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. Last Updated: 07/27/2016

Ownership and Stability

The degree of stability in any society depends on a combination of several fundamental factors. Among them, the distribution of property among various social groups plays a particularly important role. The position of each citizen with regard to ownership and his or her resulting standard of living largely determines the relations between social classes.

With this in mind, it is interesting to ask to what extent the property of Russian citizens is secure. What influence will changes in this regard have on the developing situation in the country?

Soviet-style socialism was distinguished by the fact that the overwhelming majority of the population was effectively deprived of the right to private property. Even the nomenklatura (the "ruling class") simply managed state property and took advantage of its privileges without ever having any property of its own. Only those active in the "shadow" economy, because their activity was illegal, gradually came to control some property.

Thus Russia entered into Mikhail Gorbachev's perestroika and Boris Yeltsin's "radical reform" in a state of property equilibrium or -- as we used to say -- everyone was equally poor.

One way to gauge the well-being of the Russian population on the eve of market reform is to consider the amount of money in savings deposits at the State Savings Bank in 1990. At that time, there were 216 billion rubles on account, or a little more than $40 billion by the realistic exchange rate of five rubles to the dollar. The average deposit was about $345.

Among the first steps taken by Yegor Gaidar's reform team in early 1992 was the liberalization of prices. Prices rose and the relative value of the ruble fell, until by the middle of 1994 one could say that the cost of living had increased 1,000 times. Savings deposits were wiped out, enabling opposition politicians to claim that they had been "confiscated."

Although the question of compensating the population for lost savings has been raised many times, it has not yet been solved as President Yeltsin and his administration argue that the government simply does not have the necessary resources. The proposal that state property be used for this purpose continues to be slowly "studied."

Instead, the government has adopted a privatization program that does not consider the question of providing compensation to the previous "owners" or their heirs. No one has paid attention to the moral or legal considerations that call for compensation for property taken against the owners' will. This has considerably weakened the moral and legal basis of privatization in Russia.

In June 1994, the State Duma considered a draft law called, On Acknowledging the Property Rights of Russian Religious Organizations, but it was not accepted. The reason for the project's rejection was that dealt with the return of -- or compensation for -- property seized from religious groups by the Soviet government since 1917. The Duma was reluctant to set such a precedent, since it would certainly be followed by requests from the former owners of businesses, buildings and agricultural land.

Critics of the reforms do not miss an opportunity to point out that, when the Duma voted on this draft, communist deputies and delegates from Russia's Choice (which includes the ideologue of privatization Anatoly Chubais) found common cause against it. Neither group wants to see the restoration of this stolen property.

In an address this June, Yeltsin reported that 70 percent of Russia's industrial enterprises had already been transferred to private ownership. He also stated that 40 million Russian citizens had become owners of these privatized enterprises.

This summer marked the end of the first -- "voucher" -- phase of privatization. Approximately 150 million Russians were given vouchers which were to be used to invest in privatized enterprises. However, the value of each voucher at market prices was around $20. In other words, 150 million Russians were given a share of privatized property worth a total of $3 billion. In reality, the value of Russia's basic industrial structures is estimated to be at least $246 billion, giving Russian citizens a grand total of 1.2 percent of Russia's industrial wealth. The portion of ordinary citizens who participated in privatization was actually quite small since many simply sold their vouchers for cash.

Who then now owns this 70 percent of Russia's industry? The initial stage of privatization granted worker collectives considerable investment advantages and also allowed others to invest on a cash basis. In reality, the formal device of claiming that the worker collectives own shares is merely a way of disguising the fact that enterprise directors continue to exercise decision-making authority. Moreover, in many cases, it was precisely these directors who were in a position to buy shares for cash. The result is that the nomenklatura, taking advantage of its position in the socialist economy, has quickly transformed itself into a class of major property holders.

Together with the nomenklatura, the familiar figures from the old shadow economy have also been active in privatization. At the moment of reform, this group was in the best position to invest, since most of its wealth was less sharply affected by the preceding turmoil. Indubitably, this group will play an even more active role in the second, cash-based stage of privatization.

The result is that the nomenklatura and people from the shadow economy, representing about 5 percent of the population, have now formed our new class of industrial entrepreneurs. The remaining 95 percent of the population has been deprived of everything, even its modest pre-perestroika savings. Naturally, this bodes ill for a society that is trying to base its stability on a sense of true, individual ownership.

Ilya Mogilyovkin is a professor at the Institute of World Economy and International Relations. He contributed this comment to The Moscow Times.