Similarly, after the transition, there was as yet no market mechanism in place where producers and consumers could meet, be informed, and deal with one another. In the days of the USSR, there was no need for such a market mechanism because Gosplan, the Central Planning Agency, and the various central ministries did the job, even if poorly. But after 1991, when Gosplan and the ministries lost their power to make such allocations, Russians seeking to acquire even simple things such as a mattress, a saw, or a jacket did not know where to go. Imagine then how difficult it was for a factory director in search of a ton of coal or a specialized machine tool to find what he was looking for. Russia’s retail stores had little or no experience in dealing with an independent manufacturer and supplier. Moreover, some of the supplies allocated previously by Gosplan came from factories that were now located in newly independent countries that no longer would take rubles. This was not only because it was no longer their local currency but because of the hyperinflation in Russia mentioned earlier.
For that matter, the privatization process itself was problematic. In an effort to win political support for his new bottom-up democracy, Yeltsin agreed to privatize the heretofore centrally planned, state-owned economy. The state issued every Russian citizen a 10,000-ruble voucher redeemable in newly issued shares of the enterprises being privatized. The intention was to ensure that every Russian would not only derive some benefit from the dismantling of the old system but would also have a vested interest in the success of the new market system. But after being subjected to seventy years of state propaganda against capitalism, few Russians understood why a share of stock in the new Russian companies was worth owning or had any value, especially at a time when Russia was in such a sorry economic condition. Not surprisingly, when the market value of their voucher fell to the equivalent of $25 and then $10, most Russians opted to sell their newly allocated voucher and its entitlement to a share of stock for a bottle of vodka or a few rubles. Vodka was concrete and pleasurable, rubles were tangible, but the stock was abstract and at the time little more than a piece of paper. So the vast majority of Russians had little more than a passing hangover or a few rubles to show for seventy years of communism.
Even worse, because of politics, greed, a flawed design, and corrupt implementation, a small number of investors ended up in control of most of the previously state-owned enterprises. One group of these newly rich, so-called oligarchs were former government officials. They simply took over ownership of the state properties that they had been managing as agents of the government. Another group of owners emerged from a seamier stratum of black market operators and money changers. While despised in the Soviet era for their anti-social black market activities, they nonetheless had learned how to operate in a shortage environment by mastering market practices even if they were illegal at the time. Consequently when markets and private ownership were legalized and no longer anti-social, these previously underground operators found themselves at a significant advantage. This group stood in marked contrast to the former government bureaucrats who were used to issuing decrees in the rigid world of state ownership, unconcerned by what the consumer might or might not actually want. These former bureaucrats found themselves ill-equipped to operate in a market environment where consumers had choices and could not be dictated to.
DIVIDING UP THE SPOILS
In this chaotic environment, in a short time a growing number of these newly rich oligarchs became billionaires. But that did not necessarily mean they were good managers. Certainly none were self-made men comparable to a Bill Gates of Microsoft, Edwin Land of Polaroid, Fred Smith of Federal Express, Steve Jobs of Apple, or Michael Dell of Dell Computers. Even those adept at adapting to the market derived most of their wealth from seizing what had been state assets and in a large number of cases by stripping assets from those companies. These enterprises, taken over by the new oligarchs, were spun off from previously state-owned enterprises within the country’s various ministries.
THE GAS INDUSTRY IS KEPT WHOLE
The case of the Ministry of the Gas Industry was different. Senior officials in the ministry fought hard to retain all the various properties within the confines of the ministry. They succeeded and in August 1989, the Ministry of the Gas Industry transformed itself intact into a corporation called Gazprom. This move kept the assets of the Ministry of the Gas Industry as a whole, ensuring that they would not be parceled out to various promoters—unlike the Ministry of Petroleum, which privatized what had been its wholly controlled producing fields, refiners, and pipelines. Initially the state owned all of Gazprom’s stock but gradually sold some of its shares to private parties. Nevertheless, because the state remained the dominant share owner, the minister of the Gas Industry, Viktor Chernomyrdin, made himself president and CEO of this entity.
Chernomyrdin had served a long apprenticeship in both the energy sector and the government. He spent his early years working at the Orsk refinery, which is located not far from Orenburg in the Urals. Then after his army service, he studied at the Kuibyshev Polytechnical Institute.3 From there he went to work for the Communist Party in Orsk and stayed until 1973 when he took a job as deputy engineer at the natural gas processing plant in Orenberg, near where he was born. He became director of that plant in 1978. His next move was to Moscow where he became an instructor for the Central Committee of the Communist Party. This trajectory put him in line to become deputy minister of the Ministry of the Gas Industry in 1982 and then minister in 1985.
This was also the year Mikhail Gorbachev became General Secretary of the Communist Party. Gorbachev began the reform process that ultimately led to the end of central planning and the state ownership of all the means of production. Anticipating the changes that were yet to come, in August 1989, Chernomyrdin transformed the Ministry of the Gas Industry into Gazprom, which became the country’s first state-corporate enterprise. The state was still in control but now this control was exercised through shares of stock, 100 percent of which were initially owned by the state.
This was an early indication of what was to happen in the future. But the mass privatization program did not begin until mid-1992 after Boris Yeltsin had taken over as president. In November 1992, Yeltsin authorized the conversion of Gazprom from a wholly state-owned joint stock company into a private joint stock company whose shares could be owned by both the state and private parties. In February 1993, Gazprom began to sell its stock to the public and by 1994, 33 percent of its shares had been purchased by 747,000 members of the public, most of whom were able to obtain a Gazprom share of stock in exchange for one of the vouchers the state had issued to every Russian citizen as part of the privatization process. Fifteen percent of the stock was also purchased and allocated to Gazprom employees. For the time being, the state retained 40 percent of the shares (although this was gradually reduced to about 38 percent).