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31 August, 2016  ▪  Vitalii Melnychuk,  Bohdan Butkevych

Of vouchers and men

Privatization in Ukraine after the collapse of the Soviet Union and its role in the rise of oligarchy

When the Soviet Union collapsed, about 96% of all enterprises in Ukraine were owned by the state. Not to mention flats and land – this figure was close to 100%. One of the most important questions was how to divide up everything that only yesterday belonged to "everyone" and "the people". Decisions on who should own the several dozen square meters in a Khrushchovka apartment building, where most urban Ukrainians lived, or the hectares on collective farms where they worked, were capable of disrupting society no less than issues of language, religion and nationality. The results were very varied. The concept of privatization envisioned that citizens would become the owners not only of their apartments, but also an appropriate share of the national wealth. Therefore, the so-called voucher certificate system was chosen – every person was to receive their share of the state's property and could dispose of it as they desired. The land situation was the same. However, instead of creating a nation of nearly 52 million shareholders, privatization gave birth to today's oligarchic economic and political system. And, in the grand scheme of things, has never been brought to its logical conclusion.

Indeed, the idea that laid the foundation for privatization was noble in its own way. All the citizens worked to create the national wealth, right? So everyone should have the right to an equal share in the form of property privatization certificates, housing privatization cheques and land privatization vouchers. The plan was to privatise up to 70% of the assets of state enterprises that were subject to the programme, thus creating a "powerful class of owners as a fundamental base and main subject in society, as well as a driving force behind market reforms".

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However, some small reservations remained. For example, only those who lived in state-owned apartments (the vast majority) could take part in their privatization, and only those who actually worked in agriculture could take ownership of the land. Everyone without exception could privatise the assets of enterprises. Just two or three years were assigned for all this, after which all the citizens who would have already become owners could trade their shares for cash through a normal stock market. To all intents and purposes, that is what happened. Just with a huge deviation from the original plan.

The Concept of Denationalisation and Privatization of Enterprises, Land and Housing, adopted by the Verkhovna Rada of Ukraine on October 31, 1991, formed the legal basis for so-called mass voucher privatization These principles were finalised by the March 1992 Law on Privatization Documents. All citizens of Ukraine who lived there full-time or moved their permanent residence to Ukraine before January 1, 1992, were eligible to receive privatization documents. The National Bank of Ukraine issued the vouchers, while the State Property Fund (SPF) was supposed to work on new proposals and generally supervise the privatization process.

The National State Corporate Rights Management Agency was also created and was intended to make a register of state corporate rights, assess their value and manage state-owned shares in enterprises. On the other hand, a specific executive authority to deal with privatization was never established. The SPF inherently could not be such a body, because it was similar to an accounting department, whose competences could clearly not include operational management issues. Instead, the Fund turned into an agency that literally decided everything. This opened up huge risks for abuse, which were very soon taken full advantage of.

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Interestingly, this voucher privatization was in no way a Ukrainian innovation – at that time, the Poles and Czechs already had some experience, and parallel processes were underway in Russia. To give credit to Ukrainian legislators where it is due, our vouchers, unlike the Russian "cheques", were only issued to citizens of the country on the registered basis. Moreover, in theory, and in the first two or three years of practice, their circulation was very limited. That is, they could not be sold, they were not money as such, could not be used as a means of payment or as collateral for payments and loans, and no dividends were paid on them. But very soon the situation would change: vouchers started to be traded, even after their inflationary depreciation, and the very idea behind them was ruined.

The vouchers could be exchanged at nominal value for shares of companies by their employees and on a competitive basis by others wishing to become shareholders or pass the securities on to an investment fund or trust for management. In other words, in return for a voucher a person could get shares in a company and make a profit. And, of course, they could be exchanged for housing cheques or land vouchers (which were never actually issued).

However, a crucial problem immediately arose that would later lead to the failure of the entire process – the issue of converting and valuing the vouchers. From the start, the nominal value was calculated by a purely mathematical method – the average worth of one voucher. The assets of state enterprises were measured in roubles, housing in square metres of total floor space, and land in hectares of farmland. At the same time, a law on the privatization of land was never passed, so the vouchers for this were not actually involved in exchanges. As for the others, the property cheque was given a nominal value of 30,000 roubles, the housing one – 12,000 roubles. The values were subsequently changed: 105,000 roubles and 420,000 on 1/11/1993, 50 million roubles and 20 million roubles on 1/1/1995, and 500 hryvnias and 200 hryvnias from the introduction of new Ukrainian currency in 1996 until 1999. They could be exchanged at a ratio of 1 to 2.5, i.e. 1 property certificate was equal in value to 2.5 housing cheques. Or, alternatively, 1 housing cheque for 0.4 property certificates.

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However, the soaring inflation of 1992-1994, when the transitional Ukrainian currency depreciated hundreds of times over, very quickly nullified all these calculations. There was no talk of reasonably recalculating the value of vouchers. At that point they were worth $10 on the black market, despite the fact that their value had actually been an equivalent of more than $1,500 when issued. In parallel, the fixed assets of enterprises depreciated, but were not revalued at the same time as property certificates. So the real ability of citizens to take ownership of these shares quickly became fiction.

In addition, certificate exchange was often not allowed at privatization auctions. Therefore, many citizens simply kept hold of their vouchers, especially housing ones. Not to mention the elementary ignorance of the majority of Ukrainians, their failure to understand what they should do with these pieces of paper, where to go with them and what they are entitled to. No awareness-raising activities were conducted. As a result, at least 3 million people did not use their vouchers at all.

Later, voucher privatization became a complete sham: when Leonid Kuchma came to power, the state started to ignore the fact that vouchers were being traded, even though they were registered papers. This immediately benefited people from the criminal world, who started to buy up certificates from the gullible citizens with "black money". And they did it with the assistance of corrupt police and government officials. Now we reach the point where those who it is now customary to call oligarchs made their first huge fortunes. 

But the biggest problem was the reluctance of the then political elite to organise privatization honestly and under some semblance of public control. Do not forget that the same communist nomenclature remained in power in Ukraine and Leonid Kravchuk created the ideal conditions for them. Young reformers from the democratic opposition missed their chance to take matters into their own hands through ineptitude. If the alliance of old Communist regional committee heads and "red directors" of state-owned companies agreed to privatization, then only on terms that were beneficial to them. Ones that left the most profitable enterprises under their control and let the people have the dregs that would flop anyway in a market economy. From the first days of privatization, top management artificially inhibited it at the most interesting enterprises and only put things of relatively low value up for sale, sensibly waiting for a time when they could take over the more attractive companies themselves.

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That moment came with the advent of Leonid Kuchma – the true creator of the current oligarch/lumpen social system. At that time, vouchers had already lost any real value and shady businessmen close to the government started to snap them up on the cheap. The management of the State Property Fund, which almost single-handedly controlled all of the assets, started to systematically give the tastiest morsels to those who agreed with senior political leadership. So ownership could be obtained through political and personal loyalty, which completely cancelled out the market aspect of mass voucher privatization. A few years later, privatization moved into the realm of cold hard cash, so the road to the “national wealth”was completely blocked to ordinary citizens. And that is the story of how we ended up with a nation of oligarchs instead of a nation of shareholders.

Translated by Jonathan Reilly

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