Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

State Minding the Business of Private Factories

On Vladimir Panichev's desk at the Prostor Bread and Cake Factory is a thick folder that chronicles the causes of his biggest aggravations.

They are summons from the local government calling Panichev to meetings to discuss how the factory will celebrate City Day, International Women's Day and the official passing of winter. They are orders to paint the exterior walls of the factory and to clean the property from the building all the way to the road. They are repeated instructions to display a Russian flag.

The demands might not bother Panichev, but for one reason: His factory is a private company.

"Why is it any of their business? I'm a private entrepreneur," said Panichev, slapping his hand on the file. "They're making it impossible to work without them. It's worse than it was with the district party office."

Since privatization began in Russia in the spring of 1992, more than 60,000 small businesses and more than 6,000 large state firms have been sold. But despite the massive transfer away from the state economy, the tentacles of state control continue to stretch into Russia's new private sector -- both with relatively minor demands such as those made on Panichev's factory and with the government establishing price controls and issuing production orders to private firms.

"It's still a rather serious problem that varies from locality to locality," said Maxim Boiko, chief executive officer of the Russian Privatization Center. "But I think the trend is going in the right direction. It's getting better, not worse."

At the Prostor Bread and Cake Factory, Panichev believes that his local government officials are looking for bribes and that their continued harassment of him is on account of the fact that he refuses to pay.

"They live on this money," said Panichev, whose factory in southeast Moscow is one of the city's largest, employing 740 people. "Their families vacation on this money."

Local officials say they are simply enforcing regulations within their rights, which they say include the right to instruct factories to participate in holiday fairs where their goods are sold to local residents.

"They live in the city of Moscow and there are special demands for all factories, no matter what kind of property they are," said Pyotr Biryukov, head of the regional administration of Vikhino, the jurisdiction where the bread factory is located.

Biryukov's response echoes the general attitude toward private enterprise expressed by the office of Moscow Mayor Yury Luzhkov.

Luzhkov, who has lobbied President Boris Yeltsin to slow down privatization, is also seeking the president's approval for a special privatization plan for Moscow that would leave the city as landlord of most commercial real estate and let the city dictate how private businesses are run -- preventing such things as milk stores changing money or selling candy.

"Excuse me, but they were given permission to privatize so that they would sell milk," said Oleg Baranov, an official at the Moscow Property Committee.

City interference in private production is not uncommon. Before the New Year's holiday this year, Luzhkov ordered the Moskovsky Champagne Wine Factory to produce two million bottles of champagne for delivery to designated stores and told the Krasny Oktyabr candy factory to produce 392.9 tons of sugar candy, 506 tons of caramel and five tons of chocolate.

The recently privatized candy factory also received an order from the government to ship a specific amount of candy to the Far North last year, even though it received no payment in advance, according to Anatoly Duarsky, the factory director.

Boiko said the two key areas where government exercises control over private industry are in real estate -- by making it difficult, if not impossible, for small businesses to buy space -- and price controls. Because of restrictions on profit margins for the sale of milk in many areas last year, producers turned instead to cream, where profits were unrestricted. As a result, Boiko said, the consumption of cream rose by 40 percent in 1993.