A New Soviet Economy

The time when major state industrial enterprises had extra cash on their hands with which they created their own banks -- a period that lasted roughly from 1989 to 1991 -- is clearly far behind us. However, economic conditions -- especially high inflation -- that have proven extremely unfavorable for production have turned out to be highly profitable for lending.


Today the majority of the banking structures that were created under perestroika have grown up. They have diversified their holdings, expanded their share base and, in general, have freed themselves from the supervision of the enterprises that created them. Now the rules of the game in Russia's emerging market economy are dictated not by industrial concerns, but by financial structures which have gradually begun to divide their "parents" among themselves.


One function that Russia's banking structures seem to have taken on is the process of gluing the broken pieces of the Soviet economy back together again. Inasmuch as the current economic climate is unfavorable for small business, the capital from Russian banks is being drawn toward "intervention" in industrial enterprises, shares of which can still be bought up cheaply. Specialists have already designated 1994 as the year of the formation of "unofficial" but powerful financial-industrial groups, known by the Russian acronym FPG. According to President Boris Yeltsin's decree On the Role of Financial-Industrial Groups and the Procedure for Forming Them, an FPG is any organization that includes both industrial enterprises and financial structures and which has been created under the provisions of that decree.


This decree was largely the result of lobbying by industrial directors, the infamous "red directors," who imagined that FPGs could be a means of funneling additional financial resources out of the financial sector and into industry. The mentality among the directors is virtually identical to that seen in 1992 and 1993 when there was a rage for forming holding companies, although few people really understood what a holding company was. Now everyone wants to get in on an FPG. So far, however, only three FPGs have officially registered: Sokol in Voronezh, Dragotsennosti Urala in Yekaterinburg and Ruskhim in Moscow. None of them have yet accomplished anything beyond their official status as FPGs.


Russia's other financial structures are in no hurry to register because the decree introduces sharp restrictions on shareholding by FPGs. Moreover, existing legislation limits direct investment by banks in non-banking enterprises, including the purchase of shares in enterprises being privatized. Banks have gotten around these restrictions by forming "investment companies," but now they have no reason to register as FPGs, which would give the government additional information about their activities. These unofficial FPGs fear state pressure to invest in unprofitable concerns.


Unofficially, the leading non-registered FPGs are considered to be Inkombank, with a network of financial, investment and insurance subsidiaries; Alfabank, which control's one of Russia's largest investment funds; Bioprotsess, which holds shares in nearly 100 enterprises in the oil and chemical industries; Tveruniversalbank; Menatep and others.


Such FPGs, usually consisting of major Moscow banks and industrial enterprises scattered throughout the country, can be said to be holding Russia together economically. However, they are now finding the opportunities in Russia to be too limited.They believe that Yeltsin's decree is already out of date and that it does not meet their economic needs. Moreover, the economic process of concentrating capital has not passed unnoticed by certain political entities.


In response to these feelings, a new draft law on FPGs has been introduced in the Federation Council, after having been submitted for "expert evaluation" to the country's leading bankers. According to its authors, the draft law is intended to stimulate a new cycle in the formation and structuring of FPGs in Russia and to increase their power.


In addition, many government figures in Russia are insisting that the other countries of the Commonwealth of Independent States adopt analogous laws and provide guarantees that property held by FPGs will not be re-nationalized. In view of the fact that FPGs in the other CIS countries are only just beginning to form, Russian FPGs will be in a position to overwhelm whatever economic self-sufficiency has developed there. The pattern observed in Russia, where FPGs are the clamps holding the economy together, may well be repeated elsewhere.


Russian FPGs may well become instrumental in effectively restoring a unified economy over the territory of the former Soviet Union. It is well known that Russian financial structures already control the re-export of Russian raw materials from the Baltic states and that they are making headway into other spheres of the economy. Why shouldn't this process continue to expand?


Recently signs appeared on the walls in the State Duma announcing the formation of a group called The Economic Union, the main goal of which is the reintegration of the old Soviet Union. Analogous intra-parliamentary groups have formed in Ukraine, Belarus and Kazakhstan. There have been reports of similar groups in Armenia, Kyrgyzstan, Latvia and Tajikistan as well. All of them are discussing the organization of FPGs and the creation of identical legislation covering their activity in all of the new republics.


Versions of the new draft law now before Russia's Federation Council have already been introduced in the legislatures of Ukraine, Belarus and Kazakhstan. If the four major CIS states all pass identical legislation in this area, it will be a short path indeed for, as they said in 1917, "the triumphal march of Soviet power."





Vladimir Buyev is a researcher at the Center for Economic Reform. He contributed this comment to The Moscow Times.