Privatization According to Sachs

Not since U.S. Senator Joseph McCarthy's witch-hunts of the early 1950s has a Harvard professor been suspected as a Communist sympathizer. Could it now be that button-down Communism may soon be back in vogue? At a recent London conference, hosted jointly by the European Bank for Reconstruction and Development and the Center for Transition Economies, Professor Jeffrey Sachs -- director of Harvard's Institute for International Development -- made a rather odd statement. He called, unmistakably, for the renationalization of Gazprom.


Described by the New York Times as probably the most important economist in the world, Sachs has been a regular in these parts. During 1990 and 1991, he co-authored the radical reform program of post-communist Poland. And from late 1991 to 1994, he worked closely with the Russian government. Whether Sachs -- and the band of foreign advisers he led -- ever enjoyed real influence in Russia is debatable. But he undoubtedly was, and remains, the most influential foreign commentator on Russia's economic reforms, if only due to his links to the U.S. establishment. This is why his London renationalization statement warrants examination.


There are two main questions. The first concerns the feasibility of renationalization in Russia. On the one hand, under the Constitution and Civil Code, the state can appropriate property only with preliminary and equal compensation; this renders most renationalizations impossible in budgetary terms. On the other hand, if past privatizations are declared illegal, no compensation is required. The bottom line, then, is any whiff of wrongdoing, and anything goes.


Some investors in Russia fear an anti-reform parliament will order Boris Yeltsin's government to conduct a wave of renationalization prior to the June presidential elections. The constitutional truth, of course, is that the Duma cannot order the executive to do anything. The government is, however, vulnerable to threats of serious negative publicity at crucial moments.


Seeing as how the State Duma's regular Privatization and Property Committee is under the control of the government-backed Our Home Is Russia faction, Communist deputies have set up a separate Duma body to assess Russia's privatization record. Subsequently, over the next three months, both the voucher and cash stages will be scrutinized by the new privatization commission. State selloffs deemed unlawful will be identified and exposed. Despite enjoying only advisory powers, as June approaches, the commission could become a powerful anti-reform platform. The high political stakes may compel the government to concede several token deprivatizations.


Such concessions would likely focus on state stakes distributed since last August under the loans-for-shares banner -- whereby bundles of equity were distributed by auction to bidders who lent the government money. Such concessions, though, would involve no genuine renationalization. The shares were expected to become property of commercial banks when the government deliberately defaults on its loans in September 1996. Renationalization would see the government simply exercising its right to repay its debts, regaining control of shares currently held as collateral.


The loans-for-shares scheme anyway carved up remaining state stakes in firms already majority privately owned. Loans-for-shares concessions made by Yeltsin before the elections, or even complete loans-for-shares reversals under a President Zyuganov, would leave in their wake not renationalized enterprises, but private enterprises in which the state's minority stake has, for the moment, remained constant. In this sense, renationalization ?€? la Russe is a possibility. But it will amount, almost certainly, to no more than a delay in the sell-off of a few minority state holdings.


The second question concerns Sachs himself. Why is a man who exerted reams of energy promoting reform in Russia now calling for a privatization reversal? Renationalization, he says should take place on the grounds of social equity and the rule of law. Certainly, the loans-for-shares auctions were dubious. No less than half of the 12 auctions which took place were won by the banks that organized them. Another four winners were subsidiaries of the actual company under the auctioneer's hammer.


Sachs contends that state assets have been plundered by corrupt insiders. In the name of public accountability, he says, Gazprom should be renationalized through state purchase of outstanding shares. Similarly, the controversial loans-for-shares deals of last fall should be ended by making early repayments of government bank loans -- financed through new Treasury bills, or even the $10.2 billion IMF loan itself.


The academic interpretation of the Sachs statement is straight-forward. Were Gazprom back in the public sector, it would pay more tax, get away with fewer wage arrears, and could be sold off at a later date for more money once Russia's stock market has recovered from political paralysis. Case dismissed.


A cynic would say it is no surprise that Sachs chose Gazprom. This is not only because Gazprom had net 1994 profits of $1.5 billion, accounts for 29 percent of the world's gas production, and annually meets the entire gas demand of Eastern Europe and almost a quarter of Western Europe.


The ownership of Gazprom is restricted not only among domestic but also among foreign investors. Not more than 9 percent of Gazprom's total share capital can be foreign owned, and even the tiniest Western stake requires written permission from the board of directors. So tight was the Gazprom sell-off, the company did not even appear on the loans-for-shares list. The only way Western financial interests could possibly get close to the Gazprom action is if the existing deals are ripped up, allowing them to buy into the new ones.


For whatever reason, Sachs says he wants fair and transparent procedures. But so do we all. Just as we all want an end to mass hunger and the outbreak of world peace. Russia's family jewels have now, for the most part, been handed out -- it was a messy, ugly fusion of money and politics. Were the wounds re-opened, though, the resulting gutter squabbles would profoundly undermine the concept of private ownership in the eyes of the electorate.


It is all very well for Westerner observers to take the moral high ground preaching social equity, especially when they simultaneously do their compatriot money men a favor. But those who do so, especially when they are as important as Jeffrey Sachs, must realize they provide readymade political capital to Russia's anti-reform lobby.