IV. Communicative practice. Situations

1. Role play an annual meeting of a big company. The board of directors is making an annual report, the shareholders are asking questions. Discuss the future perspectives of the company, its gains and losses, profits, dividends.

2. You run a health food shop. Your shop is prosperous. You need money to expand, to buy bigger stocks, better premises, a delivery van, and office furniture. Discuss the ways to raise all this money with your partners.

3. You are a shareholder of a company that declared bankruptcy. You feel sorry for the money you spent buying shares. Discuss the situation with another shareholder.

4. Your friends and you are going to start your own business. Discuss the way it will be organized.

Key terms.

1. Sole trader

2. Partnership

3. Company

4. Shareholder

5. Limited liability

6. Dividends

7. Capital gains

Russian Experience

1. Think and say:

a) There are thousands upon thousands of industrial enterprises in Russia. Are all of them prosperous? Why?

b) Is anything being done to reform them?

c) Is economic growth possible in Russia? Prove your opinion.

2. Read the text and get ready to analyze reforms in Russia and express your personal attitude to them.

3. Write an essay “Macroeconomic intentions and microeconomic realities in presentday Russia.”

Common Profile of a Russian Enterprise

Any economic reform is aimed at building an efficient economy which, in turn, must ensure a decent life for the population. But the Russian economy took a downturn after the reforms were introduced: there was a decline in production, default in payments, shutdowns in production, and strikes.

A dramatic gap formed between macroeconomic intentions and microeconomic realities. Actually, the microeconomic level in Russia comprises medium and large, even huge, enterprises with more than 1,000 employees

It is these enterprises that make up the backbone of the Russian economy and that make market waves break. It is there that macroeconomic innovations run up against a brick wall. Enterprises differ, but let us try and picture a Russian enterprise: what it is like and how it behaves.

Ownership.

A typical industrial enterprise nowadays is owned by its employees. It is a joint stock company with the controlling interest belonging to its workers. A manager has more shares than a rank-and-file worker, but on the whole, the administrators have fewer votes than the workers.

The state retains a large block of shares in it, up to 20 percent. A considerable part of state-owned shares continue to be sold, and soon there will be new proprietors of the enterprises — first of all, banks and investment companies which may get a large block of shares (15 to 30 percent).

The size of the enterprise (the number of employees, the amount of fixed assets) has not changed much throughout the period of reforms: it is still too large and its equipment is very worn-out. The enterprise has branches which are independent legal entities, but the administration retains rigid financial control over their activities.

The enterprise owns apartment houses, schools, clinics and kindergartens. All this social infrastructure is hopelessly unprofitable. At the same time, it cannot be turned over to local authorities because their budget cannot bear such a heavy burden.

Management.

The director of a former state-owned enterprise nowadays most often chairs the Board of Directors of a joint stock company and is its president. All the representatives of the former administration have also got the main posts on the Board. The Board of Directors is made up of representatives of the federal government (the former ministry) and local government.

The director-president cannot be removed from his post unless he gets into a bitter conflict with the employees Naturally, he himself tries to avoid this. The president is under great pressure from all directions: sometimes he is simply beset by the so-called “new Russians”, by the administration of the enterprise, by representatives of government bodies and by the rank-and-file employees. Compared to 1991, the director has less freedom in decision-making.

The administration of the enterprise and the president give priority to maintaining the level of employment and wages. Another priority of theirs is their personal interests which they further by gradually draining capital from the enterprise. Namely, representatives of the enterprise’s administration and government bodies establish commercial companies inside the country and abroad (mainly in offshore zones), into which part of the enterprise’s capital is channeled. They also evade taxes on their personal incomes by having the company pay their entertainment costs and travelling expenses. And, naturally, they establish high salaries and regular bonuses.

Financing.

The enterprise is almost fully self-financed — mainly, from its profits because depreciation deductions are not enough because of the low book value of fixed assets. The enterprise cannot afford taking a bank loan at a market interest rate: the profit that could be made with it is much lower than the loan interest. The need for loans is partially met by a “friendly” bank — one co-founded by the enterprise and which has contributed part of its funds to the bank’s charter capital. “Informal” ties with representatives of government bodies (both local and federal) also help. Personal contacts make it possible to receive centralized credits at a much lower rate than the one set by the Central Bank of Russia. They also help evade customs duties imposed on exports and imports. “Lobbyists” are included (sometimes the “relatives” of the right people) among the founders of the enterprise’s branches and related commercial companies.

Financial resources are used almost equally to pay salaries, ensure production and investment projects, and cover losses of the social infrastructure.

Outlays on the payment of dividends on already-issued shares are insignificant: the dividends are much lower than the market interest rate on deposits. As a result the enterprise refrains from issuing more shares and bonds.

Employment.

Over the past four years the number of employees has somewhat decreased, largely because of the curtailment of auxiliary production. Besides, many highly skilled and active workers have left industry and taken up trade or foreign economic activities. So, on the one hand, enterprises are short of specialists, and production discipline is on the decline; on the other hand, there is hidden unemployment and a gradual reduction of real earnings. Workers are ready to put up with low incomes in order to retain their jobs. And, as a result of pressure from the employees, the administration hesitates to make any cuts.

Production.

The enterprise has preserved its traditional production structure and the percentage of new types of goods if the output is not high. The administration seeks to support and develop research and development projects at the enterprise with a view to introducing new types of products. The funding of investment projects, started several years ago, continues because their implementation is essential, at least for maintaining production (“supporting investments”).

The enterprise aims to maintain production at its current level or even to increase it. Since sales have been going down, stocks of newly produced goods have been growing — this serves as partial protection against inflation. Stocks of finished goods at storage facilities of the enterprise increase or decrease, depending on what kind of inflation prevails: cost inflation or demand inflation.

Marketing.

The principles of price formation have remained unchanged. The enterprise orients itself on its costs and on a profit which it considers “normal” — 10 to 15 percent over the costs. As a rule, this approach is used with regard to traditional consumers; for new clients prices are established at a retail price level, taking wholesale, transport and other discounts into consideration.

Goods are supplied to traditional consumers irrespective of their current solvency; the enterprise gets the same good will from its traditional suppliers, too. Barter trade still dominates the economy. This conserves the system of traditional ties and keeps the payment crisis in the economy at a high level. Meanwhile, relations between new suppliers and consumers are different. They are done on a 100 percent prepayment basis.

More often, the enterprise is a monopolist. However, it is greatly dependent on transportation costs and marketing margins which account for a considerable part of initial prices.

The enterprise has to conduct trade under conditions of the utter “politization” of the sales and supply markets. Relations with suppliers and consumers in countries of the Commonwealth of Independent States are particularly unstable.

This is what thousands upon thousands of industrial enterprises in Russia are like and how they behave. They regard current market conditions as a hostile environment in which they have to protect themselves by pooling efforts with their traditional suppliers and consumers and with friends from ministries (now associations and financial and industrial groups). The federal government has been unable to change these tendencies so far.

The reason is that enterprises are still a long way from free competition. They are now at the stage of “market socialism” which has been developing at least since the mid-1960s.

The Russian government is doing little to really reform enterprises. Moreover, at the microeconomic level all reforms are constantly “adjusted” to the former “habitat”.

Economic growth in Russia is possible only if a competitive atmosphere is formed in the country and if ownership is redistributed in favor of “efficient” proprietors. This is a new task which the Russian government has not yet fully realized. Nevertheless, it will be put on the agenda in the very near future because disintegrated corporate property can only produce long-term stagnation of production.

However, the state will have to pay a high price for an efficient economy. This includes, first of all, a high unemployment rate — 10 to 20 percent. Otherwise, the hidden unemployment will be just as high, and there will be paltry salaries and a decline in production. In order to achieve economic growth, the country must give social guarantees because being poor and sick for long is too great a danger.

(Passport, July-August 1996.)