This paper identifies and investigates conceptual and empirical links among Russia's disappointing growth performance of the mid-1990s, its costly and eventually unsuccessful stabilization, the macroeconomic meltdown of 1998 and the spectacular rise of non-payments. Non-payments developed into a system that flourished in an atmosphere of fundamental inconsistency between a macroeconomic policy geared at sharp disinflation and a microeconomic policy of bailing-out enterprises through soft budget constraints. It embodies a large volume of untargeted, implicit subsidies in the order of 7-10 per cent of GDP, which has stifled growth, contributed to the 1998 meltdown through its impact on public debt and made at best a questionable contribution to equity. The overwhelming priority at this point is to dismantle this system, thereby promoting enterprise restructuring and growth (by hardening budget constraints) and medium-term macroeconomic stability (by reducing the size of the subsidies).JEL classification: E61, E63, E65, P26. 299 second, by signalling the credible implementation of reform, dramatically improve the investment climate. Once this process is launched, it will facilitate the more medium-term tasks of institution building, much the same as in Poland. 4
DefinitionsWe define non-payments to include: (i) arrears, or overdue accounts payable, as well as (ii) all forms of non-cash settlement (NCS), including barter, offsets and veksels. 'Barter' is the exchange of goods, either on a bilateral basis (rare), or on a multilateral basis facilitated by an intermediary (more common). 'Offsets' refer to the cancellation of existing or anticipated mutual arrears, and could occur between enterprises and the budget; between manufacturing enterprises and the energy monopolies (paying energy bills with goods or services); and among manufacturing enterprises as a group. The most common kind of offset is the provision of goods and services in lieu of tax payments, known as 'tax offsets'. A key conceptual difference is that barter is primarily a working capital related transaction, while offsets are a mechanism for settling mutual debts. 'Veksels' are promissory notes issued by enterprises, banks or the government, and involve promises to pay, either in cash or in kind. 5 Three observations are of interest. First, instruments such as multilateral barter based on intermediaries, tax offsets and veksels evolved and spread mainly over Russia's 1995-98 stabilization, reflecting a desire to economize on the use of cash both by the government and by enterprises (as a result of extraordinarily high interest rates, as discussed later). The government's apparent motivation was to replace money printing by the use of money surrogates and borrowing in order to lower inflation. Second, these instruments and the use of intermediaries, frequently owned or controlled by enterprise managers, permit arbitrary pricing combined with profit shifting and side payments. Third, the core transactions of interest are those between manufacturing com...
