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Russian Privatization Plan Needs New Cash Infusion

Moscow looks to aid from G-7 meeting to keep reforms on course

WITH Russia's privatization effort facing a capital crunch, government reformers are counting on aid from the Group of Seven industrialized nations to provide crucial support.

G-7 leaders gather for their annual summit tomorrow in Tokyo. At the meeting, the group is expected to finalize a privatization aid package for Russia, totaling as much as $4 billion. American officials, however, say the figure is likely to be around $2 billion.

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Both foreign and Russian officials say the money is urgently needed to maintain privatization's momentum. To date, privatization, the cornerstone of Russia's overall reform strategy, has met expectations with the state selling off more than 70,000 enterprises nationwide since January 1992, Privatization Minister Anatoly Chubais says.

But now officials say that simply distributing shares will not guarantee privatization's success. The key is attracting investment, Mr. Chubais says, adding that most newly privatized enterprises lack the money to restructure and thus make themselves profitable.

"The Russian State Property Committee's efforts on privatization have been valiant, but they never had the time, or the resources to think post-privatization," says Roger Gale, the Moscow representative of the International Finance Corporation, a World Bank affiliate that has been advising the Russian government on privatization. "What has to happen now is to help enterprises turn themselves into efficient, open and honest ventures," Mr. Gale continued.

In trying to guide enterprises down the path to profitability, Russian reformers have come up with a plan to establish regional privatization funds. G-7 aid money would be used to stock the funds, which would selectively provide investment to enterprises showing the most profit potential.

The goal is to establish up to 30 regional funds throughout Russia, each comprising as much as $75 million, Chubais says. To promote peak operating efficiency, both Russian and foreign specialists would be eligible to run the funds and compensation would be based on performance.

By creating the funds on the regional level, Chubais says he hopes to bypass the Moscow bureaucracy which has gained a reputation for gobbling up foreign assistance while producing few tangible results. Some regional officials caution the concept can work only if the regions to receive privatization funds are carefully chosen.

"Aid should be extended only to the people who are ready to accept it," says Boris Nemstov, governor of Nizhny Novgorod, perhaps the most progressive of Russia's regions.

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In many regions the local leadership is unenthusiastic about the privatization process, Mr. Nemstov says. It would be a waste of time and money to establish funds in such areas, he adds.

IT is "imperative" to get at least one privatization fund up and running as soon as possible," in order to demonstrate to skeptical factory directors and workers the potential rewards of efficient operations, Gale says. Without the funds, other privatization experts say, Russia runs the risk of not fulfilling its potential.

"The desire is for Russia to have the most efficient economy possible, but that can only happen when there is real private property," says Arkady Yevstafyev, a Chubais aide.

Currently, the conservative-minded work collectives at most newly privatized enterprises hold a controlling interest. Under such conditions, directors are reluctant to take austere, performance-enhancing measures, particularly layoffs. Only when investors hold a majority of shares will the necessary changes be likely, Mr. Yevstafyev says. But without stock markets in Russia, potential outside investors are hindered in their ability to acquire shares.

Chubais and others point to the Vladimir Tractor Plant, located in a regional capital about 150 miles east of Moscow, as an example of the potential trouble facing the privatization process.

At the first shareholders' meeting in late June, the Vladimir plant's 3,000 workers faced the future and flinched. When asked to choose a director, they voted by a large margin to retain long-time, Soviet-style boss Anatoly Grishin over Iosif Bakaleinik, a Harvard-trained economist employed by the World Bank. Mr. Bakaleinik had served as a deputy plant director in the mid 1980s before he departed for Harvard Business School.

Though disappointed by the tractor plant results, Chubais says he remains optimistic, calling the privatization process "irreversible." Gale says the International Finance Corporation was designing a pamphlet to educate inexperienced shareholders on how to run a company in a market economy.

"It may look like not much is changing at the moment, but things actually are changing," he says. "The workers and new owners are only beginning to realize what they've got."

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