The Politics of Russian Enterprise Reform: Insiders, Local Governments, and the Obstacles to Restructuring

Abstract

Russia and other countries in the Commonwealth of Independent States that have implemented voucher privatization programs have to account for the puzzling behavior of insiders-manager-owners-who, in stripping assets from the firms they own, appear to be stealing from one pocket to fill the other. This article suggests that asset stripping and the absence of restructuring result from interactions between insiders and subnational governments in a particular property rights regime, in which the ability to realize value is limited by uncertainty and illiquidity. As the central institutions that govern the Russian economy have ceded their powers to the provinces, regional and local governments have imposed a variety of distortions on enterprises to protect local employment. To disentangle these vicious circles of control, this articles considers three sets of institutional changes: adjustments to the system of fiscal federalism by which subnational governments would be allowed to retain tax revenues generated locally; legal improvements in the protection of property rights; and the provision of mechanisms for restructuring and ownership transformation in insider-dominated firms. The aim of these reforms would be to change the incentives that local governments, owners, and investors face; to convince subnational governments that a more sustainable way of protecting employment lies in protecting local investment; to raise the cost of theft and corruption by insiders and local officials; and to allow investors to acquire controlling stakes in viable firms. Russia implemented real sector reforms-including the privatization of 15,000 enterprises through vouchers-with the goal of making the transition to the market credible, irreversible, and rapid. The objective of the mass privatization program was to establish a critical mass of profit-seeking corporations that were no longer dependent on state support for their survival, and a class of owners willing to invest in their enterprises and manage their restructuring. However, the mass privatization program has brought few tangible benefits to enterprises privatized in voucher auctions.

Ownership dynamics and firm performance in an emerging economy: a meta-analysis of the Russian literature

“…Shleifer (1998) Che and Qian (1998), for example, suggests that ownership by local government may limit state predation, increase the provision of local public goods, and decrease costly revenue hiding. However, Desai and Goldberg (2001) argue that regional and local governments may impose distortions on enterprises in order to protect local employment. Overall, Cheung et al (2010) note that "the distinction between central and local governments has received little attention in the academic literature" (p. 671), which ultimately makes the effect of ownership by different levels of government an empirical matter.…”

Enterprise Reform and Corporate Governance in Russia: A Quantitative Survey

“…This paternalistic relationship between governments and domestic firms maintained through public aid has been a breeding ground for political and bureaucratic corruption involving local firms as well as for ‘state capture’ from the enterprise side (Broadman, 2000; Desai and Goldberg, 2001). 28 The magnitude of this problem has been documented by many studies inside and outside Russia, such as those by Johnson et al (2000, 2002), who confirmed the high prevalence of bribery by local corporate executives in Russia compared with that in Central and East European countries; Chirikova (2001) and Frye (2002a), who clarified the close ties existing between local governments and local enterprises; Golikova et al (2003), who unveiled serious state intervention in private businesses; and Yakovlev and Zhuravskaya (2004), who verified the intensity of state capture practices by business groups by a quantitative analysis based on a unique corporate data set.…”

Fiscal federalism in rentier regions: Evidence from Russia

“…On the contrary, they are typically active participants in a mutual relationship in which, through law, regulation, or intimidation, firms may be forced to provide concrete political benefits to regional governments in the form of employment and non-wage benefits for both employees and the general public (Desai and Goldberg, 2001). In particular, the absence of a well-functioning social safety net, either nationally or sub-nationally, has prompted regional governments to use firms as surrogate sources of social services.…”