money to the state budget and resolved few of the country's economic problems -- bringing neither foreign investment nor restructuring to newly privatized companies.


Worse, they say, the state handed over large chunks of enterprises to criminal groups and allowed massive fraud to take place in the form of voucher-investment schemes.


"Privatization attained neither its social nor its economic goals," Stanislav Shatalin, one of the economists who authored the 500-day reform plan under Mikhail Gorbachev, said recently.


But supporters say that given the political opposition and the size of the job, no other program could have accomplished so much in so little time. They claim to have laid the groundwork for new and more efficient Russian enterprises to be restructured at the behest of shareholders demanding dividends.


"At the end of the day, it's an incredible achievement," said Roger Gale, head of the Moscow office of the International Finance Corp., an arm of the World Bank that advised the government on creating the program. "The world hadn't seen anything like it. Nobody believed it could be done."


In a notebook in Gale's office are his notes from a meeting in February 1992 with officials from the State Property Committee in which the program was beginning to take form.


On one page, a roughly drawn rectangle is divided into boxes with a percentage scribbled in each section. This was the genesis of the uniquely Russian privatization program that engendered compromise between conservative and liberal forces but kept as its essence the dismantling of the communist system of ownership.


Indeed, while Yeltsin has wavered on other reforms, like reducing inflation or liberalizing the export system, he has been steadfast in his support for privatization and has consistently stuck by Anatoly Chubais, the program's main architect.


"They originally were going to sell enterprises for cash," Gale said in an interview. But few Russians had any money to buy into state enterprises largely because the second major reform of 1992, price liberalization, had brought about staggering inflation and wiped out savings.


The final plan, approved by Yeltsin and the former parliament in the June 1992, gave workers and management the option to buy their companies.


It was designed to buy off -- some say bribe -- resistance to privatization at its root: on the factory floor and in the director's office.


Even though privatization was required of most enterprises, workers and managers were allowed to choose among three different variants with two of the choices becoming the most popular.


Under option one, workers and managers received 25 percent of the enterprise for free. Under option two, they were given 51 percent, or control, for a price of 1.7 times the estimated book value of the company.


Another stake, usually 29 percent, was reserved for sale at voucher auctions. The state held onto another chunk which could be sold off to a single investor or held.


ZiL, the Moscow-based truck and limousine maker which is one of Russia's largest enterprises, provides one example of the program in action.


In the fall of 1992, workers and management at ZiL struck a special bargain with the State Property Committee: They would agree to become one of the first big Russian state enterprises to privatize in exchange for control of the company.


Yet in the past several weeks, following a shareholders' meeting in which stock owners expressed their anger about not receiving a dividend, the new ZiL board of directors fired the company's long-time director, signed several joint ventures with large Western companies and approved a plan that will pare its workforce by up to 20,000 employees by year-end.


It is this type of deep restructuring that voucher privatization was designed to bring about.


But Valentin Kovalyov, deputy chairman of the Duma who was elected on the Communist Party ticket, said he does not see any particular success from the ZiL restructuring because it neither reversed the company's production decline nor paid workers or shareholders a dividend.


Kovalyov also fundamentally disagrees with one of the main aims of privatization: creating a small class of owners who can force change on an enterprise.


"If privatization results in the increased polarization of poor and rich, we don't need such privatization," he said. "We say privatization should be good for everybody, not for a certain class of society."


More radical market reformers, on the other hand, have criticized voucher privatization for excluding whole industries. Many defense companies and energy enterprises were not sold at all or offered only nominal percentages to the public.


Some regions, such as Tatarstan and even Moscow, successfully rejected some or all of the program.


"They deliberately left bits out in order to get on with the bits they could do," responded Gale.


Supporters and opponents also disagree on the impact privatization has had on the former state enterprises. A World Bank study of 92 companies in Moscow and Vladivostok last October found that 60 percent have laid off workers, 47 percent had changed the mix of their products and 57 percent have changed the way they reward employees.


Russian privatization officials have used these results to show that private companies are slowly adjusting to the market economy.


But economist Shatalin recently drew entirely different conclusions from a poll conducted by Reforma, an independent research group that he heads.


The survey of 150 large and state-owned enterprises throughout Russia found that privatized companies increased prices faster and reduced production more steeply than state companies.


"I don't know of a single big enterprise in the major branches of the economy that started working better after workers had obtained part of its stock," Shatalin said. "The primary goal of privatization, an increase of economic effectiveness, is working very, very badly."


Gale, noting that most companies had only been privatized in the past six or nine months, said the impact of the program will only be known as newly privatized companies begin to restructure and the economy improves.


"It's kind of the twilight zone out there," he said. "It's hard to tell now if it's getting lighter or darker."