Organization and Development of Russian Business A Firm-Level Analysis_1 potx

8 Organization and Development of Russian Business
that, for JSCs not affiliated with company groups or parent companies of the
groups, the influence was identified for ownership and governance features
supporting the protection of property rights and for the pressure of com-
petition with manufacturers from developed countries as an incentive for
improving management quality.
In Chapter 8, we test a competing hypothesis on the nature of Russian
business groups and possible tools for disciplining the executive managers
in the subsidiaries of those groups. Our empirical results show that busi-
ness groups act as integrated companies rather than a network of companies
and that hierarchical coordination prevails inside the groups. We also con-
firmed that the most important way to resolve the agency problem in the
groups is through the participation of the ultimate owners by themselves or
represented by the parent company in the management. Corporate govern-
ance instruments are important, mostly in subsidiaries acting in regulating
industries or in state-owned companies. However, one in three subsidiaries
that is a private company in nonregulated industry also develops internal
corporate governance. Corporate governance as a disciplinary tool is neces-
sary in state-owned as well as new private companies.
Chapter 9 examines the impact of business integration on enterprise
restructuring and financial and operating performance of group subsidi-
aries in Russia. Directors of affiliated enterprises and, especially, of those
merged after mass privatization acknowledge the impact of groups on the
market competitiveness of the enterprises. A comparison of subsidiaries and
independent enterprises supports the positive attitude of directors toward
group membership. Our survey results indicate, as many other studies in
Russia have shown, that group subsidiaries outperform independent enter-
prises in terms of corporate restructuring and financial and operative per-
formance. However, it is not clear whether the comparative advantages of
group enterprises are explained by higher productivity alone. The results of
our comparison of total factor productivity in affiliated and independent

enterprises are mixed. The higher productivity of affiliated enterprises is
mostly due to companies that joined the groups before 1995. The advan-
tages of affiliated enterprises over independent ones provide an additional
explanation of the stability of a business group as an organizational form in
Russian industry. Better firm performance helps to solve agency problems
in subsidiary companies.
The chapters in Part III, “The Role of External Players in Corporate
Governance,” present the outcomes of our research on the relationship
among industrial and communications companies and commercial banks,
business associations, and the government. It is controversial whether the
latter three economic entities have a specific influence on corporate govern-
ance and the performance of nonfinancial enterprises. Chapters 10, 11, and
12 present empirical evidence of these issues from a careful examination of
the results of the enterprise survey.
978023_0217287_02_ . dd 8 5/12/2009 5:18:01 PM
Introduction 9
The focus of Chapter 10 is on the banking sector. With the objective of
clarifying the emerging role of commercial banks in corporate finance in
economically buoyant Russia, we reveal the results of an analysis in this chap-
ter conducted from a macro and micro standpoint. Macro-economically, the
share of the banking sector in the overall corporate investment finance has
been rising. The results from our joint survey reveal that about one-third of
medium-to-large scale enterprises have no external borrowings, suggesting
that there is still a large capacity for the banking sector to increase its role.
These firms tended to be smaller, with a closely held ownership structure,
and were not active in new investments. In this chapter, the role played by
Sberbank, the largest Russian saving bank, is also examined; it is by far the
largest major bank that has served as a main supplier of funds since the
financial crisis of 1998. The enterprises that showed Sberbank as the larg-
est financer were mostly large ones and had export records. They tended to

have special relationships with the government, implying that the corpo-
rate financing mechanism had been evolving in close cooperation between
the government and enterprises.
Chapter 11 scrutinizes the relationship between the business associations
and their member firms. Empirical literature on the membership of Russian
firms in business associations provides no clear explanation of the main
incentives of the firms to participate in collective action. In this chapter, we
explore whether these incentives are inspired by market pressure, or, on the
contrary, whether rent-seeking and a desire to establish personal relation-
ships with authorities influence major decisions within a firm. To clarify
these issues, we empirically examine the determinants of membership in
associations and explore the reasons for simultaneous membership in dif-
ferent types of associations, that is, the phenomenon of multiple member-
ship. Our estimation results reveal that the larger and better-performing
enterprises are more interested in joining associations in situations of
competitive pressure from the Baltic countries, Turkey, and China. We also
confirmed that enterprises with general directors who are large owners sig-
nificantly more often become members of associations than do firms headed
by hired CEOs. The main benefits from joining these business associations
are related to the close interactions with state authorities. We argue that this
feature may help to overcome information asymmetry in the fragile institu-
tional environment of Russian business. In addition, multiple membership
significantly increases the chances to obtain financial and organizational
support from the state and, thus, is a rational strategy of market players.
In Chapter 12, we analyze the influence of the state on the improvement
of corporate governance in Russia of the early 2000s. Taking into account
the low quality of market institutions in the 1990s (i.e., the market failure
phenomenon), we assume that state intervention as the second-best solu-
tion had a positive impact in this case. Using a firm-level dataset obtained
from our enterprise survey, we test this hypothesis in two types of corporate

978023_0217287_02_ . dd 9 5/12/2009 5:18:01 PM
10 Organization and Development of Russian Business
models: state-owned or mixed firms and politically connected firms. The
first model confirmed a strong positive influence of state ownership on the
corporate governance in Russia in 2001–2004. The estimation results are sta-
tistically robust in different model specifications. We connect this empirical
evidence with attempts of the Russian government to use standard mecha-
nisms and procedures of corporate governance to defend its property rights
in its relationships with state-owned and mixed enterprises.
The concluding chapter summarizes the major findings in this study and
discusses the remaining issues and agenda for future research.
We are hopeful that this volume will provide an insight into firm organi-
zation and management in Russian business and stimulate further discus-
sion and research on this topic.
Notes
1. Many experts point out, however, that a large part of this remarkable growth
of FDI inflow in recent years can be explained by active repatriation of offshore
Russian capital. Nevertheless, it is also a fact that many Western companies,
including several world-famous multinational enterprises, embarked or decided
to embark on the Russian market, which also boosts direct capital investment into
Russia.
2. We describe the details of the joint survey in the Appendix of this book.
3. Chapter outlines have been prepared by their individual authors.
Bibliography
Avdasheva, S. (2007) Russian holding groups: New empirical evidence, Problems of
Economic Transition, 50/5: 24–43.
Dolgopiatova, T. (2007) Ownership concentration and Russian company develop-
ment: Empirical evidence, Problems of Economic Transition, 50/5: 7–23.
Dolgopyatova, T. (ed.) (2006) Integratsionnye Protsessy, Korporativnoe Unpravleniye i
Menedzhment v Rossiiskikh Kompaniyakh. Seriya “Nauchnye doklady: Nezavisimyi

Ekonomicheskii Analiz,” No. 180. (Moscow: Moskovskii obshchestvennyi nauch-
nyi fond i Proekty dlya budushchego).
Dolgopyatova, T. G., Iwasaki, I., & Yakovlev, A. A. (eds.) (2007) Rossiiskaya Korporatsiya:
Vnutrennyaya Organizatsiya, Vneshnie Vzaimodeistviya, Perspektivy Razvitiya (Moscow:
Izdateliskii dom GU-VSHE).
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ous issues) (London: EBRD).
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issues) (Moscow: Rosstat).
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/>Iwasaki, I. (2006) Korporativnoe pravo i organizatsionnyi vybor: Otkrytye i zakrytye
aktsionernye obshchestva v Rossii, Rossiiskii Zhurnal Menedzhmenta, 4: 55–76.
Iwasaki, I. (2007) Legal forms of joint stock companies and corporate behavior in
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Introduction 11
Iwasaki, I. (2008) The determinants of board composition in a transforming econ-
omy: Evidence from Russia, Journal of Corporate Finance, 14: 532–549.
Sugiura, F. (2007) Rosia kigyo no shikin choutatsu koudou: Kigyo chousa deta ni
motozuku bunseki, Keizai Kenkyu, 58: 151–162.
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noshenii i ikh evoliutsiya, Voprosy Ekonomiki, 1: 124–139.
978023_0217287_02_ . dd 11 5/12/2009 5:18:01 PM
12
1
The Emergence of Russian
Corporations: From the Soviet
Enterprise to a Market Firm
Tatiana G. Dolgopyatova, Ichiro Iwasaki, and Andrei A. Yakovlev
Introduction

In this chapter, the evolution of an enterprise model in the Russian economy
is examined using two key events that predetermined major changes in
enterprise behavior as division lines. The first was the disintegration of the
Soviet Union, the swift dismantling of central planning, and the shock ther-
apy of price liberalization in 1991–1992. The second event was the financial
crisis of August 1998 and the political crisis that followed, which served
as starting points for radical improvement in macroeconomic policy and
strengthening of the role of the state.
Prior to 1991, one could speak about socialist enterprise of the type that
many researchers, from Josef Berliner to Janos Kornai, had been studying
for several decades. The period from 1992 to 1998 in Russia was the time of
classical transition firm, which disagreed with the forecasts of mainstream
economists and led to serious challenges to the prevailing economic theory.
These challenges were met by studies of economic transition and company
behavior in transition economies, with the participation of leading econ-
omists of the world, including Andrei Shleifer, Gerard Roland, and Josef
Stiglitz. Finally, after 1998, the specific features of the transition firm started
to erode and, the patterns became more in agreement with the standard
models established in developing and developed economies. Our research
focuses on this transitional period in Russia. However, to clarify the con-
temporary trends, we focus on the features of the socialist enterprise and
the transition firm and compare their Russian prototypes with counterparts
in Eastern Europe and China.
The remainder of this chapter is organized as follows: The first section is
a discussion of the Soviet model of the socialist enterprise and its character-
istics. The second section is an examination of Russian enterprise reforms
in the initial stage of systemic transformation to a market economy. The
978023_0217287_03_cha01. dd 12 5/12/2009 5:19:12 PM
The Emergence of Russian Corporations 13
third section traces the evolutionary process of Russian corporations after

the 1998 financial crisis.
The Soviet socialist enterprise
The classical ideal model of a planned socialist economy implied that each
enterprise was included in the system of central planning. This means that
higher-ranking agencies of the state established output and input plans
for an enterprise, identified suppliers and customers, and made decisions
regarding capital investments and appointments of top managers. In this
system, the main function of the enterprise was to achieve the target plan
that had been set by the authorities. In this sense, the socialist enterprise
has never been a firm. Rather, it was a production division or a shop in the
gigantic “single factory,” as it had been described by Vladimir Lenin.
In formal terms, the enterprise was considered a national property.
However, in reality, the chief representative of the enterprise who protected
the interests of the enterprise and its employees was the general manager –
enterprise director.
Physical resources were the main incentive for the socialist enterprise.
They were the decisive factor, taking precedence over money. Decisions
on the reallocation of resources for the next planning period were gener-
ally dependent on successfully meeting the targets of the preceding period.
Product demand was insignificant to the socialist enterprise because the
right to acquire products was not based on customer solvency but, rather,
on the customers identified in the procurement plans. Physical demand was
also a matter of certain importance. This demand was taken into account
in the compilation of a plan for the next term, but the compilation was also
affected by many other matters, such as the achieved volume of output by
certain item. After the plan was adopted, the target received from higher
authorities became the primary task, and the enterprise produced the prod-
ucts specified in the plan. However, product demand usually changed as the
plans were being compiled, and some of the production then appeared to
be unwanted by customers. At the same time, the products in high demand

were always in short supply because changes in plans regularly lagged
behind changes in demand. This process and its implications as a base for
chronic shortages of resources in a planned economy are discussed in detail
by Kornai (1980).
The priority right to acquire products in short supply was given to the cus-
tomers whose needs had been considered in procurement plans. However,
suppliers had also some room for maneuvers in their relations with these
customers. This was because each plan was initially compiled in physical
terms (units of production). Prices were regarded as an auxiliary account-
ing instrument, which could be used for the aggregation of plan targets for
individual enterprises into integrated plans for industrial sectors and the
978023_0217287_03_cha01. dd 13 5/12/2009 5:19:13 PM
14 Organization and Development of Russian Business
economy as a whole. However, total plan targets (excluding key designated
items) were approved in value terms, as so-called “plans of gross output.”
This enabled suppliers to operate on changes in assortment, producing (and
imposing on customers) those products that were easier to make under regu-
lar shortage of key inputs. This enabled suppliers to operate with changes
in product type and customer demand, and to produce products that were
easier to manufacture in consideration of the regular shortages of key
components.
Simultaneously, enterprise managers were constantly involved in negotia-
tions with their suppliers about the procurement of key resources; they were
also involved with their superior agencies about getting their plans of gross
output either considered as fulfilled despite deviations from the planned
assortment or corrected for shortages of resources. Managerial success in
this informal interaction, which was first described by Berliner (1952) and
later analyzed in a series of Duke–Berkeley Occasional Papers on the Second
Economy in the USSR, was one of the main factors in the fulfillment of the
target plans of an individual enterprise. In turn, failure to fulfill a plan was a

cause for superior agencies to penalize the enterprise to the point of dismiss-
ing its top manager from office.
The role and functions of the socialist enterprise in the centrally planned
economy led to a number of important consequences, which determined
typical managerial behavior. Among them are the following: (a) attention
was given to production and technology (typically, the absolute majority of
enterprise directors in the USSR and other socialist countries were educated
engineers and technicians); (b) the focus was on day-to-day operations of
an enterprise with a short planning horizon (the management could make
decisions within their approved annual plans, while decisions for more
prolonged horizons that were related to the compilation and approval of
five-year plans and implementation of investment projects came within the
competence of higher levels of government); and (c) managers were involved
in systematic informal negotiations with superior agencies about planned
target volumes and resources allocated to the enterprise and with suppliers
and customers on product mix and other terms of supply.
This pattern of behavior was typical of enterprises in all socialist econo-
mies. However, a substantial number of national features were related to
the planning system in the USSR as well as to ideological approaches to
organization of the Soviet planned economy. There are five features prima-
rily responsible for the transformation of the Soviet enterprise, and they are
described in detail below.
First, Soviet enterprises had a very low degree of independence, prede-
termined by the scale and detailed elaboration of central planning in the
USSR.
1
T he y had no acce s s to rea l e c onom ic i n for mat ion, wh ic h wa s colle c ted
by the central economic agencies. Their experience in horizontal interac-
tion with other enterprises was limited to mutual adjustment of terms of
978023_0217287_03_cha01. dd 14 5/12/2009 5:19:13 PM

The Emergence of Russian Corporations 15
production and supply in the framework of adopted plans. Production out-
side of state plans in the USSR was regarded as criminal until the late 1980s.
Outside of centralized planning, the only legal activity was food production
on private plots in rural areas, whereas, in most of Eastern Europe, small
private ownership was permitted. Economically and ideologically, the USSR
was quite closed. Soviet enterprises had practically no contact with Western
firms, and their managers had no knowledge of the operations of the mod-
ern market economy. In the best cases, they based their understanding on
information gleaned from Das Kapital by Karl Marx.
Second, deliberate industrial policy for higher concentration of output
and product specialization, which was the strongest in the 1960s and 1970s
in the Soviet Union,
2
was the cause for the establishment of a noncompeti-
tive industrial structure in which each enterprise had very limited numbers
of suppliers and customers. As a result, enterprise directors knew each other
well, and the whole managerial corps was a cohesive informal corporation.
Readiness of the members of this corporation to help each other was one
of the factors responsible for the survival of Russian enterprises and for the
setup of barter networks under the crisis of arrears in the 1990s. However,
the productive assets of Russian enterprises, which had been established
under the industrial policy of preceding decades, were so specific that the
enterprises were highly dependent on their partners. For this reason, after
the launch of reforms, the activity of Russian enterprises became more disor-
ganized than that of East European economies (Blanchard & Kremer 1997).
Third, price disparities were greater in the USSR because the planning
system lived longer and isolation from the world market was more complete.
The disparities resulted from the desire of enterprises to overprice their prod-
ucts in order to fulfill their “plans of gross output” (Kornai 1980). Central

economic agencies used administered prices to prevent this tendency, but
price control produced sufficient effects only in mono-product extract-
ing and primary processing industries. In industries with more differenti-
ated products, producers bypassed this obstacle by operating on changes
in assortment when modified old products were passed for new ones with
higher costs. This enabled the enterprises to demonstrate higher volumes
of “gross output” at unchanged volumes of output in physical terms. As
a result, in the course of time, prices of primary materials became under-
stated, and prices of products with high level of processing grew overstated
in comparison with international prices. This historically established rela-
tive overstatement of costs and prices in some industries determined, to a
large extent, the scale of competitive weakness of enterprises in these indus-
tries in Russia after prices in foreign trade were liberalized.
Fourth, the Soviet Union was considered the heart of world socialism. It
resisted the United States and what it referred to as “imperialist aggression”
while emphasizing the expansion of its military industrial complex (MIC).
As a result, the share of enterprises belonging to the MIC and dependent on
978023_0217287_03_cha01. dd 15 5/12/2009 5:19:13 PM
16 Organization and Development of Russian Business
military procurement orders was much higher in the USSR than in other
socialist countries. For this reason, a sharp reduction in military spending
in the age of reform had a stronger effect on the enterprises. Since many of
these enterprises had been making technologically complex products and
had been key customers of their suppliers, this reduction was an additional
factor responsible for higher disorganization and a deeper slump in output
(Blanchard & Kremer 1997).
Finally, the Soviet model of a planned economy was very conservative,
and Soviet enterprises had no experience of operation under reform. Eastern
Europe started to reform its planning system and to introduce some ele-
ments of market economy as early as at the end of the 1960s. China began

a similar process in 1979, but, until that time, enterprises had gone through
several waves of centralization and decentralization and had also survived
the Cultural Revolution. Against this background, the Soviet Union limited
all experiments in the late 1970s and early 1980s to various schemes of dis-
tribution of final enterprise income and never touched upon the issues of
industrial organization and planning.
In general, a planned economy used quite different criteria for the assess-
ment of enterprise performance and incentive mechanisms than those used
in a market economy. As the Soviet economy reached a crisis level in the
mid-1980s, changes in economic policy began to emerge. On the micro
level, the logic of changes was focused on the transformation of incentives
of economic agents. The formation of new incentive mechanisms took two
directions.
On the one hand, private initiative was allowed for the first time in serv-
ices and supply of consumer goods. In 1986–1988, laws on personal labor
and cooperative enterprises were enacted, and small private businesses were
allowed. State-owned enterprises were permitted to launch joint ventures
with foreign partners. Output prices for products and services of individual
and cooperative, small-scale and joint ventures were unregulated. However,
until 1992, the share of this private segment in the economy was too small
to affect the behavior of state-owned enterprises.
On the other hand, state-owned enterprises were given a greater extent of
independence. This was regarded as a fundamental line of economic trans-
formation aimed at the enhancement of efficiency of the Soviet socialist
economy. Enterprise directors, willing to escape from the control of superior
agencies, supported this line in every possible way. The Law on the State-
Owned Enterprise, which was enacted in 1987 and came into effect in 1988,
was an important step in this direction. This law provided for the creation
of councils of labor collectives and the introduction of elected directors,
which, indeed, made top managers independent from supervisory agencies.

The law permitted labor collectives in agreement with a supervisory min-
istry to lease assets of a state-owned enterprise and, later, to buy out the
leased property with profits (this was one of the displays of “nomenklatura
978023_0217287_03_cha01. dd 16 5/12/2009 5:19:13 PM
The Emergence of Russian Corporations 17
Table 1.1 Chronology of enterprise reforms and related events in the USSR and
Russia, 1986–2007
Period Year Month Events
a
Category
b
The perestroika period and collapse of the Soviet Union
1986 Nov USSR law on individual labor activities
enacted
A
1987 Jan Resolution on joint enterprises adopted by
the USSR cabinet of ministers
C
Jun USSR law on state enterprises enacted C
1988 May USSR law on cooperatives enacted C
1989 Nov USSR leasing law enacted E
1990 Mar USSR ownership law enacted C
Jun USSR enterprise law enacted C
Jun USSR law on corporate tax enacted F
Aug 500-day plan announced A
Dec USSR law on trade union enacted H
Dec USSR law on investment activities enacted G
Dec USSR banking law enacted E
Dec RSFSR banking law enacted E
Dec RSFSR law on ownership enacted C

Dec RSFSR law on enterprises enacted C
1991 Mar RSFSR law on competition and limitation
of monopoly enacted
D
Jun RSFSR law on investment enacted G
Jul USSR law on denationalization and
privatization enacted
B
Jul USSR law on foreign investment enacted G
Jul USSR anti-monopoly law enacted D
Jul RSFSR law on privatization enacted B
Aug Soviet coup d’état attempt
Dec RSFSR law on corporate tax enacted F
Dec RSFSR law on value-added tax enacted F
Dec Collapse of the Soviet Union
The Yeltsin administration and initial
enterprise reforms
1992 Jan Liberalization of price and foreign trade A
May Mortgage law adopted E
Jun Mass-privatization program adopted B
Jun Law on consumer cooperatives adopted C
Sep Law on monetary system adopted E
Oct Law on foreign exchange regulation adopted E
Oct Voucher privatization begins B
Nov Law on bankruptcy adopted B
1993 May Treasure bills market initiated E
Jun Customs code adopted F
Jul New Russian ruble introduced E
Aug Law on labor protection adopted H
Sep–

Oct
Constitutional crisis
Continued
978023_0217287_03_cha01. dd 17 5/12/2009 5:19:13 PM
18 Organization and Development of Russian Business
Table 1.1 Continued
Period Year Month Events
a
Category
b
The Yeltsin administration and initial enterprise reforms

1994 Jul Monetary privatization begins B
Oct New civil code adopted C
Sep Currency crisis
1995 Jun Law on small and medium-sized
enterprises (SMEs) enacted
G
Jul Currency corridor system introduced E
Aug Law on natural monopoly adopted D
Oct Law on state regulation of trade activities
adopted
A
Nov Loan-for-share privatization begins B
Nov Law on financial-industrial groups adopted C
Dec Law on production sharing agreement
adopted
G
1996 Jan Law on joint-stock companies enacted C
Jan Law on trade union adopted H

April Securities law adopted E
May Law on producer cooperatives adopted C
Jun Full currency convertibility introduced E
Nov First IPO by Vympelkom at NYSE
1997 Jul First corporate Eurobond issued
Jul Privatization law adopted B
1998 Jan Denomination of ruble conducted E
Jan Bankruptcy law adopted B
Feb Law on limited liability companies adopted C
Jul Law on workers’ JSCs (people’s enterprises)
adopted
C
Aug Financial crisis
Sep Float exchange rate system introduced E
Oct Leasing law adopted E
1999 Jan New tax code (Part I) enacted F
Feb Law on restructuring of credit
organizations adopted
E
Jul New law on labor protection adopted H
Jul Law on foreign investment adopted G
Development of Russian
corporations under the
Putin administration
2000 May The program of national development
strategy (Gref’s Program) announced
A
Aug New tax code (Part II) adopted F
Jun Law on minimum wage adopted H
2001 May Banking law amended E

Aug Law on audit activities adopted E
Jul Law on profit tax adopted F
Nov Law on investment funds adopted G
Dec New privatization law adopted B
Continued
978023_0217287_03_cha01. dd 18 5/12/2009 5:19:14 PM
The Emergence of Russian Corporations 19
privatization”). In general, the interests of managers and labor collectives
could be considered unanimous. Enterprises had the right to choose suppli-
ers and customers, and they had more freedom in the use of their profits.
Later, state enterprises obtained the right to sell the above-mentioned target
products at freely determined prices.
However, in a noncompetitive industrial structure, this greater extent
of enterprise independence became only an additional factor of greater
macroeconomic imbalance along with the incompetence of Soviet party
functionaries. As shown in Table 1.1, in the late 1980s, the Soviet govern-
ment was quite rigid in adopting new pro-market legislation. The process of
development of new legal institutions had accelerated only in 1990–1991,
when the conflict between the USSR and RSFSR governments became acute.
Table 1.1 Continued
Period Year Month Events
a
Category
b
Development of Russian corporations under
the Putin administration
2002 Jan Law on joint-stock companies amended C
Feb New labor code enacted H
Apr Corporate governance code endorsed C
Oct New bankruptcy law enacted B

Nov Law on unitary enterprises adopted C
2003 May New customs code adopted F
Oct Arrest of Mikhail Khodorkovsky, main
owner of Yukos Oil company

Dec Law on deposit insurance adopted E
2004 Dec Court decision on Yukos affairs
2005 Jul Law on special economic zones adopted D
2006 Jul Full liberalization of capital account
transaction
A
Oct Competition law amended D
Dec Securities law amended E
2007 May Law on the development bank adopted G
Jul Law on SME sector development adopted G
Jul National corporation “Rosnanotekh”
established
D
Now Law on national corporation
“Rostekhnologii” adopted
D
Notes:
a
This table covers only selected events regarding enterprise reforms in Russia. “RSFSR law”
denotes a law of the Russian Soviet Federative Socialist Republic. All laws adopted or enacted in
1992 onward are laws of the Russian Federation.
b
A: Market and trade liberalization, B: Privatization and bankruptcy measures, C: Organization and
corporate governance reform, D: Competition and industrial policies, E: Financial and monetary
reform and corporate finance, F: Tax reform, G: SME and investment policies, H: Labor policies.

Source: Compiled by the authors.
978023_0217287_03_cha01. dd 19 5/12/2009 5:19:14 PM
20 Organization and Development of Russian Business
However, the quality of this new legislation was very low. With the adop-
tion of new laws, both governments tried to secure support from enterprise
managers and the population rather than provide the conditions for sus-
tainable market development. This inter-government competition resulted
in extremely populist policy
3
and, in 1991, dramatic escalation of macroeco-
nomic troubles in the Soviet economy predetermined the shock of further
reforms and accelerated the transformation of the socialist enterprise into
a transition firm.
The transition firm: The specific Russian type
Radical changes in principles and regulations that determine the behavior of
economic agents were the key feature of the transition from a planned to a
market economy. In particular, these changes consisted of the liberalization
of prices and foreign trade, privatization, the establishment of a tax system,
the introduction of antimonopoly legislation, and the creation of a system
of financial institutions. On the micro level, all of these large-scale changes
resulted in great uncertainty on the activity of enterprises. At the same
time, important features of the transition period were structural imbalances
and price disparities, which were inherited from the planned economy and
allowed the receipt of “transitional rent” (Polterovich 2001) and the coexist-
ence of two major sectors of the economy: state-owned enterprises subject
to privatization and newly created private firms.
In both sectors, enterprises were independent to make decisions with
regard to the choice of suppliers and customers, output, and prices, and,
in this sense, they were firms. However, the way these firms in both sec-
tors were doing business could not be described as market behavior. In

most transitional economies, firms tended to violate the rights of minority
shareholders, to develop shadow activities, and to resort to state capture
and rent seeking in their relations with governments using the weakness
of public institutions and the remaining soft budget constraint. The causes
of such deformation will be examined with regard to the conduct of the
transition firm.
The central problem for state-owned and privatized enterprises was that,
at the time of their creation, all of them were oriented toward entirely dif-
ferent criteria of efficiency. The transition to market principles resulted in
the deterioration of the financial conditions of the firms; they need serious
changes in organization and management as well as technological restruc-
turing, and their central objective was survival (self-preservation) in the
new situation.
Changes in the external environment, such as price liberalization, aban-
donment of subsidies from the state, and opening of competition with
private and foreign firms, were designed for the creation of incentives for
enterprises to undertake restructuring. However, the basic tool for making
978023_0217287_03_cha01. dd 20 5/12/2009 5:19:14 PM
The Emergence of Russian Corporations 21
them efficient was seen in privatization, which involved the transfer of
liability from the state to private proprietors and opened opportunities for
private initiative.
Different countries with transitional economies used different methods
of privatization. Russia realized the voucher scheme of mass privatization
based on the free distribution of “privatization checks” (vouchers) to every
citizen in the country. Later, the vouchers could be used to purchase shares
in enterprises that were eligible for privatization. This method resulted in
considerable dispersion of ownership rights, but because it entitled each
citizen to become a private shareholder, it was considered to ensure the
irreversibility of market transformation.

During the mass-privatization period, October 1992 to June 1994, 67%
of all Russian state-owned enterprises eligible for privatization adopted an
option plan in which management and employees were allowed to acquire
a maximum of 51% of a firm’s total stock at 70% of face value. In addition
to this option, the federal government prepared two other schemes. Under
the first one, 25% of the total preferred stock of each public enterprise was
granted to its management and employees free, and 10% of the total ordi-
nary stock was distributed to them at 70% of face value. The second scheme
allowed both the management and the employees to purchase 20% of the
total ordinary stock each on a preferential offer basis. However, firms that
had adopted the former and the latter accounted for only 30% and 3%,
respectively, of the total number of privatized enterprises (Iwasaki 2007).
This design of the privatization program was a compromise resulting
from pressure from industry, and it was clear that privatized Russian firms
would be heavily controlled by insiders (Boycko et al. 1995; Blasi et al.
1997). At the same time, it should be emphasized that the insider type of
privatization was typical of other transitional economies as well (Berglöf &
von Thadden 2000).
In 1994–1995, the Russian government shifted to monetary privatization,
that is, the so-called investment tenders. The conditions of these tenders
stipulated that a purchaser of a stake in equity of a privatized enterprise
should not only pay the government in cash but also ensure capital invest-
ments in its development (the volume of investments was fixed in a sepa-
rate contract). However, the government made no provision for monitoring
compliance with these investment contracts and no provision for penaliz-
ing their breach; as a result, investors used this loophole for opportunistic
behavior on a massive scale.
Auctions of loans-for-shares introduced in December 1995 were the final
stage of this phase. This scheme envisaged that banks would acquire the
state-owned shares in 21 blue-chip public companies as collateral for grant-

ing credits to the federal government. Twelve auctions were implemented
under this scheme, bringing a total of 5.1 trillion rubles of revenue (or about
1 billion US dollars in current prices) to the federal government.
978023_0217287_03_cha01. dd 21 5/12/2009 5:19:14 PM
22 Organization and Development of Russian Business
With loans-for-shares auctions, the Russian government drove a handful
of commercial banks to snap up a large amount of shares of the biggest cor-
porations. This scheme, which has been under continuous criticism for lack
of transparency in the bidding process as well as inadequacy as an industrial
policy itself, gave crucial momentum to the emergence of large industrial
syndicates, including new business groups headed by so-called “oligarchs.”
After loans-for-shares auctions, the peak of privatization in Russia was
over, and the privatization program was gradually curbed. In total, more
than 94,000 state-owned enterprises and organizations were made private
under this program, including more than 22,000 industrial enterprises (see
Table 1.2 for more details on privatization results). However, an enterprise,
regardless of the scheme of privatization it had chosen, as a rule, received
no benefits from the change of the form of ownership because the inves-
tors paid the state for the acquired stakes with either cash or money earned
through stock transactions.
It is true that the interests of managers and employees were already not as
inseparable as they had been in a planned economy. On the one hand, man-
agers tried to ensure the survival of their enterprises and to preserve their
labor collectives because these were factors enabling them to maintain their
own social status in their city and region. On the other hand, in an attempt
to take complete control over their enterprises under the menace of upcom-
ing external shareholders, managers regularly used their working capital to
buy up the enterprise shares on the market and take from the hands of their
employees. This worsened the financial condition of their enterprises and
increased the arrears on wages of their workforce.

External investors also made similar moves to buy controlling stakes
because the legal institutions were too weak to protect their interests as
minority shareholders. In a study by Berglöf & Pajuste (2003), this tendency
is reported to be common throughout Eastern Europe; furthermore, these
authors report that controlling shareholders is the second-best response to
weak legal institutions. However, in Russia, this consolidation of ownership
and control took separate directions depending on the industry.
This diluted ownership structure was soon overcome in primary and
processing industries because control over these businesses promised very
large profits from the gaps between prices in domestic and global markets. A
real concentration of ownership took place at the most efficient enterprises
in the industries with low capital intensity (the food industry, light indus-
try, and trade) because the initial investment levels were much lower there
and potentially high returns were guaranteed by fast capital turnover in the
domestic market.
On the other hand, the majority of Russian industrial enterprises in
capital-intensive high-tech industries, as well as major employer enterprises
in one-factory towns burdened with social assets, found themselves in a state
of “precarious balance.” Being uncompetitive in the world market, they did
978023_0217287_03_cha01. dd 22 5/12/2009 5:19:14 PM
Table 1.2 Privatization of state-owned enterprises and privatization revenue in Russia, 1993–2007
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total number of
privatized enterprises
42,924 21,905 10,152 4,997 2,743 2,129 1,536 2,274 2,287 2,557 434 502 491 444 302
Federally owned
enterprises
a
7,063 5,685 1,875 928 374 264 104 170 125 86 161 121 112 98 73
Regionally owned

enterprises
a
9,521 5,112 1,317 715 548 321 298 274 231 226 152 246 226 254 115
Municipal
enterprises
a
26,340 11,108 6,960 3,354 1,821 1,544 1,134 1,830 1,931 2,245 121 135 153 92 114
Total amount of
privatization revenue

(Million rubles)
b
450 1,067 3,815
c
3,234
c
26,230 17,538 12,291 41,609 16,756 22,857 88,673 90,143 87,462 93,607 109,077
Total amount of
privatization revenue

(Million USD)
d
NA 415 835 630 4,530 1,777 498 1,479 574 728 2,893 3,129 3,089 3,449 4,267
e
Notes:
a
By ownership type before privatization. Regionally owned enteprises denote public enterprises owned by the subjects of the Russian Federation.
b
It includes not only revenues from the sales of state-owned enterprises but also those from privatization of other state properties. Figures for 1993–97
are in billions of rubles.

c
It was a split of revenue from loan-for-shares auctions between late 1995 and early 1996.
d
Authors’ evaluation.
e
To evaluate the privatization revenue in the 2000s, it is necessary to take into account the strong increase of the RTS index in this period; therefore, at
the end of 2007, the RTS index was 16 times higher than that in 2000 (see Table I.1 for details).
Source: Rosstat.
978023_0217287_03_cha01. dd 23 5/12/2009 5:19:14 PM
24 Organization and Development of Russian Business
not offer potential long-term profits but required the largest expenditure
on restructuring. As a result, in most cases, the investors did not replace the
state, take responsibility for the enterprise, or initiate internal reforms.
In practice, this yielded a specific model of corporate control with “dis-
persed ownership” (Dolgopyatova 2002) based on a framework with manag-
ers who managed the assets but had only minor stakes in their firms and
were independent from the other owners and from the equity market. This
situation objectively created conditions for opportunistic behavior, such as
the transfer of liquid assets from large enterprises run by managers who were
partial owners, to controlled intermediary and financial firms. In this way,
historically established inefficient market structures were preserved, and
the critical condition of this type of large enterprises was only aggravated.
To explain the characteristics of the new private firms, it must be empha-
sized that, in all postsocialist countries, the incentives available to the new
private sector were important aspects of the economic policy, along with
the privatization of the state sector. There was a presumption that new pri-
vate firms, springing up as small and mid-sized enterprises, could introduce
a market spirit of initiative and entrepreneurship in the former planned
economy.
As we have already reported, the establishment of the private sector began

in Russia in the mid-1980s when self-employment was permitted and legal
grounds were set up for cooperatives and joint ventures. However, it must
be pointed out that, even at that time, new private ventures engaged not in
production sectors but, rather, in trade and profited mainly from the differ-
ences in prices between the state and private sectors. Price liberalization in
January 1992 limited the scope of deriving this “transformation rent,” but
the liberalization of external economic relations gave private intermediaries
other opportunities for making profits, this time, from differences in prices
between the domestic and world markets. At that time, the undervalued
ruble encouraged exports in the first place, of primary goods, while the
domestic market became saturated with cheap imported goods from Poland,
China, and Turkey that arrived through the channels of “shuttle” trade.
The establishment of a foreign currency market and vigorous speculation
in US dollars (particularly in 1992–1994), along with mass privatization,
opened great opportunities for private businesses in the financial sector. As
soon as vouchers came into being in 1993, favorable conditions were created
for interregional arbitrage. Later, private financial and investment compa-
nies and commercial banks strongly speculated in the purchase and resale
of stakes in privatized enterprises. Unlike markets for goods, the Russian
financial sector was closed to foreign competition for a long time, and this
was, indeed, another source of rent for insiders.
In general, by the late 1990s, the private sector enjoyed a fair amount
of success, when new private companies that had started from trade and
financial operations were gradually penetrating into the sector of privatized
978023_0217287_03_cha01. dd 24 5/12/2009 5:19:15 PM
The Emergence of Russian Corporations 25
enterprises. The loan-for-share auctions reported above were the most obvi-
ous manifestation of this trend.
At the same time, the tax policy had a very strong influence on the devel-
opment of the new private sector in Russia, although its impact has been

underestimated in the literature. In 1992, trying to cope with an acute fis-
cal deficit, the government introduced a 28% VAT and 40% social charges
on salary payments. This measure, which represented a substantial increase
in costs for all enterprises, was combined with an effort to toughen mon-
etary policy and liberalize prices in the highly monopolized economic envi-
ronment and resulted in an acute liquidity crisis as early as in the spring
of 1992. However, the effects of the liquidity crisis were unequal in state-
owned enterprises and in private firms.
State-owned enterprises could borrow from state-run banks to finance
their wage bills. Moreover, they were integrated into established economic
ties and, relying on informal relations inside the director corps, agreed
to deliver their products to their traditional customers on credit, getting
raw and processed materials and components from their traditional sup-
pliers in the same way. Therefore, they remained generally afloat on legal
terms, and they calculated and even paid newly introduced taxes (mass
tax arrears in the sectors of state-owned and privatized enterprises began
only in 1994).
On the contrary, firms in the private sector, which performed earlier as
an appendix for redistribution in a planned economy, faced severe prob-
lems under liberalized prices and a greatly increased tax burden. Demand
for their services had high elasticity and immediately and steeply declined.
For this reason, private enterprises were forced to resort to all possible ways
to reduce costs, including reliance on various schemes of tax evasion. The
latter was facilitated by the fact that the government, having declared high
tax rates, had no administration for tax collection. Therefore, the state
actually pushed the new private sector toward mass tax evasion and to the
development of “gray” business that basically relied on unrecorded cash
transactions.
On the other hand, the government, on alleged sociopolitical grounds,
for a long time turned a blind eye to these developments in the sector of

private business. It was believed that, while legal support of small businesses
was weak, this policy line would help promote entrepreneurship and gener-
ally favor the expansion of the private sector. In turn, evolution and expan-
sion of the private sector would help to cope with problems of excessive
employment. At first glance, something like this really took place. Until the
mid-1990s, the number of small firms was increasing at high rates, but offi-
cial unemployment remained rather low in spite of a reduction in industrial
output to one-half. It is logical to assume that, having lost jobs in the indus-
try (to be exact, nominally staying on the payroll of the enterprises that
had paid no wages for many months), people found jobs in the informal
978023_0217287_03_cha01. dd 25 5/12/2009 5:19:15 PM
26 Organization and Development of Russian Business
sector. However, this rapid development of private businesses in legal and
semi-legal forms had contradicting results. On the one hand, indeed, social
problems were alleviated, and new jobs were created. However, on the other
hand, the effect of unequal or unfair competition took place when, under
nominally equal taxation, a number of enterprises paid practically no taxes.
This competition was one of the reasons that large state-owned and priva-
tized firms, which initially had paid their taxes, later started to generate tax
arrears on a massive scale. Furthermore, they bartered and used the money
of surrogates to settle with their suppliers.
As a result, by the mid-1990s, Russia had a sort of dual-sector economy.
The generally prosperous first sector was mainly represented by new pri-
vate enterprises that specialized in trade and financial operations and
received rent from accumulated structural and price disproportions. The
second sector, mainly represented by old state-owned and privatized indus-
trial firms that were poorly adapted to market conditions, suffered a crisis.
Simultaneously, the diffused structure of ownership rights and their uncer-
tainty gave this sector the incentive to withdraw rapidly liquid assets and
place limits on restructuring, which had poor prospects as it was. In both

sectors, as individual firms engaged in more market-oriented behavior, they
became more deeply integrated in the informal economy.
However, this type of system, which, from a functional aspect, absorbed
more resources than produced value and functioned with reliance on net
borrowing (Gaddy & Ickes 1998; Ericson & Ickes 2000), was unable to exist
for very long, and this predetermined the inevitability of a serious economic
and political crisis, which occurred in August 1998.
Summing up the features of the transition firm in its Russian version, in
contrast to the market firm, which is oriented toward profit making and busi-
ness development, state-owned and privatized firms were typically oriented
toward survival and self-preservation under new conditions. Although they
were given private status, in reality, the chief acting figure in such transi-
tion firms was its director, who enjoyed the support of labor collectives and
regional authorities in his opposition to external investors.
The difference between new private firms and the market firm was that,
in an extremely unstable and uncertain external environment, the former
were mostly oriented toward short-term profit making and set no goals for
business development. At the same time, such enterprises were active in
using opportunities for receiving “transformation rent” from structural
imbalances and price disparities, which were inherited from a planned
economy, and from irregularities in the implementation of reforms. The
chief acting figures in such new private companies were their founders, who
launched the business and simultaneously performed the roles of owners
and managers.
Nevertheless, as reported by Berglöf & von Thadden (2000), a soft budget
constraint resulting from the weakness of public institutions was the
978023_0217287_03_cha01. dd 26 5/12/2009 5:19:15 PM
The Emergence of Russian Corporations 27
essential feature that determined the behavior of firms in both sectors. As
a consequence, firms in both sectors had many opportunities to resort to

a strategy of state capture (Hellman, Jones, & Kaufman 2003; Iwasaki &
Suzuki 2007), that is, to receive subsidies and benefits, and to evade taxes
and customs duties. For the transitional firm, all of these lowered the incen-
tives for the restructuring and development of business.
These features were, in general, typical of transitional firms in other post-
socialist countries as well. At the same time, the trajectories of evolution of
transitional firms also depended on alternative methods of transition from
the plan to the market taken in different countries.
For instance, the greater competence of old institutions was an important
factor in China (Kolodko 2002), along with the gradual speed of reform-
ing and the relatively closed nature of the economy. Privatization in China
was launched in the mid-1990s, 15 years after the reforms had begun (Qian
1999), and the domestic market was actually opened to foreign companies
still later, after China joined the WTO. A more competitive industrial struc-
ture, which had been established in China in the framework of regionally
organized central planning, was also essential for the change in motiva-
tion and behavior of the firms as well as competition between state-owned
enterprises, which the Chinese government deliberately encouraged in the
early stages of reform.
Eastern Europe, primarily, carried out an alternative scenario of
reforms, relying on the maximum openness of economies, including the
financial sector, and on the active participation of foreign investors in
privatization. The behavior of firms was also significantly influenced by
their earlier experience gained in interaction with markets due to the
existence of the private sector and trade contacts with foreign partners
before the start of reforms. A desire to join the European Union, which
was unanimously shared by citizens of most countries in Eastern Europe,
regardless of their political views, was a no less important factor of the
reforms. As a result, local companies and their insiders were much better
prepared to meet the standards and requirements for newcomers, which

were claimed by the EU.
In this context, Russia’s public institutions were much weaker and
exposed to different pressure groups, and reforms were carried out partially
(Hellman 1998) with the preservation of the sources of rent for these pres-
sure groups. Another important difference was a much larger amount of
accumulated wealth under the command of the state and the availability of
rich natural resources. On the one hand, this enabled the state to postpone
the necessary reforms and enlarged its opportunities to influence economic
activities. On the other hand, the struggle for getting these resources under
control in the course of privatization made corporate conflicts much more
acute, and property rights were violated much more brutally than in Eastern
Europe (Woodruff 2004).
978023_0217287_03_cha01. dd 27 5/12/2009 5:19:15 PM
28 Organization and Development of Russian Business
These differences appear to be the reason that, in Russia, distortions of
enterprise behavior in the framework of the model of “transitional firm”
reached a much larger scale than in any other former socialist country.
On the road to the market firm
The August 1998 crisis, which manifested itself in a default on government
bonds and in a fourfold devaluation of the ruble, had serious economic as
well as political consequences. It was a systemic crisis of distorted patterns
and mechanisms of interactions between the state and the business that
took shape in Russia in the 1990s.
In September 1998, a government with the participation of prominent
figures in communist opposition took power for the first time in an era of
market-oriented reforms, producing the effect of a “cold shower” on the
representatives of the new Russian elite, who had gained power from the
reforms of the 1990s. The crisis reached a point at which the elite became
aware of the possibility that they might lose their property or status (as dem-
onstrated by specific politicians and businesspersons). In this context, the

crisis served as a prerequisite for stretching the horizons of the interests of
all actors and for reaching a consensus among members of the elite on such
issues as the need for responsible macroeconomic and fiscal policies as well
as the need for consolidated power and a strong state. As shown in Table 1.1,
in the period of 1999–2003, the Russian government adopted a large set of
new important legislation in such areas as taxation and customs regulation,
corporate governance and bankruptcy, and labor regulation. For the firms,
from the point of view of the choice of strategic behavior, these changes on
the government side meant that the scope of state capture was limited, and
budget constraints, which had been characteristically weak during the tran-
sition, were gaining in strength (Berglöf & von Thadden 2000).
The crisis was a severe blow to the new middle class, who had emerged
in large cities in the 1990s, as well as to companies that had been prima-
rily engaged in financial operations and trade. At the same time, the crisis
created opportunities for the development of companies in the industrial
sector. The August 1998 devaluation of the ruble resulted in increased com-
petitiveness of Russian exports along with dramatic growth of prices and fall
of demand for imported products. Growing sales improved the performance
of Russian business. As a result, the new owners of enterprises (both old “red
directors” and new private investors) had the opportunity to recover their
investments in block shares by not only withdrawing liquid assets from their
enterprises but also generating revenues by doing business. This created
incentives to invest in the development of enterprises that did not exist in
the 1990s. One of the consequences of the new investment opportunities in
Russia was a noticeable reduction in capital outflow. In 1997–1998, annual
capital outflow from Russia was estimated at $20–25 billion, whereas, since
978023_0217287_03_cha01. dd 28 5/12/2009 5:19:15 PM
The Emergence of Russian Corporations 29
2004, Russia received an inflow of capital and investments. At the same
time, the volume of Russian FDI in production assets in other countries

began to increase significantly (Vahtra & Liuhto 2004).
However, to ensure revenue from these investments, both old “red direc-
tors” and new outside shareholders needed not only operational control
over financial flows but also official legal control over relevant enterprises.
This resulted in a stronger tendency toward the concentration of ownership
and control.
At this point, a new bankruptcy law provided additional momentum
toward this tendency. Implemented in 1998, it triggered a new wave of
ownership redistribution and acute corporate conflicts (Simachyev 2003).
A very large amount of mutual nonpayment to suppliers and tax arrears,
which had been accumulated by enterprises in the early and mid-1990s,
was the prime cause of this phenomenon. Due to the rationality of such
behavioral strategy, these nonpayments were typical of the absolute major-
ity of enterprises, both inefficient and efficient ones. However, for this very
reason, the simplification of bankruptcy procedures provided by the law
of 1998 for creditors, combined with the gradually increasing efficiency
of enforcement, resulted in a tendency to apply the new bankruptcy law
mainly to viable, efficiently run enterprises. In fact, any overdue indebted-
ness of such enterprises, even minimal amounts, was used for the seizure
of power and for gaining control of liquid assets. Mass protests against this
practice of these corporate takeovers led to passing the third bankruptcy
law in 2002, which provided protection of interests for creditors as well as
debtors.
Nevertheless, such an opportunistic use of any overdue debt, however
small, to “intercept” control at successful enterprises provided the current
owners with strong incentives to clear and settle the arrears accumulated
in the 1990s. More adequate tax policy pursued by the government after
1998 also contributed to reducing the nonpayment problem. For instance,
in 1999–2000, the government wrote off a significant amount of fines
and penalties on overdue tax payments and provided a debt restructuring

opportunity to enterprises, which had made current tax payments on a
regular basis within a certain period of time. Eventually, by 2001, indus-
trial arrears were concentrated in inefficient “lying” enterprises, distinctly
from the mid-1990s, when they were typical of almost all major industrial
enterprises.
When free financial resources appeared in the economy from not only
devaluation but also rising prices in energy carriers and metals in the world
market, they reinforced tendencies toward corporate integration, with the
establishment of integrated business groups. This tendency became clearly
apparent in the second half of the 1990s, in the first place, as a reaction
against an imperfect institutional environment (Avdasheva 2000; Pappe
2000). In the early 2000s, this tendency developed further, and, now, it is
978023_0217287_03_cha01. dd 29 5/12/2009 5:19:15 PM
30 Organization and Development of Russian Business
evident that there is a relatively steady distribution of crucial assets between
the largest financial and industrial groups.
Concentration of ownership and control in the hands of dominant
shareholders practically provided a solution to conflicts between manag-
ers and owners, which had caused most blatant violations of shareholders’
rights and gave foreign experts grounds for describing corporate govern-
ance in Russia as “awful”. By now, in the absolute majority of Russian
companies of any interest to investors, either outside shareholders have
successfully changed old managers and taken supervision in their own
hands or managers have gained control over their enterprises and ousted
outside shareholders. The former course of affairs was more frequent, and
the latter occurred rather rarely. In many cases, particularly in mergers
and acquisitions, an intermediate solution took place when old managers
retained their positions as junior partners. Nevertheless, a typical situa-
tion today is when a proprietor runs a corporation directly or exercises
effective control over his managerial team. This situation has been equally

typical of privatized and newly established firms, because of which their
differences are obviously fading.
As a consequence of the concentration of ownership and control, there
was a decline in the number of corporate conflicts as well as a change in
the motivation of dominant shareholders. In the 1990s, the main source of
income in the corporate sector was control over financial flows, which went
together with the withdrawal of liquid assets from industrial enterprises.
This occurred to the detriment of interests of minority shareholders and the
state. Since the beginning of the 2000s, new ways of appropriation of cor-
porate income became widespread, such as the payment of dividends and
increase in the market value of shareholdings, which better corresponded to
the principles of a market economy.
In turn, this created real demand for instruments of corporate governance
(Razvitie Sprosa 2003). Owners of large companies found themselves inter-
ested in the use of standard instruments of corporate governance with the
purpose of keeping the activities of hired managers under control. At the
same time, a desire to give a better image of their expanding business in
the global market gave companies an incentive to analyze the requirements
of good corporate governance, including the disclosure of financial state-
ments, invitation of outside directors, and respect for the rights of minority
shareholders.
The cause of all these positive shifts requires an explanation. It is doubt-
less that external factors have played a positive role, but the accumulation of
experience in a market economy has also been very important. It is notewor-
thy that, in the 1990s, in spite of powerful incentives for an opportunistic
rent-seeking strategy, there was also an alternative strategy in the Russian
business community to retain some distance from the state (Yakovlev 2006).
The raison d’être for this strategy was that not all firms were allowed to take
978023_0217287_03_cha01. dd 30 5/12/2009 5:19:15 PM