Hybrid Capitalism at Work in Russia

A maverick governor tidies up debt-ridden businesses

Vostokrybprom, a fish-processing company based in Khabarovsk near Russia's Pacific coast, nearly foundered after it was privatized in the early 1990s. A rogue director commandeered its fleet, diverted revenues into his pocket, and stopped paying wages to the workers, who responded with a hunger strike. Then the rascal fled to New Zealand, just ahead of outraged creditors.

It's a sadly familiar tale for post-Soviet Russia. But the denouement is hardly what you would expect. Vostokrybprom didn't collapse and turn to rust. Instead, a rescuer appeared in the person of Governor Victor Ishayev, a former shipyard welder who's the political boss of this remote Far East province bordering on China. Vostokrybprom owed millions of rubles to the Khabarovsk government. So as holder of the debt, the local regime forced the company into bankruptcy and took possession of a majority of its shares. Ishayev then found a friendly local bank to reorganize Vostokrybprom under new management and with fresh credit.

It took the government over three years to turn things around, but Vostokrybprom is once again a wage- and tax-paying concern. It had sales of $15 million in 2000 and pumped 35% back into the company in the form of capital investments. Its fleet hauls in 50,000 tons annually of Pacific crab, herring, and other fish. Now Ishayev's administration is negotiating to sell its 51% stake to Russian or Japanese investors to raise fresh capital needed for new equipment. "Governor Ishayev knows what he is doing; the moment a child is standing on his feet, you allow him to become independent," says Konstantin Voloshenko, Vostokrybprom's boss.

So proceeds one of Russia's most intriguing experiments, a search for a Third Way between the Soviet-style command economy and those laissez-faire policies that have achieved such disappointing results. "We are saying the state should help to build a market economy," says Ishayev, "because the market does not create itself." An attentive President Vladimir V. Putin is urging the 53-year-old Ishayev to keep going. And fellow governors are watching with interest, too. "We have to construct a new kind of partnership between government, business, and the people," says Duma Deputy Sergei Glazyev, a policy guru who's counseling Ishayev.

TAX BOON. Khabarovsk, seven time zones east of Moscow with a population of 1.5 million, has provided other opportunities for its entrepreneurial governor. His administration has taken control of some two dozen struggling companies, found new strategic investors for nearly a quarter of them, and is eyeing a half-dozen more or so enterprises for possible takeover. In one such case, Ishayev's team reorganized a gold mine and turned it over to commodities giant Sibneft in return for investments that so far reach $20 million. The mine has more than doubled production and is paying $9 million of its $45 million annual sales to the local government in taxes.

It's not what Adam Smith would recognize as pure capitalism. But by putting companies back into temporary government custody, Ishayev is giving them needed breathing room. Consider Amur-Cable, a wiremaker privatized in 1993 and acquired by Ishayev's administration two years ago. The company, now with 820 workers, annual sales of $14 million, and aftertax profits of $1.4 million, has adopted international standards of quality control, started paying bonuses to the most productive workers, and permitted divisions to operate as profit centers. "Don't misunderstand, we are not against markets," says Oleg G. Burov, the plant's 44-year-old commercial director. "But to develop a new economy, a country still needs state direction. After that, the state can retreat."

Presiding over this policy laboratory is a seasoned politician, elected in 2000 to a third four-year term. Ishayev grew up in these parts, and after starting out as a teenage welder took on a succession of factory management jobs at the behest of the ruling Communist Party bosses. Now a political independent, Ishayev says he has no interest in returning to Soviet measures, notwithstanding the Lenin bas-relief that still graces the foyer of his office building.

Policies similar to Ishayev's are being pursued in the Yaroslavl, Nizhny Novgorod, and Tula regions in central Russia. But Ishayev's team has it down practically to a science. There's a line item in the $17 million regional budget for the government's acquisition of debt-ridden companies. Dalkombank, the Far East's biggest financial institution, is 25% owned by Ishayev's administration. When Ishayev acquires control of a company, the bank typically assists in straightening out the books, arranging loans, and scouting for a buyer. "I don't know what to call this model, but it is being implemented successfully," says Dalkombank President Andrei Shlyakhovoy, a 41-year-old economist.

No matter what the model is called, Ishayev clearly took a page from China's playbook. For the past two decades, the Chinese government has actively developed state enterprises into for-profit businesses, often with spectacular results, although with some failures, too. Across the Amur River from Khabarovsk, in China's Heilongjiang province, the economy is booming. Capital city Harbin sports glitzy modern hotels, sleek public buses, and restaurants that lure passersby with colorful displays of live fish, clams, and crabs. By contrast, downtown Khabarovsk--the capital city and the region share the name--is a desolate landscape of unrenovated Soviet-era buildings, cracked sidewalks, and dilapidated buses. With little cash in circulation, barter is popular. Drugmaker Dalkhimpharm pays foreign-equipment suppliers as well as local repairmen with crates of medications.

POLITICAL TEMPTATIONS. And yet, conditions have improved. After shrinking by two-thirds, industrial production in the region has risen 10% since 1996. Khabarovsk's manufacturers benefited from the devaluation of the ruble, but credit belongs too with Ishayev's interventionism. The consequences of a policy vacuum can be seen in neighboring Primorskye Krai, which is blessed with more natural resources. After the collapse of the Soviet Union, corrupt politicians and business gangsters looted key enterprises, plunging the capital, Vladivostok, into a nightmare of lawlessness and power outages.

Not that there aren't dangers to the Ishayev approach. It could turn into a jobs-protection program, keeping companies from launching necessary restructurings. And although Ishayev's regime seems to have avoided this pitfall so far, there is always the temptation to sell deprivatized companies to political cronies.

Free-market purists in Russia tend to decry such interventions as the beginning of a new communism. Yet sometimes the best formulas come not from the policy wonks but from the men and women who must tackle real problems in real places. Khabarovsk's progress is fragile. But its model may yet prove the bridge between a bankrupt system and a functioning economy.

By Paul Starobin, with Russell Working in Khabarovsk

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