Ruble's Fall Roughens Russia's Reform Path

IT used to be assumed that acute instability in foreign exchange rates, extreme inflation, and a massive government budget deficit would make the shift in former communist countries to a market economy nigh to impossible. Russia put the lie to that claim, says John Nellis, a World Bank official.

Despite such economic problems, Russia has carried out a remarkable amount of privatization of state-owned enterprises since November 1991, notes Mr. Nellis, senior manager of the Bank's private-sector development department. The collapse in the ruble this week ``certainly can't help'' the continuation of privatization, he says. But, he adds, it won't stop the program.

Nellis and his departmental colleagues at the World Bank are engaged in what Lawrence Summers, undersecretary for international affairs of the United States Treasury, has dubbed ``the greatest economic reconstruction job in history.'' These Bank bureaucrats relish their advisory role in this dramatic change taking place in much of Eastern Europe and the former Soviet Union. ``It is a very exciting agenda,'' says Gary Perlin, another Bank official who works in the financial sector.

The pace and depth of Russia's first phase of privatization, which ended July 31, is producing what one wag calls ``Wild East capitalism.'' The results are impressive:

* Some 15,000 mid to large-size state enterprises were transferred to private ownership through a voucher program that gave 144 million Russians a chance to become owners. ``Insiders,'' including executives and other employees, on average, acquired 60 to 70 percent of their own enterprise's equity.

* The new private firms employ more than 14 million people. That's about one-half of those employed in Russia's industrial sector.

* About 40 million Russian citizens have become shareowners.

* Some 650 private investment funds have been created, competing for vouchers and converting them to diversified shareholdings in newly privatized enterprises. This is the start of a mutual fund industry.

* About 85,000 stores and other small business units have been privatized. However, this effort lags behind similar programs in Poland, Hungary, Estonia, and the Czech Republic.

``These achievements border on the miraculous, having taken place in the absence of consensus of the desirability, scope, and pace of liberalizing reform in general, and privatization in particular,'' states a new World Bank book entitled, `Russia; Creating Private Enterprises and Efficient Markets,'' which Nellis helped write and edit.

Moreover, this privatization program was carried out by a relatively tiny group of officials in the Russian State Committee for the Management of State Property, with the help of World Bank officials, professors, and private consultants from Western countries, hired on contract.

This group still plans to privatize another 12,000 to 14,000 medium and large state enterprises. With the expiry of the voucher program, this is to be accomplished by cash sales. Local governments will be given some of the proceeds, providing them an incentive to privatize local enterprises. And company managers will be able to use some of the cash for restructuring and investing in their enterprises. This sale process promises to be slower than the voucher method, Nellis predicts.

Despite the political turmoil in Moscow, an International Monetary Fund (IMF) mission will head there next week to negotiate terms for a loan under the IMF's Systemic Transformation Facility. One sum that has been mentioned is $4 billion. But such a loan will be conditional on continuation of various economic reforms, including a tighter budget.

Stanley Fischer, No. 2 at the Fund, said in an interview early this month: ``We have a general stance: if a country will undertake something brave and coherent, we will support them.'' A loan, he added, would be commensurate with the strength or modesty of a Russian program for more price stability and structural reform. ``There are a lot of resources in this institution with which we can help them,'' he said.

Last week, Russia agreed with its 600 foreign bank creditors on a deal to postpone repayment of $26 billion in loans. That's expected to somewhat relieve the financial pressure on Russia.

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