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Russia: Why Moscow Is The Exception To The Privatization Rule -- An Analysis

Moscow, 12 September 1997 (RFE/RL) - Last week's 850th birthday party is over in Moscow. City workers will soon start removing Russian flags from main bridges and replace the "We Love You Moscow" banners downtown. But window decorations and potted trees at the entrance of many shops, bars and restaurants will remain, at least for a while.

On the eve of the anniversary, city officials were reported firmly to be encouraging owners and managers of downtown establishments to purchase decorations and display them in time. The city inspectors were clear enough. The choice was to decorate, or get an unspecified fine. Now, as the manager of a central supermarket puts it, the businesses' hope is that "not only Moscow's Mayor Yuri Luzhkov, but also customers, will appreciate our apparently voluntary contribution" to the improvement of the city's face.

The mixture of free-market and command methods used by Luzhkov's team to encourage businesses to contribute to the resources-mobilization effort, to Moscow's economy in general, and, some say to their own pockets, was summed up by the Russian financial weekly "Expert." Its front page features a picture of Luzhkov near his multi-million dollar pet project, the newly-rebuilt Christ the Savior Cathedral. The headline over the ambitious mayor's head reads "850 years of a natural monopoly."

According to "Expert," during all its existence at the heart of the Russian and Soviet state, Moscow has successfully put pressure on central authorities to allocate national resources in its favor. And the last few years of transition to market reform, the magazine argues, have marked a peak in this process. The key factor, says "Expert," has been Moscow's unique privatization.

During decades of Soviet rule, all property belonged to the state or Communist Party. Control over all assets was exerted de-facto by the Party, although the assets were often officially on the balance sheets of federal and local authorities. The Moscow Communist Party was especially effective at amassing these assests. The balance sheets of the city of Moscow listed the most attractive chunks of property.

In 1991 and 1992, Mayor Gavriil Popov not only retained state-owned assets already controlled by the city, but also obtained new ones from the federal balance sheets. Luzhkov was Popov's deputy in charge of the economy, and, in 1992, succeeded Popov as mayor.

Estimates say that in 1992, Moscow assets included about two-thirds of all property in the city, while the federal government owed the other third. According to "Expert" figures, Moscow owned more than 40,000 buildings, 10,000 commercial retailers, schools, hospitals, transport facilities, construction complexes, oil refineries and food-processing industries.

At the beginning of 1992, the Russian government, then led by liberal economist Yegor Gaidar, freed prices and started the first wave of Russia's privatization. Under the program, all Russian citizens were issued shares of state property and assets. However, this nationwide attempt to transfer state-owned assets into private money was fiercely, and successfully, opposed in Moscow.

Workers in industrial concerns in Moscow could gain control at minimal prices of no more than ten percent of the shares, while their colleagues nationwide received the right to retain control of 51 percent of assets. The most profitable city assets were merged in holding companies, with the right to issue licenses for the exploitation of municipal resources. These holding companies, pillars of Moscow's business empire, are under direct control of Luzhkov's key associates.

In 1994, reports quoted President Boris Yeltsin's order to "tell (now First Deputy Prime Minister Anatoly) Chubais not to touch Moscow." It became clear Luzhkov had won Yeltsin's support for the right to craft Moscow's own privatization.

Chubais' privatization implied that companies should be put in private hands as fast as possible. This, the reasoning goes, would create a new class of rich entrepreneurs, who would actively oppose attempts by leftists to regain political control, and would contribute to a competitive, free market. But, Luzhkov insisted on greater control in the city, and considerably slowed down privatization.

"As Gaidar was freeing prices and launching privatization, Moscow city authorities kept a tight grip on almost all former state property in the city, setting maximum profit margins for retailers and deciding which products could be sold in stores", recalls Vladimir Mau, one of Gaidar's closest associates.

Critics of the Moscow scheme, including officials in the State Property Committee, have said privatization tenders in Moscow were far from being as open and transparent as city officials describe. They recall that city officials in charge of privatization were openly saying that tenders were mainly a formality and that stakes in Moscow assets would be sold (or given in trust) only to businesses already having proved their "ability to manage them effectively." This was taken to mean sharing these assests with the city. Thus, the traditional old-boy network, rooted in the Soviet era, was maintained.

According to World Bank analyst Alexander Morozov, such a method allowed city officials to stay in control of almost everything in the city. It created the most advantageous conditions for Luzhkov's own projects, but discouraged competition. Morozov says it also contributed to the steep increase of prices that, over the last few years, has made Moscow one of the most expensive world capitals.

As Moscow Property Committee officials confirm in private conversations, it is well know among entrepreneurs that the city creates the best possible conditions for the companies in which it invests. Western investors say that, in Moscow, bureaucratic corruption is "at very high level."

One of the businesses that has taken advantage of the situation is run by Luzhkov's wife, Yelena Baturina. Baturina, who normally is very careful to stay away from the spotlight, runs a highly successful plastic-manufacturing company, Inteko.

The company's offices are located in premises belonging to the city building-and-construction department, which charges bargain rents to favored tenants in some of Moscow's more prestigious office buildings. The rapidly growing fast food chain "Russkoe Bistro," founded by Luzhkov in 1995 to compete with McDonald's, heavily relies on Inteko supplies of disposable plastic products and advertising signs. According to a recent "New York Times" report, Inteko has won a million-dollar contract to manufacture plastic seats for the huge Luzhniki stadium, where the 850th celebration were officially closed. Luzhniki, with a gigantic trade-centre under Manezh square, is one of Moscow' largest construction projects in decades.

Real estate and construction development, essential as the source of the most desirable property in a capital rapidly becoming wealthier and dynamic, was one of the key sectors blessed by Luzhkov. Luzhkov approves and inspects personally all major ventures, and reports have said that real estate developers have given the city authorities big, sometimes controlling stakes in everything they built or developed. According to figures released by the Moscow Property Committee, since 1994, the city has taken -- in many cases -- controlling stakes in more than 180 new ventures, ranging from luxury hotels, to profitable office complexes, various industries, and, this year, even the city's Stock Exchange.

Yeltsin's victory over communist leader Gennady Zyuganov last year, and his recovery from heart surgery months later reassured foreign investors. More than ever in the past, they are now pouring huge amounts of money in Moscow, considered it the safest and most lucrative Russian region. Luzhkov told the daily "Trud" in a recent interview that Moscow received some $4.3 billion in foreign investment last year. He said Russia as a whole has received $4.8 billion.

This year, saw the creation of a city of Moscow financial-industrial group to maintain control in the capital and expand Moscow's business empire to the rest of Russia. The group's main interests are: oil (Central Fuel Company), banking (Bank of Moscow), telecommunications (Mostelekom), media (TV Center), building assets and other fields.