Privatization was a seed that fell on hard, dry ground. After four years of reform, the nation was still struggling to jump-start national and regional stock markets and bank loan to enterprises. Any future "reform" government will confront a budget crisis of daunting proportions. It will not be able to fund social programs for the needy and at the same time bestow its largess on corporations and cronies. The government must start to extend aid to weak citizens directly through health, welfare, unemployment, and training programs and let firms stand or fall on their own.

Our evaluation of the Russian National Survey of corporations in 1995 and 1996 leads to a shocking conclusion: No more than a quarter of Russian companies are clear winners (financially sound firms with well-established domestic or export markets), although even of these firms, only a small number will be able to finance modernization out of their profits. Three-quarters of Russian corporations are in need of radical and far-reaching restructuring. At least a quarter of those firms should be bankrupt.

How much capital investment is necessary to modernize all 18,000 privatized corporations? When estimates by the top managers in the Russian National Survey in 1995 are telescoped to all privatized corporations, the amount is between $150 billion and $300 billion, depending on the method of estimate. (The size of the entire 1995 Russian government budget was approximately $50 billion.) These estimates include only the costs of capital investment. They do not include the costs of subsidizing wages to maintain full employment or supporting the many social services provided to employees. With foreign investment in Russia amounting to no more than $1 billion to $2 billion a year since the beginning of reform (in 1995 half of Russia’s foreign investment went to the energy sector, which accounts for less than 6 percent of all employment), the capital that privatized corporations need represents a capital investment crisis of astounding proportions.

Russia’s only choice is to develop capital markets—stock markets and bond markets that efficiently put capital in the hands of corporations and banks that believe they can make money by lending it to companies. Banks must be regulated so that citizens can view them as safe havens for their funds. Mutual funds need to be developed to attract Russian and foreign capital and direct it to productive investment. Capital markets must be developed in all of the country’s eighty-nine regions and they must be relatively free of crime and corruption. This is a tall order.

Rather than thinking of subsidies, the Russian government should be stimulating the training and education of thousands of young Russians in the skills of restructuring, turnaround management, and bankruptcy workouts, by sending them as apprentices to the regions of the major industrial powers that have faced these crises. It should use foreign assistance to contract with the best universities in those countries to offer eighteen-month MBA programs.