Thursday, January 3, 2008

Sitting on the flow

Kommersant's Dmitry Butrin had another interesting piece on the recent trend to form state corporations in Russia (Russian version, English version). What caught my attention are the two sentences at the beginning.

... authorities have realized the age-old dream of Russian business: never mind property, just give us a cash flow.

... Russian business of the first wave (we hope there will be more waves) always agreed with the principle that Boris Berezovsky is said to have given voice to in the romantic past of the early days of privatization. For creating a medium for business in Russia, property is less important than control over the cash flow, he said. The Russian business term “sitting on the flow” dates from that era.

What surprises me is Berezovsky's conclusion that "property is less important than control over the cash flow." because this statement seems to run directly against another seemingly widely held statement that in current day Russia: control is much more important than cash flow.

For a very selfish reason, I do hope the latter is correct. In that case, my dissertation would make more sense or at least the questions I raise there would make more sense. For whatever reason, if control is extremely decisive, then one would make all efforts to control the assets, even through the very extreme (or primitive) way of "physical control". That then would account for all those various extreme forms of gaining physical control of the factory/facilities observed in many corporate property scandals in Russia. That can also (partially) explain why the market for assets does not clear easily. For example, those outsiders who try to buy into a firm can't offer a price satisfactory to the current insiders because for the latter control is way much "pricier" than the cash flow the outsiders are willing to offer, hence a source of conflict among different market players.

However, after reading Butrin's piece, I feel that these two seemingly contradictory conclusions might be two sides of the same coin. What Berezovsky meant in the "romantic past of the early days of privatization" is that given one's property (or ownership) is not secured anyway it is better to count on cash flow: at least you can get something. What the second observation argues is that when one's cash flow rights are not secured enough, it is better to try to hold on to what you have (even in a physical sense) as hard as possible. The gist is that both of the observations are the results of the lack of security of ownership/property by an external, neutral agency, be it state or mafia. Each of these two observations may well apply to a different set of market players or the same set of players at different time spots (e.g. Khodorkovsky's Youkos before and after 1998).

I am not totally sure whether my interpretation is correct. Your comments are particularly welcome.

As to why control is so important in the Russian context, I will leave it for another post.

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