CH. 13 Creating the Institutions of a Russian Market Economy

TRANSITION FROM SOVIET TO RUSSIAN GOVERNMENT Political Events  Yeltsin(reelected in the summer of 1996)-Putin(December 31, 1999) Presidency President appoint the prime minister and the cabinet, Duma must ratify the appointment(if the Duma rejects the president’s choice three times, the president can dissolve the Duma and call new elections) The Legislature  Federation Council(upper house) & State Duma(lower house) The Cabinet Federalism  Federal-local fiscal relations is a major item for reform and change  Conflicts over jurisdiction such as overtaxation, authority, and privatization Unresolved Issues  Power-sharing arrangements  Persistent friction between the legislative and judicial branches  A gap between legislation and its enforcement and execution  Acceptable rules of behavior for Russian officials have not been formulated

ECONOMIC LAWS: THE CONSTITUTION AND OTHER BASIC LEGISLATION Russian Constitution(1993) addresses  the right of citizens to own private property and to use that property to engage freely in economic activity Civil Code (Grazhdansky Kodeks)(1994) addresses the freedom to engage freely in economic activity The legislative framework is only part of the process of creating legal institutions. In addition to gaining passage of legislation, the major challenge to Russia has been enforcing laws and legal guarantees. The problem in Russia has been not the legislation itself but carrying out this legislation.

PRIVATIZATION State property Committee (Goskomimushestvo) Voucher privatization  Vouchers could be used to buy shares of the 15,000 medium and large Russian companies. Federal Property Fund Second stage of privatization  governed by the State Privatization program, “On the Fundamental Provisions of the State Privatization Program for State and Municipal Enterprises in the Russian Federation After July 1, 1994”  Remaining shares of enterprises to be transformed into open joint stock companies were sold through investment tenders, cash auctions, or specialized auctions(tenders) for the sale of shares Privatization Results  The ownership structure of the Russian economy had shifted from government to nongovernment ownership  The change in property rights had a substantial effect on how Russians earned incomes and upon how income was distributed.

CORPORATE CONTROL AND RESTRUCTURING Soviet Union: Corporate control was exercised by ministry officials, planning committee officials, and state enterprise managers. The course of privatization in Russia gave existing vested interests preferential treatment in the acquisition of corporate enterprises. Insider privatization: put the majority of industrial companies into the hands of a relatively narrow group of interests, namely enterprise managers and their close associates. Setting aside significant shares for managers at preferential prices. Retaining control of shareholder registries, timing stock sales in conveniently, canceling airline flights to the headquarters city, arbitrarily dropping shareholders from registers, and issuing new shares to dilute the holdings of outside shareholders. Effectively eliminating foreign purchasers for the most desires Russian companies. Auctions and tenders were limited to a few bidders, who often colluded among themselves.

FROM ADMINISTRATIVE CONTROL TO ECONOMIC FREEDOM Economic decision making: a mix of private and government actions.  State control of price  Issuing of license  State budget distribution  Controlling the allocation of property through the process of privatization With the passage of time, more and more economic activities have gained freedom from government control.

COMPLEX MARKET: MARKET STRUCTURE Weak market: capital market(monopolistic) Soviet economy was characterized by monopoly producers(Table 13.6) Federal Anti-Monopoly Commission Soviet administrative command economy was noted for nonmarket distribution of resources Personal enrichment to individuals with connections, former ties with the state bureaucracy, access to Party cash, and outright criminal groups Mafia Capitalism Crony Capitalism Wild Capitalism