Privatization in Russia

When the Berlin Wall fell in 1989 it signalled the end of the USSR and major disaster. One of the masters of disasters was and is Boris Berezovsky who was written up in Godfather of the Kremlin He was the entrepreneur who made the average capitalist swine in the West look like an amateur or even benevolent. Here he puts a very percipient view of privatization.

He used his approach to rob Aeroflot blind. The author of the book Godfather of the Kremlin, was Paul Klebnikov  and  murdered for his pains or not as the case may be.

PRIVATIZING THE PROFITS OF AEROFLOT [ at page 170 ]

 "Our Interest Here Is Clear"

"Privatization in Russia goes through three stages," Boris Berezovsky told me in 1996. "The first stage is the privatization of profits. The second is the privatization of property. The third is the privatization of debts,"

In other words, it was not necessary to buy an enterprise to control it. The company could remain in state hands. All one had to do was co-opt the management and then funnel the company's revenues through your own middlemen, thus "privatizing the profits" without spending time and money privatizing the enterprise itself. Berezovsky explained that this first stage, the privatization of profits, "led to the disintegration of the enterprises" and "the primary accumulation of capital" by the middlemen. "Once enough capital has been accumulated, those people who have accumulated it begin to think of how to spend it," he continued. "Some buy property abroad, others go to play in Monte Carlo, and others use their money to acquire the disintegrating enterprises." 1

It was a strikingly astute explanation of what was happening in Russia. Almost all the big business empires of the early 1990s had been created in this way. Berezovsky himself had honed his model to perfection. First, in 1989, he began privatizing the profits of the automaker Avtovaz, buying cars from the factory at a price that guar­anteed him a profit and the automaker a loss. Next, in 1992, he entered into the commodities trade, exporting oil, timber, and aluminium; like all the other big traders of the time, he privatized the profits of the producers by paying them a nominal price while selling the commodities abroad at a huge mark up. In 1993, with the beginning of the voucher auctions, Berezovsky proceeded to the second stage of his model-privatization of property. Together with Avtovaz boss Vladimir Kadannikov, he used the Avva investment scheme and a number of other financial vehicles to buy a controlling stake in Avtovaz. With ORT, he began by privatizing its profits through the TV network's advertising monopoly in 1994 and went on to privatize its equity in

Though he did apply the second stage of his model (privatization of property) by buying equity stakes in Avtovaz and ORT, Berezovsky continued to pay more attention to the privatization of profits. He knew that control of a company's cash flow was more important than the ownership of its equity. With the collusion of company management, he established intermediaries to handle the target company's finances, sales, and marketing on the most disadvantageous terms. By taking control of company management Berezovsky could accomplish a "virtual privatization" without bothering to invest money in acquiring an equity stake. Nothing illustrated his mastery of this type of procedure better than the takeover of Aeroflot.

"Aeroflot is in a transitional phase between the privatization of profits and the privatization of property," he declared in an interview with the business newspaper Kommersant in November 1995. "We want to participate in both processes."

The company was one of the crown jewels of Russian industry, boasting the best assets of the former Soviet airline monopoly and dominating Russia's international travel market. [ That made it worth robbing of course - Editor ].