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

Russia and other countries in the Commonwealth of IndependentStates that have implemented voucher privatization programshave to account for the puzzling behavior of insiders—manager-owners—who,in stripping assets from the firms they own, appear to be stealingfrom one pocket to fill the other. This article suggests thatasset stripping and the absence of restructuring result frominteractions between insiders and subnational governments ina particular property rights regime, in which the ability torealize value is limited by uncertainty and illiquidity. Asthe central institutions that govern the Russian economy haveceded their powers to the provinces, regional and local governmentshave imposed a variety of distortions on enterprises to protectlocal employment. To disentangle these vicious circles of control, this articlesconsiders three sets of institutional changes:; adjustmentsto the system of fiscal federalism by which subnational governmentswould be allowed to retain tax revenues generated locally; legalimprovements in the protection of property rights; and the provisionof mechanisms for restructuring and ownership transformationin insider-dominated firms. The aim of these reforms would beto change the incentives that local governments, owners, andinvestors face; to convince subnational governments that a moresustainable way of protecting employment lies in protectinglocal investment; to raise the cost of theft and corruptionby insiders and local officials; and to allow investors to acquirecontrolling stakes in viable firms.