Separating Power from Property
By Grigory Yavlinsky
Vedomosti – 4 April 2012
Recently, Prime Minister Vladimir Putin reiterated his desire to end once and for all close the discussion on the unfair privatization in the 1990s, though he does not yet know the possible mechanism. His intention to return to the issue of a “privatization tax”, expressed during a February election meeting in the RSPP has already sparked many statements, comments, articles on the issue of privatization of the 1990s, including the notorious loans-for-shares and their consequences, which would require the adoption of certain political decisions. Opinions tend to vary from the denial of an existing problem i.e. that the question can be considered closed so there is no need to stir up old issues; to the identification of the large number of technical difficulties that this would imply and accordingly, the impracticality of using money as a method of legitimizing property obtained during privatization.
The topic obviously requires serious discussion, and as my name has been mentioned actively in this regard, I think it is necessary to recall my position on this matter in more detail and, given the context of the discussion, to re-formulate some theses.
The nature and context of the proposals
Firstly, the fact that proposals made almost 10 years ago still incite lively, if not passionate, debate proves that a problem of the legitimacy of the privatization of large amounts of assets and property in the 1990s a) exists and b) remains unresolved. In a series of speeches to the press in the mid-2000s, I spoke and wrote about the possibility of payment of monetary compensation from the beneficiaries of the loans-for-shares for the productive assets that they fraudulently received from the state. But if we return to the context of my proposals it is easy to see that they come from reflection about how to solve the problem of legitimization of the privatization of large amounts of property in Russia in a situation where the general attitude to the right of the current owners to dispose of this property is at least ambiguous (for details see my article in the magazine № 9 2007 “Economic Issues”). The attitude of the overwhelming majority of the population to the largest owners, the beneficiaries of privatization does not seem to be changing, in fact they restlessly continue to hound the privatizers. And even their “colleagues” are not allowed to forget. Let any who doubt this read the trial lists of the London courts.
Secondly, I have offered and continue to offer a comprehensive resolution to this problem. The proposal of some form of compensation by the beneficiaries of privatization to the public for loss of profits is only one of many, and besides now is not its key moment. This proposal was about an integrated, packet decision, in which the state took it upon itself, including making specific commitments to protect property rights and business, to ensure greater transparency in its activities. Also discussed was how to put a barrier between government and business, which would prevent their fusion at any level, including local, and the establishment of workable mechanism that would make it easy to challenge and to recognize null and void any transactions made with the use of administrative resources. Finally, this resolution would see the creation of a system of checks and balances between government, business and non-public entities (such as trade unions, and associations of all kinds of interests, which perform lobbying functions). Claims for satisfaction by society to privatizers should be part of this total, integrated solution. This measure has never been considered by me as a way to supplement the budget or as personal retribution for abuse of power by the oligarchs in the mid-1990s.
Thirdly, we proposed that such compensation was necessary in principle, though what specific form it should take was for an expert to decide. There are different ways to compensate society, including a one-time tax on the beneficiaries (assuming that they could be explicitly ascertained, as well as the size of the advantage earned unfairly). There are certain possible restrictions on the right of disposal of assets received during privatization; using community or social encumbrances, for example. Moreover, we said that the solution must be complex, with different forms of compensation relative to the specific assets, but these are just technicalities.
The real problem, without the resolving of which it would remain impossible to live and work normally, are the absence of clear and understandable long term rules of business. In Russia, this is the main obstacle for the normal development of the private sector in general and for large-scale private enterprise in particular.
I want to state straight away that we see no problem in the ownership of private apartments and the notorious six acres. Yes, there are problems with the protection of these rights in the courts and, even more complicated problems in daily life, but the right of citizens to own property is not in question. The same applies to traditional small business: the right to dispose of a hairdressers or a shop is not in dispute, especially since in most cases there is nothing to be disposed of, as it is no coincidence that many of these business can survive under any government or even in the absence of such.
Large-scale enterprises are another matter, which by definition are highly dependent on the government and its decisions. So that private business can manage these enterprises with an eye to the long-term, and invest resources in their development and modernization, it is necessary to clearly define the question of who has the right and what is the right and whether this right will be recognized by both government and society in 5, 10 or 30 years. And it is not only the formal law. On paper you can write anything you want. The only reliable guarantee is the force of inertia of social consciousness, which recognizes (or doesn’t) the possibility for citizens to dispose of some or other property as their natural and indisputable right. It is clear that an important role in this process belongs to government, whose behaviour in many things forms that consciousness, though at the same time it does not determine it fully.
So I argued then (and continue to remain of the same opinion now) that the people found on the lists of the richest businessmen in our country hold its key assets with a high degree of conventionality. However, neither the vertical of power, nor the judicial system (to the extent that it is now in a position to act on its own), nor the mass of ordinary people consider them to be full owners of their assets. Rather, they are perceived as being scandalously highly-paid by the state or from the state’s property. And they themselves have a clear understanding of the limits of the possible, knowing that the really important decisions concerning the disposal of the assets is to be agreed with the government as the ultimate owner of all significant assets in the territory under its control. And most importantly, the fact that they manage these assets only as long as a decision is taken to the contrary, in which case they can only rely on the “severance pay”, the amount of which is determined by the subjective opinion of the authorized officials.
Public social pact
I suggested not to wait for decades in the vain hope that the issue would solve itself, but to force the legitimization i.e. To have a public recognition of the real, not formal, rights of specific individuals and to manage these structures not only to make the most of the ports, mines, mills, and all others, ( that in our country not only in the Soviet, but also in pre-Soviet times was essentially seen as “sovereign” property,) but also to freely dispose of them: to sell, pledge, convert, etc., without asking for permission from on-high and without fear of arbitrary denial on some sort of administrative grounds.
Next, I wrote that the roots of this defective and inferior type of property rights in Russia are numerous and varied, and that privatization is not the only, and perhaps not even the main factor that determined the sceptical attitude of society to the new owners of factories and mills. The sub-par running of most of the business assets, and the semi-criminal mores of the time played a role in this too. These attitudes prevailing in the oligarchic environment and the brazen attempts to use money to control all decisions made, at any and every level of government as well as the dubious reputation of Russian business abroad all had their parts to play as the root causes of the problem. I thought then and still think today that the issue must be addressed so that all of these factors will be dealt with and agreed upon by government, business and society.
In fact, the proposal offered a sort of public social pact in which all parties involved: the federal government, big business and the most influential associations (in particular, political and professional) would try to, if not remove entirely; then streamline and smooth the competing claims by each assuming certain responsibilities, primarily with respect to transparency and accountability, mutual contacts and relationships, and a clear division of spheres of effort and responsibility.
The ultimate goal of action in this direction is the dismantlement of the oligarchic system of relations. I thought and still think that it is absolutely, and it can and should be implemented without harming business, economics, or the country. To do this, of course, it is necessary to comply with some very significant limitations. Principally, I think it is absolutely impossible to have administrative oversight of privatization, despite all its shortcomings. In these circumstances such redistribution would be completely devoid of any kind of stringent criteria whatsoever. The result could only be a change in the names of owners, and not the complete overhaul of the system of relations between business and government.
The package of laws
To solve this problem I proposed to adopt a package of laws, which consists of three main parts, to be launched simultaneously.
Firstly, in order to exhaust the possibility of speculation in the papers of “Time of Troubles,” from the mid-1990s, it is necessary to accept laws for capital-amnesty, including criminal proceedings, except for murder and other serious crimes against the person.
The second part involves the introduction of a compensation tax, order of appeal and expenditure of corresponding social funds.
The third part relates to the normalization of the relationship between business and government, and most importantly, their separation from each other. Over the past twenty years the financing of political parties has not been transparent. Here, those bodies that do not have financial backing for lobbying in the Duma find themselves in a very weak position. It is therefore necessary to adopt laws on transparency in political party financing and transparent lobbying in the parliament. To this package of laws we include those who would create a foundation for an independent national public television, which does not now exist in Russia.
The adoption of this or a similar package of laws is now the only alternative to an atmosphere of fear of endless repetition of the Yukos story.
As part of this decision, I also believed it necessary to undertake a series of coordinated steps to reduce as far as possible, the great sense of injustice that remains for society from the memory of “big privatization”. I recall that then, and even now, the great, and far from degraded ( as today my opponents are trying to suggest) part of the society held the popular wish for “re-privatization”, i.e. the cancellation of privatization of the 1990s and holding it again, though in a stripped-down and far more rigid form. Realizing the absolute unacceptability and danger of a new mass redistribution of property, I saw fit to highlight cases of frankly fraudulent distribution of state assets in the form of loans-for-shares that had all the signs of fake transactions made with the use of the state’s budget for the benefit of private individuals, as well as privatization done in a “special way”, necessitating a departure from the standards set forth by the general law and regulations.
Because challenging these transactions in court and a subsequent restoration of the status quo was an extremely complex and double-edged affair, as a more practical solution, I proposed that the beneficiaries of these deals somehow compensated for society’s loss of state benefits to society by paying a special one-time tax as compensation for the additional benefit they received and by assuming certain restrictions on the commercial use of these assets, which would not impair the economic efficiency of asset utilization, giving consumers and society an advantage or benefit. The funds could be accumulated in an absolutely transparent special compensatory extra-budgetary fund spent one way or another for the good of society. At the same time, I saw no need to contrive a long debate about how, in what form and how much this tax should be defined. In the end, the fiscal side of this law does not seem to me decisive or even significant. What is most important is that, on the one hand, the payers of this tax were the real beneficiaries of the transactions, and on the other, that the people have a feeling of at least a partial restoration of justice. Such a move would then finally bring an end to the debate about privatization and the national conversation could begin about quality control and authority of the major private property owners. Such a measure would be akin to the ‘tax amnesty’ regularly practiced in many countries as a source of tax revenue, and though it is unlikely to have special significance, it allows those who want it to get rid of fear of persecution and to start a “new life” in terms of their relationship with the fiscal authorities and in general the public authorities. The main point is not in the details, but in the targeting of taxation and the guarantee of its finality, issued by the State, as well as a feeling among the people that the owners have squared up with them for all that they received through pulling strings/ connections.
It will not go away on its own
Again, it seems to me that, no matter what, the issue of the lack of legitimacy of large property has not been lost and it does not lose its relevance and its problematic nature does not depend on whether it will return in the near future or not. The issue is much broader than the assessment of the legal correctness of the loans-for-shares or the other shady privatization deals of the 1990s. The problem is that most of our delegates in the lists of “Forbes” are one way or another billionaires and “captains of Russian business,” and no matter what anyone says, deep down, everyone understands that they don’t name the owner-proprietor but the manager. We have seen in recent times, the examples of the “rulers” from the Bank of Moscow and “Inteko”, and in the next six months, I feel that we will be seeing a few new interesting subjects from the same series. And if in the coming years the country will not suffer from total disaster, some form of settlement of property relations in the spirit of what I proposed five years ago, will become ever more necessary.
I do not know what form it might take as much depends on understanding the problems and ways of thinking of the main participants in the process. Nevertheless, we must think over the concrete steps to be taken and think over them a lot, because this problem will not disappear, neither by being ignored, nor by hasty and clumsy actions. It will not reach a final conclusion, even if oil costs $ 200 per barrel, and even if all the “dissenting and dissatisfied” amicably leave the country. In this context, I see nothing impossible, under the right conditions, in returning to the idea of closing the history of loans-for-shares and other specific episodes of privatization by the payment of compensation to certain beneficiaries. In any case, I do not envision any insurmountable technical obstacles along the way. To find out which specific Ivanov-Petrov was the beneficiary of a transaction is not too difficult, especially if the political will and well-designed mechanism is there. Those same beneficiaries would suffer no harm for themselves, but only long-lasting benefits from this process. And to calculate the adequate amount of compensation based on relevant criteria in this case is a task that even non- highly-paid experts can handle.
The main thing is the determination to finally begin to address long-standing institutional problems hampering our economy moving forward. And what is necessary for this determination to appear, and what political transformations are needed for this, is an issue that we all must answer, and the sooner the better.
The author is a PhD in Economics.