Publication: Prism Volume: 2 Issue: 16

The Predations of the Red Directors (Part I)

By Albert Speransky


(This is the first of three articles)

A Soviet-style enterprise director is one of the most enigmaticfigures of our time. This kind of director was appointed to hispost at the "recommendation" of oblast or district Communistparty committees. The party committees no longer exist but thedirectors remain, like "fixed-post" agents of the oldregime, sentries left behind, unrelieved and forgotten, by a hurriedlyretreating army.

Shortly after the Communist party committees ceased to exist,the final hour came for the Soviet ministries which once controlledevery move of an enterprise director. It was at this moment thatthe reforms began; the reforms stumbled over the directors, ricocheted,and went along a curved path or even hit the skids.

But the fact is that we all have become hostages to these directors.It is precisely the directors who have dragged our economy intoa deadlock, not any particular one of them, but all of them combinedand, as long as we do not understand the mentality of the "reddirector," we will not understand what is happening to ourcountry and our economy.

Lenin himself once attempted to formulate a set of qualificationsa person should have to be the head of an industrial enterprise.In a letter to Kamenev, Lenin outlined these specifications: "Theparamount task of the Communist party is to lead the masses, whoare exhausted and looking for a way out, to show them the rightway, to make them respect labor discipline. Labor conditions canbe discussed at rallies. At work, employees must be implicitlyobedient to a Soviet manager, their ‘dictator’ during workinghours."

If someone is called a "dictator," this naturally meansthat his will and his ambitions are above the law. This is truenot only within the territory surrounded by the factory fence;the "area of serfdom" was also supposed to include theworkers’ settlement, including kindergartens, schools and shops.A closed-off little world, ruled by a single master.

But, this "master" was, in fact, a serf himself, boundby the will of his own feudal lord, his boss.

A Change in Work Habits

In the Soviet era, enterprise directors were like company-levelpolitical officers in the army, whose job was to make the soldiersget up and attack the enemy one more time, or in this case, toinspire the collective to fulfill the production plan. This work,however hard, became habitual for the directors. Not so much timehas passed since then, but the command-administrative system hasgone. And now it is hard to find a director at his enterprise.And that’s during working hours, not to mention nights and weekends.When asked where he is, secretaries and aides reply vaguely: "He’sgone off somewhere. He’ll be back later." You can wait outsidehis office for hours without any hope of getting an appointmentto see him.

I had an opportunity to "study" the activities of anumber of enterprise directors recently. The study led me to concludethat the directors do not want to have anything improved or modernizedat their enterprises. Moreover, they do not want to work at all.

Consider, for example, the large "Mayak" radiofactory in Kursk. It is well known that state defense orders havediminished. Seeking to save the enterprise and its technical andhuman potential, the factory’s engineers and designers began tobombard the director with conversion projects. These projectsrequired no major reconstruction or remodeling of the factory:Everything could have been organized with the existing productionlines. But the director rejected all these proposals out of hand,not even taking the trouble to read them. The result was thatthe enterprise shut down and went bankrupt.

Thousands of examples of this sort can be cited. A similar caseoccurred, for example, at the Perm electrical appliance factory.The director of the Moscow "Caliber" plant went evenfurther: Instead of beginning conversion to new production items,he fired nearly all of the enterprise’s designers, which meantburying the enterprise alive.

Criminal Decline

Contrary to the widespread opinion, it was not January 1, 1992(when Gaidar’s reforms were started) that a precipitous criminaldecline began in the directors’ ranks. It was much earlier, whenthe "weeping Bolshevik," Nikolai Ryzhkov, was primeminister. The people were demanding reforms, and Ryzhkov fearedthem like fire. He gave a green light to cooperatives and allowedprivate property. However, what Ryzhkov had given permission towere not cooperatives in the broad sense, but only cooperativesat state-run enterprises. Not just anyone, but the directors,their wives, children and other relatives became the foundersof these cooperatives, which became parasites on the body of thenational economy. Producing nothing, living off some bogus intermediaryactivities, they began to divert huge sums of money to secretbank accounts.

How was it possible to allow the directors to establish "familycompanies" at state-run enterprises? Willingly or unwillingly,Mr. Ryzhkov became the godfather of a new movement which led tothe criminalization of the economy.

These directors, with the help of their "family firms,"got passing marks in the "school of criminal business."Tall factory chimneys and spacious shops served well to coverup directors’ private companies which produced nothing but generatedunheard of amounts of cash, to be divided up in the directors’offices.


As soon as a free market for goods, including consumer goods,machinery and equipment, appeared in this country (i.e. the systemof administrative distribution died out) the directors faced theproblem of how to sell their obsolete production. They resolvedthe problem by supplying the results of their workers’ labor toeach other by the trainload, without any guarantees, on the basisof mutual "gentlemen’s agreements." Our directors havenever been altruists, much less fools, especially when it cameto their own personal interest. One does not have to be very wiseto presume that the "agreement" provided for certainamounts of money (in cash) changing hands at secret places. However,the directors also mastered barter operations which are absolutelyimpossible to monitor.

It appears that in starting this risky game, the directors didnot actually take any risk. They hoped for the support of their"blood brothers" in the structures of government. Facedwith an outcry over employees not being paid their wages — thegovernment organized a mutual cancellation of debts. What choicedid they have? The directors were encouraged to try again. Theyexpected the government to behave the same way. However, theyare still waiting. But they can afford to wait.

New directors were elected recently at three Moscow enterprises(the 1st Clock factory, the "Caliber" plant and theWallpaper Factory) to replace directors who were distinguishedfor their rapacity. What was the result? At first, the newly electeddirectors did not know what to do. A bit later they began successfullyto continue the course of their predecessors. Given Russia’s byzantinelegislation, it is a sin not to take advantage of the shareholders’property. Production continues to fall. Loans taken by the government,including those in foreign currency, are immediately channeledabroad. A host of questionable agreements (which lose money forthe enterprises) are signed, mainly with foreign companies, whichthe enterprises must fulfill or pay penalties. For example, theKondopoga Paper Combine charged $400 a ton for paper to domesticconsumers and only $196 per ton to foreign customers. As a resultthe combine incurred a loss of $22.5 million. One does not haveto be very wise to see that the discount was not granted to foreigncustomers for their beautiful eyes. Look for secret bank accounts.Whose property has been squandered?

Whom are They Afraid of?

Our directors are not afraid of the government because they havelong had common interests with state apparatchiks and have cometo terms with them. Furthermore, our directors are not afraidof courts and prosecutors because, in the Soviet tradition, ourjudicial bodies almost always take the side of administration.

Nevertheless, there are things which are very unpleasant for thedirectors. They are afraid of audits. The fear is baseless. Thefact is that auditor services are very expensive. The governmenthas no intention of running up such expenses while employees don’teven have enough money for a crust of bread.

Directors are also afraid of racketeers. In fact, criminal groupsspecializing in extortion have a good "nose" for unearnedmoney. They come and demand their cut.

But what the directors fear most of all are the new free tradeunions which have recently begun to appear. So far, these tradeunions are the only force in the country seeking to save enterprisesfrom collapsing, to save jobs and to try to organize resistanceto the directors’ swindles.

Do the Directors Have Any Chance in the Conditions of a FreeMarket?

The style of power in Russian enterprises is becoming increasinglyreminiscent of the mafia. The members of the director’s team aretied together by their common involvement in certain unsavoryacts. An attempt to disband a superfluous department or fire adeputy director might well promote a mafia-style clash which oftenresults in a contract murder.

A bankruptcy procedure or attempt at restructuring should notbe limited to just replacing the director. It is necessary to"uproot" the entire administration to cut the criminalconnections existing within the staff. If you remove the director,while leaving his team in place there will be no change at all,and the psychological climate at the enterprise will not improve.

In all likelihood, the current directors are "transitional"figures. At this point their aim is to grab the enterprise’s property,fire the workers, and shut down production. After this is done,they will begin to sell the enterprise, shop by shop, buildingby building, etc., because they will hardly find a customer readyto buy it all at once. When enterprises are managed by such "provisionalgovernors" it is simply naive to expect any increase in production.

The former Central Institute of Standard Design is a graphic exampleof what is happening to our state property, on which the fateof the workers directly depends. First the director forged documents,got his institute privatized and made it part of a mythical firm,established by a commercial bank.

When the employees of the Institute found out about it, they voted"no confidence" in the director, and protested his actions.However, the director was able to undermine the "rebels’"unity. He "bought off" some of them with good salaries,promising them "hills of gold." He fired the organizersof the protest. The "traitors" earned the extra rublesin their pay packets. The administration set them against thosewho had been fired and forced them to give false evidence in courtin favor of the director. Finally, the director was able to win.The "fighters for justice" met their fate. Then it wasthe strikebreakers’ turn. No longer needing the "defenders,"the director fired them as well.

This story ought to be a lesson for all our labor collectives,because this scheme may well be used by other directors. In fact,some have already launched similar campaigns.

The expected bankruptcies, and the numerous changes in leadershipof large enterprises made the directors feel uneasy. Feeling theuncertainty of their situation, they decided to secure themselvesfinancially. They actively started to buy up shares from theiremployees. And the employees willingly parted with them for apittance, being persuaded that these pieces of paper were of nouse to them anyway, since they entitled them to no dividends orextra votes at shareholders’ meetings.

Simultaneously, the directors began to fight against those holdinglarge share parcels. They waged this war in their habitual brashand insolent style, stopping at nothing.

Thus, at a shareholders’ meeting of the Mid-Volga Machine ToolManufacturing Plant, a group of investors who held 28 percentof the enterprise’s stock was not even invited to the dais. Atthe same time, in his speech at the meeting, the director harshlycriticized the investors, accusing them of staging provocations.He claimed that they obstructed the adoption of the plant’s charter(incidentally, the charter contradicted Russian law). The directorsof the Lebedinsk Ore Refining Combine (Belgorod oblast), the "Bolshevichka"Moscow Garment Factory and Norilsk Nickel Mining and MetallurgicalConglomerate have all acted in the same manner. In violation ofthe law, the directors prevented co-owners of their enterprisesfrom participating in management.

Let’s see how events developed at the "Novgorodsky"privatized construction company in the Nizhny Novgorod oblast.After the enterprise was privatized, the director, Boris Arest,began to look for investors and found a Turkish firm. Finally,an agreement was signed according to which the Turkish firm acquired78 percent of the enterprise thus becoming its factual owner.Shortly afterwards the new owners found it necessary to fire thedirector for surreptitiously selling modern equipment suppliedto the company. The resolution dismissing the director was approvedat a shareholders meeting. The owners wanted to take the keysand seals away from him right in the meeting hall. But the directorhad a squad of bodyguards under his command and insisted thathe would not allow anyone else to take control of the enterprise,much less the Turks. And representatives of local law enforcementquietly watched all this lawlessness, as if it were not theirjob to make sure that the country’s laws were enforced. Is itpossible to expect foreign investors to come to our country whensuch arbitrariness reigns everywhere?

And here is another example. For nearly a year a woman from theAstrakhan region tried to assert her rights as a shareholder.Having developed too much faith in privatization she sold herflat and invested the money in shares of the Zelengin Shipyard,acquiring, at least on paper, 15 percent of the enterprise. Theseshares, it would seem, should have given her the possibility tohave at least some influence on the shipyard’s economic policy.In another country, perhaps. In ours, it doesn’t work that way.The shipyard was rapidly going to pieces. The woman demanded thatan emergency shareholders meeting be called. The demand was honored,a meeting took place and it returned a no confidence vote in thedirector. However, on the next day the director declared thatthe meeting was held illegally and hence its resolution was invalid.For nearly a year the poor woman sought to assert her rights.She even managed to reach the office of Anatoly Chubais. All invain.

The list of examples can be continued. The administration of theKrasnoyarsk Aluminum Plant simply crossed "outsiders,"or anyone else they didn’t like, off the shareholders register.At Moscow’s famous automotive giant, ZIL, the directordid not come to terms with the investors from Microdin company.The director wrote a letter to President Yeltsin asking that heuse his power to pick more suitable, "more patriotic,"investors.

Who acquired the right to manage property in this country afterthe first stage of privatization? The same directors! Are thereany guarantees provided for an owner or for the right to own property?No answer can be given to this question.

Directors and Politics

At present our directors can well be called suicidal. By theiractions, and their greed, they are virtually aiding the Communistsin their efforts to regain power. And a "red" governmentcan only hold onto power by repressing these very directors, expropriatingthe property they have stolen, which often goes far beyond simplytheir packet of shares in their enterprise. The first thing theworkers will point their fingers at are the directors’ villas,their limousines, and other objects of luxury.

The Communists will revive the notorious organs which used toexist in the USSR: People’s control, the OBKhSS (the agency tocombat the embezzlement of socialist property), and they willseverely punish those guilty of stealing socialist property. CommunistDuma deputy, Deputy Chairman of the State Duma’s Committee onLegislation Yuri Ivanov says: "It will not be a court oflaw, but ad hoc extraordinary commissions that will decide whomust be deprived of property. This process will be initiated mainlyby the labor collectives." Therefore, we obviously must concludethat the directors have done everything in their power to provokethe lumpen-proletariat to take the offensive, and for it to becomeaggressive and merciless. Certainly, somebody will look for guiltyparties outside the factory yards, among the pro-reform politicians,however, the workers will assert social justice first of all athome in their factories.

It’s a pity that the directors, being citizens of this country,knowing its severe customs, do not take the trouble to think ofthe possible consequences of their actions…

When will New People Come to Manage Production?

Many are surprised that new people do not come to build or reconstructour production, our economy, to squeeze out the old directors,and start producing goods again. Some say that it is because hightaxes make production unprofitable. That is only partially true.What kind of a fool would build his business, his future, on nothingbut air? Land cannot be bought and sold, but only rented. At anymoment, our rulers can cancel a rental agreement and advise atenant to leave and take his walls and roof with him.

People say that the main stage of privatization still lies ahead– when they will privatize the land on which the factory machinesrest. But that is the future. Right now, all the privatized propertyis "hanging in the air." As long as it hangs like this,there is no point in waiting for genuine reforms or positive changes.However we curse the directors, the fact is that they are actingquite logically trying to grab at least something for themselves:to remit some money to a banking account, to build a cottage,buy a car, a house in Paris, i.e. something that they can reallycall their own. Unfortunately, this does not enrich our countryas well; it ruins it.

What Should be Done?

Among the general public the word "reforms" is increasinglybecoming a curse word. Not because the people fail to understandthat reforms are necessary. The fact is that the people have seenfor themselves that the whole idea has been profaned and distortedby the apparatchiks. After saying "A," the governmentforgot to say "B." Paradoxical situations emerge whereemployees request that their enterprise be subjected to a bankruptcyprocedure, i.e. be sold at an auction. They do it because theyunderstand that a bankruptcy is the last chance for the enterpriseto survive. If the director is not removed, the enterprise itselfwill disappear. It will blow away in the wind.

But the government as well as the Federal Department for Bankruptciesremain deaf to such desperate appeals.

The moment is truly a crucial one. For the sake of our countryand her economy it is necessary to do whatever is necessary tonourish genuine proprietors, people who are interested, not inclosing down enterprises, but in modernizing and developing them.Unfortunately, no legal basis has been established to create theconditions for such proprietors to appear. The Duma is procrastinating,and so are our politicians. We have no laws in effect to helppull our economy from the present "criminal" marketto a genuine free market.

Translated by Aleksandr Kondorsky