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Russian City Starts Model Program

Western economists hope success of privatization effort will encourage other cities

DURING the years of Soviet power this ancient Russian city on the Volga River was shrouded in secrecy, sealed off from the outside world because of its high concentration of defense-related industry.

Now, this city of 1.4 million inhabitants finds itself under a microscope, receiving attention from all over Russia, as well as the world, because of a radical privatization program that aims to auction off 2,000 small, state-run stores in just six months. Hundreds of potential buyers and interested observers attended a weekend auction, the third sale of its kind, during which 21 stores were sold for a total of 46.5 million rubles (about $465,000 at the Russian Central Bank's exchange rate).

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Bidding was brisk, as the entire slate of stores was auctioned off in only an hour and a half. A slick-talking auctioneer wearing a red bow tie kept the event running smoothly.

The Nizhny Novgorod privatization scheme, worked out by Western experts from the International Finance Corporation (IFC), is one of the few bright spots so far in Russia's effort to transform its economy into a market system after more than 70 years of communism. Privatization in other cities, particularly Moscow, is not going as well as hoped. And Deputy Prime Minister Yegor Gaidar, who is in charge of the government's crash marketization program, is hard-pressed to keep reforms on track.

"I consider what has been done here to be wonderful work, a model which could be repeated throughout Russia," said Mr. Gaidar, who attended the weekend auction.

The IFC, an organization similar to the International Monetary Fund and the World Bank, targeted Nizhny Novgorod for its privatization project in late January, says Anthony Doran, IFC chief for Commonwealth of Independent States operations. The city was chosen because the IFC felt it had the strong, reform-minded leaders needed to make privatization work.

IFC experts also viewed it as a typical Russian city that officials in other cities could easily identify with, hopefully fostering a "mushroom effect" of privatization throughout Russia. "In Nizhny we have something that will put some body and soul to all the talk about reform," IFC Vice President Wilfried Kaffenberger says.

Drawing on experience gained in Eastern European privatization efforts, the IFC came up with the Nizhny Novgorod blueprint in just six weeks. In the end it was decided auctioning off state-owned shops was the best method of privatization, Mr. Doran says. Anyone is able to bid on shops, although the auction system is weighted slightly to favor employees seeking to buy out the state. There is a limit of five stores per buyer to prevent monopolization, and for now foreigners are excluded from participating.

At the weekend auction nine of the 21 properties were bought by employee groups.

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Despite the efforts to maintain fairness, local officials face stiff resistance from workers, many of whom feel the deck is stacked against them. Several hundred demonstrators jostled and jeered Mr. Gaidar outside the auditorium where the privatization auction was held, shouting "Shame, shame." One woman held a sign that read: "Privatization in '92 = Collectivization in '29," a reference to the brutal policy of former Soviet dictator Josef Stalin that was the foundation for the so-called "planned economy ."

"The approach of the two policies are the same," said Alexandra Balasheva, a cafeteria employee. "They don't care if their plans cause hunger."

Most workers present at the demonstration said they feared for their jobs if privatization went ahead. "Some of us have worked 20 or 30 years at an enterprise and in two months they can put us out on the street," Tatyana Tsinitsina, another cafeteria worker, said about the possibility of new ownership. There is also a widespread impression that only the mafia is capable of raising the funds to buy shops.

When it came to discussing financing, the new store owners were generally tight-lipped, many saying they received loans from local banks without discussing details. Deputy Premier Gaidar played down the influence of organized crime in privatization.

"It would be unpleasant if part of the [mafia] money goes into privatization, but that would be better than fueling crime," he said, adding that some worker opposition was natural.

"People are scared.... I think the efficient performance of private shops will be the best way to convince public opinion," Gaidar says.

Opposition to privatization in Nizhny Novgorod may be the least of Gaidar's worries at the current stage of reform. In a move to ease rising discontent in industry with the government's harsh austerity program, Gaidar has eased Russia's tight money policy. In the next six months, 200 billion rubles (about $2 million) in credits will be made available to ailing enterprises, the Itar-Tass news agency said.

"It was an inevitable consequence of the overadjustment of the money supply. It decreased just a little bit too much," Gaidar told the Monitor, commenting on the increase of credits.

The credits, along with a parliamentary decision to raise the minimum pension from 340 rubles ($3.40) to 800 rubles ($8), will create tremendous hyperinflationary pressure. Gaidar, however, expressed confidence that Russia would not be swamped by hyperinflation. His prediction was echoed by Western financial officials, who remain confident that Russian reforms will progress.

"It means some heating up, but it's carefully tailored not to slip into hyperinflation," World Bank Vice President Wilfried Thalwitz said of the Russian government's latest moves.

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