BUSINESS PERFORMANCE The 1999 Surveys of Industrial Enterprises: Results and Forecasts... 3

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2 The Russian Economic Barometer market situation tests, estimates, forecasts Vol.IX, 1 Winter 2000 Russian Academy of Sciences Institute of World Economy and International Relations 23 Profsoyuznaya St., Tel. (7-095) GSP-7, Moscow, Russia Tel/fax (7-095) reb@avallon.ru Fax (7-095) BUSINESS PERFORMANCE The 1999 Surveys of Industrial Enterprises: Results and Forecasts... 3 STUDYING TRANSITION The Largest and Dominant Shareholders in the Russian Industry: Evidence of the Russian Economic Barometer Monitoring... 9 OFFICIAL DOCUMENTS: SUMMARY & COMMENTS List of Official Documents on Privatisation and Change of Ownership Forms in Russian Federation SURVEY STATISTICS Survey outlines Clarification to the series REB indexes INIOR-HSE indexes... 88

3 EDITORIAL BOARD Chief Editor S.Aukutsionek A.Batyaeva R.Kapeliushnikov English Editors E.Leontieva, M.Baskakova, L.Ivanova Production Editor G.Churkina Acknowledgements to T.Serzhantova, N.Dyomina, A.Ivanova, A.Zabelin, I.Bashirova, X.Netschajewa, A.Skripko, Yu.Andreev, M.Boglovskaya Technical or financial assistance was provided by: Institute of the World Economy and International Relations of the Russian Academy of Sciences, Russian Academy of Professional Training for the Agricultural-Industrial Complex (B.I.Shaitan), AGROCONT Association (A.Matveyev), Society for Global Social and Economic Integration, United Kingdom, The Russian Economic Barometer is published four times a year. 2000, The Russian Economic Barometer (Russia). All rights reserved. No part of this issue may be reproduced or transmitted in any form or by any means without the prior permission of the editorial board. ISSN X

4 B U S I N E S S P E R F O R M A N C E THE 1999 SURVEYS OF INDUSTRIAL ENTERPRISES: RESULTS AND FORECASTS S. AUKUTSIONEK, N. ZHUKOVA 1. Results of 1999 Results of monthly surveys of managers of industrial enterprises conducted by «The Russian Economic Barometer» (REB) show that in 1999, the situation has considerably improved by many criteria. On the average, monthly increase in OUTPUT was observed at 49% of enterprises. This is 11 percentage points higher than a year ago, and this is the best result in all eight years of our monitoring. ORDER-BOOKS were increasing every month at 56% of enterprises, which is 12 percentage points higher than the same indicator a year ago, and is also a record figure. At the same time, the volume of orders booked has notably increased: from 65% (last year) to 78% of its normal level. Intensity of ACCUMULATION OF INVENTORIES of finished products has significantly weakened. While in 1998, inventories were increasing every month at 42% of enterprises, in 1999, they were increasing only at 37%. This is the lowest mark of this indicator in the eight years it has been measured. The volume of inventories has drastically decreased: from 85% of its normal level in the preceding year, to 76% last year. CAPACITY UTILIZATION RATE was 62% in This means that the level that had been the lowest in the post-reform period, was surpassed by 7-8 percentage points at once. Monthly dynamics of this indicator also looked quite encouraging. While early in the year (in the January-February period), the capacity utilization rate was 56-58% of its normal level, it rose to 64-65% by the October-December period.

5 4 The Russian Economic Barometer, Vol IX, N1, 2000 LABOR UTILIZATION RATE reached 83% in 1999, which is also 8 percentage points higher than the record of the preceding year. As for EMPLOYMENT, it continued declining, even if at a slower rate. As a year ago, the majority of industrial enterprises were cutting their personnel down, while only 44% were increasing it every month. In 1998, the latter were a much smaller group of 33%. Indicators of INVESTMENT ACTIVITY have also improved. While in 1998, on the average, 66% of enterprises reported that they had not bought any equipment for 2 months or longer, in 1999, this figure is 58%. This is the same record as in 1995, but worse than in 1993 (53%). Among those enterprises that still have been buying equipment, the majority are not increasing their purchases and are not going to do so, keeping them at the same level. Last year, the VOLUME OF PRODUCTION CAPACITIES has increased at 27% of enterprises, decreased at 39% and stayed unchanged at 35%. The unfavorable gap between the first and the second figures is still quite large. Nevertheless, this is the best record in the last six years. For example, in 1998, only 16% of enterprises increased their productive capacities, while 54% cut them down; in 1997, the respective figures were 12% and 60%, etc. It is also worth mentioning that in the second half of 1999, portions of enterprises with decreasing and growing capacities have become almost equal for the first time since the start of reforms: 34-35% and 31-32%, respectively. As in the past, changes in the PRICE STRUCTURE were unfavorable for most enterprises. In this case, the situation has been worse than a year ago (as a consequence of the financial crisis in August 1998): during the last year, the share of enterprises with improving price structure has declined from 35% to 31%. However, the monthly movement of this indicator looked brighter. While in the January-March period, the price structure was improving at 27-30% of enterprises sampled by the REB, in the October-December period, it was improving at 30-35%.

6 Business Performance 5 Since August 1998, CONDITIONS OF BANK BORROWINGS have also deteriorated dramatically. The share of enterprises regularly reporting that their borrowing conditions had been improving was 25% in 1992, and it rose to 46% by In 1998, the share of such enterprises declined to 28%. However, in 1999, the equilibrium at the credit market was generally restored, and this figure was 44%. Deterioration of borrowing conditions (which, incidentally, were always unfavorable to enterprises) contributed to further growth of the NON- BORROWING SECTOR in the Russian industry. In 1999, about 51% of enterprises did not use bank credits. This figure is 3 percentage points higher than a year ago, and 13% higher than in As for the enterprises that still have LIABILITIES TO BANKS, the volume of their debt to banks was, on the average, 85% of the level considered normal by respondents. This is the lowest record of this indicator since 1996, when the relative debt volume was 118% (unfortunately, it was never measured in earlier years). Among LIMITS TO PRODUCTION, «shortage of financial resources» was still in the first place. In 1999, on the average, it was pointed out by 64% of respondents. Improvement since the previous year was only 5 percentage points. The second and the third places were shared by «shortage of demand» and «shortage of raw material and semi-finished products», each amounting to 37% of total «votes» of the REB respondents. This means that against the previous year, the rigidity of demand constraints has declined by 17 percentage points at once, while on the contrary, the rigidity of material and resource constraints has grown by 8 p.p. The latter tendency is a matter of certain concern. Since in 1994, estimates of shortages of raw materials and semi-finished products reached a minimal level of 19%, this indicator has invariably demonstrated an upward trend for 5 years. It was possibly related to deficiencies of market mechanism, particularly to growing barterization of the Russian industry (resulting in market fragmentation and further difficulties in finding the needed inputs). Last year, this tendency may

7 6 The Russian Economic Barometer, Vol IX, N1, 2000 have been enhanced by high economic growth which found the industry unprepared since after the financial crisis in August 1998, imports declined drastically. In any case, we have to point out that the growth of physical shortages was probably held back in the second half of the last year, when the share of respondents reporting about it declined from 42% (in the third quarter) to 30% (in the fourth quarter). Last year, we saw a turning-point of another long-term tendency, namely, of BARTERIZATION. For the first time since 1992, the share of bartered industrial output in total sales has declined by 11 percentage points, from 51% to 40%. However, there are many signs showing that total elimination of barter cannot be expected in the near future. Since the second half of 1999, this indicator is showing stabilization at a level of 34-36% of total sales. In 1999, as earlier, the majority of enterprises assessed their FINANCIAL CONDITION as «poor», and only 45% believed it was «good» or «normal». Nevertheless, this figure is an absolute record in all years of our monitoring (started in 1992), is more than twice as high as the same figure for (20-23%). As for forecasts of financial condition, in 1999, its improvement was anticipated every month by 44% of respondents - 7 percentage points more than in In 1999, the share of LOSS-MAKING ENTERPRISES has declined by 10 percentage points from the previous year and was 33%. The share of enterprises where top managers believed they were really facing BANKRUPTCY in the next one or two years, has declined still more steeply, from 40% to 27%.This indicator hit the lowest level since In December 1999, DEMAND FOR PRODUCTS ANTICIPATED WITHIN TWELVE MONTHS was assessed in the following figures (estimates made in the previous year are given in brackets). Productive capacities were considered redundant at 46% (53%) of respondents; normal at 45% (38%); and lacking at 9% (9%). Similar assessments of labor force are the following: it was considered redundant at 15% (30%) of enterprises, normal at 64% (57%), and insufficient at 21% (13%).

8 Business Performance 7 2. Forecasts for 2000 As usual, in the early 2000, managers of enterprises responding to the REB survey gave their forecasts of industrial production till the end of the current year. Their evaluations look as follows. By December 2000, total volume of industrial production in Russia will increase by 8% from the level of The greatest increments are expected in machinery (+15%); in light industry (+12%); and in metals (+11%). On the opposite side of the scale there are chemicals and building materials which are expected to remain unchanged. Table 1 Forecasts of Output by Managers of Sampled Industrial Enterprises for the Coming Year December 2000 December 1999 December 1998 Difference (December 1999 =100) (December 1998 =100) (December 1997 =100) (4)=(1)-(2) (1) (2) (3) (4) INDUSTRY ON THE WHOLE Machinery Other industries Light industry Metals Lumber, pulp and paper Fuel Electric power Food Building materials Chemicals Source: «The Russian Economic Barometer» surveys This is the most optimistic forecast of all made by REB respondents in recent years. In comparison with the one year-old survey, the outlook has improved in 9 industries out of 10. Optimistic shift is the most conspicuous in machinery (+27 percentage points) and in fuel sector (+25 p.p.). Only chemicals, the most promising sector of last year, now

9 8 The Russian Economic Barometer, Vol IX, N1, 2000 showed a shift to the worse (forecast was evaluated 13 p.p. lower than a year ago). Range of forecasts by industry has significantly narrowed. The gap between the highest and the lowest anticipated rates of growth was 30 percentage points last year, and only 15 percentage points, this year. Distribution of expected growth rates at individual enterprises is also the evidence of widespread optimistic expectations (Table 2). Table 2 Distribution of Enterprises by Their Forecasts of Output after 12 Months (%) January 1996 January 1997 January 1998 January 1999 January 2000 Decline Stability Growth During the past five years, we saw how this distribution was gradually improving. In January 1996 and January 1997, about 40% of enterprises were expecting that their output would fall in 12 months, and about 30% were expecting it would grow. In January 1998, the distribution has become quite the reverse: 29% were expecting decline, and 41% were hoping for growth. In the early 1999, this shift became still more evident: now, only about a quarter of enterprises were expecting a decline in output, and almost a half were hoping for growth. At last, in January 2000, the prevalence of optimists over pessimists was overwhelming: 68% against 16%. In total, the results of monthly surveys of managers of industrial enterprises conducted by the REB demonstrate that 1999 by most indicators has been the best year in all years of market reforms. And although the present market mechanism is yet far from being perfect, and is imposing serious limits upon possible trajectories of future development, there are certain grounds to expect that the favorable impetus gained by our industry will be maintained in 2000, even if somewhat weakened.

10 S T U D Y I N G T R A N S I T I O N THE LARGEST AND DOMINANT SHAREHOLDERS IN THE RUSSIAN INDUSTRY: EVIDENCE OF THE RUSSIAN ECONOMIC BAROMETER MONITORING R. I. KAPELYUSHNIKOV This study focuses on evolution of ownership structures and patterns of control at Russian privatized enterprises in It applies and further develops approaches that were offered in earlier research projects of «The Russian Economic Barometer» (REB) where the initial stages of that process were analyzed (Aukutsionek, Kapeliushnikov and Zhukov 1998; Aukutsionek, Filatotchev, Kapeliushnikov and Zhukov 1998). 1. Characteristics of Data-Set The empirical basis of the study is a specialized monitoring of problems of ownership and corporate governance which relies upon regular REB surveys of Russian industrial enterprises based on identical questionnaires and conducted at two-year intervals. By now, three special surveys have been conducted: in the early 1995, in 1997 and in 1999 (the next survey is scheduled for 2001). The REB sample, despite its rather limited size, is fairly representative by its major structural characteristics (for comparisons of the REB sample with other samples The study was supported by INTAS Project Strategies for Enterprise Survival and Recovery, Ret No I am grateful to S. Aukutsionek, I. Filatochev and V. Zhukov for joint work and discussions on problems of ownership and corporate governance in the Russian transition economy. Unless, this paper could hardly have been written. My thanks to O. Kuznetsova for valuable suggestions that helped substantially to improve the questionnaire. The responsibility for any conclusions and assessments rests with the author.

11 10 The Russian Economic Barometer, Vol IX, N1, 2000 and the whole population of Russian industrial enterprises, see our previous publications: Aukutsionek et al. 1998a; Aukutsionek et. al. 1998b). The first two surveys covered about 140 privatized enterprises across major branches and regions of Russia; in the last one about 160 valid responses were obtained. Moreover, about 50 respondents took part both in the 1995 and 1997 surveys (further, this panel will be abbreviated as P5/7); about the same number took part both in the 1997 and 1999 surveys (P7/9); and finally, about 20 in all three surveys (P5/7/9). In each survey, respondents provided information on distribution of equity capital of their enterprises among main groups of shareholders. Besides that, in the 1999 survey, about two thirds of the respondents reported whatever categories of owners their single largest shareholders belonged to, and what blocks of shares they possessed (in the previous surveys, these data were not collected). In addition to the information on actual distribution of shares, the REB surveys also contained respondents forecasts of future distribution anticipated in the next two years. In the 1995 survey, expected distribution of shares was projected for the early 1997; in the 1997 survey, for the early 1999, and in the 1999 survey, for the early This allows to assess directions and intensity of further probable changes in the ownership profile of the Russian industry. 2. Taxonomy of Ownership Structures and Patterns of Control Potential impact of ownership factor on firms behavior and performance follows from the fact that owners have formal rights to control their activities. As a result, an answer to the question what patterns of control prevail in an economy, that is whom rights of control belong to and how effectively they are exercised, might be of foremost importance. However, in contrast with formal rights enjoyed by owners actual control over companies is not an observable variable that can be measured directly. Only indirect evidence of its presence and

12 Studying Transition 11 effectiveness is available. In earlier published studies, two characteristics were identified as crucial in this respect (Short 1994; Earle and Estrin 1997). The first is degree of concentration of equity holdings. This aspect was originally examined in the classic study by A. Berle and G. Means who put forward a famous thesis about separation of ownership from control in the modern public corporation (Berle and Means 1932). According to A. Berle and G. Means, dispersed shareholders are incapable of exercising effective control over managers activity. On the contrary, concentration of the bulk of shares in the hands of a single owner or a group of owners helps to discipline their behavior. This implies that companies with dispersed distribution of shares would significantly differ in terms of performance from companies with highly concentrated equity holdings: the higher is concentration, the more effective would be owners control; the more their control is stringent, the better would be performance. Another important aspect of the problem is different identities of owners. In last decades, many interesting and insightful studies of this side have appeared (in particular, see: Hansmann 1996). The agency theory argues that various types of blockholders (even owning similar blocks of shares) may have quite different objective functions and face different costs to monitor managers activities (Shleifer and Vishny 1996). This implies that behavior and performance of firms might vary with dominance of different groups of shareholders [1]. Virtually all studies on problems of corporate governance in the Russian economy under transition (including previous REB studies) focused on distribution of shares among groups of holders, leaving aside the issue of concentration of shares in the hands of single shareholders. This was partly due to non-availability of relevant information, and partly to particularities of the Russian privatization that stipulated for transference of a huge (by any standards) part of equity capital to insiders. So, all discussions on problems of corporate governance in

13 12 The Russian Economic Barometer, Vol IX, N1, 2000 Russia inevitably revolved around the question, how stable this insider-skewed ownership structure would be. Data of the last REB survey conducted in 1999 provide an opportunity to overcome this biased approach and to take into account concentration of equity in the hands of single owners. Information obtained allows us to construct three alternative classifications of enterprises depending on to their ownership structures and patterns of control. In a sense these classifications are complementary to each other. The first is grouping of enterprises by size of block of shares owned by single largest shareholder (an individual as well as a juridical person). Let us denote this single largest stake as L1. Depending on its magnitude, we can single out four classes of enterprises: those with low (L1 is under 10%), medium (L1 is from 10% to 20%), high (L1 is from 20% to 50%) and superhigh (L1 is over 50%) ownership stakes in the hands of the first largest shareholders. (In our sample each of these groups consists of a roughly equal number of enterprises). The second is grouping of enterprises by types of dominant shareholders. Here we are following the classification developed by J. Earle and his coauthors (Earle, Estrin and Leschenko 1996; see also: Earle 1998) with modifications that were offered in previous REB studies (Aukutsionek et al. 1998a; Aukutsionek et. al. 1998b). According to this classification, we single out three large categories of enterprises: dominated by insiders (IE), dominated by outsiders (OE), and dominated by the state (SE). In turn, each of the first two classes is divided into two sub-classes: insiders enterprises into sub-groups dominated either by managers or by workers; outsiders enterprises into subgroups dominated either by financial or by non-financial outside shareholders. In sum, we have five types of enterprises: dominated by managers (ME), by workers (WE), by financial outsiders (FE), by non-financial outsiders (NE), and by the state (SE) [2].

14 Studying Transition 13 The following procedure was applied (for more details see: (Aukutsionek et. al. 1998a; Aukutsionek et. al. 1998b). A company was defined as dominated by insiders, if their stake of shares was equal or larger than the stakes held by outsiders or the state. The insider-owned enterprise was classified as dominated by managers if their equity block was not smaller than workers one; otherwise it was classified as dominated by workers. (We assume that if managers of insider-dominated enterprise hold more shares than non-managerial employees, total insiders shareholdings are actually controlled by managers.) Companies were identified as being dominated by outside owners if their stake was larger than the stake of insiders and not less than the stake of the state. Likewise, the outsider-owned enterprise was qualified as dominated by financial outsiders if their equity block was not smaller than non-financial outsiders one; otherwise it was qualified as dominated by non-financial outsiders. And in the cases when the maximum blocks of shares were owned by the state, enterprises were classified as being state-dominated. Finally, grouping of enterprises by types of the first largest shareholders is also a matter of interest. We shall denote these groups with the same abbreviations that we are using for classes of enterprises with different types of dominant shareholders, adding mark (*): IE* - enterprises with the first largest insider shareholders, ME* - enterprises with the first largest manager shareholders, WE* - enterprises with the first largest worker shareholders, etc. Taxonomies described above allow us to identify categories of blockholders who supposedly possess power over enterprises, and potential levers that are at their disposal to exercise effective control. Indeed, none of these typologies can reflect with absolute accuracy how the effective control is actually distributed among different categories of owners. For instance, classification by size of maximum single block of shares leaves aside the issue of different identities of their holders. At the same time, classification by identity of the first largest shareholders does not take into account the size of their stakes that may be rather

15 14 The Russian Economic Barometer, Vol IX, N1, 2000 modest and for this reason, insufficient to establish effective control. As for classification by types of dominant shareholders, it ignores the free rider problem and difficulties to reconcile conflicting interests within each particular group of owners. Even if a certain category of owners holds the bulk of shares in a company stock, diffusion of shares among numerous small holders would increase costs of concerted action and make them passive owners (this situation is most expectable at enterprises dominated by workers or individual outside shareholders). However, using the three above classifications concurrently, we may obtain a fairly complete and detailed picture of what kind of ownership structures and patterns of control have emerged in the Russian industry and in what ways they might evolve in the nearest future. 3. Basic Characteristics of Current Distribution of Shares Table 1 summarized basic findings of the REB monitoring of problems of ownership and corporate governance in While the results of consequent surveys cannot be considered as directly comparable because composition of respondents has not remained identical, general patterns revealed are close enough. As it is well known, both spontaneous privatization which was based mostly on leasing out state-owned enterprises with an option of buy-out, and mandatory privatization that followed it and provided enormous advantages for insiders, helped to concentrate the bulk of equity in the hands of managers and workers. REB surveys confirm that the initial distribution of shares was, indeed, clearly in favor of insiders. They also indicate that this insider-skewed ownership profile was kept over the whole post-privatization period. What s more, according to forecasts made by REB respondents, the bulk of equity may belong to insiders even in 2001 (see corresponding data in the last column of Table 1).

16 Studying Transition 15 Table 1. Ownership Profile of the Russian Industry According to the REB Monitoring, (%) 1) Categories of shareholders (forecast) Insiders, total Managers Workers Outsiders, total Non-financial outsiders, total Outside individuals Other enterprises Financial outsiders, total The state Other shareholders Grand total ) 136 respondents took part in the 1995 survey; 135, in the 1997 survey; 156, in the 1999 survey. In respondents gave their forecasts of the anticipated ownership structure for The last REB survey gives a more comprehensive picture of current distribution of shares (Table 2). According to its findings, in 1999, only one out of twenty industrial enterprises was free from insider ownership. Managers and workers in tandem remained the largest groups of shareholders: their combined share was 46.2% of total stock. Workers held 31.5%, managers 13.6% and the residual 1.1% were held by subsidiaries established by enterprises [3]. Meanwhile, by the early 1999, outsider ownership was already quite common: it was absent only at one enterprise out of ten. However, there was a very large part of enterprises (80-90%) that had no banks, investment funds, holding companies or foreign investors among their owners. At the same time, four enterprises out of five had individual outside shareholders. This proliferation of individual ownership is a new phenomenon not yet observed in earlier studies, including previous REB surveys.

17 16 The Russian Economic Barometer, Vol IX, N1, 2000 Table 2. Ownership Structure of the REB Respondent Enterprises, 1999 Groups of shareholders Average shareholdings (unweighted ), % 1) Average shareholdings (weighted), % 2) Insiders, total 46.2 (30.3) 43.3 Managers+ 3) 14.7 (18.9) 10.3 Managers 13.6 (18.1) 9.4 Subsidiaries established by enterprises 1.1 (4.8) 0.9 Workers 31.5 (24.2) 33.0 Outsiders, total 42.4 (28.9) 47.1 Non-financial outsiders, total 32.0 (27.0) 33.8 Outside individuals 18.5 (21.5) 16.5 State-owned enterprises 0.9 (5.9) 1.0 Privatized enterprises 6.6 (17.0) 5.2 Private enterprises 6.0 (14.5) 11.1 Financial outsiders, total 10.4 (20.9) 13.3 Commercial banks 1.0 (5.2) 1.4 Investment funds 3.9 (12.0) 3.5 Holding, investment and insurance companies 3.5 (12.4) 4.3 Foreign investors 2.0 (12.0) 4.1 State, total 7.1 (17.6) 6.4 Federal and regional property funds 5.8 (15.9) 5.7 Regional and local administrations 1.3 (7.8) 0.7 Other and non-identified shareholders 4.3 (15.6) 3.2 Grand total ) Standard deviations in parentheses. 2) Average shares in stock, weighted by enterprise size. 3) Total share in stock owned by managers and subsidiaries established by enterprises.

18 Studying Transition 17 Distribution of enterprises by size of blocks of shares owned by particular categories of holders, % 2) 0% 0-10% 10-20% 20-30% 30-40% >40% Total

19 18 The Russian Economic Barometer, Vol IX, N1, 2000 Cumulative stake of outside owners was little smaller than cumulative stake of insiders (42.4%). Interestingly enough, it mostly belonged to non-financial outsiders (32.0%), while financial outsiders had only 10.4%. Average blocks of shares held by banks, investment funds, holding companies or foreign investors were no larger than 3-4%. As for non-financial outsiders, the stake of outside individuals looked unexpectedly large: 18.5%, or almost 1.5 times as high as the stake of other enterprises (13.5%). The state kept 7.1% of equity of which 5.8% belonged to the Federal or regional property funds and 1.3%, to regional or local administrations. Table 2 also presents average stakes belonging to various groups of shareholders, weighted by enterprise size (weights were calculated from numbers of employees). It shows that shareholdings of managers and individuals were relatively larger at smaller enterprises (after weighting, their stakes look diminished). On the contrary, other enterprises and financial outsiders more often appeared among shareholders of large enterprises. However, disparities between weighted and non-weighted estimates don t look very significant, and this confirms that enterprises of different size had a more or less similar distribution of equity interests among major groups of shareholders. As for another basic characteristic of ownership structure, namely, concentration of equity holdings, a general bias of the Russian privatization in favor of insiders might give grounds for two opposite hypotheses. (1) On the one hand, the bulk of the stock was initially distributed among a large number of employees. This allows to suggest that level of ownership concentration should be relatively low. (2) On the other hand, individual outside investors have no incentives to buy shares of enterprises where interests of minority shareholders are not respected, which are mostly loss-makers, do not provide reliable information on their financial conditions, etc. In such a situation, it would be reasonable to expect that the bulk of shares would be concentrated in the hands of few large owners.

20 Studying Transition 19 Answers to a question in the 1999 REB survey about size of blocks of shares owned by the first largest shareholders clearly support the second hypothesis. On average, the single largest stakes in the REB sample amounted to 32%, indicating that the ownership structure in the Russian industry may be described as highly concentrated. 4. Dynamics of Redistribution In previous REB studies based on the results of 1995 and 1997 surveys, we traced main routes of redistribution of shares in the post-privatization period: from the state to non-state owners, from insiders to outsiders, and from workers to managers. In these studies we recorded some disturbing symptoms unfavorable for perspectives of formation of a workable corporate governance system: namely, shrinking shareholdings of banks and investment funds that had been supposed to become effective owners at the time when the State Program of Privatization was worked out and implemented. As it can be seen from P7/9 panel, the tendencies we had traced in continued in (Table 3). It is worth noting further weakening of role of financial outsiders, which was exhibited in an absolute decrease in their stake in total equity. At the same time, an almost two-fold increase in the stake of individual outside investors from 10.4% to 19.5% has become a surprise. Gross intensity of redistribution can be measured with an integral indicator m computed from a formula: m = 1/2 d i (t) d i (t-2), where d i (t) and d i (t-2) are average equity stakes belonging to an i group of shareholders at present and two years earlier, respectively (a multiplier 1/2 is introduced to avoid double counting, since the sum of positive changes is equal to the sum of negative changes by definition). Indicator m shows what part of share capital was redistributed among main groups of shareholders within two year intervals [4].

21 20 The Russian Economic Barometer, Vol IX, N1, 2000 Table 3. Changes in Ownership Structure of the REB Respondent Enterprises, (%) 1) Groups of shareholders Average shareholdings Insiders, total Managers+ 2) Workers Outsiders, total Non-financial outsiders, total Outsider individuals Other enterprises Financial outsiders, total Banks Investment funds Holding & other companies Foreign investors The state Other shareholders Total ) The Table is based on a sub-sample of 43 enterprises that took part both in the 1997 and 1999 REB surveys. 2) Total share in stock owned by managers and subsidiaries established by enterprises. According to REB estimates, in , intensity of inter-group migration of shares reached 17% (Aukutsionek et. al. 1998a; Aukutsionek et. al. 1998b). In , it happened to be somewhat lower: about 12%. A tentative conclusion which is implied by these data is that though in , the rate of ownership redistribution in the Russian industry declined as compared with the first post-privatization years, it still remained non-negligible.

22 Studying Transition What Patterns of Control Prevail? Wide diversity of intra-firm ownership profiles inevitably implies variability of patterns of control. It would appear reasonable to suggest that forms and efficiency of control would vary depending on size of single largest blocks of shares, identity of their owners and type of dominant shareholders (see above, Section 2). Comparing groups of enterprises that differ in these dimensions we can assess, first, incidence of prevailing forms of control, second, specifics of ownership profiles within particular groups of enterprises, and third, interrelation between characteristics that shape existing patterns of control. In other words, how large are zones of control by leading categories of owners in the Russian industry? What is the stake of shares needed to really influence the process of decision-making? How is control exercised by different categories of stakeholders related to concentration of equity holdings? 5.1. Incidence of Particular Forms of Control (a) Distribution of surveyed enterprises by concentration of shareholdings is presented in Table 4. At 19% of enterprises, level of concentration was low (L1 under 10%); at 21% it was medium (L1 ranging from 10 to 20%); at 25%, high (L1 in the range of 20-50%); and at 22%, super-high (the single largest shareholders owned controlling blocks). The remaining 13% of respondents reported that they knew neither the size of maximum block of shares nor who its owner was. This implies that, at every second industrial enterprise, the first largest shareholders had substantial blocks of equity capital, big enough to really influence decision-making on key issues and to have interest in the establishment of efficient monitoring over managers behavior.

23 22 The Russian Economic Barometer, Vol IX, N1, 2000 Table 4. Distribution of Enterprises by Size of Single Largest Blocks of Shares, 1999 Stakes of the single largest shareholders as % of total enterprise equity 0-10% 10-20% 20-50% % unknown Percentage of enterprises, % Note: the Table is based on sub-sample of 117 enterprises that responded to questions on size of stakes owned by the first largest shareholders and their identity. (b) To describe distribution of Russian industrial enterprises by categories of dominant shareholders, we are in a position to use findings of all three surveys conducted over While their results are not directly comparable because composition of respondents did not remain the same, they allow us to record some general trends in evolution of ownership structures and patterns of control. As follows from Table 5, the Russian industry entered the postprivatization period with an obvious prevalence of insiders control. The portion of workers-dominated enterprises was particularly high. However, in the course of time the workers zone of control started to shrink, while the zone of control of managers and non-financial outsiders began to expand. Surprisingly, but the fraction of enterprises with dominance of financial outsiders seems almost unchanged. It is significant that these conclusions are supported by data of all three panels - P5/7, P7/9 and P5/7/9. In 1999, the composition of surveyed enterprises in terms of dominant categories of shareholders appeared as follows (see Table 5): insiders dominated at 48% of them, outsiders, at 45%, and the state, at 7%. Workers and non-financial outsiders were dominant owners of every third enterprise, managers, of every seventh, and financial outsiders, of every tenth. As we can see, while insiders firms remain the most common type in the Russian industry, almost a half of enterprises have already passed under the control of outside investors. Nevertheless,

24 Studying Transition 23 assuming that the forecasts made by enterprise managers in the early 1999 are going to come true, one might conclude that even in 2001, the major part of the Russian industry would be still controlled by insiders. Table 5. Distribution of the REB Respondent Enterprises by Categories of Dominant Shareholders, (%) Groups of enterprises with different types of dominant shareholders (forecast). IE ME WE OE NE FE SE Total sample (c) Distribution of enterprises by identity of their first largest shareholders is somewhat different from the distribution by categories of dominant shareholders (see Table 6). If we put aside enterprises where respondents did not have information on first largest shareholders, as well as enterprises whose largest shareholders belonged to the group of other owners, we can see that insiders control 27% of all enterprises, outsiders, 60%, and the state, 13%. In other words, from the distribution by types of the first largest shareholders one might conclude that by the early 1999, most industrial enterprises had already gone under the rule of outsiders, while only a quarter remained under control of insiders.

25 24 The Russian Economic Barometer, Vol IX, N1, 2000 Table 6. Distribution of the REB Respondent Enterprises by Groups with Different Identity of the First Largest Shareholders, 1999 (%) Groups of enterprises by types of the first largest shareholders ME* WE* NE* FE* SE* Other * Unidentified largest shareholder Percentage of enterprises, % As could be anticipated, when passing from the classification by types of dominant shareholders to the classification by types of the first largest owners, zones of control by categories consisting mostly of small holders are getting narrower, while zones of control by categories consisting of larger shareholders are getting wider. For example, the number of enterprises controlled by outside individuals and workers declines sharply (for instance, only one respondent reported that somebody of the employees owned the largest block of shares). This means that at the majority of enterprises where the maximum cumulative blocks of shares were owned by outside individuals or workers, the maximum single blocks belonged to owners from other categories of shareholders. On the contrary, there was observed a significant increase in the fraction of enterprises controlled by managers (by 12 percentage points), financial outsiders (by 10 percentage points) or the state (by 7 percentage points) Specifics of Intra-Group Composition of Shareholdings (a) Table 7 displays ownership profiles of enterprises that differed by size of single largest blocks of shares. It follows from it that workers shareholdings monotonously declined along with the increase in L1. In the case of managers, the relationship turns out to be non-linear: their stake was smaller in two polar groups, namely, those with the highest and the lowest concentration of equity holdings. Finally, there were observed a negative correlation between L1 and the stake of outside individuals and a positive one between L1 and stakes belonging to such

26 Studying Transition 25 categories of owners as other enterprises, financial outsiders and the state. Table 7. Ownership Profiles of Enterprises with Different Size of Single Largest Blocks of Shares, 1999 (%) 1) Groups of enterprises by size of single largest Categories of blocks of shares shareholders 0-10% 10-20% 20-50% over 50% All enterprises Insiders Managers+ 2) Workers Outsiders Non-financial outsiders Outside individuals Other enterprises Financial outsiders The state Other shareholders Total ) The Table is based on the data on 100 enterprises with identified first largest shareholders. 2) Total share in stock owned by managers and subsidiaries established by enterprises. (b) What stake should a group of shareholders have in order to bargain for a status of a dominant owner? Table 8 allows us to answer this question. According to findings of the 1999 survey, mean stake owned by dominant shareholders of different types varied from 52% in the case of ME to 64% in the case of FE. Similar results were obtained earlier in the 1997 survey (they are also displayed in Table 8). In other words, shareholders groups have to accumulate very large blocks, usually larger than a controlling interest, in order to gain dominant positions. This confirms a conclusion made in the previous REB studies

27 26 The Russian Economic Barometer, Vol IX, N1, 2000 that high concentration of equity holdings in the hands of dominant shareholders is setting up an insurmountable barrier to other categories which could challenge for control over an enterprise (Aukutsionek et. al. 1998a; Aukutsionek et. al. 1998b). Table 8. Average Stakes Owned by Dominant Shareholders as Depending on Their Types, (%) Groups of enterprises by types of dominant shareholders ME WE NE FE SE (c) Let us turn to ownership profiles of enterprises with different types of the first largest shareholders. As follows from Table 9, mean size of blocks owned by the largest shareholders varied significantly depending on their identity: for insiders, it was not over 20%, while for outsiders it reached 30-40% and for the state, 40-50%. Interestingly, for different groups of outsiders it was quite similar: from about 30% for outside individuals, banks and investment funds to about 40% for other enterprises, holding companies and foreign investors. What fractions of cumulative blocks of shares held by certain groups of owners are concentrated in the hands of the single largest blockholders from those groups? As it is shown in the same Table 9, the largest blockholders among managers and outside individuals held 48-67% of cumulative blocks of shares belonging to these groups of owners. This means that they may face serious problems in forming coalitions within their own groups. In other groups, analogous indicator amounted to 83-95% that is the largest owners commanded virtually total blocks of shares held by their groups.

28 Studying Transition 27 Table 9. Stakes Owned by the Single Largest Shareholders as Depending on Their Identity, 1999 (%) 1) Groups of enterprises by type of the first largest shareholders Average stakes owned by the first largest shareholders Blocks of shares owned by all holders of the same category as the first largest owner Stake of the first largest shareholder as % of block of shares owned by all holders of the same category (1) (2) (3) (4) IE* ME* WE* OE* NE* Enterprises with outside individuals as the first largest owners Enterprises with other enterprises as the first largest owners FE* SE* Enterprises with other shareholders as the first largest owners ) The Table is based on the data on 100 enterprises with identified first largest shareholders Correlation between Characteristics Shaping Particular Patterns of Control (a) What types of dominant owners are most common at enterprises with high and low L1? Let us look at the data presented in Table 10. It follows from them that two thirds of enterprises with low concentration of shares in the hands of the single largest holders (L1 not above 10%)

29 28 The Russian Economic Barometer, Vol IX, N1, 2000 and none with super-high concentration (L1 over 50%) were dominated by workers. On the contrary, none of the first group and about a quarter of the second were dominated by financial outsiders or by the state. A sizable part of enterprises in two central groups (with L1 in the range between 10% and 50%) were dominated by managers, while dominance of non-financial outsiders was more frequent among enterprises with high and super-high L1. Table 10. Distribution of Enterprises with Different Size of Single Largest Blocks of Shares by Types of Dominant Shareholders, 1999 (%) 1) Groups of enterprises by Groups of enterprises by types of dominant shareholders size of blocks of shares IE OE SE Total owned by the first largest of which of which shareholders (L1) Total Total ME WE NE FE 0-10% % % over 50% All enterprises which provided assessments of L ) The Table is based on the data on 100 enterprises with identified first largest shareholders. (b) In the case of classification by identity of the first largest shareholders, results turn out to be slightly different. Available data (Table 11) seem to suppose that dispersed ownership commonly benefited to control of insiders while more concentrated ownership contributed to control of outsiders, both financial and non-financial ones. For instance, managers held maximum stakes at 60% enterprises with L1 not above 10%, while at 50-80% enterprises with higher concentration than that level, the first largest shareholders were outsiders. Apparently this suggests that in accumulating large blocks of

30 Studying Transition 29 shares managers due to limited access to financial resources confront with more serious difficulties than outside investors. Table 11. Distribution of Enterprises with Different Size of Single Largest Blocks of Shares by Types of Their Holders, 1999 (%) 1) Groups of enterprises by Groups of enterprises by types of largest shareholders size of blocks of shares IE* OE* SE* Total owned by the first largest of which of which shareholders (L1) Total Total ME* WE* NE* FE* 0-10% % % over 50% ) The Table is based on the data on 100 enterprises with identified first largest shareholders. (c) Finally, let us pose a question: how much does classification of enterprises by dominant types of shareholders correspond to their classification by types of the first largest shareholders? The comparison shows that there is a fairly high degree of conformity between them. For instance, from Table 12 it follows that at the majority of enterprises dominated by certain groups of shareholders, the single largest blocks were also held by owners belonging to those same groups (see the data at the diagonal of the Table). The only exception was WE, since, as it was noticed, there were virtually no largest shareholders among employees. This means that classification by categories of dominant shareholders is a sufficiently reliable source of information about whatever types of owners exert actual control over particular enterprises. Such a conclusion is obviously inapplicable only to WE group.

31 30 The Russian Economic Barometer, Vol IX, N1, 2000 Table 12. Distribution of Enterprises with Different Dominant Shareholders by Types of the First Largest Shareholders, 1999 (%) 1) Groups of enterprises by types of the first largest shareholders Groups of enterprises SE* Unidentifie Total by types of dominant IE* OE* d shareholders of which of which Total Total ME* WE* NE* FE* IE ME WE OE NE FE SE ) The Table is based on sub-sample of 117 enterprises that responded to questions on size of stakes owned by the first largest shareholders and their identity. 6. Impact of Ownership Structures and Patterns of Control on Behavior and Performance of Enterprises It is natural to suggest that performance and behavior of enterprises varied by concentration of equity holdings and by identity of dominant or largest shareholders might differ. Our comparative analysis will proceed on the basis of the same alternative classifications that were described above. In this section, we shall discuss the impact of ownership structures and patterns of control on current performance of enterprises, and in the next one, on their financial and investment policies Enterprise Performance and Concentration of Ownership According to the data of Table 13, in terms of performance, enterprises with medium concentration of equity in the hands of the single largest shareholders (L1 ranging from 10 to 20%) were in the most favorable position. Compared to other groups, their order-book level was 9-16 percentage points higher; capacity utilization rate was 9-