frye other russian economy

8/8/2019 Frye Other Russian Economy

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Timothy Frye, AndreiYakoviev, and YevgenyYasinThe "Other" RussianEconomy: How EverydayFirms View the Rules ofthe Game in RussiaA NEW NARRATIVE HAS COME TO DOM INATE VISIO NS OF BUSINESS-STATErelations in Putin's Russia.* This view depicts th e rise of Russia as a natu-ral resource state bent o n using its oil, gas, and mineral riches to restoreRussia's place in the world and to ensvire high levels of economic growthfor th e pop ulation at large. Indeed, scholars and policymakers have devotedconsiderable attention to th e im pact of the boom in natural resources o nthe Russian econom y in recen t years. This atten tion is well placed as th eenergy sector has fueled econom ic growth in Russia since 2000. Oil andgas exports alone account for more than two-thirds of Russia's exportrevenue and mo re than 15 percent of GDP. Of course, energy's imp ortancefor economic grow th is no t the only reason for the g reat atten tion to th issector. The oligarchs run ning these m am m oth companies, w heth er theywere high-flying private citizens in th e 1990s or spies turne d businessm anin the last decade, make good copy for the press.


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unfortunate because these sectors are also critical for Russia's future,especially given the recognition by the Russian government of theimportan ce of diversifying th e economy. This imperative is not univer-sally shared vdthin the gov ernme nt and there has been mu ch debateabout the benefits of diversification, but the global financial crisis andthe collapse of the price of oil has changed th e term s of the debate andfocused atte ntio n on oth er sectors as well.

The impo rtance of the m anufacturing and service sectors is read-ily app aren t in employm ent data. Most Russians wo rk outside the natu-ral resource sectors; whether manufacturing and service sector firmsare able to pay good wages on time will go a long way toward deter-mining the prospects for social peace in this suddenly more turbulentperiod.

In addition, the oligarch-dominated businesses in the energyand natural resource sectors are atypical due to their large share ofstate ownership, high levels of geographic concentration, and interna-tional promin ence. The problems of Gazprom are no t the p roblems ofVoronezhtransstroi, a construction company in Voronezh. To under-stand th e full d iversity of business-state re lations in Russia, it is impor-tant to draw from a broader sample and look beyond the oligarchiccompanies.

Finally, from a policy perspective, the Russian government hasmore control over the business environment for manufacturing andservice sector firms th an it does for natu ral resource firms th at ope ratein a global market with fluctuating prices that are largely beyond thecontrol of the Kremlin. In contrast, the business and service sectors aremuch more dependent on municipal, regional, and federal officials tocreate a business environm ent th at allows them to prosper.

To thro w light on the "o ther" Russian economy, we report resultsfrom two original surveys of 500 firms conducted in 2000 and 2007 ineight regions in Russia that explore th e business enviro nm ent for manu-


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the game in 2000 were quite similar for firms that were investing andthose that were not, in 2007 regional governments had come to favorthe former through a variety of informal and formal means. This shiftin the ru les of the g am e in favor of firms th at invest suggests tha t a coregroup of firms in the regions under study have managed to cooperatewith the regional government to temper the weak insti tutional envi-ron m en t in Russia.

It would be certainly be preferable to have more neutral rulesth at provide a level plajdng field for all firms in Russia and th e ar rang e-ment we document is a "second-best" option for economic develop-m en t (Rodrik, 2008). But it is also an im pro vem ent over a "third-best"option tha t involves the state using its pow er to pu nish m ore successfiilfirms to reward less successful firms. More generally, this change ininformal institutions in a relatively short time suggests that informalinstitutions are m utable th an m any accounts suggest.BACKGROUNDOne of the central tasks of the tran sition from a com ma nd to a ma rke teconomy is the creation of set of formal and informal institutions thatprotect prope rty rights and suppo rt ma rke t exchange. New state agen-cies needed to be constructed to perform functions that did not existund er a comm and economy, such as regulating mono polies, governingstock markets and banks, collecting taxes, and privatizing state assets.In addition, state agencies that were powerful under the commandeconomy, such as the State Planning Agency, needed to be reformed orabolished to make way for econom ic liberalization.

This novel experiment in the postcommunist world dovetailednicely with a theo retical tu rn in econom ics and political science tow ardthe study of the emergence, evolution, and impact of formal andinformal institutions. Scholars began to analyze more precisely howthe quality of governance, levels of corruption, and the constitutionalarrangements of state power influenced economic performance. A


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by neoclassical models of economic growth; countries also needed to"get the institutions right." Without informal and formal institutionsthat reduced the costs of engaging in exchange and protected prop-erty rights, economic development was difficult to achieve. In addi-tion, capable state institutions that created a level plajdng field andprom oted the e ntry of new firms to challenge old firms w ere an impor-tan t com pone nt of the n ew recipe for development. As a resu lt of thes etwo crosscurrents, studies of business-state relations have been amongthe most fertile areas of research in postcommunist studies.

Research on business-state relation s in Russia have unde rgo ne atleast two periods. In the 1990s, analysts examined whether relationsbetween business and the state were better characterized by a "grab-bing hand" mod el or by a "helping han d" m odel. The former envisionedstate officials w ho provided few public goods, failed to coordinate th eirgovernance strategies (leading to high levels of corruption), remainedbeyond the reach of legal institutions, and imposed heavy regulatoryburdens on firms. This model depicted states largely as predators oneconomic activity. The latter model saw state officials as intimatelyinvolved in the promotion of economic activity, as providing favor-able policies to some firms, but n ot o thers , and as having a coo rdinated ,governance strategy that led to lower overall corruption. The helpinghand model looked to the East Asian developmental states as a refer-ence point (Frye and Shleifer, 1997).

Evidence from Russia in the 1990s found stronger support forthe "grabbing han d" m odel. The disorganization and fragmen tation ofthe Russian state allowed individual bureaucrats and politicians to usethe power of the state to extract considerable rents fi:om businesses.Go vernm ents at all levels w ere likely to prey on m ore successful firmsto red istribu te r en ts to less successful firms and to political allies. Thisline of research had special relevance for small and medium-sizedfirms that lacked political power to defend themselves against public


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tions early in the reform process and managed to parlay their econom icgains into political power (Hellman, 1998). On this view, it was thebureaucrats turned businesspeople who managed to capture the state,enrich themselves, and und erm ine economic developm ent. This argu-m en t fit well for the o ligarch-dominated firms, bu t ther e is debate abo uthow well it accounts for relationships between nonoligarch firms andthe state (Frye, 2002; Yakovlev and Zhuravskaya, 2004; Iwasaki, 2007).Taken together, the grabbing hand and the state capture models empha-sized the pathologies of business-state relations in Russia in the 1990s.

By con trast, in the Pu tin years, studies have turn ed the statecapture argument on its head and have instead emphasized that thestate has captured private business (Yakovlev, 2006). Rather thanoligarch-dominated firms dictating policy to the state, it is the federalgov ernm ent th at defines w hich firms will be favored. The tur nin g poin tin this relationship occurred with the arrest of Mikhail Khodokorsky,the principal owner of Yukos, on charges of underpaying taxes andabusing privatization in the fall of 2003. At the tim e of Khodorkovsky'sarrest, Yukos was the largest private oil company in Russia, had grandplans to expand its sphere of operations, and little inclination to workclosely with the Putin administration. The federal government bank-rupted Yukos and auctioned off its main oil-producing entities whicheventually ended up in the hands of the state-owned Rosneft. Thecreeping renationalization of firms in other sectors, from automobileproduction to aviation, drove hom e the p oint th at th e rules of the gamebetween the largest firms and the federal government in Russia hadchanged.

W he the r business has captured t he state at the regional level is anopen question. Using data from 2000 to 2003, Yakovlev and Zhuravskaya(2004) find that large firms continued to exert influence over regionalpolicy as evidenced by "earmarks" in regional legislation t ha t m entio nbenefits for specific firms. This research project is an important contri-


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ment with respect to private business and recent personnel changesin regional elites have led to the development of cooperative strate-gies between business and state actors in some regions in Russia. In asimilar vein Brown et al. (2008) find th at th e privatization of ind ustrialfirms in Russia is m ore effective in regions w ith larger bureaucra cies.Thus, there is some evidence that regional governments and at leastsome types of firms have found a common language despite Russia'sgenerally hostile business environ m ent.

In both periods scholars have emphasized the importance ofinformal relations between business owners and public officials (seeLedeneva, 1998, 2006). Indeed, in many instances the boundariesbetwe en the tw o were blurred beyond recognition. This line of researchhas sought to dem onstrate the impo rtance of informal institutions rela-tive to formal institution s and to unrav el precisely how these informalinstitutions function. This is no mean feat given that the beneficiariesfrom these informal rules of the game seek to obscure their existenceand leave few pap er trails.

Thus, each of these mo dels paints a qu ite different picture of rela-tions betw een business and the state, bu t there is little consensu s ab outth e cu rrent state of affairs. This may be due to the fact tha t m any stud-ies focus on th e 1990s and th e early years of the Putin presidency, b utfew address th e second half of his term . This is im po rtan t because m anyscholars see a sharp break in business-state relations betw een PresidentVladimir Putin's first and second term s. Moreover, wh ile mu ch existingwork focuses on relations between oligarchs and the federal govern-ment rather than on nonoligarch firms and regional governments, i tis unclear whether the two tjT)es of firms have similar relations withpublic officials. Finally, few works make an effort to capture changeover time in the business e nvironm ent.

We aim to address these three points in the literature. First, weexplore th e relevance of different models of business-state relations for


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oligarch firms. In addition, we explore both formal and informal insti-tutions. Finally, we can capture the evolution of the business environ-ment better than most studies because we have survey data from twopoints in tim e. Using the year 2000 as a baseline, we h ope to identifythe extent to which there have been significant changes in the formaland informal in stitutions in the years of the Putin presidency.THE MANUFACTURING AND SERVICE SECTORS DURINGTHE PUTIN YEARSIt is hardly a secret th at m anu facturing and service sector firms in Russiaface a host of difficulties. The historic unde rde ve lop m ent of th e servicesector and the grave distortions in the manufacturing sector underthe command economy left them ill-suited to make the transition to amore market-oriented economy. In addition, managers in these sectorsm ust con tend w ith Russia's notoriously difficult business e nv iron m entw ith all its corruption , favoritism, and red tape. Moreover, they are ina difficult position in relation to global com petitors. Squeezed betw eenhi-tech Europe and low-wage Asia, Russian manufacturing and servicesector firms face stiff competition in terms of product quality andm arket price in the pursuit of export m arkets.

So have how manufacturing and service sectors fared in recentyears? Relatively well. Since 2000 the m anu factu ring and service sectorshave generally shared in the strong overall performance of the R ussianeconomy. It is surprising to no te that even as the n atur al resource sectorhas seen record high p rices, the share of industry and th e service sectorin gross dom estic product has been remarkably steady. For exam ple, asoil prices surged beg inning in 1999, the sh are of GDP growth in Russiacoming from the m anufac turing sector barely fluctuated, ranging from19 perce nt in 1999 to 19.4 perce nt in 2006. Similarly, indu strial employ-ment hovered around 21 percent of total emplojmaent through thePutin years.


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of the grovi^h in the Russian economy from 2000 to 2005; this figurefell to about 10 percent in 2006. The rest of the econom ic grow th camefrom outside the energy sectors. These estimates are imprecise for avariety of reasons, bu t still leave considerable room for the manufactur-ing and service sectors to contribute to Russia's rapid econom ic growthin recent years. In particular, machine-building construction and theservice sector experienced rapid grow th in the last decade.

The manufacturing and service sectors have seen impressiveproductivity gains since 1998. De Souza (2008: 84) estimates th at indus-trial produc tivity increased on average by m ore th an 7 perce nt per yearfrom 1999 to 2006. Much of the rebound in the manufacturing andservice sectors can be attrib uted to the devaluation of the rub le follow-ing the econom ic crash of 1998, the improved macroeconom ic environ-ment that followed, and the low starting point for comparison. Indeed,the steep economic decline of the 1990s that was accelerated by thefinancial crash of 1998 left little room to go bu t up.

It is also interesting to note the heterogeneity of the perfor-m ance of firms w ithin econom ic sectors. Firm-level studies have foundthat successful firms are not necessarily defined by sector (Golikovaet al., 2008). Successil firms have managed to innovate in all sectorsand firm performance varies widely vdthin sectors. Thus, while it ishelpful to report average performance across sectors, it is also impor-ta n t to differentiate be tw een successfril and unsuccessfiil firms w ithinsectors.

Other evidence also suggests that the much of the economicgrovk^h in recent years has come from nonoligarchic firms and thatthere is substantial heterogeneity in the performance of nonoligarchicfirms. Drawing from a sample of firms provided by the Russian StateStatistical Agency, one study finds that from 2000 to 2006, medium-sized firms (annual sales betw een $10 million an d $350 million) expe-rienced strong performan ce (Ekspert', 2008). Within this group, about


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tier of middle-sized com panies th at saw rapid expansion appea r to haveemerged during th e Putin years.

It is im po rtant n ot to make too m uch of the p erformance of themanufacturing and service sectors in recent years given the globalfinancial crisis. Even the best performing firms vwll not go untouchedby the crisis, and more likely, many firms that have performed wellin recent years vll see their gains erased as credit tightens, infiationincreases, and global trade co ntracts. Nonetheless, firms th at have pros-pered even in the h arsh business env ironm ent of Russia in recent yearswill go a long way toward determining how well Russia adapts to thecur rent econom ic crisis. Firms th at have already restructu red will bein a better position to respond to changes in the m arket environ m entthan those that have not. In the next section, we begin to explore theevolution of the formal and informal rules of the game in Russia forsuccessful and unsuccessful firms in Russia.OUR APPROACHTo bett er un derstoo d the beh avior of firms and t he evolution of business-state relations in Russia, we commissioned the Levada Center to conducttwo large-scale surveys in the autumn of 2000 and the spring of 2007in eight regions in the European pa rt of the Russian Federation, includ-ing Moscow, Bashkortostan, Voronezh, Nizhny Novgorod, Novgorod,Sverdlovsk, Smolensk, and Tula. The range of regions was selected in2000 to have different types of un its of the federation presen ted in t hesample: donors to and recipients of the federal budget, regions withstatist and liberal economic policies; and those that had and had notchanged their governors since the start of economic reforms. Theseregions capture roughly 20 percent of the population of Russia, aboutone-third of GDP in 2006, and one-third of all enterprises registered inRussia.

We stratified the samp le by th e nu m be r of employees and sector,


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(for example, public health, education). The samples were designed tobe representative of the economies of the regions in question with acorrection for a somewhat larger share of industrial enterprises and asom ewh at lower share of com mercial trade tha n in the general popula-tion. So, in con trast to m any studies of big business and "the o ligarchs,"our surveys reflect the views of the ran k and file of Russian business.

Interviewers spoke with top m anagers of the enterprise, includ-ing the chief financial officer, the chief executive officer, or chief legalofficer. The survey instrument had more than 150 questions about arange of topics, including th e co ndition and efficiency of public institu-tions, influence of the firm on econom ic policy, and th e different waysin wh ich the governm ent influences th eir business.

Our sample represented industrial and service firms in almostequal shares. Num erically, they we re m ostly small-scale o nes. For exam-ple, 50 percent of the industrial firms had fewer than 200 employees,and another 18 percent had between 200 and 500 employees. In theservice sector, a third of all firms emp loyed fewer th an 50 worke rs andano ther third, from 50 to 150 wo rkers.

About 60 percent of the industrial f irms in the sample wereestablished before 1991. In services, the share of such firms was muchlower only 32 perc ent. It is also wo rth m en tion ing that one-fifth of allenterp rises in our sam ple we re established after 1998 (in industry, th eirshare was 10 perc ent, an d in services, it reached 28 percen t).

The absolute majority of firms (about 70 percent) had a domi-nant owner who maintained control over the enterprise. The share ofstate-owned (state and municipal unitary enterprises) was 6 percent ofthe sample, while foreign juridical and physical persons had only 2.5percen t of all firms u nd er th eir control.

Our data suggests that enterprise performance has been rela-tively steady. For instance, 39 percent of industrial and 64 percentof service firms described their financial and economic condition as


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Our sam ple of firms is designed to be rep resentative of th e regionsthat we study in terms of emplojmient by sector, but it is also closeto a national sample in terms of employment by sector in the energy,finance, construction and transport/communications sectors. In 2007,we have a higher percentage of manufacturing firms by employmentin the sample than the national average (46 versus 30) and somewhatlower percen tage of service and trad e sec tor firms (18 versus 29). Givenmanufacturing's importance for output and the difficulty of categoriz-ing "service" sector firms, this imbalance is less troub ling t ha n it m igh tseem, but these differences between our sample and the nationalsample should be kept in m ind.

Survey data have strengths and weaknesses. Surveys can helppain t a m ore gene ral picture of business-state relations th an can casestudies by captu ring t he experiences of a bro ader sw ath of firms. Casestudies have the great advantage of providing a rich, detailed accoun tof specific firms in specific circumstances, but it is often difficult toextrapolate from the experience of specific firms in specific sectorsbecause their views may be driven by idiosyncratic factors. Surveysalso allow us to gather information on a broad range of factorsthat may be influencing firm performance, and when surveys arerepeated, they provide clear benchmarks for measuring change overt ime.

But this approach also has some drawbacks that should be keptin mind. Surveys can provide a useful snapshot, b ut we should be awarethat responses can often be undu ly influenced by current events. Wealso recognize that respondents are unlikely to respond truthfully toquestions about sensitive financial data and we avoid these.

Two more stubborn difficulties arise from "survivor bias" andthe "anchoring problem." First, we are only able to gather data fromfirms that have "survived" by adapting to the business environmentand therefore we miss data from firms that have become extinct. This


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respo nde nts th at have a bad relation ship vth pub lic officials may havebeen less likely to survive.

In addition, survey questions th at seek to capture th e perce ptionsof respondents often suffer from anchoring problems. For example,interviewers may ask respondents to rate the performance of differentagencies on a scale, bu t it is difficult to kno w whe the r each resp onden tis using th e same scale. In oth er wo rds, is one person 's "5 " the sameas another person's "5"? One hopes that these types of measurementerrors cancel each other out, but it is difficult to divine this after thefact. Similarly, the "halo effect" may bias responses in favor of morepositive evaluations of the business environment. Russia's rapid rateof economic growth may induce respondents to give better ratings forthe business environment than is warranted. Given the complexityof the environment, respondents may falsely attribute the improvedperformance of their firm to improvements in the business environ-ment. Where respondents give higher scores to all aspects of the busi-ness environment, one might suspect that the halo effect is at work.However, w her e respo ndents discrimina te across pohcy issues and indi-vidual elem ents of the business environm ent, one m ight conclude thatthey are less influenced by the ha lo effect.

This problem is more relevant for questions that tap perceptionsof the business environment than the behavior of respondents. Forexam ple, anchoring problems may lead responden ts to inflate ratingsof the performance of gov ernm ent agencies, bu t are less likely to causethe m to say tha t they used the courts to resolve a dispute w he n they didnot. For the m ost part, we find tha t anchoring prob lems a re no t a majorobstacle, but we are nonetheless cautious in interpreting responsesthat capture the perceptions of respondents to similar questions acrosst ime. All methodologies have strengths and weaknesses that lead tobias. At least we can better understand the direction of the bias giventhe n ature of our data.


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comparisons by respondents to similar questions vthin each survey.For example, we can compare the responses of successful and unsuc-cessftil firms in 2000 and 2007 and see if the difterence between thesetwo groups of firms has increased, decreased or stayed the same. Bycom paring the responses of groups of business m anagers vwthin eachsurvey, we can trace important changes in the formal and informalbusiness environment in Russia.CHANGES IN THE GENERAL BUSINESS CLIMATETo begin, we make simple comparisons in responses to similar ques-tions about the business climate in 2000 and 2007. For example, weasked firm managers whether or not their f irm "planned to make amajor investment in their firm (such as a new construction or recon-struction project, a major building renovation, the purchase of newcapital stock or equipment etc) in the next 12 months." While only33 percent of firms in our sample in 2000 responded positively,this figure increased to 49 percent in 2007, reflecting the improvedeconomic fortunes of the country. To capture the level of corruptionin 2000 and 2007, we asked firm managers to rate on a scale of 1 to 5(where 1 equals no problem and 5 is an extremely severe problem),"how intense is the problem of bribery for firms in your line busi-ness among bureaucrats at the federal level?" We then repeated thequestion, but asked about bribery am ong bureauc rats at the regionaland m unicipa l levels. Average ratings of the intens ity of bribery as aproblem were somewhat lower at all levels of government in 2000compared to 2007. Thus, on average there seems to have been anincrease in the perception of bribery as a problem between 2000 and2007 at the m unicipa l and th e regional levels.

We also asked respondents to rate the performance of severalstate agencies on a scale of 1 to 5, (where 1 is low and 5 is high), includ-ing the state arbitration courts, the police, and the regional bureau-


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Table 1. The General Business Environment, 2000 and 2007

2000 2007Firms planning to invest (%) 33 49Regional bribe ry as an obstacle(1 not an obstacle; 5 a severe obstacle) 2.0 2.3Municipal bribery as an obstacle(1 not an obstacle; 5 a severe obstacle) 2.1 2.3Ratings of state arbitration courts(1 low; 5 high) 3.2 3.3Ratings of police(1 low; 5 high) 2.6 2.8Ratings of bureaucracyC low; 5 high) 2.8 2.9Firnns reporting lobbying success atregional level (%) 17 17Firnns experiencing a property rightsvio lation in last tw o years (%) 70 50

the reasons noted above, we are reluctant to draw strong conclusionsfrom estim ations of the level of bribery and th e rating of perform anceof government institutions given the difficulty of anchoring problemsin surveys over time. Indeed, given the dramatic improvement in theRussian economy between 2000 and 2007, one might have expectedresponses in the latter survey to be somewhat more infiated. In otherwords, it is surprising that increases in the ratings of the perform anceof state agencies over time are so small.

We asked firms in both surveys whether they had "managed toinfiuence legislation on matters of importance to their firm in the lasttwo years." In both surveys 17 percent of firms reported that they haddone so. Finally, we asked firms whether or not they had experienced


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percent. This indicates a substantial drop in the n um be r of firms repo rt-ing violations of the ir prop erty rights be twe en 2000 and 2007.

INVESTOR AND NONINVESTOR FIRMSTo exam ine th e differences in responses am ong firms tha t had success-fully adapted to the market and the rest of the population, we consid-ered several criteria. Our survey included a host of questions on salesand profit and subjective ratings of the financial position of the firm.These responses provide valuable insights, but may not tap successfuladap tation to the m arket very well. Firm performan ce may be driven bysectoral conside rations, price fluctuations, or oth er ma rketw ide factorsrather than firm behavior. Thus, a profitable firm that is increasingsales may not have adjusted to the market, but simply be benefitingfrom good ma rket con ditions.

Instead, we focus on firm investment. More specifically, weexamine a response to a question about whether firms were planningto make a major investment in their f irm in the next 12 months asa useful starting point for identifying successful firms. These tjqiesof major investments require up-front costs for only the prospect offuture gains and therefore indicate that the firm has confidence in thesecurity of its property rights over time. Moreover, inv es tm en t itself is auseful indicator of firm pe rforman ce. Of course, one objection to usingthe question as an indicator of success is that it refers to plans ratherthan to behavior. However, it is highly correlated vdth other measuresof past restructuring in the survey. In addition, it is forward lookingand therefore captures future intentions and may be a better guide tofuture behavior.

Thus, to drill deeper into relations between business and theregional government, we divided the sample in each survey in twogroups: investor firms, including those that planned to make a majorinvestment in the coming 12 months; and noninvestor firms, includ-ing those that did not. Investor firms in 2007 tended to be headed by


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Table 2. The Chan ging Rules of the Gam e2 0 0 0 2 0 0 7

N o n - N o n -Investors Investors Investors Investors

Regional br ibery(1-5) 1.99 1.79 2 .4 0 2.09Munic ipal br iberyas obsta c le * 2.16 1.96 2.51 2.13Co mp et i ti on asob sta cle * 2.87 2.91 3.37 3.09Regiona l govern -ment help for f i rms(%) 26 3 0 10 31Rat ing of arb i t ra-t io n co ur ts* * 3.16 3.26 3.4 0 3.10Expect to win vs.reg iona l govern -me nt in co urt (%) 37 4 4 4 4 58Expect to en fo rcevs . reg iona lgo vern me nt (%) 37 39 45 6 0Resolved d isputewi thout us ing theco ur ts (%) - - 53 79Successfu l lobby-ist at regional level(%) 12 2 6 14 21F i rms exper ienc inga proper ty r igh tsdispu te (%) 6 6 76 4 3 57

Notes; Bold indicates significant differences in the resp onses of investors and non-investors within each survey at the .05 level.


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organiza tions or to be mem bers of large financial industrial groups th atplay an important role in the Russian economy.

We explore the extent to which relations between the govern-ment and investor firms changed between 2000 and 2007 vwth a focuson the degree to which formal and informal institutions are biased infavor of or against investor firms. We also want to identify the ex tent towhich the degree of bias in formal and informal institutions changedover tim e. For exam ple, we divided the responses to th e q uestion aboutbribery at the regional and municipal level into those given by "inves-tor" and "noninvestor" firms to determine whether there were differ-ences in the answers between the se two tj^es of firms.

The responses are intriguing. In 2000, there are few statisticallysignificant differences in the responses be twe en investor and noninves-tor firms. At the regional and the municipal level, investor and nonin-vestor firms report experiencing bribery at about the same levels. Butin 2007, the picture is quite different. Investor firms perceive briberyto be a significantly less im po rtan t obstacle than do noninv estor firms.Noninvestor firms rated bribe ry by regional gov ernm ent officials to bea 2.40 on a scale of 1 to 5, wh ereas investor firms rated it is only a 2.09.These differences are no t large in m agn itude , but this is to be expectedgiven that the scale of 1 to 5 is rathe r limited. Nonetheless, tha t we findstatistically significant differences between these two groups despitethe crudeness of the measure and the narrow scale is revealing. Moreim portan t, the differential trea tm en t of investor and noninvestor firmsin 2007, bu t no t in 2000, repeats itself thro ug ho ut the data wh ich givesus greater confidence in the resu lts.

We also asked respondents in 2000 and 2007 to rate how large a nobstacle the cu rren t level of m ark et co m petition w as for their firms. Onaverage, com petition was a less severe prob lem for firms in 2000 th an in2007, which indicates some improvement in the business environmentfrom th e early Putin years to the late Putin years. More im po rtan t fromour perspective, investors and noninvestors in 2000 found competition


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reported that competition was a 3.37, while investor firms reportedthat it was only a 3.09. This difference is statistically significant in asimple com parison of m eans at the 95 percent level. Moreover, regiona lgovernments were more likely to discriminate between investor andnon investo r firms in gran ting aid to firms in 2007 tha n in 2000. In 2007,31 percent of investor firms re ported receiving som e form of aid fromthe regional governm ent wh ile only 11 percent of non investors did so,but in 2000 there was little difference in the responses between thesetwo groups (30 versus 26 percent).

In addition, investor firms expected much greater protection oftheir property rights compared to noninvestor firms in 2007. Investorfirms in 2007, but not 2000, gave significantly higher scores to theperformance of the state arbitration courts than did noninvestor firms.Moreover, we asked firms whether they believed that the courts couldprotec t their rights in a dispute with t he regional gove rnm ent. In 2000,investor and non investor firms gave relatively similar answ ers. Thirty-seven percent of non investors said "yes" or "more or less yes," while 44perc en t of investor firms did so. This difference falls ju st shy of statisti-cal significance. However, the gap between the responses of investorand noninvestor firms in 2007 was much greater. Investors were 14percentage points more likely to believe that they could use the courtsto protect their rights in a dispute with the regional government. Inaddition, investor firms were significantly more likely to believe thattheir property rights could be enforced in a dispute vwth the regionalgovernment compared to noninvestor firms in 2007, but not in 2000.Finally, data from 2007 indicate that 53 percent of noninvestor firmsexpected that they could resolve a dispute with another firm withoutturning to the courts, while 79 percent of investors believed that theycould do so.^ These results suggest tha t investor firms benefitted dispro-portionately from both formal and informal means of protecting prop-erty in 2007, bu t not in 2000.


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likely to rep ort be ing able to infiuence legislation on m atters of impor-tance for their firm at the regional level. Indeed, if anj^hing, investorfirms experienced greater lobbying success in the regional governmentrelative to noninvestor firms in 2000 than in 2007. Twenty-six percentof investor firms reported being able to infiuence legislation at theregional level in 2000 versus 21 percent in 2007. It also does n ot seemto be the case tha t investors and non investors differed in the frequencywith which they experienced property rights violations. In both 2000and 2007, investor firms were more likely to report a violation of theirproperty rights v^rithin the last two years. In some respects this is notsurprising. Investor firms were likely engaged in more extensive busi-ness activities, wh ich m ay have m ade th em m ore likely to ex periencea dispute. Thus, the change in the business environment is not dueto investor firms becoming more successful lobbyists or less likely toexperience p roperty rights violations.

The change in business-state relations was not a one-way streetin which regional governments showered investor firms wdth formaland informal benefits without receiving anything in return. In 2007,investor firms were significantly more likely to report that they hadoffered various forms of aid to th e regional gove rnm ent th an did nonin-vestor firms. Sixty-six perc ent of non inves tor firms rep orted deliveringsome form of assistance to the regional government, but a whopping90 percent of investor firms reported doing so. These figures may beinfiated by m anag ers seeking to exaggerate th eir sense of good citizen-ship. But bo th investor firms and non inves tor firms have sim ilar incen-tives to dissemble. Thus, the difference in responses between investorand non-inv estors shou ld not be affected by this bias.

In sum, our findings depart fiom the Hterature in two respects.While the fingerprints of the grabbing hand are still present, we alsofind evidence in support of some aspects of the helping hand model.Datafi-om2007 indicate that regional govern me nts have tende d to bias


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firms. If in the 1990s, state officials primarily preyed upon successfulfirms, in recent years regional governments have begun to bias policyin the ir favor.

Second, wh ereas m uch of the literature on informal institutionsemphasizes the ir resistance to change, here we find evidence in suppo rtof their mutability. If in 2000 informal institutions underpinning busi-ness-state relations were sim ilar for investor and n onin vesto r firms, by2007 the rules of the game had changed dramatically. Investor firmsbenefitted considerably more than noninvestor firms from changes toinformal institutions.

These differences in the treatment of investor and noninvestorfirms indicate that a tangible change has taken place in business-staterelations at the regional level in the Putin era as formal and informalinstitutions appear to reward investor firms far more than noninves-tor firms. Determining whe ther these p atterns hold across the countryas a whole requires more research, but the relationship is consistentwith the data. One recent study does make a similar point. Using datafrom 77 regions for 1993-2004, Ahrend (2008) found that more reform-oriented policies and b etter regional leadersh ip are positively related toeconomic development during the period 1998-2004, but not before.

It is important not to overstate the changes in the business envi-ronment in the Putin years. Russia remains a very difficult businessenvironment for investor and noninvestor firms alike and investor andnoninvestor firms share m any of the same grievances. Moreover, w he the rthe differential treatment of investor and noninvestor firms survives theglobal financial crisis is very mu ch a n op en question .IMPLICATIONS

This shift in the formal and informal rules of the game underPresident and n ow P rime M inister Putin's ru le will likely have consider-able implications for how firms respond to the global financial crisis,


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As an alternativ e, they could be using a "leveling" rule that redis tributesresources away from successful firms to unsuccessful firms, a practicefor which there is some evidence in the 1990s (Frye and Zhuravskaya,2000). In a second-best scenario, it could be th at regional gov ernm entsare trying to substitute for the lack of capable and neutral institutionsby favoring firms that have better adjusted to the market (Rodrik,2008). This more positive view of the evolution of relations betweenfirms and the regional government has echoes in studies of businessrelations vdth local governments in China, Brazil, and southern Italy(Qian, 1999; Locke, 2001).

However, it could be that only those firms that are on good rela-tions with the regional government receive favorable treatment andare therefore willing to invest. To the extent that these firms are notm ore econom ically efficient th an o the r firms in the region, th e region algov ernm ent m ay be blun ting incentives for the majority of firms in theregion to use the ir capital, effort, and tim e productively. In sum , politi-cal favoritism rath er tha n econom ic developm ents determ ines to wh omthe regional government provides benefits. If this is the case, then theconseq uences for eco nom ic efficiency are likely quite negative.

We tried to distinguish between these two views by comparingwhether investor and noninvestor firms rated the performance of thegovernor in their region differently. Neither in 2000 nor in 2007 didinvestors and non investors give significantly different respon ses to th eques tion. This gives mild sup por t to the m ore positive inte rpreta tion ofth e ev olution of business-state relation s, but it is hardly conclusive.FROM CRISIS TO CRISISAs this work goes to press the ele ph an t in the ro om is the financialcrash that continues to roil markets, upset governments, and destroysavings in Russia and around the globe. Indeed, the financial crash of1998 and the global financial collapse of 2009 provide rough bookendsfor the surveys in our study. It is difficult to determine how business-


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and elsewhere. Precise predictions about the future of the Russianeconomy are imp rude nt, but several factors are w orth noting.

Firms in Russia are likely in better condition to weather thefinancial storm of 2009 th an the crash of August 1998. Most industrialfirms in Russia are now dom ina ted by a single ov^oier or sm all grou p ofov^Tiers, which gives stronger incentives for current owners to restruc-ture their firms for the long-haul rather than to strip assets for theshort-run (Berglf and Pajuste, 2003; Yakoviev, 2004; Iwasaki, 2007). Ifthe 1998 financial crash led to a host of conflicts within enterprisesover ow nersh ip rights that had a destructive effect o n performance, thisscenario is less likely in 2009. In addition, the quality of managementis likely higher today than it was a decade ago. Indeed, the experienceof surviving the last crisis may have prepared managers and regionalgovernm ents to better h andle th e cu rrent extraordinary levels of finan-cial and economic instability. Moreover, while the declining value ofthe ruble m akes it hard er for borrow er firms to repay loans, it wall ulti-mately make Russian exports more competitive than they are today.Of course, dem and for Russian exp orts will dep end to a large ex tent onexporting countries rebounding from the current crisis and when thatvll hap pe n is anybody 's guess. Finally, Russia began the crisis vth alarge financial cushiona roughly $500 billion stabilization fund.

Yet the cu rren t financial crisis is likely to be much m ore profoundth an the A ugust 1998 crisis due to its global na ture . Demand for Russia'smain exportenergy^will not likely rebound until the economies oflarge im porte rs begin to recover. In add ition, the crisis is hittin g Russiaespecially hard. Industrial ou tpu t fell by 20 perc ent and m anu facturin goutput fell by 30 percent in January 2009 as compared to December2008. Manufacturing output fel l by more than 25 percent whencompared to January 2008 {Moscow Times, February 17, 2009). Grovi^hfor the year is likely to be negative. Few companies in Russia are likelyto go un scath ed and, in certa in respec ts, the m ore successfial firms are


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relative to the dollar and euroas m any exp ect it will these loans willbecom e m ore difficult to repay. In sum, th e sh eer scale of th e financialcrash and the country's great dependence on energy suggests that theRussian econom y is in for a roug h patch .CONCLUSIONOur study seeks to m ake th ree general con tributions. First, our researchpoints to the value of looking beyond the oligarchs in the naturalresource sectors of the Russia economy. The none nerg y and non -natu ralresource sectors continue to play a key role, and in the short run, theimportance of these sectors is likely to grow due to the depression ofoil prices. Indeed, over the longer term , if Russia's a ttem pts to diversifyits economy are to have any hopes of success, the manufacturing andservices sectors w ill have to find n ew sources of efficiency and grov^^h.

In addition, there appear to be important differences betweenthe business environment for oligarchic and nonoligarchic firms inRussia. Despite the increasing encroachment of the state in the natu-ral resource sector (which has likely produced greater uncertainty overfuture business opportunities), there appears to be greater stability inthe business environm ent for m ore typical firms in the m anufacturingand service sectors. The rules of the gam e betwe en m anufacturing andservice sector firms and reg ional gove rnm ent app ear to have solidified,altho ug h they n ow app ear to be mo re biased in favor of investor firms.

Second, our work co ntribu tes to the study of formal and informalinstitutions. In recent years scholars of economic development havepaid increasing attention to the importance of formal and informalinstitutions for shaping economic outcomes. This interest has dove-tailed nicely vith the p ostcom m un ist cases. We find tha t over the lasteight years, tha t there has been substantial change in the relationshipbetw een firms and regional gove rnm ents. Firms were m uch m ore likelyto invest in 2007 th an in 2000, bu t investor and no ninvestors have com eto inhabit increasingly different business climates within the same


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in 2007 than in 2000. While much of the existing work stresses thedifficulty of chang ing the inform al rules of the gam e, our study depictsconsiderable chan ge over a relatively short period of t ime.

Finally, our work provides a temporal baseline against whichwe can measure future changes in formal and informal institutions inRussia. The financial crisis curren tly ba tter ing all sectors of the Russianeconomy has the potential to reshape fiindamentally relations betweenbusiness and the state. W het her th e informal and formal institutionstha t em erged betw een 2000 and 2007 survive the financial crash will bea topic for future research.NOTES* This research was supp orted by the National Council on Eurasian

and East European R esearch and the Center for Advanced Studies ofHigher School of Economics in 2006-2007 and the Program of BasicResearch of Higher School of Economics in 2008.

1. The state arbitration courts are th e ma in forum for resolving disputesbetween firms and betw een firms and the state. They are located ineach of Russia's regions.

2. Herewe have reported th ese changes by simply com paring differencesin mean responses between investor and noninvestor firms wdthineach survey. However, these results also hold in m any instances if werun more sophisticated statistical analyses or use measures of firmrestructuring rather than investment.3. This question was no t included in the survey in 2000.

REFERENCESAhrend, Rdiger . "Understanding Russian Regions ' Economic

Performance During Periods of Decline and Grow th: An Extreme-Bound Analysis Approach." OECD Economics Departm ent W orkingPaper No.644, October 2008.


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Berglf, E. , and Pajus te , A. "Emerging Owners , Ecl ips ing Markets?"Corporate Governance in Central and Eastern Europe. Eds. P.K.Cornelius and Bruce Kogut. Oxford: Oxford University Press, 2003 :267-304.

De Souza, Lucio Vinhas. A Different Country: Russia's Economic Resurgence.Brussels : Ce nter for Eu rop ean Policy Studies , 200 8.

Eksper t .

Frye, Tim othy, and A ndrei Shleifer . "The Invisible Hand an d th e Gra bbin gHand . " American Economic Review Papers and Proceedings 87:2 (May1997): 354-359.

Frye, Timothy, and Ekater ina Zhuravskaya. "Rackets , Regulation, and theRule of Law." Journal of Law, Economics, and Organization 16:2 (2002):478-502.

Frye, Timothy. "Capture or Exchange? Business Lobbjdng in Russ ia . 'Europe-Asia Studies 54:8 (Nov emb er 2002): 1017 -36.

Go l ikova, V., K. G on ch ar , B. K uzn etsov , a nd A. Yakovlev. RussianMa nufacturing at the Crossroad s: W hat Prevents Firms from BeingCompetitive? Moscow: Higher School of Econ om ics, 200 8.

Iwasaki, Ichiro. "En terpr ise Reform an d Co rpora te Gov ernan ce in Russia:A Qu an tita tiv e Survey." Journal of Economic Surveys 21:5 (November2007): 849-902

Hel lman, J . S . "Winners Take All : The Pol i t ics of Par t ia l Reform inP os t c om m uni s t T r a ns i t i ons . " World Politics 50:2 (January 1998):203-234

H ellm an , J. S., G.Jones, a nd D. Kau fnian. "Seize th e State, Seize th e Day: AnEmpir ical Analysis of State Capture and Corruption in Transit ion."Paper prepared for the Annual Bank Conference on DevelopmentEco nom ics (ABCDE). W as hin gto n, D.C., Ap ril 18-20, 20 00.

Ledeneva, Alena. Russia's Economy of Favours: Blat, Netwo rking and InformalExchange. N ew York: Cambridge Universi ty Press , 1998.


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ing of th e A merican Political Science Association, H ilton Towers,San Francisco, California, September 1, 2001.Rodrik, Dani. "Second-Best Institutions." NBER Working Paper N o.l4050,National Bureau of Economic Research, 2008.Qian, Yingi. "The Process of China's Market Transition (1978-1998):Evolutionary, Historical and Institutional Perspectives." Paperpre pa re d fo r t he journal of Jnstitutional and Th eoretical Econo micssymposium on "Big-Bang Transformation of Economic Systemsas a Challenge to New Institutional Economics," June 9-11, 1999,Wallerfangen/Saar, Germany.Yakoviev, Andrei. "Evolution of Corporate Governance in Russia:Go vernm ental Policy vs. Real Incentives of Econom ic Agents." Post-Communist Economies 16:4 (December 2004): 387-03 .. "The Evolution of Business-State Interaction in Russia: FromState Capture to Business Capture? Europe-Asia Studies 58 (2006):1033-1056.

Yakoviev, Evgeny, and Ekaterina Zhuravskaya. "State Capture: FromYeltsin to Putin." Manuscript. Moscow, 2004.


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