Never mind those headlines about the bitter struggles over the future of Russia’s economic reforms. Reform is here, for Igor Smolkin and thousands like him. One in three Russian workers is already employed in the burgeoning small-business sector. Despite worries about organized-crime groups and fly-by-night speculators muscling in, privatization of heavy industry is in full swing. All over Russia clever gamblers are angling to become Carnegies and Rockefellers. Their ambition and their penchant for risk are shaking Russia’s lumbering socialist industry to its foundations.
As part of President Boris Yeltsin’s effort to have every Russian taste the fruits of capitalism, the State Committee on Property has issued to each citizen one privatization voucher, face value about $10. The voucher may be invested by the end of the year in any of the thousands of enterprises that are going up for auction–or traded, in the burgeoning secondary market, to someone with bigger dreams. The hope is that as private capitalists take over state-controlled industry, they will force flabby enterprises to shape up, After some initial skepticism, Moscow’s babushkas are standing in line for hot stocks like Germes or MMM, two fast-growing trading companies. At the Auction Center in Volgograd, Maria Baibakova, 43, fills out the forms to put up her voucher for shares at an upcoming auction. Several colleagues from her collective farm, called The Road to Socialism, are signing up, too. “We don’t really believe this will change much,” she says. “But why not invest just in case?”
In fact, private investment has already changed things a great deal, as the managers of Moscow’s Bolshevik Cookie Factory learned this spring. Alpha Capital bought 26 percent of the factory’s shares and launched one of Russia’s first hostile takeover bids. Among Alpha’s demands: deals with Western companies and creation of a new position, chief financial officer, to keep watch on profit flow. At Bolshevik Cookie’s grimy bakery, where an army of white-hatted ladies watches as square cookies roll out of a huge line of ancient green ovens, chief engineer Vladimir Mazunin shakes his head. “They have 26 percent,” insists the 65-year-old Mazunin. “That’s not a controlling stake.” Like directors all over the country, Bolshevik’s management is buying up shares in the hope of holding control and protecting its jobs. Not to worry: Alpha knows that the longtime bosses have vital ties to distributors that would be destroyed if they were fired. It has already agreed to compensate them if they lose their jobs at the hands of future foreign investors–a golden parachute, Russian style.
In the early years of the free market the word capitalists referred to the racketeers and free-spending traders riding with their bodyguards in flashy Mercedes cars and BMWs. More often than not, their riches are the fruits of illicit raw materials exports and spekulatsia, the pejorative term for buying state goods cheaply and selling them dearly. But the new movers and shakers tend not to drive fancy cars or own fancy houses. They live inconspicuously, and they quietly accumulate stock portfolios. “Fund manager” Aleksandr Shvedov is typical. Shvedov, 32, spent a decade working at Volgograd gun and cable factories. Recently he quit his job, hocking his clothes, his stereo equipment and even some of his wife’s possessions to buy up vouchers and exchange them for shares. So far he owns 88 shares of an irrigation company, 84 shares of a cement maker and smaller stakes in a tractor factory, a margarine plant, and soap, trucking and construction companies. “I am a full-time investor with a private investment fund,” he says proudly. “I am laying the foundations, so I will live well tomorrow.” Already he’s living off his modest dividends.
The most successful of the new Russian investors is Kakha Bendukidze, a huge, balding man with the quiet confidence of an international tycoon. A microbiologist by training, Bendukidze abandoned his research on recombinant DNA five years ago to set up Bioprocess, a company manufacturing enzymes and pharmaceuticals and selling them for profit. He subsequently diversified into shipping and banking. In July Bioprocess hit the big time, taking a controlling 18 percent stake in one of Russia’s largest enterprises, Uralmash, an antiquated complex that builds oil-drilling and mining equipment with a staff of 30,000.
Where do investors get backing for such large-scale undertakings? Most Russians assume they either stole it, got it through Communist Party ties or accumulated it through illegal deals. Some of those assumptions often border on the truth. Alpha managing director Andrei Kosogov, 32, has contacts aplenty thanks to his career as a leader in the Communist Party’s Komsomol youth movement. Bioprocess got a head start because Bendukidze and his colleagues were able to draw on the state research center where they worked. “They couldn’t have done it if they hadn’t had the free labs,” says one microbiologist who used to work with them. Bendukidze laughs at the stereotypes–but admits they are not entirely wrong. “We are successful speculators,” he says. “Every Russian business starts from zero capital. You need to trade to fund other businesses. It’s absolutely necessary.”
Despite the rush, betting on private enterprise in Russia is far from riskless. Stock markets are fledgling; investors who want to unload shares have no easy way to find the going price. Financial information on profits and assets is rudimentary. Organized racketeers threaten most small businesses and demand protection payments. Political uncertainty goes with the territory; proposals to block voucher privatization are still being debated in Parliament. And most problematic of all, basic legal issues like investors’ rights have yet to be clarified. “It’s a slippery moment,” says Alpha’s Smolkin. “I can’t prove to the factory head that I have the right to interfere in management.”
The private-investment wave is new enough that few of the new tycoons have demanded major changes in the companies they hold shares in. Nor has the private capital translated into an infusion of new machinery and computers. That may be just a matter of time: many of Russia’s biggest enterprises are only now going on the block. But cynics warn that privatization does not mean productive investment or a commitment to building the business. “These people are just investing paper,” scoffs Aleksandr Yermishin, the manager of an airplane plant that sold all its shares to workers instead of to the public.
Most Russians don’t think that private share-holdings will fundamentally change the Russian economy. But they are starting to believe there is money to be made in shareholding. That doesn’t please people like Kakha Bendukidze, who had been accumulating Uralmash shares secretly before word leaked out. Bendukidze already controls about 300,000 vouchers-one of every 500 the government has handed out. With voucher fever spreading, he worries it will cost more to increase his stakes. “Most people are scared to invest here,” he says. “But now they see a small company buying up Uralmash and they say, ‘I will, too’.”
Whether Yeltsin’s star rises or falls, the process of privatization seems irreversible. Fewer Russians are ready to sell their vouchers; demand has become so high that it’s hard to find the certificates for sale at any price. After cruising Moscow’s ramshackle kiosks and markets, NEWSWEEK managed to acquire five vouchers at 10,500 rubles each. That’s a 5 percent markup over face value. But if holdings like the Vladimir Tractor Factory live up to their potential, that $52.50 investment should prove to be a very good bargain.
