The Vicious Circles of Control: Regional Governments and Insiders in Privatized Russian Enterprises

Abstract

How can one account for the puzzling behavior of firms' taxable cash f ows will have been reduced through insider-managers who, in stripping assets from the very cash flow diversion, have responded by collecting firms they own, appear to be stealing from one pocket to revenues in kind. fill the other?To disentangle these vicious circles of control, Desai Desai and Goldberg suggest that such asset-stripping and Goldberg propcse a pilot for transforming and failure to restructure are the consequences of ownership in insidet-dominated firms through a system interactions between insiders (manager-owners) and of simultaneous tax-debt-for-equity conversion and regional governments in a particular property rights resale through competitive auctions. regime. In this regime, the ability to realize value isThe objective: to show regional governments, by limited by uncertainty and illiquidity, so managers have example, that a more sustainable way to protect little incentive to increase value. As the central employment is to give managers incentives to increase institutions that rule Russia have ceded their powers to enterprises' value by transferring effective control to the regions, regional governments have imposed various investors. distortions on enterprises to protect local employment.The proposed mechanism would provide cash benefits Prospective outsider-investors doubt they can acquire to insiders who agree to sell control to outside investors. the control rights they need for restructuring firms andThe increased cash ievenue (rather than in-kind or doubt they can avoid the distortions regional money surrogates) would enable regional governments to governments impose on the firms in which they might finance safety nets for the unemployed and to promote invest. The result: little restructuring and little new other regional initia:ives. investment. And regional governments, knowing the This papera product of the Private and Financial Sectors Development Unit, Europe and Central Asia Regionis part of a larger effort in the region to address growth, governance, and poverty in the former Soviet Union. Copies of the paper are available free from the World Bank,

Eichnerian megacorp and investment behaviour of Russian corporations

“…The latter in the modern Russian economy has been studied by a number of Russian and foreign specialists (Desai and Goldberg, 2000;Dolgopyatova, 2002;Dorofeev, 2001;Dzarasov and Novojenov, 2003;Kapelushnicov, 1999;Novojenov, 2003A;Oman, 2001;Pappe, 2000Radygin, 1998Radygin, , 1999Radygin, , 2001Radygin and Sydorov, 2000;Radygin et al 2002, Skorobogatov, 1998. These studies show large differences between the formal distribution of 'property rights' and the real relationships of ownership and control in the Russian economy.…”

The Rise and Fall of Privatization in the Russian Oil Industry

“…175. See Maxim Ryzhov, 'Energichnaya Gosduma', Neft' i Kapital, 2000and Raj M. Desai 24 May 2006. 66.…”

Factors Influencing Corporate Governance in Postsocialist Companies: An Analytical Framework

“…As long as ownership rights were insecure, owners tended to withdrew cash from their enterprises through fictitious expenses or outright theft at the expense of minority shareholders, instead of reinvesting. Within short time horizons, the owners diverted cash flows to offshore accounts and shell corporations, concentrated losses among subsidiaries held by outsiders (rather than evenly distributing them between the insider-owned holding company and the subsidiaries), and delayed the payment of dividends (Desai/ Goldberg 2000).…”