IS RUSSIA A MARKET ECONOMY?

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do by verifying online that deposited sustainable strategic advantage by
monies are actually in their bank balancing technical requirements
accounts or have been traded as and social values.
requested. ARNOLD B. URKEN
The implementation of multiple
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Center for Voting and Democracy
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The social choice issues
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As local and wide area networks
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competitive differentiation and
 IS RUSSIA A MARKET
ECONOMY?
Both the European Union and the
United States have recently declared
that Russia now enjoys a market
economy. In a further evaluation,
very similar to that of EU, the U.S.
Commerce Department has
announced that “Russia has made
tremendous econom[ic] changes…
over the last decade” (Slevin, 2002).
In this contribution, I question the
validity of these claims and suggest
that Russia remains a long way short
of a fully-fledged market economy.
In one definition the term market
economy means an economy in
which most goods and services are
produced and distributed through
markets under the price system
(Webster’s 1993). Under this
definition, Russia can be considered
“somewhat market-oriented”. In
most markets there are no shortages,
and forces of supply and demand
determine prices; the private sector
is estimated by the U.S. to control
about 70% of Russia’s GDP (Slevin,
2002). But the unique perversions of
Russian markets call for a more
rigorous analysis.
In order to make a judgment
about the nature of Russia’s
economy, we must first investigate
whether such markets coexist within
an appropriate institutional
environment. Superficially, Russia
appears to possess private property,
contract law, and a credit system;
but the real question is whether
these institutions function
successfully, and whether the
majority of Russians enjoy the
benefits of these institutions.
1. The Market for Bureaucratic
Decisions
In an October 2000 interview with
Le Figaro, President Putin shrewdly
remarked: “I…think that the state
has a mallet, with which it only
324 IS RUSSIA A MARKET ECONOMY?
strikes one blow — to the head. So
far we have not used this weapon;
we have just picked it up….
However, if we are angered, we will
undoubtedly use it….” While
discussing the relations between
tycoons and the government, Mr.
Putin emphasized that the key
determinant of resource allocation in
Russia is the bureaucracy. The
bureaucratic system possesses a
mallet, and threatens to strike with
that mallet in order to extort money
from individuals and businesses.
Bureaucrats indirectly determine
who produces what, how much, and
at what cost. Consumers are
“sovereign” only within the
framework set up by this
governmental bureaucracy.
Although rent seeking exists in
all economies, its scale and effects
are pervasive in Russia. Federal Law
#128-FZ (August 8, 2001) “On
Licensing of Various Types of
Business Activity” gives
government officials arbitrary power
to grant and revoke business licenses
and to enforce compliance with any
and all government standards. This
power, combined with other
licensing laws, gives regulators
extensive oversight of just about
every imaginable commercial
activity. Before competing against
each other for the consumer rouble,
entrepreneurs first have to compete
for bureaucratic favours. It is
common practice for government
officials to grant favours in
exchange for money and non-
monetary bribes — indirectly raising
costs, curtailing competition, and
consequently raising prices for
consumers as well as limiting the
variety and quality of goods in the
market.
2. Property Rights
Although the rights to own, use,
transform and reassign property
have been increasingly vested in usually is enough to revert to the old
private citizens, the enforcement of purpose of use.
such rights remains problematical.
Since the power to enforce rights is
still concentrated in the hands of the 3. Credit System
few, and is redirected to benefit a
The shortcomings of the credit
narrow circle of politicians and
system prevent money from being
rising oligarchs, the most valuable
channelled to its highest valued uses.
resources, such as oil and gas,
Private banks profit from currency
belong to oligarchs, while other
speculation and from servicing state
major resources, such as urban and
industrial enterprises and oligarchs.
agricultural land, are still
All government transactions,
monopolized by the state.
including credits to industry,
Ordinary Russians possess few
pensions and unemployment
valuable resources, though the
insurance are done through the
majority own at least one of the
Central Bank, Sberbank.
following: shares of stock, an
The personal banking and credit
apartment, a house, a suburban
system suffers from chronic illness.
and/or rural land plot, a car, or a
Because of lack of trust, people do
business. Shares distributed on open
not keep their money in banks. With
markets usually are poor
minimal funds to lend, and little
investments and are issued by
competition from other creditors,
insolvent government-subsidized
default-fearing banks offer small
enterprises; shares of profitable
loans at high-interest rates and
businesses are seldom distributed in
ridiculous terms. Most Russians are
open markets. After privatization
in fact excluded from using credit in
and suburban land reform, private
planning their economic future.
ownership of real estate has
Since credit is not affordable,
increased, but it has caused little
automobiles and real estate are
change — most Russians were given
purchased mostly in cash. Private
title to a place where they already
banks offer a one or two year
lived or grew vegetables — and
personal loan at about 20% interest
owning an apartment or a suburban
(12% in foreign currency). Sberbank
land plot is no different than under
offers mortgages for a maximum of
Soviet rule. Semi-open markets
15 years, and a car loan for up to 5
existed in the USSR (Boettke, 1993,
years, at over 20% (13% in foreign
esp. Ch. 4; Latov, 2001; Osokina,
currency).
1998). In the Soviet Union, not only
To obtain a loan, onerous
was produce grown on suburban
requirements must be met. First, a
land widely marketed, the plots
valid permanent residence permit is
themselves were also owned and
required. (This permit states the
traded. Rural housing was also
geographical boundaries within
widely traded.
which one is permitted to live and
Today even if a building or land
work legally, and functions also as
plot is privately owned, the town or
an access card to state provided
regional planning committee can
health care). Next one is required to
change without warning a property’s
submit proof of a stable source of
“purpose of use” — a highly
income. On loans over $5,000 a note
arbitrary zoning restriction. For
verifying mental health must be
instance, a new regulation can
provided, on loans over $10,000
require turning an office building
both a co-signer and some form of
into a bakery. However, a bribe
second collateral must be given.
 These restrictions significantly
reduce incentives to apply for credit.
Those who already have additional
collateral most likely do not need a
loan, and in any case would not have
income statements showing
sufficient income, as tax-evasion is
universal.

4. Contract Law

Contract law is still a meaningless

concept in Russia. But relational
contracts — contracts that combine
a legal exchange of rights with a
guarantee supported by the