Continuity and Change: Institutions and Transition in the Russian Forest

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2008:32 DOCTORAL T H E SIS Mats-Olov Olsson Continuity and Change and Continuity Mats-OlovOlsson Continuity and Change Institutions and Transition in the Russian Forest Sector – Institutions and Institutions – ForestTransitionSector Russian the in

Mats-Olov Olsson

Luleå University of Technology Department of Business Administration and Social Sciences

2008:32 Division of Political Science

Universitetstryckeriet, Luleå 2008:32|: -1544|: - -- 08 ⁄32 -- 

DOCTORAL THESIS

Continuity and Change

Institutions and Transition in the Russian Forest Sector

Mats-Olov Olsson

Luleå University of Technology Department of Business Administration and Social Sciences Division of Political Science

2008 © Mats-Olov Olsson Doctoral Thesis 2008:32 Luleå University of Technology ISSN 1402-1544 ISRN LTU-DT--08/32--SE Printed in Luleå, Sweden, by Universitetstryckeriet To Marianne, Peter, Anton, and Tobias

Preface

The research reported in this thesis originated in the study Institutions and the Emergence of Markets – Transition in the Russian Forest Sector conducted within the Forestry Program at the International Institute for Applied Systems Analysis (IIASA), Austria, in the period 1997–2001. The study was subsequently continued at the Centre for Regional Science (Cerum) at Umeå University. The overarching objective of the studies reported in this thesis has been to analyse two issues, a) In what way are institutions important for a nation’s economic and political development, and b) In what way do institutions change? These issues are studied in the context of Russia’s transition from a command economy to a market based system. The turbulent Russian transition, characterised by extremely fast and nearly all-encompassing social change, offers a “laboratory” for investigating the still little known causes and character of institutional change. Since its inception the project has developed dynamically for over ten years. During its first 3–4 years major attention was focused on the issue of whether or not there existed institutional hurdles for a market efficient development of the Russian forest sector after the disintegration of the Soviet Union in 1991 (see article I). Subsequently, after having verified the existence of such hurdles and analysed their character, our main attention was transferred to the issue of how the existing institutional framework might be modified to better serve the development towards a market efficient Russian forest sector. In an action oriented approach, using policy exercises as a tool for systemic intervention, an attempt was made to initiate participatory policy formulation processes with Russian forest stakeholders with the purpose of generating proposals for improved regional forest policies (II). In 2005 an attempt was made to re-assess the quality of the institutional framework governing enterprise behaviour in the Russian forest sector to see if the “rules-in- use” now had become better adapted to the requirements of a market economy (III). Finally, in the most recent phase of the project, attention was shifted again to issues relating to the functioning of the Russian political system, assessing democratisation and the development of an efficient system of governance (IV). The outcome of these analyses is recounted and discussed in the introduction to this thesis and in the four appended articles. During the first IIASA based phase of the project a series of case studies of the institutional embedding of the forest sector in eight Russian regions was performed by a small core team of IIASA researchers in collaboration with a number of Russian colleagues and PhD students enrolled in the institute’s Young Scientists Summer Program. The intense intellectual exchange in this research group has meant a lot for me and my work with this thesis and I would like to express my gratitude to everyone involved in the project. It is not possible to list all of these

v former colleagues here, but their names can be found in the study’s List of Publications (see Appendix B). A number of people must, however, be named for all the encouragement and support they offered me during the work with this thesis. First of all I would like to thank my friend and thesis supervisor, Prof. Lars Carlsson, and his colleague, Prof. Nils-Gustav Lundgren, of Luleå University of Technology for their enthusiastic support and invaluable advice. I would also like to thank Prof. Sten Nilsson, vice director of IIASA and leader of the institute’s Forestry Program, without whose initiative and persistent support the “institutional framework” study would never have materialised. Over the years Sten has also promptly read my various drafts and responded to my questions with exceptional punctuality and sense for expedi- ency. Several other colleagues and friends at IIASA are also remembered with affection for their support and lively company, including Prof. Anatoly Shvidenko, Dr. Michael Obersteiner, Dr. Soili Nysten-Haarala, Dr. Ian McCallum, Mrs. Cynthia Festin, Mrs. Shari Jandl, Dr. Mattias Jonas, and Dr. Vladimir Stolbovoi. Both before and after my stay at IIASA I have been working at the Centre for Regional Science (Cerum) of Umeå University. The director of Cerum, Prof. Lars Westin, has been of great help in finding solutions to the many intricate problems with regard to science as well as finance that repeatedly have threatened to put a premature end to my work with this thesis. I sincerely thank him for his efforts. I have always felt well taken care of on my somewhat irregular visits to Luleå and the Division of Political Science. Thanks to all of you at the department for making me feel welcome. Finally, I would like to thank my wife Marianne and my sons Peter, Anton, and Tobias, for allowing me to get absorbed by my work, treating me with the consideration and respect that kind people bestow upon the derelict. Thank you ever so much for your stubborn support forcing me finally to finish the task of writing this thesis. Funding for the study of which this thesis is a part has been provided by the FRN – the Swedish Council for Planning and Coordination of Research and subsequently by Formas – the Swedish Research Council for Environment, Agricul- tural Sciences and Spatial Planning, the successor of FRN as the Swedish member organization of IIASA. The generous support from these two research councils is hereby gratefully acknowledged. The study also received financial support from the Swedish Academy of Sciences, the Kempe Foundations, and the Västerbotten County Administrative Board, as well as from IIASA itself and Cerum, Umeå University.

Umeå, 8 May 2008 Mats-Olov Olsson

vi Table of Contents

PREFACE ...... v TABLE OF CONTENTS ...... vii

1. INTRODUCTION ...... 1 1.1 Background ...... 1 1.2 Organisational Setting and Purpose of the Study ...... 3 1.3 Basic Assumptions ...... 6 1.4 Analytical Approach ...... 7

2. TRANSITION,INSTITUTIONAL CHANGE AND DEMOCRATISATION IN RUSSIA –ANOTE ON THEORY ...... 10 2.1 Setting the Stage ...... 10 2.2 Transition the Russian Way ...... 13 2.3 Institutional Change in the Russian Context ...... 17 2.4 Democracy, Democratisation and Trust-Building Policy-Making ...... 21

3. OVERVIEW OF APPENDED ARTICLES ...... 27 I. The Russian Detour: Real Transition in a Virtual Economy? ...... 27 II. Systemic Interventions to Promote Institutional Change in the Russian Forest Sector ...... 31 III. The Russian Virtual Economy Turning Real: Institutional Change in the Arkhangelsk Forest Sector ...... 34 IV. Assessing the Structural Prerequisites for an Efficient Russian Political Market ...... 40

4. PERTINENT RESULTS OF THE STUDY ...... 47 4.1 Merits of Using an Institutional Approach and Opportunities Foregone ...... 47 4.2 Characteristic Features and Persistent Problems of the the Russian Transition in Its First Decade ...... 48 4.2.1 Consequences for Enterprise Restructuring and the Prospects of Establishing an Efficient Market Economy ...... 51 4.2.2 Consequences for Citizens and Employees ...... 53 4.2.3 Consequences for Democracy and the Implementation of Public Policies ...... 54 4.3 The Russian Transition in Its Second Decade ...... 55

vii 4.4 Theoretical Contributions and Implications for Policy and Further Study .... 61 4.4.1 Theoretical Contribution ...... 61 4.4.2 Policy Implications ...... 66 4.4.3 Ideas for Further Study ...... 70 REFERENCES ...... 74

APPENDED ARTICLES

Article I. Carlsson, Lars, Nils-Gustav Lundgren, and Mats-Olov Olsson “The Russian Detour: Real Transition in a Virtual Economy?” Europe-Asia Studies, Vol. 53, No. 6, September 2001, pp. 841–867. Article II. Olsson, Mats-Olov “Systemic Interventions to Promote Institutional Change in the Russian Forest Sector”. Review of Policy Research, Vol. 23, No. 2, March 2006, pp. 505–530. Article III. Olsson, Mats-Olov “The Russian Virtual Economy Turning Real: Institutional Change in the Arkhangelsk Forest Sector”. Europe-Asia Studies, Vol. 60, No. 5, July 2008 (forthcoming). Article IV. Olsson, Mats-Olov Assessing the Structural Prerequisites for an Efficient Russian Political Market. IIASA Interim Report (IR-07-037), December 2007. The appended articles are referred to by their Roman numerals when discussed in the thesis introduction.

APPENDICES

Appendix A: Case Study Instructions and Questionnaire Form Appendix B: List of Publications from IIASA’s Institutional Framework Project

viii 1. Introduction 1.1 Background With Perestroika and, especially, with the disintegration of the Soviet Union in 1991, life in Russia – normal habits and ways of conducting business – suddenly and drastically changed. Features characterising market economies (like prices established on open markets) started to emerge. However, the change was not smooth and uniform. It proceeded unevenly in time as well as in space. Since the new way of resource allocation via price formation affected the basic functioning of the economy – producers started to react on “real” income-cost relations – its impact was profound and immediately noticeable. Potential profits now became the primary “driving force” in the economy instead of the economic plan. The subsequent privatisation only added further momentum to this fundamental transformation process.1 However, it soon became evident that such a profound system change is no fast and easy venture. Most features characterising the old system had to be radically changed or discarded altogether. In the years since the disintegration of the Soviet Union quite a lot has indeed happened. Radical reform measures have been heavily subsidized by the western world, notably led by the United States. But it is equally clear that much of the highly raised expectations of those directly or indirectly promoting and supporting these changes have not yet been met (see, e.g., Arrow, 2001). Still, a large share of Russian business firms operate under rules that have little or nothing to do with conditions prevailing in a “normal” market environment. The question is why? Present-day Russian society, where radical market oriented reforms are a stated objective, offers a kind of laboratory for studying the roots and causes of system changes. Here, social changes are currently more dramatic and they happen at a much faster pace than in most other parts of the industrialised world, and especially compared to Europe. Despite the obvious complexity of the task to reform the entire economic system and the policy-making procedures in Russia and other transition countries, domestic reformers as well as many foreign advisors nevertheless assumed that the transition would somehow swiftly and automatically, through the workings of the emerging market forces, lead to an economy characterised by a greater allocative efficiency and an increase in the standard of living (see,

1 For recent overviews of what has happened so far during the Russian transition process, see, e.g., Colton (2000); White (2000); Ellman (2000); Lane (2000); Lavigne (2000); Brown (2001); Klein & Pomer (2001); Kahn (2002); Sutela (2003); Krueger (2004); Reddaway & Orttung (2004; 2005); White, Gitelman & Sakwa (2005); Colton & Holmes (2006); Herspring (2007).

1 e.g., Kolodko, 2000). However, after more than fifteen years of transition, evidence of unambiguously positive effects of the changes is still scarce. As is argued in this thesis, an important reason for the meagre results is to be found in the configuration of the established institutional arrangements. During Soviet times there were hardly any market forces in operation and the political representation system had very little real influence over socio-economic developments. Thus, expectations were high for this situation to change rapidly as transition started to make an impact. As it turned out, however, the process did not produce the far-reaching and positive changes promised at the outset. While many new private enterprises were established in the emerging market segment of the economy, the majority of Russian enterprises were left with small chances of survival.2 While transition brought an increasing wealth to a few entrepreneurs, a large part of the population was left with very little to share. Thus, at least until quite recently, the Russian transition seemed to have failed on its two major goals, that of achieving market efficiency and introducing democratic governance (see, Ko- lodko, 1999). This does not mean, however, that no progress has been made towards attaining these goals. And, it can be argued, ultimately it is the direction and speed of change that is most important for assessing the success of the process. This thesis discusses the significance of institutions and problems of institutional change in relation to the Russian dual transition, that is, the simultaneous transformation of the Soviet system to a market economy and democratic governance. Whatever the causes of this fundamental social change, it is evident that institutions play a role, either in the sense that they are affected by the changes or in the sense that they influence them. Following North (1990), the concept of institution is used here to denote a set – or system – of rules that guides or constrains actors’ operations in various social contexts.3 The research presented in the thesis originated in a major research project dealing with the institutional problems hampering the transformation of the Russian regional forest sector from its position as an integrated part of the Soviet command economy to its new more independent position in the emerging Russian market economy. It might seem strange that the forest sector and the Russian economy at large should meet with difficulties when attempting a transformation to a mode of political and economic organisation that is claimed to be vastly superior to the previous Soviet command economy system. Russia has huge reserves of natural resources, which allegedly could provide a foundation for a transformation of the economy to meet the demands of the new market environment. For instance, the country’s forest resources are among the

2 It is this division of the economy that has been labelled the virtual economy. The concept is further discussed in Section 2.2 below. 3 The concept of institution is further discussed in Section 1.4 below.

2 largest in the whole world. However, so far, the oil industry is the only resource extractive industry that has displayed a positive development and its success must to a large extent be ascribed to the high world market prices of crude oil. Despite its obvious potential, the Russian forest sector has not contributed much to the country’s economic growth during the last fifteen years. The intriguing question is why? It is a well-known fact that for a natural resource to benefit a country’s economic development its use must be circumscribed by a system of rules governing its extraction and utilisation. Therefore, it can be assumed that the rules governing the extraction and utilisation of Russia’s forest resources have not been sufficiently adapted to the new market economic environment that has been emerging since the onset of transition more than fifteen years ago. While changes in these rule systems might be achieved through policy reforms, the question is how such reforms come about, who should elaborate and decide about reform proposals? The forest sector is not the only sphere of Russian society in which the organisation and rules of conduct must be adapted to changing circumstances. The same is true for most other spheres as well. It is believed that understanding developments in the Russian regional forest sector would also produce valuable knowledge about the forces driving the entire Russian transition.

1.2 Organisational Setting and Purpose of the Study The overarching goal of this thesis is to contribute to a better understanding of institutions and institutional change for the functioning and development of a society’s economic and political system. The disintegration of the Soviet Union in 1991 and the subsequent dramatically fast and profound changes that have been taking place in the Russian Federation offer a suitable arena for investigating this issue. A substantial part of the research reported in this thesis was performed within a research project conducted at the International Institute for Applied Systems Analysis (IIASA).4 The main aim of the IIASA project was to try to understand the workings of the institutional framework governing the Russian

4 Between 1997 and 2001 a small group of scholars, of which the present author was a member, coordinated a IIASA based research project called Institutions and the Emergence of Markets – Transition in the Russian Forest Sector. The project, which was part of IIASA’s long-standing Forestry Program, engaged four in-house scholars as well as nine Russian researchers serving as local study coordinators for case studies conducted in eight Russian regions, and about 15 PhD students participating in the institute’s Young Scientists Summer Program. Apart from the case-study reports several specific aspects of the institutional framework governing actors’ behaviour in the Russian regional forest sector were discussed by the summer students and members of the in-house research team. See Appendix B for a complete listing of publications from IIASA’s institutional framework study. (More information about IIASA can be obtained from the institute’s web site at http://www. iiasa.ac.at.)

3 The Russian Federation

Murmansk Republic of Oblast Karelia Arkhangelsk Oblast

Khabarovsk Krai

Moscow Tomsk Oblast Oblast

Krasnoyarsk Irkutsk Krai Oblast

Figure 1: The eight Russian regions studied in the IIASA project. forest sector and the changes in this framework that had taken place since the beginning of the 1990s, the purpose being to identify the institutional problems that were the main obstacles for a further development of the forest sector in the emerging Russian market economy. Since its inception the entire study has gone through three phases, one phase providing the basis for the next. The first phase consisted of a series of case studies that were conducted in eight Russian regions: the counties (oblasti) of Murmansk, Karelia, Moscow, Tomsk, and Irkutsk, the Republic of Karelia and the regions (kraya) of Krasnoyarsk and Khabarovsk (cf. Figure 1). The specific purpose of the series of case studies was to describe the institutional framework governing actors’ behaviour in the regional forest sector and to identify the most prominent institutional problems hampering the further development of the forest sector in the respective eight regions.5 This early phase of the work ended with an article synthesising the results of the eight case studies in order to reach more general conclusions about the institutional barriers for a restructuring of the forest enterprise sector to make it more competitive in the emerging Russian market economy. The article called The Russian Detour: Real Transition in a Virtual Economy? is included as Article I in this thesis.6

5 Each one of the cases were reported in IIASA’s Interim Report series (see Appendix B). 6 In this introduction the four appended articles are referred to by their Roman numerals.

4 In the second phase of the study the results that had emerged in the previous phase of the project were disseminated among forest stakeholders in four of the eight case-study regions (Tomsk, Murmansk, Karelia, and Arkhangelsk). In a series of policy exercises the results of the research previously performed were presented to regional forest stakeholders in order to (a) test the validity of previous analyses by exposing the results to a thorough scrutiny by the actors in the sector who actually know the most about the existing problems, but also in order to (b) test the efficacy of using policy exercises as a tool to stimulate a discussion and collective action among the stakeholders about possible ways of improving on the problem situation, ways to reach agreement on suggestions for specific policy measures with the purpose of making the institutional framework more conducive to an efficient functioning of the regional forest sector. The experiences gained through the policy exercises were discussed in an article called Systemic Interventions to Promote Institutional Change in the Russian Forest Sector (Article II). In a later third phase of the study one of the previous case-study regions (Arkhangelsk Oblast’) was revisited and another round of interviews were conducted with a subset of the forest enterprise representatives who took part in our original case study seven years earlier. An analysis of the two rounds of interviews coupled with a broad scan of public statistical data from recent years describing the development of the structure and functioning of the Russian economy were used to assess whether the institutions governing enterprise behaviour seem to have changed so that their behaviour is increasingly corresponding to that found in a normal market economy. The result of this analysis was published in The Russian Virtual Economy Turning Real: Institu- tional Change in the Arkhangelsk Forest Sector (Article III). This research indicated that there was also an urgent need for changes in institutions governing political life in Russia. Therefore, in a subsequent study, a way to assess changes in the institutions guiding actors’ political behaviour was outlined. The primary purpose in this study was to identify a conceptual model for assessing the efficiency of the Russian political market. The outcome of this endeavour is reported in the study Assessing the Structural Prere- quisites for an Efficient Russian Political Market (Article IV). The remainder of this introductory part of the thesis is structured in the following way. Section 1.3 discusses some basic assumptions relevant for the whole study and Section 1.4 gives an overview of the Institutional Analysis and Development (IAD) framework that has informed the design of the study. In Section 2 the emerging thinking about the Russian transition, theories of institutional change and relevant extensions of theories of democracy are reviewed. This discussion provides a theoretical background to the approach used in the study of institutional problems hampering the development of the Russian dual transition.

5 The four articles included in the thesis are summarised in Section 3. In Section 4, the most important findings of the research (as reported in the four articles) are reviewed and conclusions are formulated. The section continues with a discussion of policy implications induced by the conducted studies. Finally, some ideas for further research are suggested.

1.3 Basic Assumptions This thesis takes its departure in the observation that a fundamental systemic change has been taking place in Russia after 1991 in the sense that the old Soviet “command economy” has been abandoned in favour of a transition towards a market-like system. The statement that Russia currently is in transition towards a market-like system is in fact an assumption, but it is an assumption that most people – both laymen and experts in the field of economic systems – today consider viable. It is also assumed (and this is likewise commonly considered to be a viable assumption) that the situation in the Russian forest sector is dismal in the sense that resource allocation is highly inefficient judged from a market economic point of view. In practice, this means that the sector is not contributing as much as it could do to the country’s economic development. A third assumption is that it is crucial to learn more about the functioning of the Russian forest sector at the local and regional level in order to understand how the efficiency of the sector’s performance might be improved. Behind this assumption lies a set of other assumptions. So, for instance, it is assumed that the suboptimal (in the market sense) performance of the Russian forest sector is the result of (a) an obsolete sector structure (both the political, administrative and company structure is largely incompatible with the requirements of a modern market economy) and of (b) an inadequate behaviour on the part of the actors in the system. Consequently, since both the structure of the forest sector and the specific behaviour of its actors are, at a specific point in time, a result of the set of rules that has governed actors’ behaviour prior to that moment, it can be concluded that understanding how changes are introduced in this set of rules – the “rules- in-use,” or institutions – is of central importance both for our interpretation of the problem situation and for our ability to actually improve on this situation. In this sense, then, one could claim that the current problems of the Russian forest sector are fundamentally related to the institutions governing actors’ behaviour and that changing inefficient institutions is crucial for the possibilities to improve the situation (efficiency) in the sector. On the basis of these assumptions the following hypothesis emerges: it is possible to learn about the prerequisites for institutional change in the Russian forest sector by studying the behaviour of its actors at the local and regional level. Furthermore, it is also hypothesised that it is possible to learn about the

6 Russian transition in general by studying the institutional development in the country’s forest sector. The theoretical underpinning and the viability of these assumptions are further discussed in Section 2 below.

1.4 Analytical Approach Assuming – as was done in the IIASA project – that Russia is a country in transition from a command economy to a more market-like system, and assuming as well that this transition mainly consists of profound institutional changes in the current Russian system (where the institutional framework still preserves many features from Soviet times) it is obviously necessary in this context to consider recent theoretical developments relating to (a) the transition process and (b) institutional change. Doing so produced convincing arguments for the view that it is possible to achieve institutional change by design, implying that existing “rules-in-use” can be deliberately changed through citizens’ collective action with the purpose of achieving specific changes in the rules. A basic feature of the old Soviet system, of which there seems to be an almost universal agreement, was its fundamentally undemocratic nature. The lack of democracy is also believed to be one of the root causes of the failure of the system to survive. The ongoing transition is therefore required to improve the functioning of the new Russian market-like system while simultaneously improving democracy (the dual transition). Looking for ways to achieve institutional improvements through democratic means also urges us to review some of the recent developments in the theory of democracy. Institutional arrangements, as envisaged by Kiser and Ostrom (1982, p. 179) are “complex composites of rules, all of which exist in a language shared by some community of individuals rather than as the physical parts of some external environment.” Such arrangements are hierarchically structured. Kiser and Ostrom (1982) distinguished three “worlds of action,” three types of institutions operating on three separate but interdependent levels, the operational, the collective choice, and the constitutional level. Rules guiding action at the operational level are constrained by institutions guiding action at the collective choice level, which in turn are constrained by rules operating at the constitutional level. How the rules operating at these different levels are established is determined by the operation of the existing political system. In an undemocratic society, like the Soviet Union, rule compliance was ultimately based on coercion. In a democracy the key to rule compliance is legitimacy. Unless institutions are seen as legitimate by those whose actions they are to constrain, rule compliance will hardly be possible to enforce. In a democracy, legitimacy is believed to be promoted if actors find the processes through which the institutions are introduced fair and transparent. Or, as

7 Figure 2. The Institutional Analysis and Development (IAD) framework for institutional analysis. (Source: Ostrom, 2005, p.15.)

Rothstein and Teorell (2005) have argued, good or legitimate government is furthered by impartial democratic procedures. Institutions may be formal or informal (North, 1990). Formal institutions, such as laws and public regulations, are established through collective decisions, while informal institutions emerge spontaneously in actors’ everyday interaction. Nevertheless, the two forms of institutions are highly interdependent. Changes in formal institutions might affect informal institutions and vice versa. Deliberate change of formal institutions (especially at the constitutional and collective choice levels) may be attempted through collective decisions. That is why it is essential in the present context to understand how democracy works and develops in the Russian transition. This is the reasoning behind the choice of theories that have informed the present study. These theories are dealt with in the following section. However, before looking a bit more closely at the theoretical background, something should be said about the methodology used to structure our study. The design of IIASA’s study of institutional problems in the Russian forest sector was based on the so-called Institutional Analysis and Development (IAD) framework developed by Prof. Elinor Ostrom and her collaborators at Bloomington University, Indiana, USA, during many years of institutional studies of the management of common pool resources, including water and forests.7 As illustrated in Figure 2 the IAD framework focuses on what happens on the “action arena” (in our case this arena is regional timber procurement, i.e., the chain of wood deliveries from the forest to the final user).8

7 The results of this research has been published in a large number of books and articles, see for instance Ostrom, Gardner & Walker (1994), Imperial (1999); Ostrom (1995; 2005). 8 Here a version of the figure found in Ostrom (2005, p. 15) is used. Some of the previous publications from the project contained a slightly less elaborated version of the figure found in Ostrom, Gardner, and Walker (1994, p. 37).

8 But it also emphasises the “environment” of this action arena, the “attributes of the physical world” or “Biophysical/Material Conditions” as they are called in Figure 2 (primarily characteristics of the resource, in our case the forests and what determines the growth of forests), the “attributes of community”, and “rules” (“rules-in-use” or institutions) governing the behaviour of the actors in the action arena. The interaction that takes place between actors (named “Parti- cipants” in Figure 2) in the action arena is conditioned by the quality of the environment (the “boxes” to the left in the figure) and it emerges to the analyst as “patterns of interaction” (simply called “Interactions” in Figure 2). This interaction pattern produces certain “outcomes” in the system (in the case of the Russian forest sector such outcomes may be various wood products as well as the benefits that these products bring to both users and producers). An “evaluation” of these interactions and outcomes will tell you whether the actions that led to a certain pattern of interaction are adequate or not, depending on to what extent the outcome is considered satisfactory. In the IIASA study of institutions in the Russian regional forest sector data on the conditions restricting the behaviour of the actors in the system (the boxes to the left in Figure 2) were collected with the help of Russian local study coordinators. The data consisted of public statistical information, existing forest sector plans and reports, etc. Actors’ behaviour on the action arena was captured through interviews with representatives of some 25–35 forest sector enterprises in each one of the eight regions in the study. The IIASA research team then analysed the data obtained in this way.9 Observing the actual behaviour of forest firms and noting the opinions of their managers allowed a comparison with a number of “baseline” criteria characterising the “normal” situation in a market economy. This way it was possible to assess to what extent the firms in the eight regions that were studied behaved in a manner that is typical in a market economy environment. Many of the conclusions that were reached in the study were derived on the basis of information obtained through these surveys. Questions in the survey mainly related to the behaviour of the respondents in their capacity of managers working in a new and unfamiliar market context. The surveys were conducted with the help of local Russian study coordinators. The answers were reported in writing (in both Russian and English) and delivered to the IIASA in-house group of researchers who performed the analysis of the information.

9 The questionnaire form used in these interviews can be found in Appendix A. The case- study reports (IR-98-084, IR-99-010, IR-99-021, IR-99-068, IR-99-069, IR-99-070, IR-99- 071, IR-00-017, IR-00-028) listed in Appendix B all contain chapters in which the results of this analysis are discussed. (All reports can be downloaded from IIASA via http://www. didaktekon.se/mats/ii-publ.htm.)

9 2. Transition, Institutional Change and Democratisation in Russia – a Note on Theory 2.1 Setting the Stage It seems that, while a lot has been written about what constitutes an efficient market economy and what might make it work even more efficiently, not so much is known about how to build such an economy from scratch or how to transform a non-market economy into an efficient market system (North, 1997; Klein, 2001). While the existing literature on transition mainly deals with changes of non-democratic states into democratic states, there has not (yet) been so much research devoted to the institutional changes needed to transform a Soviet type command economy into a modern market oriented system. In order to understand – and even to influence – where the transition is going one must understand from where it is coming and where it currently stands, since these circumstances limit the choice of future directions, at least in the short term (Kolodko, 2000). This is the idea that social changes are path-dependent, as suggested in the post-socialist context by, for instance, Nielsen, Jessop & Hausner (1995), North (1997; 2005) and Braguinsky & Yavlinsky (2000). Here, issues concerning the reasons for the disintegration of the Soviet Union, or ideological issues related to the nature and direction of the transition process are not given much attention. However, it should be noted that these intensively debated issues deserve serious consideration, especially since the views that an observer of transitional Russia holds on these issues intriguingly affect the selection and interpretation of facts that are deemed important for explaining past and forecasting future developments in the country. Past ideological cleavages undoubtedly still affect the way current Russian reality is understood. Many examples might be provided to illustrate the often radically differing views on these issues that are held by various observers of the Russian and East European transition processes. Robinson (1995), for instance, discusses the role of ideology in the development and failure of Gorbachev’s reforms, and Hillel Ticktin (1992 and 1999) offers a Marxist analysis interpreting the reform movement that started with perestroika as a vain attempt by the old nomenklatura to remain in power. In the IIASA study, “transition” was taken to represent a shift in Russian institutions (both in the sense of modified existing and newly installed “rules- in-use”) and in the “mindset” of the country’s citizens that would contribute to a more efficiently functioning forest sector and economy in general. The “baseline” criteria used to assess the progress of the transition in the forest sector

10 describe some basic functions effectively in operation in any western market economic system. In effect, this imposes a normative restriction on what could be considered, in the context of the IIASA study, a positive institutional change. Thus, in characterising the changes it was simply assumed that the transition in the Russian forest sector and the economy at large is moving the Russian socio-economic system towards a state resembling that of Western Europe and North America. This view of the transition is in a sense related to the understanding of the reasons for the Soviet disintegration, which is still a hotly debated issue. Very briefly, the view (more or less implicitly) adopted in this thesis and in the whole IIASA study of Russian forest sector institutions puts the main blame for the Soviet disintegration on the allocative inefficiency of the command economy. The system was wasteful and could eventually not satisfy the needs of its citizens. Productivity was increasingly lagging behind the standards of the market economies. The main bottlenecks in the Russian economy was not the availability of natural resources, rather it lay in the inability to produce (and use) modern advanced technology (Dyker, 1996; Ticktin, 1992).10 This development put an increasing pressure on the Soviet government to reform in order to improve the functioning of the economy. Eventually, however, it was clear for everyone to see that the fundamentally undemocratic political system – economic policy reforms in the Soviet Union were designed and instituted by the political sphere – could not come up with a working solution to the economic insufficiency problems. This development paved the way for Gorbachev and his perestroika attempts, which opened the door to new initiatives in Russian political and economic life. The relatively short Gorbachev era (1985– 1991), when efforts were still (at least initially) aimed at reforming the old Soviet system, ended even before it was clear what effects the reforms might have been able to produce (see, e.g., Cox, 1996; Kotz & Weir, 1997; Gorba- chev, 2001). It could be noted that the final disintegration of the USSR (in December 1991) was preceded by the “transition from communism,” the fact that the Communist Party had to abandon its monopoly of power (cf. Brown, 2001; Fish, 1995). In 1990, the Party’s “leading role” in society was formally

10 The fact that the Soviet Union was never able to keep up with the development of modern microelectronics in western capitalist economies is especially important in this respect. (The U.S. enforced CoCom trade restrictions on telecom equipment probably plays a significant role in this failure. See, for instance, Weiss, 2000.) Ticktin (1992) finds that, ultimately, the scarce resource in the Soviet economy was labour capable of high-quality production. This is a kind of “stylized fact” with corollaries for a whole series of problems related to the fundamental question: how could there be a shortage of this type of labour in a planned economy? In order to produce a sufficient supply of good-quality labour society has to be able to meet a lot of demanding requirements. Ticktin is actually taking a systems view, criticizing the Soviet command economy for its inflexibility, the inadequate competence of its political leadership and its economic managers (the nomenklatura), the insufficient institutional environment produced by the prevailing political system, etc.

11 abandoned through a change in the Soviet Constitution. In reality it had disappeared earlier with the rise of numerous socio-political movements. (See also Sergeyev & Biryukov, 1993.) With Yeltsin’s takeover (in 1991) the development took a different direction, now under a strong influence of foreign actors, notably the World Bank, IMF, and U.S. development aid (Pomer, 2001; Bogomolov, 2001). A strong case can be made for the view that the events that finally triggered the actual overthrow of the Soviet Union were the result of manipulations of a rather small group in the Russian elite, which was (mainly) supported by U.S. financial aid and advisors (cf., for instance, Wedel, 1998). After its initial success, when several profound reforms in principle transformed the Soviet command economy into a rudimentary market system, the “Washington Consensus” (as “shock therapy” came to be officially known) has been the target of an increasing criticism for not taking into account the social costs of the reform process and the fact that profound social changes actually cannot be introduced and expected to work smoothly in a short period of time. Perhaps the most important criticism was (somewhat unexpectedly) mounted from the (then) chief eco- nomist of the World Bank and (later) Nobel Laureate, Joseph Stiglitz (see, e.g., Stiglitz, 1999), but many other prominent western researchers also contributed to this criticism (cf. for instance Desai, 1995; Nielsen, Jessop & Hausner, 1995; Ellman, 1997; North, 1997; Raiser, 1997; Kolodko, 1999 and 2000; Hedlund, 2000; Tobin, 2001). This interpretation of the background to, and the immediate reasons for, the Soviet disintegration helps to explain the general hesitation on the part of Russian citizens about all “reform proposals” affecting Russian political and economic life. Russians in general seem to be extremely sceptical to any reforms proposed by their political representatives, even if these representatives nowadays have been appointed through legitimate elections. Solnick (1998) seeks to explain the main causes of this popular scepticism of political reforms in the Soviet Union and why this scepticism remained prominent during the first decade of transition, showing how officials in the political and economic sphere were able to pursue their own self-interests at the expense of public good. Brown (2001, p. 38) describes how the Russian political elite regularly has “put the pursuit of naked power and personal wealth ahead of respect for democratic institutions, political accountability, and the general welfare.” He concludes: “When so much of what has been dignified with the title of ‘economic reform’ has involved dirty deals behind the voters’ backs, it is hardly surprising that public opinion turned against the ‘really existing democracy’ of the Second Russian Republic” (p. 38). In such a situation – and this was in fact one hypothesis behind IIASA’s policy exercises with Russian forest stakeholders (II) – all endeavours to engage citizens in participatory policy processes should be seen as an attempt to improve democracy and make the

12 results of political deliberations more legitimate, thus increasing chances of successful implementation of political decisions. These issues are not further pursued here. Suffice it to say once again that the analyst’s understanding of the Soviet economy and society constitutes a restriction on the types of changes/reforms that he or she can envisage. And the fact remains: there is no unanimously agreed upon understanding of the character of the Soviet system, nor, for that matter, of the reasons for its disintegration or the most efficient route of transformation. In the following three sections the most important theoretical foundations for the study are briefly discussed: (1) the character of the Russian transition and the emerging theorising about the process; (2) theories of institutional change; and (3) theories of democracy, especially modern developments of these theories elaborating so-called deliberative (or discursive) democracy, since these extensions of the theory seem highly relevant for policy-making in a situation characterised by popular distrust that seriously hampers policy implementation.

2.2 Transition the Russian Way The literature on transition mainly deals with changes of the political governance system from non-democratic to democratic rule (Carothers, 2002). This literature has appeared in the last twenty years and it was occasioned by what seemed to be a clearly discernible trend among non-democratic countries to move towards more democratic rule. The literature offered an analytical framework that made it possible for the organisations (mainly in the U.S.) promoting democracy abroad “to conceptualize and respond to the ongoing political events” (Carothers, 2002, p. 6). Thus, “transitology” emerged as an academic field and, when the changes in Eastern Europe started in the late 1980s, Ameri- can “democracy promoters extended this model as a universal paradigm for understanding democratization” (p. 6). Carothers now suggests that it is time to dismiss this “transition paradigm,” which might have been of some use earlier, but which is not any more able to describe reality. According to Carothers (2002, p. 6 ff.) five core assumptions define the transition paradigm: 1. Any country moving away from dictatorial rule can be considered a country in transition toward democracy; 2. Democratisation tends to unfold in a set sequence of stages; opening, breakthrough, and consolidation; 3. Elections are believed to be an absolutely essential ingredient in the transition process;

13 4. The paradigm does not consider underlying conditions in transitional countries, such as the economic level, political history, institutional legacies, ethnic makeup, socio-cultural traditions or other “structural” features, to be major factors in either the onset or the outcome of the transition process; 5. The paradigm also assumes that democratic transitions are being built on coherent, functioning states where only some institutions need to be redesigned. Clearly, the transition process in Russia has run into problems on all these accounts. It is not obvious that the transition is really moving Russia toward democracy. For instance, Gerner et al. (1995) have expressed doubts about this direction. While it seems that the Russian transition is unfolding in stages it is not quite clear which stages and how long the development is halted at a particular stage (see, for instance, Csaba, 1995). Elections have indeed been organised on many occasions already. The problem here rather concerns deficiencies in the emerging party system (too many parties with too few members and supporters) to articulate the needs and opinions of the electorate and the unequal opportunities given different parties to communicate their programs in the media (IV). After more than a decade of the Russian transition it is quite clear to observers that underlying conditions have played a decisive role and severely restricted the unfolding of the process. It has also become evident that a major problem in the Russian transition has been the very limited power of the state (cf. Bunce, 2004; Remington, 2006; Stoner-Weiss, 2006; Hanson, 2007). This has to do with the fact that many comprehensive institutional changes have been attempted, although these changes have not always (perhaps even rarely) produced intended results due to the “stickiness” of old patterns of behaviour (again the so-called “path-dependence”). As the transition in Eastern Europe evolved it became increasingly clear that the process took different roads in different countries and that development was to a significant degree determined by the “initial conditions” obtaining in the respective countries, including the existing institutional structure and political culture. Many analysts also emphasised that the kind of fundamental social changes that transition entails would take a long time to design and implement (see, e.g., Arrow, 2001). The implementation, furthermore, requires a strong and well-organised state power. This is not to say that some reforms that were advocated by the early “shock therapists” ought not to have been introduced and implemented quickly once the political decisions were taken. On the contrary, certain reforms require quick action. One such reform was the macroeconomic stabilisation undertaken at an early stage of the Russian transition. The two basic ingredients of the macro-economic stabilisation were price liberalisation (that is, prices should be set free to be determined on markets reflecting supply and demand relations) and the enforcement of hard budget

14 constraints for enterprises (meaning that the state should discontinue its practice of subsidizing unprofitable production, which, in practice, amounts to allowing enterprises to go bankrupt). These reforms were intended to produce improved corporate governance, making enterprise leaders adopt new and better rules to guide their behaviour, a change that would make their behaviour more similar to “western” management standards. It is, in principle, difficult to imagine how such reforms could be gradually introduced. And, indeed, these reforms were quickly introduced early on in the transition process.11 However, – and this was an unexpected development – the reforms triggered a spontaneous reaction in the Russian economy effectively forcing a large part of all Russian enterprises not to comply with the proposed changes, but rather maintain much of their behaviour from the days of the Soviet command economy. The alternative would have been bankruptcy and social distress.12 This development moved a large part of the Russian enterprises into the so- called virtual economy. The notion of the virtual economy has proved very fruitful in explaining enterprise behaviour in Russia. The concept was originally introduced by a Russian government committee and subsequently picked up and elaborated by two American researchers, Clifford Gaddy and Barry W. Ickes, in their studies of the Russian economy in transition. The discussion here is based on a number of publications by Gaddy and Ickes (1998a, 1998b; 1999a, 1999b; 2002a) and other authors discussing their theory (see, e.g., Phillips, 1999; Åslund, 1999; Ericson 1999; Slay, 1999; Chang, 1999; Woodruff, 1999; Gaddy et al., 2000; Carlsson, Lundgren & Olsson, 2001). Gaddy and Ickes subsequently (2002b) compiled a book based on the material that they issued earlier as journal articles, chapter contributions to edited volumes, working papers, and various manuscripts available via the Internet. The notion of the virtual economy was also taken as a fundamental hypothesis about the structure and functioning of the Russian economy in the IIASA study of forest sector institutions. The virtual economy is in fact a name for a specific institutional configuration (an institutional set-up). The theoretical underpinning of the concept offers an explanation of the fact that much of the relations that characterised the Soviet economy can still survive in today’s

11 William Tompson (2002) concludes that while the Gaidar government made “its share of avoidable errors, and its successors made many more” (one mistake being their failure to find broad social support for the reforms) it is nevertheless hard to see how government could have adopted another strategy than it actually did. Tompson concludes: “In short, the Russian state in early 1992 was far too weak to pursue a “gradualist” approach. Unfortunately, it was also too weak to pursue radical policies effectively.” 12 One has to keep in mind that enterprises then still ran a variety of services for their employees, services that are provided by the public sector in most market economies (like housing, food supply, child care, schools, etc.) These services were subsequently transferred to the local administrations (for an account of this process see, e.g., Struyk, O’Leary & Dmit- rieva, 1996; Freinkman & Starodubrovskaya, 1996; Healey, Leksin & Svetsov, 1999).

15 Russia, although the system has changed fundamentally. In short, the virtual economy explains why so comparatively few Russian enterprises have gone bankrupt, although they would not be competitive if their performance were valued at true market prices. If prices for all goods and services in the economy were actually always set in the market, that is, through the interplay of supply and demand, it can be assumed that a large portion of Russian enterprises would be unprofitable. When price liberalisation was instituted enterprises seemed forced to meet and respond to signals transferred through the market price system, but since this would effectively kill a large number of enterprises unless very drastic efficiency improving measures were taken, a large portion of the existing enterprises chose to insulate themselves from the influence of the market price system and not let themselves be exposed to the severe competition that true market relations trigger. By reverting to barter trade at negotiated prices many Russian firms managed to stay alive (and keep their personnel) although what they produced and traded in this “virtual market” would not be possible to produce profitably if their input prices had been set in the market and their output (products) would have to be sold at prices reflecting market demand. Thus, through the virtual economy an inefficient resource allocation is being maintained in the economy, contributing to a continued economic “waste” of resources (I). How come, then, that such an inefficient system could be established and maintained? Efficiency is ultimately determined at the social level and, since the centrally planned system inherited by Russia from the Soviet Union had created an economy with a regional specialisation that did not at all reflect demands as they are expressed in a market system, there were (and still are) whole regions, cities, and districts with a one-sided production structure that cannot be changed overnight (cf. Olsson, 2006) (III). There are, for example, forest communities entirely based on one enterprise (a harvesting company or a wood processing factory), which might turn out to be entirely unprofitable if market based prices would be allowed to operate. That would mean the bankruptcy not just of a single enterprise, but of a whole community. If this development were widespread it would of course create a very serious social problem. But by reverting to operating in the “virtual economy” these enterprises and communities have managed to stay alive for the time being. How- ever, investments are insignificant in the virtual economy and when investments are actually made there is a high risk that resources are invested in the production of unprofitable (in the market sense) products. Thus, life in the virtual economy is non-viable in the long term if society is moving towards a market economy. However, in this context, it is important to remember the fact that society’s movement towards a market economy is heavily dependent upon what happens in the enterprise sector. Especially in communities where the economy is mainly based on one or a few enterprises operating in the virtual economy, the public sector is also pulled into this system and in effect forced

16 to sanction the behaviour dictated by the institutions defining the virtual economy. For example, enterprises in the virtual economy that are unable to engage in monetary transactions resort to barter trade. These enterprises cannot offer monetary payments of taxes either – provided they are at all willing to pay taxes. To be able to actually collect any tax revenues public sector officials are therefore often forced to accept tax payments in kind. The real issue is how to create incentives that make public sector officials as well as enterprise owners and managers chose to stop operating in the virtual economy and start to restructure enterprises’ production to become competitive in the (real) market sense. The issue is whether it is possible to somehow impose changes in the behaviour of enterprises, their managers as well as their workers (II).

2.3 Institutional Change in the Russian Context The Russian transition, which presumably is moving the country towards becoming a democratic market system, requires institutional change to make the rules of the game more conducive to economic efficiency. This is the point of departure. Transition is, in effect, social change brought about as a result of institutional change. Institutions, or “rules-in-use,” are made up of sets of rules that govern the behaviour of actors in society. Such rules can be formalized through law or regulation (both private and public), but they may also be informal rules, i.e., rules that are adhered to although they have never been sanctioned by any collective decision (see, e.g., North, 1990). Thus, it should be noted that not all laws are institutions in the sense that they actually govern the behaviour of actors. (There may be laws that no one obeys, that is, laws that actually are not in use.) Examples of formal institutions in the Russian forest sector might include rules for allocating forest plots to forest users, harvesting rules, taxation rules (not all existing taxation rules, however). Examples of informal institutions might include the rule of advance payments, the rule that governs investment behaviour and excludes bank loans, etc. A prominent feature of the Russian transition (and also, for that matter, the transition in other East European countries) is the much debated and dubiously legitimate privatisation of state owned enterprises. There is a huge literature discussing the Russian privatisation, its intended scope and character as well as its results. For instance, Cox (1996) has described the background of the Rus- sian privatisation; Sutela (1998) and Hedlund (2001) have analysed the character of privatisation; Perevalov, Gimadii and Dobrodei (2000) discuss the effects of privatisation on enterprise performance; and Debardeleben (1999) has studied attitudes towards privatisation in Russia. There are also some accounts of how privatisation happened in Russia published by people who were deeply involved in the process (see, e.g., Boycko, Shleifer & Vishny, 1995,

17 Table 1: Different kinds of resource claimants and their varying rights Authorized Authorized Owner Proprietor Claimant user entrant Access X X X X X Withdrawal X X X X Management X X X Exclusion X X Alienation X Source: Ostrom & Schlager (1996, p. 133). and Kokh, 1998). In IIASA’s institutional framework study the legal aspects of privatisation was dealt with in Nysten-Haarala (2001). The legitimacy of the whole process has been seriously questioned and several cases have been brought to court to rectify unlawful acquisitions, albeit – as it seems – with very limited success (Sokolov, 1998; Levin & Satarov, 2000).13 In the present context, privatisation serves as an illustration of institutional change. Through privatisation the formal and informal rules regulating the use of economic resources were radically changed. “Property rights,” as such rules are commonly called, constitute fundamental institutions in any society. “Prop- erty” may designate any resource and the “property rights” regulate the relations between different resource users. The fact that property rights do not only regulate ownership rights is often forgotten. Property rights – and this is all the more important since the focus here is on the Russian forests, a natural resource that is (still) owned by the state – also regulate rights of access to the resources. Table 1 illustrates the more complex notion of property rights. The table draws attention to the fact that other types of resource claimants than owners have a right to use the resource in various ways, except the right of alienation, i.e., the right to transfer the ownership of the resource to a buyer. Thus, in the context of our study of Russian forest resources, the table reminds us that, while the Forest Code stipulates that forest management units (the so- called leskhozy) as the representatives of the forest owner (the state) are not allowed to actually sell forest land to private companies or private citizens,

13 A vivid account of how the new tycoons skimmed off profits and got control over many of Russia’s large state owned companies is given in an interview with Paul Klebnikov (cf. Klebnikov, 2002). (Klebnikov, who was an American journalist and editor of Forbes Russia, was murdered in Moscow on July 9, 2004. For more information about Paul Klebnikov, see, e.g., http://en.wikipedia.org/wiki/Paul_Klebnikov.) The manner in which privatisation was performed affects the legitimacy of property rights in Russia. This has been investigated by Frye (2006), who found that the “original sin of a legally dubious privatization can under- mine the legitimacy of property rights.” Frye concluded that ”the design and implementation of privatization programs are important determinants of the subsequent legitimacy of property rights.”

18 there are, in fact, many other rights of access and use that they might (in principle) be able decide about. The important feature in all this is that the existing property rights should be well defined and recognised by the citizens and that rule compliance should be possible to enforce. It is the task of the state (the political power) to guarantee the establishment and enforcement of such rules. The proclaimed purpose of privatisation was to achieve better corporate governance, i.e., to install more efficient “rules-in-use” for enterprise management. Thus, one institutional change was expected to trigger another. Private ownership was expected to create a new middle class, which embraced market economic thinking and worked to improve enterprise management. However, as it turned out, the reformed property rights did not remain stable and secure in Russia and the privatisation process itself was in many cases manipulated illegitimately installing new owners and managers (often the former enterprise directors, so-called “insider privatisation”) who primarily looked to their own short term interests and often stripped their enterprises of assets or brought them into the virtual economy pursuing goals that were suboptimal from a market economic point of view (see, e.g., Braguinsky & Yavlinsky, 2000; Arrow, 2001; Sprenger, 2002; Klebnikov, 2002). Barter trade (goods traded for goods, not for money) became another prominent institution in transitional Russia. Barter is actually what made the virtual economy possible. It is, in fact, the predominant characteristic of the virtual economy, much in the same way as monetary transactions (or even money itself) can be seen as the dominant institution in a market economy. As in the case of privatisation, a lot has also been written about barter trade. Barter features prominently in the works by Clifford Gaddy and Barry W. Ickes, who launched the theory of the virtual economy (cf. Section 2.2 above). Other recent studies of the barter phenomenon include Woodruff (1999), Guriev & Ickes (2000), Yakovlev (2000), and Gara (2001). Besides being a very inefficient mode of exchange, another serious problem with barter is that it makes transactions non-transparent, which opens up opportunities for fraud. The provision of goods (or services) has also until recently been de facto accepted as a means of payment by public authorities – enterprises’ tax payments may sometimes be made in commodities. This means that the state is drawn into – and is, in effect, sanctioning – transactions in the virtual economy, the perhaps most serious consequences of which is that it undermines normal budgeting procedures.14

14 An example: In Chelyabinsk some construction companies offered to build an underground railway system in the city instead of paying their taxes with money. As reported in IEWS Russian Regional Report, Vol. 3, No. 13 (2 April 1998), the project was actually started. When accepting such an offer a significant part of the local budget (money) income is immediately withdrawn, thus preventing the city from providing other services that might be more in demand.

19 As is shown in Article I the rules governing the behaviour of the Russian forest stakeholders are often far from being transparent. They are confusing and contradictory creating an “institutional deadlock,” which makes consistent behaviour difficult or impossible (cf. also Braguinsky & Yavlinsky, 2000; Polterovich, 2001). Such a deadlock can only be resolved through changes in the system of rules governing actors’ behaviour, i.e., by institutional change. Clearly, formal institutions (rules sanctioned by law or other public or private regulation) are amenable to change through various forms of collective decisions. While it is quite possible to design and decide about new rules to govern the behaviour of all or specific actors in the social system, implementing such rules is another matter. Rules are obeyed either because compliance is achieved through some enforcement mechanism (in the case of laws through the work of the police and courts) or because the norms expressed by the formal rules are internalised by the actors, who then try to obey the rules on their own accord. (Some kind of monitoring and enforcement mechanism is still necessary since probably not all actors will obey the rules, but inter- nalisation is nevertheless likely to reduce the need of formal rule enforcement.) The lesson is that institutional design (the design of formal rules) works best in an environment where actors find the procedures through which new rules or changes in existing rules are elaborated to be legitimate, i.e., in situations characterised by a some degree of social trust.15 But this is not the complete picture. Informal institutions also have to be considered, i.e., norms and rules that have emerged and are de facto obeyed – and enforced – without ever having been sanctioned by any formal collective decisions. How do such rules come to exist, how do they change, can they be purposefully manipulated by the actors in the system? Informal institutions are slowly formed under strong cultural influence, which means that they are not easy to affect and change. They are in fact, as North (1990) has pointed out, an important source of path dependence, making actors stick to old patterns of behaviour in the face of changes in their environment that would require new responses to better be accommodated. Institutions (both formal and informal) do change, however. They may, for instance, change as a consequence of external shock (major events like wars or technological changes that radically alter opportunities in economic systems, etc.) or changes may be rather more slow, emanating “autonomously” from within the institutional framework itself (for instance through changed behaviour in organisations entrusted with monitoring rule compliance, decisions taken by governments to change formal rules, etc.).

15 For more about the importance of social trust (or generalized or “extended” trust in contrast to “interpersonal” or “ascribed” trust) for changes of formal institutions in the context of transition, see, e.g., Raiser (1999). In the IIASA study the establishment of trust in the Russian forest sector was discussed by Fell (1999).

20 It has also been suggested (Raiser, 1997) that governments might be able to achieve a positive institutional development by engaging civil society in policy dialogues. This view also recognises that “spontaneously” changing informal institutions may exert an influence on the design and implementation of formal institutions. A requirement for using such policy dialogues is that participants trust that deliberations will be free and that the outcomes of these deliberations will mean something, that they will be taken into account, in the process of forming new policies (installing new formal institutions) (II). A prerequisite is that state power is strong enough to guarantee a certain political stability that makes it worthwhile for actors to engage in policy processes. One of the problems with the Russian transition process has been that the state (at least until recently) has not been strong enough to preserve other than moderate stability (Bunce, 2004; Remington, 2006). An important task for the state in a transition country is to influence the incentive structure in society so that actors’ behaviour becomes more conducive to economic efficiency. This would also increase social trust in society. In an empirical study of social capital in transition countries Raiser et al. (2001) found that trust in public institutions was positively correlated with “civic participation.” Pointing to the negative correlation between income inequality and social capital that had emerged by the mid-1990s the authors suggest that policies aiming at reducing large income inequalities might increase trust in public institutions. They also point at developments in East Asia, where governments found ways to build trust in public institutions by inviting the public to a dialogue and consultation in the elaboration of new policies. The conclusion is that low trust in public institutions is something that politics might improve.

2.4 Democracy, Democratisation and Trust-Building Policy-Making The “transitology” literature has been criticized for its teleological assumption that transition is pushing society along a trajectory towards democracy, rather than towards something else. Today, after more than sixteen years of transition, issues of the character of the emerging Russian political system can be put in some perspective. And, as it turns out, the issues raised are highly pertinent. “Overall,” Brown (2001) claims, “the system is a hybrid – a mixture of arbitrariness, kleptocracy, and democracy.” Solnick (1999) reminds us that when Gorbachev in 1991 rejected central planning without adopting a liberalised market an unprecedented economic recession started. Such extreme conditions might have left the field open for the government to install new institutions on a large scale. However, the development also gave the transition “a highly improvisational character” (p. 799). Actors had difficulties in perceiving their own interests or their own strength. But, surprisingly, while institutions crum- bled there was a “striking continuity in the composition of the ruling elite”

21 (ibid.). The privatisation process and the “loans-for shares” scheme of 1995 concentrated enormous economic resources in the hands of a few so-called oligarchs and it is a matter of contention how much real influence these oligarchs still exert over Russian political life.16 But the problem for democracy might rather lie at the systemic level. Russia could be seen as an oligarchy, where the “rule of the few” was maintained through a balance of power – a stalemate – between the oligarchs making sure that no single oligarch could obtain a decisive influence over the economy, but also preventing the state from consolidating its power at the national level. It suited the oligarchs to have a weak state power. This notion of Russia as an oligarchy is related to what Brown (2001) called “kleptocracy.” The way events unfolded and the relation between the presidential power and the oligarchs produced the arbitrariness, what Solnick called the “improvisational character,” of the Russian transition. It is also related to the notion of a “privatised state,” as the issue has been raised by, e.g., Schröder (1999). While the oligarchs clearly affected events in connection with the loan-for-shares scheme and Yeltsin’s re-election in 1996, their direct influence on political events has become more limited during Putin’s presidency (cf. Schröder, 1999). Today, as elaborated briefly in (IV), there are even signs indicating that the state is capturing business and political life in Russia. Another interpretation of the system that emerged in the first decade of the Russian transition took its departure in the centre-periphery relations, in the relations between the Federation and the “Subjects of the Federation,” or the regions. Several observers suggested that the Russian system might be characterised as a form of feudalism! Ericson (2000 and 2002) suggested an “industrial feudalism” and Shlapentokh (1996) saw parallels to feudal societies in the early Middle Ages. Solnick (1999) pointed out that “the feudalistic model turns on its head some of the basic assertions of modern political economy of federalism” (p. 811). It is noteworthy that during the first ten years of transition the federal government was not able to enforce federal laws within the country’s 89 regions (IV). This also applied to rules pertaining to the forest sector. Solnick (1999, p. 811) noted that the “regional leaders share the national oligarchs’ need for a federal government to preserve the integrity of the Russian state … but they also share the oligarchs’ preference for that federal government to remain anemic.” He continued (p. 811): Thus, as with the oligarchy model, the feudal system exhibits powerful equilibrium characteristics: the central government is too weak to effectively define its sphere of competence, and those regional leaders whose consent is most crucial to a re-establishment of effective federal authority are precisely the ones

16 “Russia’s Big Seven” as the oligarchs’ financial groups (FIGs) are referred to, were briefly presented in the World Bank newsletter “Transition” in February 1998. For a comprehensive account of the new Russian business giants, see Hoffman (2002).

22 with the most to lose from having a central government able to play the role of neutral arbiter. Whichever it was of the two models outlined above that best described the Russian system of the 1990s, the implications for democracy were worrying. The models suggested that fundamental institutional deadlocks (at the constitutional and collective choice level) needed to be resolved if the state should be able consolidate and exert a power comparable to what is normally in the hands of governments in modern democracies. If these deadlocks, which were keeping the central state weak, could not be resolved the consolidation of democracy might even become irrelevant. With the entrenchment of elite powers (both oligarchial and regional), which allowed members of the elite to engage in rent-seeking, practically all incentives for further democratisation were removed (Solnick, 1999, p. 813): The coincidence of political transition with property re-distribution, a distinctive feature of the Russian transition, created strong incentives for elites to secure their own share of the transitional spoils. Once they did this, the process of “democratic” institution-building was subordinated to their desire to protect the property and power already accumulated. In practice, this meant ensuring that central state institutions were defanged, and once weakened these institutions found it impossible to enforce the regulations (including tax collection) that would revive them. Russia thus fell into a classic weak state trap (the fate of Italy comes to mind here). The state lacked the resources it needed to even acquire the resources that would make it effective. However, even in this somewhat gloomy perspective Solnick maintained that “an oligarchic or feudalistic balance of power with electoral contestation is not entirely the same as a similar elite balance without it” (p.814). As is discussed in Article IV, during the last 6–7 years much has been done to establish a more stringent federal order in the country. Seven so-called federal districts were established in 2000. These districts were headed by presidential envoys with strong formal powers. The primary mission of these organisations was to monitor regions’ compliance with the federal constitution and legislation and to restore the pre-eminence of federal law. As a result of the implementation of a series of policy measures and partly led by the federal districts, regional legislations were brought into conformity with federal laws and the constitution. The “independence” of the regional governors was thereby in effect broken (Ross, 2005). So far, the discussion has primarily dealt with electoral democracy, a somewhat limited notion of democracy that basically sees democracy as a move from authoritarianism combined with the introduction of popular elections (Carothers, 2002). However, considering the more advanced notion of liberal democracy, which apart from the qualities embraced by electoral democracy also emphasises other qualities in society allowing citizens to take an active part in governance, the prospects for democracy in Russia do not necessarily look that bleak. Qualities belonging to the so-called civil society have been

23 found to be of special importance in this respect. Ever since Robert Putnam’s (1993) study of civic traditions in modern Italy a rapidly expanding political science research all over the world has focused on people’s opportunities to engage in all sorts of organisations for collective action. Research on Russian civil society is nowadays also expanding (cf., for instance, Raiser et al., 2001; Howard, 2002; 2003; Gibson, 2001; Kubicek, 2002; Evans, Henry & McIntosh Sundstrom, 2006). On the surface, judging from membership numbers, civil society in the Soviet Union was well developed and strong, the prime example of such organisations being trade unions. But since all organised civil activity was controlled by the Communist Party the real influence that members of such organisations might have had on political decisions was very limited, in effect a choice between supporting existing proposals or staying quietly passive. Expectations have been high for a rapid revitalisation of the Russian civil society during the transition period. A vital civil society is believed to help mobilise and focus citizens’ interests and ultimately be conducive to a positive democratic development (IV). Recent studies indicate that, while the most optimistic expectations for a revitalisation of Russia’s civil society have not been met, the situation nonetheless gives some ground for optimism. Howard (2002) finds that postcommunist civil society is characterised by comparatively low levels of organisational membership. He explains the low participation levels by three factors originating in these countries’ communist past. Mistrust of the old communist organisations still makes “large majorities of citizens throughout Europe continue to have a common sense of mistrust of organizations today” (p. 161). The second reason that Howard finds is related to the persistence of friendship networks established under communism. Such networks still substitute for civil society organisations. A third reason is what Howard calls “postcommunist disappointment,” that is, people’s feeling that “they have been let down, even cheated, by the new system that quickly replaced the old one” (p.163). Howard sees the weakness of civil society as a “distinctive element of postcommunist democracy” (p. 164). He fears that the situation might persist for many decades to come. The main problem with the current situation is that “not only are postcommunist citizens deprived of the opportunities for developing greater ‘civic skills’ through participation in voluntary organisations, but their voices and views are hardly represented in the political decision-making process” (p. 165). Speculating about what can happen over the next few decades Howard sees two main ways through which post-communist civil society might be strengthened: “generational change” and a “reappraisal of the role of the state and its relation to voluntary organizations” (p. 167 f.). Signs of the latter development have in fact been observed in the last few years (cf. Article IV). March (2000) in his review of social capital and democracy in Russia comes to a somewhat more positive conclusion concerning the existence of a “social

24 capital stock” in Russia and the relationship between social capital and democracy in the Russian regions. In Putnam’s vein March develops a civic community index that he then correlates with an index of democratisation17 calculated for the Russian regions. The results of March’s calculations indicate that social capital indeed exists in Russia’s regions. The author also finds a positive relation between high levels of social capital and the development of democracy. March’s conclusion is that “it appears that social capital is not only beneficial in making democratic governments more effective and efficient, which Putnam’s study of Italy shows, but that social capital can actually facilitate the democratic development of post-Communist societies” (p. 195). In their study of political discourses across thirteen post-communist countries Dryzek and Holmes (2002, p. 94) characterise Russia as “a stalled or halted transition” due to the fact that at the time of the study (1997–8) “its major political players were only weakly committed to pursuing their ends through constitutional means, as distinct from trying to manipulate constitutional structures to their own advantage.” However, when analyzing interviews conducted in 1997 with individuals in six Russian regions Dryzek and Holmes were able to identify (through the use of Q-analysis) three political discourses, which they label Chastened Democracy, Reactionary Anti-Liberalism, and Authoritarian Development. The authors find that all three discourses (which are taken to represent three fundamental and different political attitudes prevailing among Russia’s citizens) make it possible to envisage a future that is more democratic than the present. In such a future the presidency would be strong without being authoritarian, rather adopting a facilitating role. It is argued that such a development would in principle be feasible in Putin’s Russia, that the presidency would not necessarily have to end up in dictatorship. However, as the authors note, all three discourses also “recognize and la- ment alienation, a breakdown in trust, and the absence of civic engagement” (Dryzek & Holmes, 2002, p. 112). This is taken as proof of the existence of some common political ground on which consensus for policies to remedy these negative features might be built. The authors’ conclude (p. 112): Acknowledging that the situation in Russia has been chaotic and depressing is quite different from arguing that this means the future of democracy in that country is doomed. A dynamic, strong new presidency might just make a significant difference in a relatively short time, especially if Putin’s commitment to the “dictatorship of law” really translates into the rule of law rather than rule by the coercive agencies of the state. Finally, to conclude this summary of findings that indicate that democracy is amenable to improvements through the development of civil society, the results of a study by Mishler and Rose (2001) can be noted. The authors find

17 The index of democratization that March is using was developed by Tatu Vanhanen in his 1997 book Prospects of Democracy: A Study of 172 Countries, London: Routledge.

25 that institutional theories do a better job than competing cultural theories in explaining the development of trust in post-communist societies. While cultural theories assume that trust is “an emergent property linked to basic forms of social relations,” that is, as something exogenous to the political process, institutional theories, on the other hand, look upon trust as “rational responses by individuals to the performance of institutions.” Testing two hypotheses about trust based on cultural theory and two based on institutional theory by using data generated in 1998 through the fifth and seventh New Democracies Barometer18 the authors receive results strongly supporting institutional explanations of trust. “Trust or distrust in political institutions is substantially endogenous and largely determined by the political and economic performance of new democracies” (Mishler & Rose, 2001, p. 55). And indicating some important policy implications they conclude (p. 56): Insofar as institutional performance holds the key to developing trust in political institutions, then trust can be built more surely and swiftly than the decades or generations suggested by cultural theories. Trust can be nurtured by improving the conduct and performance of political institutions. Governments can generate public trust the old-fashioned way: They can earn it by responding promptly and effectively to public priorities, rooting out corrupt practices, and protecting new freedoms. […] Ultimately, the character and performance of trustworthy institutions can generate trust just as the performance of the old untrustworthy institutions generated scepticism and distrust. In this conception then, the establishment of social trust is seen as the ultimate goal of democratisation. The findings of the research discussed above indicate a certain causal order between features that are essential for establishing social trust in a society: 1. Trust can be generated through institutional change; 2. Institutional change can be achieved through the development of civil society; and 3. Civil society can be advanced through purposeful interventions (including financial and other support) by (representatives of) the state and through “autonomous” initiatives by civic organisations. Thus, as this reasoning suggests, a well-developed civil society plays a crucial role for the establishment of social trust. In the following section an overview is given of the four articles included in this thesis.

18 See the presentation given of the “New Democracies Barometer” on the Internet site of the University of Strathclyde’s Centre for the Study of Public Policy at http://www.cspp.strath. ac.uk.

26 3. Overview of Appended Articles I. The Russian Detour: Real Transition in a Virtual Economy? Article I synthesises the knowledge gained through the previous eight case studies of the institutional problems hampering a further development of the forest sector in eight Russian regions. Surveys conducted among regional forest enterprise representatives (mostly CEOs) in the eight regions provide the basis for the analysis. The article discusses some of the seemingly paradoxical effects of the Russian transition. Despite the country’s abundant natural resources, its well- educated population, endless unfulfilled needs and a large industrial sector, and despite the efforts to induce the “blessings” of capitalism the Russian Bear still seems to be asleep. How can this be explained? It is assumed that the analysis of the situation in the Russian regional forest sector can provide answers that are valid for the whole Russian economy. The fundamental insight that the article offers is that there are no easy top-down procedures that automatically lead to an efficiently functioning Russian market economy. After a discussion of the quality and function of institutions in Russia, invoking four institutional features that North (1997) has suggested as essential for the functioning of any market economy (cost of measuring; size of the market; enforcement of rules; and attitudes and perceptions), attention is given to the problem of identifying movements towards the market. It is stated that Russia’s performance should not, in principle, be assessed simply by compari- sons with the western world. The baseline principles or criteria used to assess to what extent a specific institutional configuration is conducive to a sustainable Russian forest sector and useful for the entire economy are listed. (The criteria are listed in Article I, p. 844.) Subsequent sections of the paper verify what was demonstrated in previous studies in IIASA’s institutional framework study, namely, that the criteria for a well-functioning market economy are poorly met in the Russian forest sector. The study is framed by the theory of the virtual economy (cf. Section 2.2 above). Referring to prominent features of the Russian forest sector it is argued that actors’ seemingly inadequate behaviour might be entirely rational in the virtual economy context. The problem that Russian forest firms have to face is how to become more competitive in the new emerging market environment. This is a problem that they share with many, if not most, Russian business firms. It is found that most of the surveyed Russian forest enterprises currently are far from being competitive in the market economic sense. To close this “distance” to the market firms must invest in their production capacity. In prin-

27 ciple, two different investment options exist: investments can either be made in modern physical capital (and management competence) or in so-called relational capital. By relational capital is meant “goodwill” based on personal relations with people in public positions, the provision of services to local authorities in exchange for certain privileges, like tax offsets, etc. Which investment strategy a company opts for depends upon the quality of its existing capital stock. For many companies it may be rational to choose a mixed strategy exploring the benefits of investments in both physical and relational capital. Which investment decision a company manager actually takes depends on its expected benefits and the estimated costs it would incur. It is not obvious that a manager would prefer investments in physical capital even if this strategy is more likely than the alternative to generate cash incomes and actually contribute to reducing the company’s “distance to the market.” Why should he choose this alternative if the money it produces anyway ends up with the tax authorities or in the pockets of criminal groups? The data generated through the interview survey among forest enterprise managers in the eight regions taking part in IIASA’s study confirmed the fact that many Russian forest enterprises experienced a decrease in output as well as productivity between 1993 and 1998. This indicates that they had not been successfully restructured. The data shows that output decreases in public firms were accompanied by proportionally equal drops in productivity. Even new private firms did not manage to keep up productivity when output dropped, but here the productivity displayed a relatively smaller decrease than that of output. However, in the virtual economy context it is not certain that a firm expanding production is successful in the market sense. The production increase might consist of more “soft goods” that can only be traded on the virtual quasi-markets. (Soft goods are products that cannot be profitably sold on regular markets, but can be exchanged in barter trade with other virtual economy firms.) An empirical testing of the virtual economy hypothesis was a central task in this particular study. In order to capture the position of the Russian forest enterprises in the “restructuring space” spanned by two dimensions reflecting firms’ possession of physical and relational capital as well as their managers’ propensity to invest in either form of capital, an attempt was made to construct a measure of enterprise managers’ relational capital orientation versus their inclination to reduce their enterprises’ distance to the market. In order to allow firms in our survey to be plotted in this two-dimensional restructuring space two indices were calculated. The indices were obtained by classifying enterprise managers’ answers to various survey questions and aggregating the

28 Figure 3: Distribution of Russian forest firms according to their distance to the market and their investment in relational capital. Per cent (n). (Source: Carlsson, Lundgren & Olsson, 2001, p. 855.) answers for each company in the survey.19 The outcome of these calculations is summarised in Figure 3. As can be seen in the figure there are only 12 enterprises (6 %) of the 203 investigated forest enterprises that clearly display a market-oriented behaviour. These are companies that have managed to restructure their activities to become more competitive in the emerging Russian market economy. The figure also shows that more than 60 per cent of all companies in the study have a long distance to bridge before becoming efficient in the market economy sense. The 32 per cent of the companies found in the lower right square in the diagram arguably are unviable, not compensating for their long distance to the market by the use of relational capital. The four per cent of the companies found in the upper right square are relational capital oriented, displaying a behaviour typical for the virtual economy. The situation for the middle group of enterprises is unclear.

19 Each enterprise manager’s answers to twenty questions – ten reflecting their “relational capital orientation” and ten their inclination to reduce their company’s “distance to the market” – were coded into two boolean variables. Such variables can only take the value 1 or 0 (for “true” and “false” respectively). By a simple (unweighted) addition of the ten 0-1 values of the two variables two index numbers were obtained for each one of the enterprises in our survey specifying its position in the two-dimensional “restructuring space.” Questions intended to capture enterprises’ “relational capital orientation” were, for example: use of barter in buying arrangements; negotiates but does nothing more to enforce broken buying agreements; has multiple social responsibilities; increasing employment while decreasing productivity, etc. Questions to capture enterprise managers’ propensity to reduce their enterprises’ “distance to the market” included, for instance, invests in equipment, buildings or education of the workforce; has bank relations; is not involved in barter; operates with increasing productivity, etc. One should note that the variables used for the calculation of these indices were constructed to reflect managers’ actual behaviour as well as their attitudes.

29 It was found that only a few enterprise characteristics significantly affected the likelihood of a firm displaying a market-oriented behaviour.20 While the overall likelihood of a forest company acting as a transition firm was fairly low (7.4 %) it turns out that this likelihood increases to 20.5 per cent if the enterprise is an exporter. The likelihood of finding large companies among the 32 per cent of the firms in our survey that have a long distance to the market and at the same time have a poor score on the relational capital axis is fairly low. The likelihood of finding small firms in this predicament is much higher. Hardly surprisingly, large enterprises are more likely than smaller firms to be found in the relational capital oriented group (40.6 % compared to 21.4 %). Comparing the attitudes of the managers of the most competitive firms in our survey with the answers given by the other firms it was found that the market oriented firms emphasised policy changes related to business legislation, better business ethics, work discipline, etc., while other firms called for state intervention and coordination and focused more on issues of technology, finance, and investments. The transition firms also emphasised the unpredictable and often contradictory business legislation as a basic problem. They also wanted to see an efficient mechanism for enforcing the decisions of arbitration courts and they more frequently called for privatisation of forest lands and more open procedures for assigning forest leases. An analysis (using unweighted regional averages) was performed to see whether any regional differences in the persistence of the virtual economy could be discerned. Each region’s average value for the indicators of “relational orientation” versus “market distance” was plotted in the “restructuring space.” A careful interpretation of the outcome indicates that efforts to reduce the distance to the market are slightly more prevalent in Khabarovsk, Mur- mansk, and Moscow compared with the other five regions. It should be noted, however, that while regional differences measured in this way are fairly small, the differences between the enterprises within each region are considerable. The article ends by some conclusions and recommendations about what kind of institutional improvements are needed in order to make the Russian forest sector more efficient. The study has shown that despite the massive efforts to change the rules of the game (price liberalisation, privatisation, etc.), the logic of the old Soviet system still decides much of enterprises’ behaviour. It seems that the logic of the virtual economy serves as the dominant institutional set-up in present-day Russia. The study gives empirical support to the theory of the virtual economy. Thus, enterprises in the survey behaved largely in accordance with what the theory predicts. It was found that the typical transition firm is an enterprise that is heavily exporting and has leaders who call for better business manners, ethics, competence and skills, while the typical virtual economy firm

20 These likelihoods were calculated with the help of ANOTA (Analysis of Tables), a statistical technique for exploring possibly existing relationships between categorical variables.

30 can be characterised as a large, low-exporting firm with managers who call for state coordination. The question is whether the virtual economy is only a temporary detour on the road to an efficient market economy in Russia, or whether it is a new system that is now being entrenched in society? The article closes by drawing attention to a number of features that might make a continued transition in Russia problematic, such as the fact that public authorities are already to some extent pulled into the virtual economy, that there is no existing tradition of privately owned commodity-producing companies, that a middle class is basically missing, that people’s political preferences still largely reflect and support Soviet-type attitudes, etc. A number of facts that have to be taken into account when developing policies to support a continued transition are also noted. So, for instance, it is necessary to consider the fact that market institutions must be built “from below” and that building them takes a long time, that the payoff from investing in relational capital must be reduced, e.g., through a taxation reform, and that the lack of trust in Russian society is a complicating factor, but a factor that policies can influence. Against this background it is concluded that there are a number of more specific policy measures that could actually be taken by the government and public authorities with the purpose of improving conditions for a continued development of the institutional framework to make it more conducive to an efficiently functioning market economy. It is noted that certain measures must be taken at the constitutional level (clarifying the division of power between the federal and regional/local level, sorting out property rights rules, etc.) while others belong to the collective choice level (taxation reform, enforcing a separation between the domains of political and economic decision-making, establishing of branch organisations, etc.), or to the operational level (decisions to be taken by the enterprises themselves relating to their day-to-day operations).

II. Systemic Interventions to Promote Institutional Change in the Russian Forest Sector Article II discusses the experiences gained from deliberate attempts at intervening in the forest policy formulation process of three of the case-study regions.21 The main focus of the paper is on the actual implementation of policy exercise workshops in Murmansk, Karelia, and Arkhangelsk conducted in the period October 2000–March 2001.22 The paper reports on the back-

21 The article is based on an extensive report issued by IIASA in the summer of 2004 (cf. Olsson, 2004). 22 A pilot policy exercise was conducted by IIASA in June 2000 with forest stakeholders in Tomsk Oblast’. A report from this event can be found in Olsson (2001).

31 ground to the endeavour, the theoretical underpinning and the design of the policy exercises, and their practical implementation, including the discussions that were triggered among the regional stakeholders. Finally, an attempt is made to assess the outcome of the events. The policy exercise is a procedure through which problem stakeholders are confronted with the results of an analysis of a situation (in our case the institutional problems hampering a further market oriented development of the Russian regional forest sector) produced by an outside analyst. Ideally, the policy exercise is a participatory process extended over a fairly long period of time (up to several years), during which stakeholders regularly meet to discuss existing problems with the purpose of reaching a common understanding of the situation and elaborating implementable policies to improve upon the existing problem situation. The engagement of the external analyst should be limited to a few, well-prepared meetings with the stakeholders (policy exercise workshops), during which new facts of the situation are presented and an assessment of the progress of the policy process is exposed to critical scrutiny by the participating stakeholders. With competent help of local organisers the initial workshops in such participatory processes were successfully conducted in all three regions in accordance with IIASA’s explicit directives. The format of the event did not really present any problems. Plenary presentations were made of the results of IIASA’s previous case studies. Regional and Moscow based experts also contributed to these plenary sessions. Participants were then engaged in group discussions of the problems they found most urgently in need of solution. The events attracted a fairly broad attention, the number of regional stakeholders taking part in the respective exercises was suitably large (roughly between 20 and 50 people), the participation rate in the group discussions was, however, significantly lower. In no one of the three regions did the first exercise workshop trigger the establishment of a continuing formal participatory process among the regional stakeholders as was ideally expected. The question is why. Possible reasons for this are discussed in the final sections of the paper. Working group discussions were lively and creative, dealing with a number of prominent problems in the forest sector of the respective regions. It was found that a limited set of themes discussed during the policy exercise workshops were common to all three regions and the discussion of these problems verified much of what had come out of the previous IIASA analyses. The discussions dealt with ways to come to grips with: x the low economic efficiency of the forest sector; x the need for investments in both production equipment and education; x contradictions in the existing forest legislation;

32 x the legacy of environmental degradation and ways to limit further such degradation; x the problems to push the regional forest sector on to the road towards the establishment of a market efficient institutional set-up; and x the need for coordination in the regional forest sector through some kind of branch organisation and the elaboration of a regional forest policy. In retrospect, when attempting to assess IIASA’s policy exercise workshops in the three regions, several factors of importance for the outcome and success of these events have surfaced. The significance of the forest sector for a region’s economy is one of the factors that affect stakeholders’ engagement in forest policy formulation processes. Not unexpectedly, the engagement tends to be large in regions where the forest sector is of great economic significance. A perhaps even stronger influence on the possibility for establishing a fully-fledged policy exercise is the availability of external funding that might support the implementation of policy measures elaborated by the exercise participants. It was found that in the present Russian context, where civil society is weak and new democratic procedures have not yet been established, it would probably not be feasible to organise a policy exercise with regional forest stakeholders without the sanction and support from the regional administrations and the regional forest authorities. In Russia these authorities are still left with an uncontested power to decisively influence forest matters. Arguably, however, the most important factors determining the performance and outcome of policy exercises in the Russian forest sector have to do with the selection and quality of the participants, the regional forest stakeholders themselves. An outside interventionist with only limited knowledge of the local situation can hardly expect to be able to make an unbiased selection of participants. The affiliation that the interventionist establishes with local/ regional individuals and organisations will largely decide the selection of participants, both in terms of their loyalty and their competence. Here it was found that the perception of the participants’ ability to make well-founded and fruitful policy suggestions differs between a “western” observer/analyst and his Russian counterpart. While the former would find it highly suitable and most efficient if suggestions for forest policy improvements originated from people actively engaged in forest matters of some kind (like forest enterprise managers, NGO environmentalist, etc.) such suggestions are looked upon with suspicion by a Russian observer/analyst. This has to do with the fact that all policy decisions have traditionally (since Soviet times) been taken by political officials or bureaucrats working in the administration, who look upon initiatives from other circles with suspicion. Merely the fact that others take such policy initiatives is seen as an implicit criticism of the ability of the traditional

33 authorities to cope with the situation and as a threat to the established power and private privileges of individuals working in these authorities. The reasons that could be imagined for the failure to generate long-term policy exercises in the regions of Murmansk, Karelia, and Arkhangelsk, all have to do with legitimacy and trust and the problem of finding the right stakeholders to work with. These factors are also linked so that competent and interested stakeholders are easy to recruit if they see the process as legitimate. But the legitimacy of such a process might also emerge from the fact that trustworthy stakeholders take part in it. In the absence of a well-developed civil society the legitimacy of participatory processes, such as those advocated through the policy exercises, can only be secured by the regional administrations and existing regional forest authorities. The paper ends with a set of conclusions, several of which agreeing with and corroborating the results presented in Article I. Participants in the policy exercise workshops recognised the behaviour dictated by the institutional set- up characterising the virtual economy, but even though this behaviour was judged highly detrimental participants could not distinguish any simple possible changes that would quickly improve the situation. Realising that forest sector institutions are highly interdependent participants in the three policy exercises acknowledged the existence of an “institutional deadlock” in the Russian forest sector finding this to be a factor that greatly complicates a reformation of the institutional framework, making the proper sequencing of reforms all the more important. It was also generally recognised that a regional forest policy must be elaborated in a dialogue with forest stakeholders. To be practical the opinions of the stakeholders should be aggregated through civic society organisations. However, since there is a lack of such organisations there is hardly anyone with whom to conduct such policy dialogues. Thus, the Russian civil society is not yet sufficiently developed to perform the functions it does in, for instance, the countries of Western Europe.

III. The Russian Virtual Economy Turning Real: Institutional Change in the Arkhangelsk Forest Sector Economic reforms in Russia continued in the years following the 1998 financial crisis.23 A positive development in terms of production output and investments could be observed. But did this development bring about a change in the rule system guiding the behaviour of enterprises operating in the virtual economy? Observers of the Russian transition have come to differing conclu-

23 Article III is based on an extensive report issued by IIASA in the winter of 2006 (cf. Olsson, 2006). The organisational background of the original IIASA study is briefly outlined in footnote 4 above.

34 sions concerning the interpretation of the economic recovery. Some have seen it as a sign that the virtual economy is retreating and that enterprises now increasingly live by rules guiding normal market economies, while others (among them Gaddy & Ickes, 2001 and 2005) claim that it is too early to dismiss the virtual economy hypothesis. The analysis performed in the article seeks to establish whether Russian enterprises since the beginning of the 2000s tend to leave the virtual economy and increasingly act in accordance with rules governing business behaviour in a market system. The analysis is based on two surveys among forest enterprises in Arkhangelsk Oblast’ conducted in 1998 and 2005, as well as a broad review of recent research on the Russian transition and a scan of official statistical data describing structural and behavioural changes in the Russian economy after 1998. It is hypothesised that the behaviour of business actors in the Arkhangelsk forest sector is increasingly being formed by institutions guiding business behaviour in a market economy. The data used in the analysis reflect developments on the national as well as the regional and local (enterprise) level. Previous studies of Russian forest enterprises (cf., Article I) have indicate that there are no significant regional differences in the extent to which enterprise behaviour is guided by the institutional set-up characterising the virtual economy. Since prerequisites for enterprise restructuring are expected to be comparatively unfavourable in regions with an undiversified economy dominated by a sector (or sectors) in great need of radical modernisation (such as the Russian forest sector), it is argued that Arkhangelsk Oblast’, with its highly forest dominated economy, could be considered a critical case for assessing the extent to which restructuring has actually been achieved, not only among Arkhangelsk forest enterprises and the regional forest sector, but also in the regional and federal economy as a whole. The analysis proceeds in two main steps, the first of which makes use of data collected through two surveys among forest enterprise representatives in Arkhangelsk Oblast’. The second step of the analysis uses previous research and official statistical data to assess recent developments in the Russian economy primarily at the regional and federal level. In the first part of the article attention is focused on the behaviour of the forest enterprises in Arkhangelsk that took part in our 1998 and 2005 surveys. Recall that in order to leave the virtual economy and become able to function in accordance with the rules governing business behaviour in a market economy, enterprises have to take active measures to improve their market competitiveness. Such a restructuring requires enterprise managers to decide about efficiency improving investments. To become market competitive investments in “distance reducing” capital should of course be favoured at the expense of investments in relational capital. The specific pattern of investment chosen by an individual enterprise is determined by the expected pay-off from different

35 available investment options, a choice that is conditional upon the enterprise’s initial capital mix, its command of distance reducing and relational capital. The information collected through the two surveys conducted among the representatives of fifteen forest enterprises in Arkhangelsk allowed a crude operationalisation of an index reflecting the enterprises’ relative command of distance reducing (d) and relational (r) capital. With the help of this index the capital mix (the combination of r and d) possessed by the individual enterprises in the survey could be plotted as a specific point in a two-dimensional diagram. The relative command of r and d capital as of the two survey occasions (1998 and 2005) was plotted for twelve of the fifteen enterprises in the survey. This way a picture was obtained of the changes in the enterprises’ r-d capital mix that had taken place between 1998 and 2005. It must be noted, however, that the patterns observed through the analysis of these survey data should only be regarded as an illustration, not as a statistical test of the development. The result of the calculations showed that a majority of the enterprises in the survey had reduced their distance to the market (by favouring investments in d) while often at the same time reducing their possession of relational capital (r). To summarise: eight of the twelve enterprises reduced their “distance to the market” (through investments in d). Four of these eight enterprises simultaneously reduced their “relational capital” (r). These, then, are the enterprises displaying the best performance in a market efficiency sense. Two of the remaining four enterprises increased their “relational capital” (r). The last two enterprises increased their “distance to the market” (d), one while simultaneously reducing its r, the other remaining on its already low r level. (The resulting r-d diagram can be found in Article III, Figure 2.) Some of the most important tendencies that could be observed in the survey data were: x In 2005 none of the three most swiftly market adapting enterprises were state owned. They were instead private companies having passed the state of insider ownership now mainly being owned by juridical persons. These three enterprises also invested in “distance reducing” capital (d). Their interactions with suppliers and customers had become more institutionalized, which had reduced their problems with violations of business agreements. They also had new managers appointed during the last few years. x Many enterprises had been incorporated into large holding companies. x In contrast to the situation described through our earlier survey, all enterprises in our 2005 survey reported that they no longer used barter trade in their sales and purchase operations. All had some relations with the banking system (most often for arranging payments). No enterprise reported having problems with wood supply and almost no one had problems with the implementation of business agreements.

36 x Most enterprises had increasing productivity and decreasing employment in the period 1998–2004 compared to the preceding five-year period. While these observations might be seen to indicate that the surveyed Arkhangelsk forest enterprises tend to leave the virtual economy and increasingly operate in the emerging Russian market economy, data also displayed some features pointing in the opposite direction. For instance, there are only few enterprises in the 2005 survey that report making investments, even though almost 50 per cent of the managers in the survey recognise obsolete technology as the most binding restriction on their enterprises’ activity, thereby acknowledging the importance of investments and noting the fact that financial intermediation still is a serious deficiency in the business structure embedding Russian enterprises today. Only very few enterprises exported some of their produce. Very few managers mentioned lack of entrepreneurial tradition and management competence as important problems for the development of their business. Only one manager recognised product development and finding new markets as a problem, two respondents mentioned problems related to current business practices. Very few enterprises belonged to a business association. In the second part of the article focus is shifted to indicators describing recent developments in the Russian economy primarily at the regional and federal level, in particular with respect to a) inflation, demonetisation, barter and arrears; b) investments in physical and human capital; and c) enterprise structure, changes in production and employment. An extremely high inflation rate causing a demonetisation of the economy, which led to a widespread use of inter-enterprise barter and payment arrears, were all prominent features appearing early on in the Russian transition. These features were also instrumental in pushing numerous Russian enterprises into the virtual economy (cf. Article I). Developments in Russia in the period after 1998 have improved the situation in several respects. So, for instance, inflation rates were quickly and dramatically reduced. After the year 2000 annual inflation rates have remained below 20 per cent approaching 10 per cent in 2004–2005. After peaking in 1998, various payment arrears as well as the share of barter in industrial sales have decreased significantly. This positive development, which seemed to be continued after 2005, could be observed both at the federal and the regional (Arkhangelsk) level. Capital investments in the Russian economy decreased dramatically in the years following the disintegration of the Soviet Union, in 1998 reaching a low of 20 per cent of their 1990 level. (In Arkhangelsk Oblast’ the share was even smaller, 14 per cent.) While investments started to increase after 1998 stimulated by the devaluation of the rouble, recovery has been slow and by 2004 investments in Russia were still only close to 40 per cent of their 1990 level. (In Arkhangelsk the level was slightly over 50 per cent.) Investments in human capital (education), which are indicative of the potential for economic develop-

37 ment, have been substantial in Russia. The number of students per 10,000 inhabitants graduating from higher educational institutions has been growing rapidly in Russia, especially after the year 2000. Arkhangelsk improved its position relative to the Russian average, from a level slightly below half at the beginning of the 1990s to over 80 per cent of the country average by 2004. The share of all students in higher education engaged in the study of economics and management also seems to have increased significantly in the years since 1998. The dismantling of central planning and the rapid (and dubiously legitimate) privatisation process starting soon after the disintegration of the Soviet Union brought significant changes to the Russian enterprise structure that traditionally had been characterised by relatively few, but generally large and inflexible enterprises locked into rigid delivery networks with (often) union wide geographical expansion. In the initial phase of privatisation many state owned enterprises were obtained by their managers (so-called insider privatisation), a process that was favoured by public policy. The share of state owned enterprises decreased dramatically during the 1990s. By the beginning of the 2000s, less than 10 per cent of all enterprises in Russia were still state owned – in Arkhangelsk the share was 18 per cent and had remained at that level since the mid 1990s. State enterprises’ share of total employment remained, however, significantly higher – by 2004, the average share for Russia was 36 per cent and close to 50 per cent for Arkhangelsk. The share of enterprises with mixed state-private ownership as well as their share of total employment has also decreased significantly in the ten-year period after 1995. This may be seen as an indication of an improved market competitiveness diminishing the need for state subsidies. While the share of foreign and joint venture enterprises increased rapidly after the disintegration of the Soviet Union, their share of the total number of enterprises still remained low (0.3 per cent) by the beginning of the 2000s. However, in terms of both employment and investments the foreign and joint venture capital made a much greater impact. The transition in Russia also meant that entry barriers preventing the establishment of new enterprises were dismantled leading to the creation of many new (and often small) private firms. These firms had to face market competition right from their start, typically they do not, therefore, operate in the virtual economy. While the number of small enterprises increased rapidly, their share of total employment remained on a comparably low level. In Arkhan- gelsk, small enterprises comprised slightly over 22 per cent of the total number of enterprises in the region, but they merely employed 6 per cent of all occupied in the regional economy. A prominent feature of the Russian enterprise sector development after 1998 is the conversion of the financial-industrial groups (FIGs), which emanated from banks early during the transition with the primary purpose of making money on financial speculations, into large holding companies engaged in

38 natural resource extraction and industrial production. These holdings have expanded and diversified their operations by incorporating enterprises belonging to various industrial branches. While they strive to make their subsidiaries prosperous by financing capital investments they typically take over central management functions, such as financial planning and marketing, leaving managers of subsidiaries with the responsibility for the organisation of production in a way that was typical for a traditional Soviet enterprise. There are estimates indicating that FIGs today account for a significant share of total industrial output in Russia. In Arkhangelsk, for instance, information in the press suggests that four large holdings were responsible for close to 70 per cent of total timber harvesting in the first five months of 2005. In general, production output in Russia has increased since the mid 1990s after a dramatic decline in the first half of the decade. In Arkhangelsk output of many forest products has increased rapidly after 1998. As already mentioned, output increase is no certain sign that enterprises are actually leaving the virtual economy and are now increasingly operating under normal market conditions. However, in combination with the fact that labour productivity has also increased it can be concluded that enterprise performance has markedly improved, indicating that some restructuring has taken place making enterprises better able to meet market competition. Even if the data observed cannot provide any conclusive evidence of a vanishing Russian virtual economy, the analysis nonetheless points in a certain direction, namely that, since the late 1990s, certain characteristics of the Russian economy have displayed a positive development that should make enterprises better able to function in accordance with the kind of rule system that typically guides business behaviour in a normal market economy. Still, however, as Gaddy & Ickes (2005) have noted, the continuing non-transparent resource transfer (through charging lower than market prices for energy) from the large oil and gas monopolies to non-profitable enterprises prevents the final elimination of the virtual economy. On the basis of the two step analysis that has been briefly recounted here, the article ends with the tentative conclusion that in the last 7–8 years Russian enterprises have been increasingly acting in accordance with institutions governing business behaviour in a market economy. This would mean, by implication, that the Russian virtual economy is gradually being dismantled. It is noted, however, that this dismantling might be a very slow process and that it cannot be finally completed until the still ongoing hidden resource transfer from the rich energy sector to market inefficient enterprises that fuels the virtual economy has become entirely transparent. To facilitate and speed up the process public policies should be elaborated with the purpose of stimulating efficiency improving investments and facilitating (and if necessary enforcing) structural changes in the Russian economy. To increase the probability of effi-

39 cient implementation such policies should be elaborated in a participatory process engaging broad layers of the Russian public.

IV. Assessing the Structural Prerequisites for an Efficient Russian Political Market The three previous articles (I, II, and III) have clearly indicated a need for institutional change to improve the efficiency of Russian enterprises’ market behaviour. Some of the required changes must be generated through political decisions. Thus, in order to reach good (in the sense of fair and efficient) public policies, it is important that the political system works well, that the system of governance is capable of efficiently reaching decisions that are considered legitimate and that address crucial issues in a competent way. It is assumed that legitimacy is a prerequisite for efficient policy implementation, and that good democratic governance is a prerequisite for legitimacy. Article IV suggests an approach for assessing the dynamics of the Russian political system. Based on recent writings of Douglass North and colleagues the importance of cognitive processes behind individual and collective learning is emphasised and how such learning manifests itself in the emergence of institutions. The learning that brings about new or improved institutions is such that it changes the “mental models” that people have been using for reaching decisions about a specific behaviour. This change of perception will lead to the establishment of rules that guide a more efficient behaviour in the sense that lower transaction costs are incurred. North suggests an approach to the study of efficiency in politics that parallels what is commonly used in the analysis of efficiency in economic markets. By identifying and observing the development of transaction costs incurred in the interaction between actors in the political market it should be possible to assess the efficiency of actors’ political behaviour. In principle, all citizens in a society could be seen as actors in the political market. Actors could, however, be specified on various aggregation levels, from individual human beings, to various forms of groups and more or less structured organisations (enterprises, political parties, NGOs, etc.). The “commodities” exchanged in political markets differ from those exchanged in economic markets and are a lot fuzzier to characterise. Basically, what is traded in political markets are ideas or proposals (arguments) for certain policy changes. Actors (individuals, groups, organisations) who come up with and elaborate (produce) such ideas and proposals (political commodities) must, if they want to see their policy proposals adopted and implemented, offer them to other actors (customers) in the political market in exchange for their promises of support (payment). Obviously, political markets differ from economic markets in several important respects, not least, as already indicated, in the character of the

40 “goods” traded. Political markets are coercive and highly competitive. Princi- pal-agent relations in operation in political markets differ from those in economic markets. While the latter are embedded in a well developed comprehensive institutional framework, the former are much less stringently regulated. Constitutional stipulations are of course highly significant, but otherwise the rules governing principal-agent relations in political markets are more ambiguous and difficult to enforce. Both preferences and incentives guiding actors’ behaviour in political markets differ from those in economic markets. In addition, the available information about political markets is extremely voluminous and of varying quality and therefore very difficult to assess. All these factors imply that transaction costs tend to be high in political markets. Such costs primarily depend upon the size and character of the market (personal or impersonal), the stability of the market, and the quality of the institutional system governing the behaviour of the market. Well established (legitimate and self-enforcing) rules governing market behaviour and agreed- upon procedures for changing the rules tend to lower transaction costs, and thus increase the efficiency of market interactions. The article proceeds with an attempt to conceptualize the efficiency of the Russian political market. Since Russia does not yet have a well-developed democratic governance, any discussion of efficiency must take its departure in a characterisation of the state of democracy and its development. It is suggested that the development of Russian democracy could be compared to an “ideal-type” of system defined on the basis of Dahl’s discussion of polyarchy and his (nowadays generally shared) opinions about what characterises democratic governance. It is argued that changes in the structure of the political system as well as changes in the behaviour of its actors (agency) are essential for an assessment of the efficiency of the Russian political market. Actors’ behaviour in the political market is restricted by the existing institutions specifying a structure within which market interaction can take place, but it is also restricted by actors’ perception and understanding of these restrictions (ideology or shared “mental models”). In principle, while the structure of the political market limits actors’ potential behaviour, ideology (shared mental models) limits the extent to which their actual behaviour can exploit the potential that the structure allows. Thus, the development of both structure and agency (and their consequences for transaction costs) must be analysed if the efficiency of the political market should be possible to assess. From this discussion a set of institutional criteria is deducted by which the efficiency of actors’ behaviour in the Russian political market should be judged (cf. Table 2 in Article IV). In principle, the criteria speak of certain required qualities of the institutional set-up that constitutes the structure and guides the agency of a democratic political market. In the second part of the article a tentative analysis based on secondary sources (recent research findings and information available in the public

41 domain) is made of certain structural features of the Russian political market. The purpose of the analysis is to assess if and how changes in factors structuring the political market have improved, or created better conditions for, democracy in Russia and a more efficient operation of its political market. Four broad topics relating to the structure of the Russian political market are discussed: a) constitutionalism and semi-presidentialism, b) popular representation, c) territorial division of power – federalism, and d) guaranteed citizens’ rights, social resources, and public procedures. Constitutionalism and semi-presidentialism. The purpose of constitutionalisation is to introduce the rule of law. In Russia this is a still ongoing process. Constitutionalisation entails an authoritative structuring (division) of competencies, such as the executive, legislative, and judicial powers, between various state organs, often the head of state, the parliament and the judiciary. This division of power, as well as stipulations on the form of popular representation in governance, is often laid down in a formal legal document, a Constitution. Through the constitution a political system receives a set of formal institutions to guide actors’ behaviour. However, a successful constitutionalisation not only requires the establishment of an institutional framework, but also a psychological underpinning in the form of a well-developed legal consciousness among citizens. In Russia the constitution was elaborated by President Yeltsin’s entourage and adopted in late 1993 and it is still valid today. The form of government adopted in the constitution has been labelled semi-presidentialism, a form that has bestowed extremely great powers upon the president. By comparison, the power bestowed upon the legislature (the Federal Assembly) and the government is insignificant. The parliament has hardly any say in the appointment of government. But then again, the power and influence of the government is also severely restricted by the current constitution, a fact that has made the government largely incapable of performing its normal tasks of economic and social policy-making. The stipulations of the Russian constitution have indeed produced a functioning institutional set-up, establishing a structure where power is shared between the president, the legislature and the judiciary. However, due to the specific form of government adopted (semi-presidentialism) and the character and ability of the president in office the major political power in today’s Russia is heavily concentrated in the presidency. As for legal consciousness, the other important prerequisite for a successful constitutionalisation process, the situation in Russia still is unsatisfactory. This has to do with the existing political culture with its roots in Soviet practice, a situation that, for instance, allows members of the elite to influence political decisions in their own favour with very limited possibilities for citizens to hold decision-makers accountable through legal procedures. This practice has had detrimental consequences for legal consciousness.

42 Popular representation. According to the Russian constitution representatives to various political congregations should be elected in free and fair elections. Members of the Duma, the lower house of the Russian parliament (the Federal Assembly) are elected in general elections every fourth year. The previous order of electing half of the Duma members in proportional elections through party lists and the other half through majoritarian elections in single mandate districts was recently changed so that all members of the Duma will be elected through party lists in the future. Furthermore, rules governing the establishment and function of the working coalitions in the Duma (so-called factions) have also changed recently, the purpose being to make parties’ election results be reflected in the composition of factions. These reforms are expected to increase the importance of the party system for the issues discussed and the decisions taken in the Duma and to improve the accountability of elected Duma members. Another recent reform taken to reduce the very large number of political parties that have been a prominent feature of Russian politics since the disintegration of the Soviet Union is an increase in the share of votes a party needs to gain access to the Duma. In future elections to get access to the Duma parties have to get at least seven per cent of all votes cast in the election (rather than five per cent as earlier). The Russian political system has been criticized for being a “supply-side” democracy, since political parties have been established to cater for the needs of the various elite groupings rather than in response to a demand among the electorate. Members of the elite have been able to manipulate the party system to their advantage, an example is the phenomenon called “parties of power,” the current such party of power being United Russia, created through the manoeuvring of the president to provide support in the legislature for the president’s policy proposals. The dominance of the party of power in Russian political life has made observers warn that the situation for the political opposition in Russia is very difficult. The recently established Just Russia party (formed through a merger of three existing smaller parties) has been seen as an example of how the elite (the president) can install a “loyal” political opposition. Observers have also criticized the practice of incumbent politicians of using administrative resources to support their candidacy against election opponents (so-called “machine politics”). Recent reforms have also been introduced to come to grips with this unlawful practice. In summary, thus, it would seem that a number of recently introduced reforms can be expected to produce changes in the structure of Russian political life that should increase the importance of political parties and thus stimulate the development of party politics, and possibly increase fairness and reduce corrupt practices in election campaigns by curbing the misuse of administrative resources. This might eventually strengthen accountability in Russian politics and increase the power of the Duma to influence policy-

43 making. It should be noted that these structural improvements are introduced through changes in formal institutions, which is no guarantee that actual political behaviour will change accordingly. Developments the next few years will show if such hopes are warranted. Territorial division of power – federalism. Conditions for the successful transformation of Russia into a federation were far from favourable. In principle, the complex task would require highly developed and well-functioning democratic institutions. Under Yeltsin many regions in Russia had set out on their own development path under the leadership of powerful governors (often former communist party leaders). Carefully manoeuvring in order to keep the federation together Yeltsin conceded some of the power that the constitution bestowed upon the centre to the regions. This was done through special agreements laid down in the so-called federation treaties. It is quite possible that Yeltsin’s concessions in fact saved Russia as a federative state. When Putin became president in 2000, it was soon clear that he would work to strengthen state power through a centralisation of authority to the federation centre. In retrospect it seems he has succeeded to the point where observers have begun to fear that the president’s ultimate goal is to de-federalise Russia and convert it into a unitary state. In a major reform (introduced through presidential decrees in May 2000) Putin installed a whole new regional division by establishing seven federal districts headed by presidential envoys with strong formal powers to be used for monitoring regions’ compliance with the constitution, federal legislation and presidential decrees. The new regional organisations were also to be instrumental in restoring the pre-eminence of federal law and bringing regional legislation into conformity with federal law. They were also to oversee the bilateral treaties. The work of the new regional organisations was largely successful. By the summer of 2004 the number of bilateral treaties still in operation was down to eight (from having been 46 a few years earlier). The harmo- nisation of the regional and federal legislation was also largely achieved within Putin’s first term in office. The president also enacted a number of other reforms with impact on Russian federalism, for instance, changing the rules for appointing members of the Federal Council (members are hereafter to be appointed by the regional assemblies and chief executives), establishing a State Council (as a meeting place for regional executives), amending the legislation to allow the president to dismiss popularly elected governors and to dissolve regional legislatures (under very special circumstances), abolishing direct elections of regional governors (regional legislatures should now approve the president’s nominees for this post), introducing rules for merger of federation subjects (reducing the number of regions, with ethnic republics and autonomous okrugi fearing that they might be incorporated into territorially defined regions), introducing a discussion about revisions in the tax legislation (which would change the

44 distribution of tax revenues between the federal, the regional and the local level). In summary, it could be noted that president Putin, through a series of often harsh measures, has eliminated many of the existing asymmetries in the Russian federative structure, thus strengthening federal state power and installing more orderly and transparent relations between the federal centre and the regions. In the process, it has been objected, the regions have lost some of their independence. But this, as supporters of the reforms would argue, might still be a necessary sacrifice for the purpose of establishing a federal power structure allowing a more stable and efficient policy-making. Guaranteed citizens’ rights, social resources, and public procedures. A very important characteristic of Russian democracy during transition has been the regularly recurring free elections. While this feature must be recognised as an important step in the establishment of Russia as a democratic nation, it must also be remembered that the conditions under which these elections take place are of even greater importance for the development of good governance. Elec- tions in Russia are (still) subjected to various manipulations producing a system that has been labelled “supply-side democracy.” As already noted election campaigns are also influenced by incumbents’ use of administrative resources (“machine politics”). A perhaps still more important factor making the playing field of Russian elections less even is the biased mass media reporting of the programmes and campaigns put up by parties and candidates before election day. Under Putin’s presidency the oligarchs’ occupation of the media has been replaced by “administrative control” by state agencies. Studies have indicated that media coverage of election campaigns have had a clear influence on election outcomes. Furthermore, journalists’ work situation is highly insecure, creating a situation where “paid-for journalism” as well as self-censorship has become a wide-spread practice. As has often been noted, especially by foreign observers of the Russian transition, the development of an efficiently functioning democratic political market would be greatly facilitated by a well-developed civil society. However, a number of assessments have concluded that Russian civil society still is notoriously weak, despite a rapid development at the beginning of the transition period. Civic organisations have been actively working in Russia since long before the revolution and the establishment of the Soviet Union. While first tolerated, but later closed down or converted to state controlled organisations, Russian NGOs have always assisted the government in achieving its goals, but they have also often tried to help its members and promote their interests. Such “dualistic functioning” is still affecting the performance of Russian NGOs today. During the transition period with its dramatic economic recession, civil society encountered difficulties when trying to recruit members, one reason being that people had to focus on day-to-day survival. In addition, people could

45 see how the state had been captured by business interests lowering their trust in public authorities and institutions. President Putin has been accused of trying to bring civil society under closer public control. For instance, the establishment of the Public Chamber has been seen as a step in that direction. The Chamber held its first plenary session in January 2006. Among the members (who cannot be parliamentary deputies) many well-known public figures in Russia can be found, from religious leaders, pop stars and artists to lawyers, enterprise leaders, and nuclear scientists. Some observers see the chamber as yet another organisation established by the president to operate as a parallel parliament (Oversloot & Verheul, 2006; Knox et al., 2006). In a European “statist” perspective on Russian state-society relations (where it is considered a priority to protect the state from anarchy) it is perhaps not very surprising that the authorities are attempting to get a firmer grip on developments by making the rule system governing civil society activities more stringent and seeking to improve the transparency of NGO funding.

46 4. Pertinent Results of the Study

The broad range of issues discussed in this thesis has produced a comprehensive picture of the Russian transition problems. Here the most pertinent results of the studies undertaken in the project are summarised. After discussing the thesis’ contribution to the existing literature, some implications for theory and policy suggested by the analyses are outlined. Finally, some important remaining unknowns that should be examined in future research are listed.

4.1 Merits of Using an Institutional Approach and Opportunities Foregone As this thesis illustrates, transforming the old Soviet command economy into a modern democratic market system is a formidably complex task. With the abolition of central planning the fundamental principles on which the organisation of Soviet society had rested for close to seventy-five years were suddenly made entirely obsolete. The problem was that there were no new ready-made principles available to immediately replace the old ones that no longer worked. The crucial moment when this break-down happened was when prices of goods and services were all of a sudden to be determined through the interplay of supply and demand. Previously, under central planning, capital investments (entailing decisions about what to produce, where, and how), as well as production output volumes (and the retail price of the produced goods and services) had been administratively determined with little consideration for consumer demand, giving rise to severely distorted markets. Central planning had produced a specific system of rules establishing a structure that embedded most aspects of citizens’ interactions. Now, the seemingly innocent change that relative scarci- ties of goods and services were to be reflected in their relative prices made for a dramatic systemic transformation. This single fact necessitated a fundamental reformation of the previously existing institutional structure and it entailed a profound change in the rationale motivating citizens’ behaviour. In this thesis it is argued that transition actually is identical with massive scale institutional change (I, II, III). As is also argued, the complexity of the transition process depends on the fact that simultaneous changes are required in several different but interdependent rule systems (I, II, III). In fact, the intricate causal links between various rules tend to cause deadlocks that must be disentangled in order to improve the workings of the system. Implementable institutional changes are therefore inherently difficult to design, assess, and enact. The Institutional Analysis and Development (IAD) framework (cf. Sec- tion 1.4 above), which informed the design of the series of case studies

47 reported in this thesis,24 advocates a broad approach for analysing collective action, emphasising the importance of the quality of the environment in which the “action arena” is embedded. As, for instance, Hoffmann (1998, p. 347) has suggested, in trying to understand transitional Russia theoretical and methodological pluralism should be encouraged: If the type of political system under examination is disputed by informed researchers, or if it is a hybrid or highly unstable system – maybe not a system at all – a variety of foci and paradigms should be marshaled in the quest for insight and understanding. Inclusive, especially dynamic and holistic, approaches are preferable to exclusive, especially single-level and single-factor, approaches, when one’s dependent or independent variable is multifaceted, nonrecurring, and sequential (e.g., democratization – the shift from a noncivil society, noncivil economy, and noncivic culture to a civil society, civil economy, and civic culture). The IAD framework offers precisely such an open-ended approach suitable for studying the Russian transition. But, of course, a broad approach also entails certain drawbacks. Selecting an institutional approach has in practice foreclosed other approaches focusing on various more limited aspects of the transition process that potentially could produce a more detailed understanding of the selected phenomena.25

4.2 Characteristic Features and Persistent Problems of the Russian Transition in Its First Decade As is argued in this thesis, Russia’s transition is not yet over (esp. III, IV). After more than sixteen years of transition Russia still has some way to go before it can be characterised as an orderly and smoothly functioning market economy and democracy. At the same time it should be recognised that the country has changed quite dramatically since its Soviet days. Some observers even claim that Russia today is a “normal country,” not unlike a middle-income country (such as Mexico) with typical flaws like “high income inequality, concentrated corporate ownership and turbulent macroeconomic performance” (Shleifer & Treisman, 2005, p. 152). But in view of the fact that Russia has enormous natural resources, a well- educated workforce, and a huge capacity for industrial as well as agricultural production, it may seem odd that the introduction of the “blessings” of capital-

24 See especially article (I) and (III) in this thesis, but also a number of other studies produced in the project (cf. list of publications in Appendix B.) 25 Cf., for instance, Stoner-Weiss’ (1997) study of regional governance; Frye’s (2000) study of market institutions; Smith & Remington’s (2001) study of the formation of the Duma; Kahn’s (2002) study of federalism; Hoffman’s (2002) study of the oligarchs; Fish’s (2005) study of the disrupted democracy; Pridemore’s (2005) study of law and justice; Hale’s (2006) study of the party system; Rodin’s (2006) study of federal reforms; Colton & Holmes’ (2006) study of the state and governance; Evans, Henry, & McIntosh Sundstrom’s (2006) study of civil society; Ledeneva’s (2006) study of the importance of informal institutions.

48 ism did not lead to a fast transformation of the Russian economy and society. Despite the massive “shock therapy” reforms introduced in the early years of transition many Russian enterprises are still operating in the virtual economy and most citizens are reluctant to take an active part in political life. Thus, serious efforts must still be made to achieve the fundamental restructuring of the economic and the political system required to convert Russia into a modern, efficient and democratic market economy. However, the seemingly slow Russian transition is entirely consistent with predictions based on institutional theory. According to this theory profound changes in the highly complex and interdependent rule systems governing actors’ economic and political behaviour are expected to be slow, partly due to path dependence, and partly due to the fact that such changes, if they are to be sustainable, must be built from below, through the active participation of broad layers of the population. This was also the reason for adopting a local/regional perspective in the studies of the institutional changes in the Russian forest sector that are reported in this thesis (I, II, III). Emphasising the complexity of the multi-dimensional Russian transition, Gordon Hahn (2005, p. 148) notes that: The success or failure of Russia’s transformation into a stable state with a viable market democracy will depend much on the creation of an effective and balanced federal system. The challenge is historically unprecedented. No state of Russia’s size and complexity has ever needed to develop national identity, democratize, introduce a market economy and build a state simultaneously. The studies contained in this thesis examine different aspects of how Russian citizens, their elected representatives and enterprise managers, have struggled to meet this “historically unprecedented challenge.” Several features have emerged from the analyses reported in the appended articles. In the sequel, those features that in retrospect seem most interesting and important for the understanding of the Russian transition are reviewed. Even if many of the changed parameters affecting developments in Russia during the 1990s originated already some ten years earlier, it was only after the disintegration of the Soviet Union in 1991 that their full consequences could be played out. The major events of the first two years of transition – the abolition of the Soviet Union and the emergence of the Russian Federation under a new president, a new constitution, parliament and government – caused an organisational turmoil that would, as it turned out, take more or less a decade to sort out. Price liberalisation and privatisation of previously state owned enterprises destabilised actors’ behaviour in economic markets and offered previously unknown opportunities for members of the Soviet nomenklatura26 to enrich themselves through (often dubiously lawful) acquisitions of privatised Soviet enter-

26 The term nomenklatura refers to people appointed by the Communist Party to prominent positions in Soviet political and economic life.

49 prises. This new Russian elite soon discovered the highly favourable prospects for financial operations that the new situation entailed, resulting in a rapid development of the banking sector, all of which was a part of the emergence of a number of large financial-industrial groups (FIGs) dominated by a few powerful so-called oligarchs. This development would probably have taken a different turn had reforms been more carefully worked out and, when possible, gradually implemented. As events actually unfolded they caused two major problems with far reaching repercussions; it made members of the new Russian elite who were the immediate winners of the reforms want to preserve status quo and their newly acquired privileges and oppose the continued transition process towards an efficiently functioning market economy and democracy; and it largely destroyed citizens’ confidence in the reforms, thus almost ruining the legitimacy of the whole transition process. The learning to be gained from this development, as has been pointed out by, for instance, Hellman (1998) (see also Article I and II), is that the way to constrain the winners of the reforms and prevent them from obstructing the continued transition is to stimulate the democratic process by finding ways to engage broad citizen groups (despite their often being the short-term losers of the transition) in the elaboration of continued reforms with the purpose of furthering the transition towards a fully-fledged market economy. This conclusion emphasises the connection between politics and economics in the Russian transition process. It suggests that reforms aiming at improving the functioning of democracy will have beneficial effects on reforms aiming at improving the market economy. The continued transitional turmoil entailed its own special dynamics demonstrated by the fact that the more unscrupulous business tycoons accumulated increased power and wealth by appropriating the most profitable Russian firms through transactions that often infringed upon the existing fragile and insecure property rights. Conditions under which this elite of the Russian elite lived naturally differed significantly from the conditions restraining managers- owners of smaller and less profitable enterprises of regional and/or local significance. While the goal of the former was to continue expanding their power and assets by transactions in the emerging Russian markets, the latter group, members of regional and local elites, strove for a similar goal without being able to restructure their (often) market inefficient enterprises or by acquiring more profitable production units. Instead the solution chosen by this latter group was to keep their enterprises alive by entering the so-called virtual economy (I, III). As argued in this thesis, the institutional set-up defining the Russian virtual economy should be seen as the result of an autonomous adaptive reaction by the many market nonviable Russian enterprises to the unfeasible option of meeting market competition. Many of the (primarily informal) institutions constraining the behaviour of actors in the virtual economy originated in the old

50 Soviet command system. A major problem with the virtual economy is that it maintains the suboptimal resource allocation typical of the old Soviet system. The findings reported in this thesis empirically corroborate central hypotheses generated by the theory of the virtual economy (I, III). By operating in the virtual economy market nonviable enterprises “insulated” themselves from market competition, which also meant that they only responded weakly (if at all) to incentives generated through the implementation of market stimulating public policy measures as well as on rulings authorized through legislation. This defiance of public policy is but one expression of the “unrule of law” (Gel’man, 2004) – actually a legacy of the Soviet system – that, in particular, characterised the first decade of the Russian transition. The emergence of a large virtual segment in the Russian economy had profound consequences in several respects: for enterprise restructuring and the prospects of establishing an efficient market economy (4.2.1), for citizens and employees (4.2.2), and for democracy and the implementation of public policies (4.2.3).

4.2.1 Consequences for Enterprise Restructuring and the Prospects of Establishing an Efficient Market Economy The disintegration of the Soviet Union and the abolition of central planning meant that old union-wide delivery patterns in the economy were disrupted. Inputs were now, in principle, to be obtained in the emerging markets. Since enterprise managers did not normally possess the knowledge needed to procure the necessary inputs via the market – in fact, early on during the transition there might not even have existed any domestic market at all offering the required inputs – and since inputs (if found) had to be paid for by money (that enterprises often did not have) or through credits (that the deficient banking system could not provide), enterprises’ operations were basically stalled. Many problems that were identified in the previous investigation of institutional hurdles for a market efficient development of the Russian forest sector (I, II, III) had their origin in this sudden breakdown of old delivery patterns and in the fact that enterprise managers’ competence was completely inadequate to the new tasks managers were expected to perform. Judged from a market economic perspective, the result was a seriously dysfunctional enterprise behaviour. In the following, some of the most pertinent (and often interdependent) consequences of this situation will be noted. The features discussed were identified as important obstacles for a market efficient development of the Russian forest sector in the studies reported in this thesis (esp. Article I and II). Market coordination: The old economic planning mechanism coordinating transactions in the Russian economy was abolished and there was no new functioning mechanism ready to replace it. This was an immediate effect of the broken input-output delivery patterns and the fact that viable markets for goods

51 and services could not be established overnight. Still 6–7 years into the transition, forest enterprise managers interviewed in our studies (I, II) complained of the lack of coordination hampering a market efficient development of the Russian forest sector. Managers did not find that markets were capable of solving the task of coordination, some even called for direct state intervention, while others called for the development of a modern forest policy, mainly to solve the problem of modernizing the sector (funding capital investments). Non-monetary market transactions: When enterprises encountered problems with liquidity – lack of cash and credit – the natural reaction (according to Makarov & Kleiner, 2000) was to revert to non-monetary transactions (barter trade, debt-swapping), as a way of sustaining the input-output transactions needed to keep the enterprise in operation. In so doing the enterprises entered the virtual economy, where exchange relations were not established through the direct interplay of supply and demand, but rather through direct negotiations between the parties to the transaction. This practice established relative prices on goods and services that arbitrarily differed from those that would have emerged if transactions had taken place in competitive markets. Prices thereby ceased to transmit accurate information about the relative scarcity of goods and services, information that managers in a market economy normally use for deciding about production and investments. Market information: In Soviet times, information about natural resources and their use in domestic production had been available to economic planners. But this information and the system that produced it was not readily available for anyone operating in the new emerging Russian market economy. And there was no way this system or a new system replacing it could shortly be made available. In the 1997–98 interviews (I), enterprise managers complained about the lack of relevant information about the forest sector and timber markets, but it was also clear that managers often did not have the competence to seek out existing information and put it to profitable use. Market competence: Many Russian enterprise leaders had continued as managers and (often) new owners of the privatised, formerly state owned enterprises they had previously headed. Soviet enterprises managers were typically engineers rather than economists, they knew quite a lot about production processes and technology, but not very much about the economics of market behaviour. Not unexpectedly, the good, but somewhat rigid, Russian educational system prevented a fast correction of the existing biased managerial competence and a smooth adaptation to the educational requirements of a modern market economy. Financial markets: As already noted, the transitional turmoil opened new opportunities for entrepreneurs to make fast profits (cf., for instance, Solnick, 1998). The most successful and unscrupulous of them – the ones subsequently becoming the very powerful oligarchs – managed to make (often unlawful) use

52 of the Russian privatisation process to lay the foundation for their future huge corporations, the financial industrial groups (FIGs). Early on these FIGs were established as banks that primarily engaged in financial speculations with the purpose of generating profits for their owners. A plethora of banks emerged in Russia, but with their orientation they were not very helpful in offering afford- able credits needed for enterprises’ operation and investments (I, III). Instead, many (if not most) Russian enterprises built up huge payment arrears, thereby creating the short-term credits they needed for their operation. These arrears formed a whole system of debts that state authorities and enterprises could make use of in their virtual economy operations – operations that incurred high transaction costs for all parties involved. Furthermore, the unlawful wage and pension arrears also caused very difficult problems for employees and pensioners and negatively influenced their perception of the whole transition process. Market entry and exit: Establishing new private business firms (market entry) was in principle encouraged in the nascent Russian market economy and the number of enterprises also grew rapidly. However, the rules concerning market exit, close-downs and bankruptcies, were more problematic (III). Rules establishing an orderly procedure for reutilising production capacities (an important aspect of the Schumpeterian “creative destruction”) are especially important in a situation where many enterprises are neither able to make a profit nor restructure their activity to become competitive. The lack of established institutions in this field was a source of resource waste and unlawful property redistribution, ultimately contributing to a decreased trust in the transition process.

4.2.2 Consequences for Citizens and Employees Threat of unemployment: The transition turmoil also had profound consequences for Russian citizens. For many it soon became clear that they were employed in enterprises that actually were on the verge of bankruptcy, all of a sudden making the prospects of unemployment quite imminent. Since there did not initially in the Russian transition exist any organised labour market of the kind that is normally found in mature market economies, the prospect of loosing one’s job seemed very threatening indeed. As it turned out, and probably because virtual economy enterprises tended to keep their labour despite their failing markets and output decline, unemployment never became as large as many observers had feared, and in due course unemployment services were installed in Russia to smoothen the frictions in the labour market (III). Social security: Transition also entailed dramatic changes in the previously well-developed social security systems that Russian citizens trusted for providing a number of services essential for their daily lives, such as child and health care, food catering, holiday resorts, sports arenas, cultural activities of various sorts, etc. While in Soviet times many of these services had been

53 provided by the enterprises, the goal during transition was to transfer the provision of these services to the municipalities, which were reluctant to take on the responsibility since their budget situation did not allow it. Ideology: In the end, the most demanding challenge raised by the transition had to do with ideology or people’s perception of their situation, their interpretation of problems encountered and the solution to these problems they were able to envisage. People’s general outlook, their “mental models” in Douglass North’s terminology (IV), had to change radically to adequately meet the new conditions established by the transition. In principle, the required change in mental models could be expected to be fast in some respects (like appreciating the value of money), while it is likely to be extremely slow in other respects (like developing social trust). Basically, citizens were now required to take an individual responsibility for their lives to a much greater extent than they had done in Soviet times. Moreover, they had to coordinate this individual responsibility to be able to take a collective stance on various issues in order to safeguard and advance their interests and take an active part in the governance of society. This should, presumably, be reflected in an increasingly active civil society. Civil society: To be efficient the transition towards democracy in fact requires civic organisations (political parties, different kinds of NGOs, sports and cultural associations, etc.) to have large membership numbers. However, as it turned out, Russian civil society was not strengthened in the way and to the extent (western) observers expected. One (“external”) reason for the comparatively weak civil society development can be found in the economic crisis (dramatic production decrease) following shortly after the disintegration of the Soviet Union, which forced citizens to focus primarily on breadwinning activities. Another suggested (“internal”) reason for people being discouraged from engaging in civic activities (cf. Olsson, 2004, and Article IV) has been labelled “postcommunist disappointment” (Howard, 2002) or “postcommunist syndrome” (Evans, 2002), affecting people’s mental models making them feel that “they have been let down, even cheated, by the new system that quickly replaced the old one” (Howard, 2002).

4.2.3 Consequences for Democracy and the Implementation of Public Policies Weak state: The very fact that the disintegration of the Soviet Union and the establishment of the Russian Federation led to a “transitional turmoil” clearly showed that the Russian state was weak and incapable of providing the effective governance that might have been able to smoothen the most dramatic negative effects of the profound transformation process on which the country had embarked (III, IV). There are many obvious reasons for this state incapacity: Russians had very little experience of democracy and its related institutes,

54 such as a well-established division of power between various state organs, party politics, a fair and transparent administration, and a free and competent media space. Strong presidency: The extraordinary powers bestowed upon the presidency in the 1993 Russian constitution should probably be seen as a response to the weakness of the Russian state. Yeltsin, but also Gorbachev, supported the idea of a strong presidency to allow radical decisions on the many fundamental political issues lying ahead. The fact that so much power was invested in the president in a system with practically no experience of broad popular participation in politics may in the end have stabilised the transitional turbulence, but it also clearly hampered the development of democracy. While the formal structure of a democratic society was installed and sanctioned through the constitution, democratic agency was in practice held back (II, IV). Unclear role for the Duma and government: The constitutional choice expressed in the Russian constitution establishing a semi-presidentialist mode of governance in Russia with very strong powers invested in the presidency, in practice left both the legislature and the government in a kind of vacuum (IV). The result, especially during Yeltsin’s presidency, was poor policy performance. Policy elaboration and implementation: According to the 1993 constitution, Russia should be a multi-party system. But transforming the Soviet one- party system into a multi-party system cannot be done instantaneously. In a system where political partisanship (membership of the Soviet Communist Party) had been associated with privileges and – in the eyes of many citizens – corruption, incentives for engaging in party politics could not be expected to be very strong. Add to this the above mentioned “postcommunist disappointment” that could be seen as a factor behind the weakly developed Russian civil society from which members of a Russian multi-party system should be recruited, it must be expected that developing a well-functioning Russian multi-party system from the “grassroots” is likely to take quite a long time. In mature democracies, policy elaboration and implementation is greatly facilitated and good results are attained largely through the engagement of political parties and other civic organisations. In Russia, however, policy proposals are initiated and largely elaborated by various government agencies with due negative consequences for quality and the prerequisites for efficient policy implementation (II, IV).

4.3 The Russian Transition in Its Second Decade After a decade of transition, it was still uncertain whether or not the virtual economy was an institutional set-up that would be deeply and permanently entrenched and dominate the emerging Russian market economy with due negative consequences in terms of allocative efficiency (I, II). However, as

55 recent analyses have shown,27 developments in Russia indicate that enterprises tend to leave the virtual economy and increasingly behave in accordance with institutions governing behaviour in a market economy (III). In the political sphere, reforms have also been introduced with the purpose of advancing democracy and an efficient political behaviour (IV). President Yeltsin played an important role in establishing the Russian Fede- ration and securing its current constitution. But the Yeltsin administration had to make a number of concessions to different elite groupings in the Russian society, such as big business leaders (oligarchs), and regional governors (IV), thereby weakening state authority by not being able to establish a clear boundary between the public and private sector. In 1999, when Yeltsin prematurely resigned from his post due to failing health and transferred the presidency to Vladimir Putin, the latter soon made it known that he saw it as his primary task to consolidate the political power at the federal level by limiting the influence of the oligarchs and bringing regional jurisdiction into compliance with federal laws. Several far-reaching reforms have been introduced on all the three levels of action distinguished by Kiser and Ostrom (1982); the levels of constitutional, collective and operational choice. Taken together, the changes in the functioning of the emerging Russian market economy, which have taken place during the last 6–7 years, indicate a gradual dismantling of the institutional set-up governing the virtual economy (III). Reforms affecting the economic structure as well as actors’ market agency seem to have brought about a gradual improvement in the institutional set-up governing the functioning of the Russian market, making it increasingly similar to that of more mature market systems (III). Thus, for instance, barter trade, the perhaps most pertinent distinctive feature of the Russian virtual economy, seems to have largely vanished, as have payment arrears of various kinds. Money is being used in business transactions and enterprises use banks for arranging payments and, to some extent, obtaining credits. Since eliminating the large-scale geographical misallocation of investments – one of the most problematic legacies of the Soviet era – will take decades, employees still cannot, of course, stop worrying about losing their jobs, even if unemployment numbers have been reduced the last few years. The Russian economy is expanding with due increased demand for labour. But since the expansion largely depends upon the favourable development of world market prices of oil, a sustainable growth of the Russian economy is not guaranteed. An important consequence of the recent socio-economic development is that Russians are increasingly embracing a new and “market based” ideology.

27 A large number of publications analyzing recent developments in Russia have appeared in the 2000s. Much of this research has been of great value for the studies presented in this thesis (see, esp. Olsson, 2004; 2006, and articles III, and IV included in this thesis).

56 People’s mental models have changed when forced to find solutions to a whole set of previously unknown problems generated by the emerging market relations (II, IV). During Putin’s time in office the Russian presidency has become stronger than ever before. The benefit of this “super-presidency” has been a certain political stability making economic life more predictable and less vulnerable to unexpected events. This development has been good for economic performance, but it also entails a principal threat for the further democratisation in Russia (IV). Progress has also been made with regard to several other features of importance for an improved functioning of the Russian market economy. For instance, the institutions governing market exit, i.e., the legislation concerning insolvency or bankruptcy, have been reformed and even if all problems have not yet been solved, the reforms have led to less arbitrariness and bankruptcy procedures now seem less influenced by corruption (III). The lack of information about the functioning of various markets, which actually first and foremost is a problem of managerial competence, is partially being circum- vented through “holdingisation,” the tendency for large industries to incorporate smaller firms as subsidiaries (either through legitimate purchases or through “hostile takeovers” under the threat of bankruptcy), allowing the management of the subsidiary to continue handling the “technical side” of production while taking over the economic supervisory and planning functions to be performed by the more “market competent” management of the mother company. Recently, however, the Russian educational system seems to have responded positively to the increased demand for modern management education. With the disintegration of the Soviet Union, Russian enterprises inherited the responsibility of providing employees with various social services. This practice has still not been entirely discontinued, even if a process of divestiture seems to be underway (III). Such reforms are important since this is something that tends to blur the boundary between the public and the private sector with due problems of accountability. Administrative reforms affecting Russian municipalities are slowly being worked out and introduced, one of the difficult problems concerns taxation and budget revenues. Here more still remains to be done before the problem of social security provision has been finally solved (cf. Juurikkala & Lazareva, 2006). Despite the fact that much power has been concentrated in the Russian presidency it is still a fact that the Russian state is relatively weak. While the legislation regulating vertical powers, i.e., the relations between the Russian federal and regional levels, has been harmonized during Putin’s administration in the process curbing the powers of regional heads of administration (IV), there are still ambiguities concerning the division of power between the public and the private sectors. The extent to which (and how) the state intervenes in

57 the operation of the Russian economy and in individual enterprises has still not been sufficiently clarified. (One issue related to this has to do with changes in the state’s ownership of Russian enterprises.) While some of the problems of coordination that forest enterprises in the 1997–98 survey investigation (I) saw as pertinent, such as, finding sufficient quantities of raw materials, and violations of purchase and sales agreements, seem to have been largely solved, there remain other coordination problems that continue to sustain a behaviour characteristic of the virtual economy (III). Despite much new legislation, such as a new Forest Code and a new Tax Code, Russian enterprises’ behaviour is still to some extent governed by rules that are basically incompatible with what is considered normal in a mature market economy. So, for instance, as Gaddy and Ickes (2005) claim, there still is an ongoing non-transparent redistribution of resources from large prosperous energy industries (like Gasprom) to unprofitable enterprises, thereby main- taining certain characteristics of the Russian virtual economy. Another issue that still has not found a satisfactory solution has to do with the ability of the Russian political system to elaborate and implement efficient solutions to the problems besetting the economy. While the great powers concentrated in the Russian presidency might have brought benefits in the form of increased stability and a more transparent “vertical of power,” it can be argued that the potential capacities of a well-functioning democratic political party system and popular participation in the elaboration of market furthering policy reforms have not yet been fully explored. A strong civil society is seen as a prerequisite for the creation of more active party politics in Russia. However, Russian civil society is still inadequately developed (II, III), even if recent reforms may have made conditions for its future activity somewhat more favourable (IV). Reforms that were introduced only quite recently can be expected to significantly influence future developments of Russian political and economic life (IV). For instance, the formal underpinning of the Russian party system has changed rather strikingly through a series of reforms with expected effects to be seen in the presidential administration following the expiration (in the spring of 2008) of Putin’s second term in office. The requirements for establishing a political party in Russia have become more demanding. Parties should now have more registered members than was previously required as well as nation-wide presence. As a consequence the number of political parties has decreased significantly. Other legislative reforms have been introduced to the effect that, for instance, the use of administrative resources in election campaigns was forbidden; all candidates to the Duma must be elected through party lists with a seven per cent threshold (up from five) for political parties’ winning seats in the Duma; single mandate electoral districts have been abolished; and the option allowing citizens to vote “against all” in elections has been removed.

58 It is a matter of contention whether the reforms introduced are, in fact, contributing to a concentration of too much power at the federal centre. But the fundamental problem nevertheless remains: Russian citizens still have a very limited experience of participation in democratic governance. As citizens become more engaged in politics it could, therefore, be expected that many formal governance structures that have been established in Russia so far are likely to change so that they serve a continued democratisation and better correspond to citizens’ demands. The manoeuvring following Putin’s decisions in December 2007 relating to his succession (sanctioning Dimitry Medvedev as presidential candidate for the United Russia party, and accepting Medvedev’s subsequent invitation to become prime minister should the latter win the March 2008 presidential election) may eventually reflect upon the work of the Duma and the government. Exactly what will happen remains to be seen, but various possible scenarios suggest interesting alternative developments that, in principle, can change the power relations in Russian politics at least in the somewhat longer term. One of the more interesting options in this respect is to see whether the country will leave its semi-presidential mode of governance and opt for a more traditional parliamentary rule – a development that is likely to strengthen Russian democracy through stimulating popular participation in government at all levels. While this thesis has been primarily concerned with the many troubles of the Russian transition, it must also be recognised that quite a lot has in fact been achieved in the complex process of transforming the Soviet command system into a modern democratic market economy. For instance, just to mention some of the most significant achievements affecting the economy: Soviet style central economic planning has been abandoned, privatisation has corporatized most of the former state owned enterprises, and a flourishing small enterprise sector is emerging. Significant progress has also been made in the political sphere; a multi-party system is being established and free (even if not entirely fair) elections to the parliament and the presidency have been held several times already in accordance with the constitution. An independent civil society is emerging and press freedom has vastly improved compared to the situation before the disintegration of the Soviet Union. Considering the magnitude and difficulty of the task at hand these are remarkable achievements in a relatively short period of time. It is all too easy to only see the deficiencies of the previous transition process and the difficult remaining problems to be solved before Russia has been entirely converted into a modern democratic market economy.28

28 Two basically opposed psychological perspectives underlie and affect much of what is being written about the Russian transitional achievements. An illustrative example is given in the discussion between Nicolai Petro and Mischa Gabovitsch published in February 2006 on the openDemocracy website. Here Petro lists a number of achievements in the Russian transition that he sees as quite an accomplishment, while Gabovitsch cannot see the same achieve-

59 In terms of economic performance, Russia has recovered at a good pace after the dramatic recession that started with the disintegration of the Soviet Union in 1991, a recession that did not actually reach its bottom until 1998. Today, many economic indicators display a positive development. Total GDP (estimated at constant 1990 US dollars29) was 68 per cent larger in 2006 compared to 1998 (but only 1.7 % larger compared to 1991). But, still, the Russian economy is relatively small. Looking at the size of the Russian economy relative to that of the United States, it is found that Russia’s share increased from 4.5 per cent in 1998 to 5.9 per cent of the US total GDP in 2006 (in 1991 it was 9.4 %).30 This means that in 2006 the Russian economy was of approximately the same size as that of Australia, even though Russia has seven times as large a population as Australia. In terms of per capita GDP, which despite its many shortcomings perhaps is a more valid indicator of an economy’s potential to create welfare for its citizens, it can be noted that the Russian figures increased from slightly over 1,800 US dollars in 1998 (5.9 % of the US level) to close to 6,900 dollars in 2006 (corresponding to 15.8 % of the US level), which is still slightly below its level relative to the US in 1991.31 Thus, today the future prospects for the Russian economy seem bright, even if long term growth is largely dependent upon a continued restructuring making the economy less dependent upon the price and export developments of energy raw materials like oil and gas.

ments as particularly impressive. While, with a familiar metaphor, Petro sees the glass as half full, Gabovitsch obviously sees it as half empty. See articles on the openDemocracy website at http://www.opendemocracy.net/globalization-institutions_government/russia_3259.jsp; …/ reply_petro_3281.jsp; and …/russia_reply_3299.jsp (links last verified on Jan. 14, 2008). 29 Data showing the progress of the Russian economy were downloaded from the United Nations Statistics Division at http://unstats.un.org/unsd/snaama/selectionbasicFast.asp. 30 The United States has the largest economy of all countries in the world (measured as total GDP). It contributes around one quarter to the world total GDP (data from the UN as stated in the previous footnote). Next comes Japan with slightly over 10 per cent, followed by Germany with close to 6.5 per cent of world total GDP. Shares for most developed countries have remained largely stable since the beginning of the 1970s. Russia’s share was 2.4 per cent in 1991, 1.2 in 1998, and 1.6 in 2006. 31 It can be noted that a country like China, displaying a very rapid GDP growth in the 1990s, increased the size of its economy relative to that of the United States from 7.7 per cent in 1991 to 20.5 per cent in 2006. Thus, in this perspective one cannot say that the growth of Russia’s economy was very spectacular. We can also note, however, that, despite its rapid growth, per capita GDP for China was still only 2,050 dollars – or 4.7 % of the US level – in 2006.

60 4.4 Theoretical Contributions and Implications for Policy and Further Study In the following section (4.4.1), the contributions that this thesis has given to the literature in the field are reviewed and related to current theoretical discussions. Subsequently (in Section 4.4.2) some implications for policy that are induced by our analysis are discussed. Finally (in Section 4.4.3), some ideas are listed of pertinent problems requiring further study to improve our understanding of fundamental institutional transformation processes in general and the Russian transition in particular.

4.4.1 Theoretical Contribution First and foremost, this thesis has produced some empirically based findings concerning institutional obstacles for the development of an efficient Russian forest sector. The project of which this thesis is an outcome early on noted the significance of the theory of the Russian virtual economy advanced in 1998 by Clifford Gaddy and Barry W. Ickes.32 The theory was used as one of the basic foundations for the series of case studies of the institutional problems hampering the development of the Russian forest sector conducted in the period 1997– 2000 (cf. Appendix B containing a complete listing of publications produced in the project). In the summary report from these case studies (I) an early contribution was made to the empirical corroboration of the virtual economy theory. By analysing the results of the more than 220 interviews conducted with forest sector enterprises in eight Russian regions it was possible to distinguish and characterise those forest enterprises that were likely to restructure to become better adapted to market competition from those that tended to remain operating in the virtual economy shielded from a market competition they were not able to meet. No significant regional differences were noted in the material that was analysed indicating that fundamental factors disposing an enterprise to enter and stay operating in the virtual economy were not specific for the forest sector, but were ubiquitously distributed and influencing all Russian enterprises being unable to meet the emerging market competition. At the time of publication (2001) it was not clear whether the virtual economy would indeed be a “detour” – an odd enterprise behaviour, even a new mode of production, that would only be temporarily entrenched and subsequently abandoned in favour of a more market relevant enterprise behaviour.

32 A comprehensive presentation of the virtual economy theory is given in Gaddy & Ickes (2002b). A brief overview of the theory is given in Section 2.2 above, as well as in the appended articles I, II, and III.

61 In a later contribution (III) the first study was followed up to see if the behaviour of Russian forest sector enterprises had changed in the last 6–7 years and made them better able to meet market competition without falling back on behaviours typical of the virtual economy. On the basis of this study it was concluded that the virtual economy was on retreat, probably to eventually disappear, provided that the large rich energy enterprises operating in the market economy discontinued their practice of indirectly subsidizing inefficient, non- market viable enterprises. It was also concluded that the reason for this practice had much to do with the particular geographical distribution of production inherited from the Soviet Union, which is today a remaining huge obstacle for the development of an efficient market economy in Russia, an obstacle that it will probably take decades to finally eliminate. In an action oriented approach an attempt was made to initiate participatory policy processes with the purpose of elaborating implementable proposals for regional forest policies (II). Emanating from modern theorising on institutional change, this was an endeavour to engage regional forest sector stakeholders in so-called policy exercises with the purpose of stimulating the “bottom-up” crafting of new or changed institutions to guide actors’ behaviour in the Russian regional forest sector. It was found that the initial policy exercises worked as intended allowing the conclusion that policy exercises in principle could be seen as a useful tool for elaborating policy proposals with broad stakeholder participation. However, the initial policy exercise workshops did not, as was hoped, trigger a continued long term process. (A complete policy exercise is expected to require a long period – several months to one or more years – of organised work interspaced with several workshops to allow an adequate problem specification and elaboration of implementable policy measures.) The likely explanation for this failure was seen to be related to specific contextual factors, such as the limited financial resources of the external interventionist (in this case IIASA, an international research institute) for maintain- ing a long term activity, and the legitimacy of the external interventionist’s affiliation with forest authorities and stakeholder groups in the regions where the policy exercises were conducted.

The thesis has also reached some more general conclusions of relevance for the theorising on institutional change. The problematic notion of path dependence, as elaborated by Douglass North and many others, belongs to the most pertinent features discussed. The concept has been mentioned on several occasions in this thesis mainly as a short-hand for underlining the importance of history for current developments (see, e.g., Section 2.3 above and Section 2.1 in Article IV). Two citations from North (2005) exemplify some imperfectly understood features of path dependence, features that have been further illuminated in this thesis:

62 Path dependence is not “inertia,” rather it is the constraints on the choice set in the present that are derived from historical experiences of the past. Understand- ing the process of change entails confronting directly the nature of path dependence in order to determine the nature of the limits to change that it imposes in various settings. (North, 2005, p. 51) We have now come to understand enough about institutions to be able to pin- point the sources of poor performance. They have their origins in path dependence. We inherit the artifactual structure – the institutions, beliefs, tools, techniques, external symbol storage systems – from the past. Broadly speaking this is our cultural heritage and we ignore it in decision making at our peril – the peril of failing in our attempt to improve economic performance. The degree to which such cultural heritage is “malleable” via deliberate modification is still very imperfectly understood. At any time it imposes severe constraints on the ability to effectuate change. (North, 2005, p. 156) The findings reported in this thesis illustrate many aspects of the constraints imposed by path dependence on institutional change. But, then, the case at hand – Russia in transition from a command economy to a fundamentally different system – offers very special prerequisites for the study of path dependence. As has been argued, the emergence of the Russian virtual economy can be seen as a path dependent adaptation of the old command economy to the radically new conditions of market competition. Or, rather, it was a self-organising adaptation allowing market unviable old Soviet enterprises to survive (at least for a time) in the market environment rapidly emerging in Russia after the disintegration of the Soviet Union. It illustrates a situation in which most newly installed formal institutions were disregarded while actors continued to be guided by the familiar informal institutions that survived in the emerging Russian market system. One should beware, however, of the interpretation problem that arises from the fact that different “kinds” of path dependence are at play in this situation. Mantzavinos, North & Shariq (2004) distinguish between three kinds of path dependence, cognitive, institutional and economic, claiming that the latter (most rigid) kind results from the second kind, which in turn is a consequence of the first (and least rigid) kind (IV). Much of the difficulties with restructuring Russian enterprises to make them more market efficient had to do with the severely skewed (in the new market economy context) geographical allocation of production facilities that was a legacy of more than seventy years of Soviet central economic planning. At the onset of transition this structure could be seen as a historically determined physical restriction on available restructuring options – actually a result of economic path dependence – that in and of itself precluded a fast restructuring of the Russian economy, even if the “transitional turmoil” had already largely dissolved cognitive path dependence by proving citizens’ “mental models” inadequate to the task of coherently interpreting the new turbulent situation. It was soon obvious that the emerging market competition threatened to cause massive enterprise closedowns as a result of the fact that so many old (Soviet) enterprises were unable to achieve a fast restructur-

63 ing mainly due to inadequate management competence and lack of financial resources. In this situation actors’ behaviour (primarily at the levels of collective and operational choice) continued to be guided by informal institutions “surviving” from the Soviet system, a practice that soon established the specific institutional set-up that has been labelled the Russian virtual economy. This development actually exemplifies the power of institutional path dependence. Findings related to the transition in the Russian forest sector led to the conclusion that a lack of market relevant competence primarily on the part of enterprise managers – this lack is itself an example of economic path dependence – constitutes a severe obstacle for a continued modernisation of the sector. Even if actors immediately would realise the significance of this fact and everyone in society were to strive to remedy the problem by developing relevant educational programs (freeing themselves of the restrictions imposed by cognitive path dependence), it would still take a long time, probably several years, before these measures would produce a significant impact. In the meantime actors’ behaviour would be guided by the formal and informal rules that were available to them (a result of institutional path dependence). For example, as was observed in appended Article III, “holdingisation” in the Arkhangelsk forest sector – that is, the tendency of large FIGs to incorporate many smaller forest enterprises (typically harvesting enterprises) – provides examples of two kinds of path dependence. The inadequate management competence in the subsidiaries is a result of economic path dependence. As a consequence of becoming part of a holding company managers in the subsidiaries can go about their job much in the same way as during Soviet times, i.e., mainly concentrating on production technicalities and leaving decisions requiring special competence in business economics to the management of the holding company. In this case, the managers of subsidiaries do not have to question the old mental models they use to interpret reality. Instead they can stick to the Soviet management style they are used to – a solution that makes use of and conserves cognitive path dependence, despite the dynamic transition process that tends to expose the inadequacy of old mental models. Observations reported in our studies (primarily Article III and IV) also indicate that the “cultural heritage” in North’s parlance (cf. citation above), institutions included, is in fact to a significant degree “malleable” via deliberate modifications. As has been noted, policy reforms, enacted primarily by the Putin administration, have indeed produced tangible outcomes resulting from the fact that new or modified institutions have been introduced to guide actors’ behaviour both in the Russian economy and in politics. A complicating factor is that observable outcomes may be the result of a combination of various institutional changes, and since the interdependencies existing between various institutions are not easily understood, it is not always clear exactly to which institutional change (or changes) a certain outcome could be attributed. Further-

64 more, this also illustrates the fact that tangible changes in economic or policy outcomes are often the result of incremental changes in several institutions. Thus, it is the combined effect of incremental changes in many institutions that produce a specific outcome. This is in line with propositions advanced, for instance, by North (1990; 2005), Streeck & Thelen (2005) and Boas (2007), suggesting a solution to the dilemma inherent in the claim that path dependence fosters institutional continuity while it simultaneously can accommodate change. The above examples of various kinds of path dependence suggest some tentative conclusions with regard to institutional change corroborating the ideas advanced by North and colleagues (see, e.g., Mantzavinos, North & Shariq, 2004; North, 2005). The three kinds of path dependence seem related to specific time frames or temporal scales. Features of a particular situation being the result of economic path dependence are the outcome of comparatively slow processes establishing a rigid structure that will restrain actors’ behaviour for a long time. In comparison, cognitive path dependence, resulting from different actors’ tendency to interpret specific situations in a similar way thus establishing shared mental models, takes a comparatively short time to emerge and seems less permanent. The implication is that cognitive path dependence can be “dissolved” in a fairly short time under the pressure of events that cannot be satisfactorily interpreted with the help of existing mental models, or, possibly, as a result of human action based on a radical reinter- pretation of familiar events or situations. Thus, to achieve institutional change, which actually amounts to breaking out from institutional path dependence, one must focus on actors’ learning that changes their ways of solving common problems, establishing new shared mental models. This is actually a powerful argument for stimulating broad popular participation in policy elaboration processes. Of late, the importance of the state for the outcome of the transition process has been given increased attention (cf., for instance, Grzymala-Busse & Jones Luong, 2002; Bunce, 1999; 2004; Colton, 2006). In the early stage of transition, when a multi-party system, free elections, etc., were introduced, (western) research initially focused on society, its citizens and organisations, rather than on the state and its agencies, which had been at the centre of attention in the earlier dominating “top-down” oriented studies of the Soviet Union. With the transition to a democratic market system it was now felt that the state rather was a part of the problem that had to be cured (Colton, 2006). Research and foreign aid alike, therefore, were mainly concerned with issues of agency, leaving issues of governance, state agencies, public policy-making, etc. without much attention at all. The state – its authority and capacity, as well as its relation to society (accountability, legitimacy) – will necessarily occupy a central position in an institutional approach to the study of the Russian transition. In this thesis the

65 Russian transition was seen as a fundamental change in the institutional framework governing actors’ behaviour in economic and political markets. The state is the structure within which formal institutions (such as new legislation) are typically elaborated and adopted and state agencies are to guarantee rule enforcement. As in many other studies of the Russian transition the state’s limited ability to fulfil its obligations with regard to rule enforcement was noted here as well (I, III). The Russian state that emerged at the onset of transition on the basis of the highly centralized Soviet state must be characterised as ineffective or weak. As a consequence the state was incapable of preventing or limiting the organisational turmoil unsettling developments after the disintegration of the Soviet Union. The inability to guarantee the changed property rights – perhaps the most significant institutional change in the Russian transition – can be seen as a prime example of state incapacity, ultimately underlying the emergence of the virtual economy. In the last 6–7 years, however, it can be noticed that the Russian state has been significantly strengthened – a development that has much to do with the concerted efforts of the Putin administration to establish a clear “vertical of power,” especially between federal and regional state agencies (IV). This has strikingly reduced the “organisational turmoil” and seemingly improved the rule of law thus creating more favourable prerequisites for establishing well- functioning institutions to guide actors’ behaviour in the Russian economic and political markets. Arguably this development has also significantly contributed to the ongoing dismantling of the Russian virtual economy (III). The importance of a well-developed and active civil society for the development of democratic governance has been amply demonstrated by researchers in the last twenty years or so. In this thesis, especially in Articles II and IV, it was concluded that Russian civil society organisations need to be strengthened in order to become better able take an active part in political life, thus improving the prerequisites for a democratic development in Russia. An active civil society would stimulate party politics in Russia and it would constitute a basis for participatory policy processes that are important for the development of efficient and implementable public policies. It would also contribute to creating an increased social trust in the Russian society.

4.4.2 Policy Implications The fact is that the Russian transition is not yet over. As was argued (III, IV), the process is likely to continue for years, perhaps even decades yet, if Russia is to be transformed into a modern democracy with an efficient market economy. This prolonged process primarily depends upon the inefficient geographical production structure that is a legacy of the Soviet era, the problematic consequences of which it will take a very long time to neutralize. In the meantime far-reaching policies will have to be elaborated and implemented to

66 stimulate and support economic restructuring. This means that there will continue to be a high “change pressure” in Russia, something that may be quite strenuous both for enterprise managers and employees risking to cause a “transitional fatigue” that might turn public opinion against a continued transformation of the Russian economy. In order to avoid such a development, which would be highly detrimental for the future welfare of the population, measures should be taken to ensure that the benefits of the transition are fairly distributed among all citizens. In fact, most of the policy implications to be discussed in the sequel have a bearing on this problem. Basically, it is a matter of ensuring popular legitimacy for the goals and means of the transformation programmes. In the narrowest sense, based upon the improved economic performance that the transition process eventually will stimulate, Russian enterprises must favour their employees by offering better material conditions, such as higher wages and a supply of good quality commodities and services that fully meets consumer demands. But this is probably not enough. To secure broad public support for the continued transition Russian state organs at various levels (the parliament, government, and president, as well as the multitude of state agencies) must also perform well in the eyes of ordinary citizens. As recent research indicates (cf., for instance, Rothstein & Teorell, 2005; Rohrschneider, 2005) the state must not only do good with the power that is bestowed in it for citizens to find it legitimate, it must also be good. It is not only the resulting output of state led activity (such as public policies and welfare enhancing infrastructure) that counts; citizens must also see the processes or procedures through which the state (by providing rules/institutions and by the work of state agencies) produce this output as impartial. However, developing necessary prerequisites for impartial institutions and an impartial behaviour on the part of civil servants is likely to take a long time. Conditions are especially unfavourable in a country like Russia with its recent history of undemocratic rule and remaining culture of strong patron-client relations. This fact may even be part of the reason for the surprisingly strong popular support for the Putin administration. In the time it takes to establish the necessary conditions for state legitimacy, people support the strong leader who is seen as the epitome of state power and the guarantor of order and stability and a degree of solidarity with ordinary citizens in an otherwise difficult-to-understand and turbulent environment. To maintain necessary legitimacy for the state power and establish its popular support in the longer term it would seem that the administration (not least the president himself) should explore ways to foster favourable prerequisites for establishing impartial governance in Russia. However, popular legitimacy for the state and a fair distribution of the transition benefits will probably not be enough for successfully coping with the tensions that are likely to be caused by the continued “change pressure” in the Russian society. Ultimately, what is required is a general attitude among all

67 Russian citizens – those who govern as well as those who are governed – that supports and helps develop a readiness and an ability to flexibly seek solutions to the greatly varying kinds of problems and crises that are sure to emerge in a society undergoing rapid transformation. Berkes (2002) has called this quality adaptive capacity and he sees it as important for the emergent quality of resilience in complex systems. While Berkes’ treatment of the concept remains closely related to properties and behaviour of complex systems, North (1990; 2005) discusses much the same quality, which he calls adaptive efficiency, referring to qualities of the “institutional matrix” of a society. The institutional framework of societies characterised by adaptive efficiency – to this group belong most economically advanced democratic states – is well-established and stable, but at the same time flexible enough to allow changes or modifications of rules that society need in order to accommodate fundamental economic change. Or, as North (1990, p. 81) has put it: Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems. We must also learn from failure, so that change will consist of the generation of organizational trials and the elimination of organizational errors. This is a very “demanding” quality of the institutional framework which it takes a long time to foster. To this quality belong (cf. North, 2005, pp. 107–8) established social norms (belief systems) restraining the behaviour of political officials; constitutionally assigned citizen rights and limits on government decision-making; well defined property and personal rights; and credible state commitments to respect these rights “providing protection against opportunism and expropriation by public officials.” The difficulty of establishing such an advanced institutional framework, where the formal rules are not only well specified, but are also (p. 108) “undergirded by strongly held social norms that imbed these values in the culture of the society” leads North to the following speculation: Because this cultural conditioning of a society usually takes place over generations it is fundamentally difficult to establish stable consensual order in societies that have experienced persistent disorder. In such cases authoritarian order may very well be preferred by the members of that society. Again, this suggests an explanation of President Vladimir Putin’s high popularity among Russian citizens. The question emerging from the above discussion is: in what way (if at all) can public policy contribute to the creation of the special institutional qualities that are a necessary prerequisite for improving the adaptive capacity (or adaptive efficiency) of the Russian society? Clearly, an improved adaptive capacity will be valuable when seeking solutions to the many problems Russian society will face in its continued development towards democracy and an efficient market economy. Realising that developing the specific qualities of the

68 institutional framework that will make it conducive to adaptive efficiency will take a long time and that these qualities are emergent properties of a culturally embedded evolution does not mean that nothing can be done to foster the process. Institutional path dependence must somehow be reduced to accommodate the qualities making for adaptive efficiency. In the case of Russia, where an adequate formal institutional structure is largely in place, what is primarily required are changes in agency, that is, a greater willingness and commitment among a majority of Russian citizens to take part in public life. But citizens’ engagement in public life is conditioned by ideology, or the shared mental models people use to solve tasks they are faced with in their everyday life – actually an expression of cognitive path dependence. To achieve changes in agency that might stimulate adaptive efficiency in society, at least two conditions must be met: first of all a significant share of the population must recognise the relevance of such a strategy; and, second, cognitive path dependence must be challenged. Improving citizens’ competence regarding the principles and workings of democracy and market economy can contribute towards meeting both these conditions. Special educational programmes and various learning-by-doing activities among broad groups of citizens are likely to make significant contributions towards such a goal. These are activities that naturally must be performed by the public educational system. But first and foremost it should be a task for civil society. In general, the adaptive efficiency of a society will most likely improve with increased citizen participation in public life. Such participation is mainly channelled through civic organisations (IV). Stimulating the underdeveloped civil society must, therefore, be an urgent goal for public policy in contemporary Russia. Even if such a goal is present in the rhetoric of the president and various political leaders, the task will not be easy to perform in a society where most citizens are still unaware even of the meaning of the concept of civil society (Jagudina, 2005), and only a very small share of the population is actively engaged in the work of civic organisations. Thus, an important task for civic organisations and people engaged in their work should be to demonstrate the significance of citizen participation in public life. Civic organisations should also make use of various “disruptive events” – events which are actually quite frequent in a society undergoing rapid transformation such as Russia – in order to demonstrate the value of popular engagement in solving social problems. Civic organisations could also increase their engagement in activities handled by various state organs. Citizens taking an active part in assisting the work of the police, as investigated by Taylor (2006), is but one example of possible direct cooperative engagement in state affairs that helps improving state-society relations which are still severely underdeveloped (IV). Transparency is a catchword describing a quality of society that is decisive for the successful implementation of all the above mentioned policy measures. The simple meaning is that public affairs should be public, in the sense that

69 citizens should have full access to information concerning public decision processes. Stimulating popular participation in political life is ineffective in the absence of transparency. It should be recognised, however, that transparency also can make a society vulnerable to hostile interventions, in the form of criminal activities or external threats. On the other hand, if transparency is low, corruption will eventually permeate and degrade the entire society. In this study it was especially noted how the still ongoing non-transparent redistribution of resources in the form of energy deliveries at lower-than-market prices to unprofitable enterprises is a prominent feature sustaining the Russian virtual economy (III). Making such redistribution entirely transparent would allow a proper assessment of the situation and well-founded decisions about the future of the phenomenon. Increasing transparency at all levels of public decision-making should go hand in hand with the fight against corruption. Corruption is a prominent feature of the Russian transition (Glinkina et al., 2001). That the “transitional turmoil” should open great opportunities for corrupt behaviour is hardly surprising. Basically, according to a somewhat simplified logic, corruption in Russia should decrease with the advancing transformation of society towards an efficient democratic market system entailing decreased transaction costs that would remove a prominent cause of corruption. But there is also a more disquieting perspective, according to which corruption is a truly endemic phenomenon originating in Soviet times and pervading the entire Russian society, from its leaders to its citizens. As has been indicated by, for instance, Wilson (2005), Dininio and Orttung (2005), Stefes (2006) and Cheloukhine & King (2007), adopting such a perspective would probably lead to a radically different analysis of the Russian transition process. More precisely, standard economic and political science analytical theories and techniques developed in (and for) the west may turn out to be of little use for analysing post-Soviet developments.

4.4.3 Ideas for Further Study Many of the findings reported in this thesis call for further study. Some topics of special interest in the Russian context are suggested in this section. The discussion is divided between (A) ideas directly following from the study reported in this thesis suggesting topics of immediate concern; (B) ideas for the study of topics related to the long term development of the Russian transition process; and (C) ideas for the study of topics of general theoretical significance concerning institutional change and the establishment of adaptive efficiency. (A) The last two appended articles analysed recent developments in the Russian transition establishing the tendency of the virtual economy to be dismantled (III), and assessing the likelihood of recent structural reforms to make the Russian political market more democratic and efficient (IV). Our findings

70 indicate that progress will continue on both these fronts. Much will depend upon what will happen with the further implementation of reforms introduced quite recently by the Putin administration. Following developments as they unfold in the coming few years will show if the Russian transition process will entail an improved democracy and market economy. Specific questions to study in this context include: Will the retiring president’s future engagement in parliamentary politics produce a change in the division of power between the legislature, the executive and the judicial organs of the state? What will happen to party politics in Russia? Will political parties take on the ideology-shaping and policy-formulating tasks that are central to political parties in advanced democracies? Will the reform tasks suggested in the yearly presidential addresses to the Federal Assembly actually be elaborated into a political programme (“Putin’s Plan”) for the United Russia party? An obvious remaining research task would be to finish the investigation that was started in Article IV, where the structural changes affecting the Russian political market were analysed to see whether these changes actually improved the prerequisites for efficient political market operations. To complete the analysis, the impact of agency should also be taken into account. Thus, the dynamics of actors’ behaviour in the Russian political market should be investigated. This would entail a study of the actual behaviour – including its motives, and consequences – of different actors in the Russian political market, such as the president, the government, the parliament, political parties, enterprises, trade unions, and ordinary citizens (voters). The task would be to see if and to what extent the behaviour of various actors is guided by established formal institutions and whether (and how) actors’ behaviour has triggered changes in the formal institutional set-up. (B) Another set of issues meriting further study are related to features affecting the long term transition process in Russia. Assuming that the process of dismantling the Russian virtual economy will actually continue, issues of economic governance and policy formation will become pertinent. An important feature to analyse in this context will be the character of the relation between political and economic power in Russia? What will determine the future development of this relation and where is it heading? The development of citizens’ legal consciousness is central for the Russian constitutionalisation process and the introduction and refinement of the rule of law. These are factors that basically determine Russia’s future development towards democracy. What influences legal consciousness among Russian citizens? Can legal consciousness in Russia be increased through policy, and – if so – how? The way in which the constitutionalisation process develops and the results it produces largely determine the degree of social trust that will emerge in the Russian society. Social trust is decisive for the cohesion of a society and, even if it is an outcome of the constitutionalisation process, it is at the same time

71 important for the possibility to engage citizens in politics, for stimulating participatory governance. Will it be possible to establish a political culture in Russia that enables and stimulates popular participation in public policymaking? How can this be done? Transitional Russia, being a society with semi-presidentialist governance characterised by low adaptive efficiency and a weakly developed civil society, seems to be increasingly falling back on autocratic rule, a development that offers a good opportunity for studying the role of “strong individuals” in profound social change processes. What determines the political influence of the strong individual compared to the influence of various groups, such as political parties, different kinds of interest groups, professional organisations, and groups with special relations to the strong individual (“clans”)? What determines the dynamics of such systems? Under what conditions can autocratic rule be transformed into democratic rule? How could this process be fostered in Russia? (C) Finally, some topics of a more general theoretical interest could be mentioned. The manner in which institutions change is still not well understood. As was noted above institutional change may be the result of incremental changes in many different but interdependent rules-in-use. But how do these incremental changes come about, how to understand the interdependencies and make sense of their emerging outcomes? Recent theorising and empirical studies of the various processes through which institutions may change (cf. for instance, Streeck & Thelen, 2005) could be applied to the dynamic Russian situation. So, for instance, phenomena like institutional displacement, layering, drift, conversion, and exhaustion should be readily discernable and possible to analyse in the Russian situation, hopefully producing better general insights in the problem of institutional change. Another crucial problem concerns the low adaptive efficiency that characterises Russian society today. To be able to cope with crises and improve economic performance in the longer term a society has to foster the specific qualities of its “institutional matrix” (North, 2005) that promote adaptive efficiency. As was noted above, such qualities entail well-established belief systems restraining the behaviour of political officials, constitutionally assigned citizen rights and limits on government decision-making; well defined property and personal rights; and credible state commitments to respect such rights. The question is how such qualities could be advanced in present-day Russia. Can these qualities be promoted by deliberate policies? What would be the content of such policies? Which actors in the Russian socio-economic system would be capable and willing to initiate and endorse such processes? A continued Russian transition towards an efficient democratic market economy must proceed under the restricting conditions imposed by the existing complex centre-periphery relations defined by the constitutionally sanctioned federal order. Early on during the transition the federal order was threatened by

72 regional governors’ efforts to promote their own regions without much consideration of the consequences for other regions or the federation at large. As was noted in Article IV, a more orderly “vertical of power” has subsequently been established mainly during the Putin administration. However, with so many large and resource rich regions, it can be expected that relations between the federal centre and the regions will continue to cause tensions also in the future. Furthermore, with continued democratisation in Russia, it can only be expected that certain changes in governance that are becoming prominent in many advanced democracies will also begin to make an impact on developments in Russia. These are changes that entail shifts in intergovernmental relations, establishing what has been labelled multi-level governance, a development provoked by the fiscal crises that states have experienced in the last 10–20 years and the fact that the national state is not anymore the only ruling institution; today transnational institutions (like the EU) have also become very influential. As Peters and Pierre (2001, p. 131) note, “we have been witnessing a development from a ‘command and control’ type of state towards an ‘enabling’ state, a model in which the state is not proactively governing society but is more concerned with defining objectives and mustering resources from a wide variety of sources to pursue those goals.” This development is currently re-defining relations between various levels of government, promoting negotiated, non-hierarchical exchange between institutions at the national (federal) and subnational (regional and local) levels. Another, and intrinsically related, approach to policy-making based on what Crozier (2007; 2008) has called recursive governance emerging from the dramatically increased use of new modes of communication and communications expertise in politics and policy formation, could be used in a study of the development of Russian policy-making procedures embedded in the existing complex federal-regional-local governance structure. It would be interesting to assess to what extent the principles and practice of multi-level and recursive governance are making an impact on Russian intergovernmental relations and policy-making, and to explore possible future scenarios of how Russian federal-regional relations, in which multi-level and recursive governance are applied, may produce fair and efficient policy procedures and outcomes.

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EUROPE-ASIA STUDIES, Vol. 53, No. 6, 2001, 841–867

The Russian Detour: Real Transition in a Virtual Economy?

LARS CARLSSON, NILS-GUSTAV LUNDGREN & MATS-OLOV OLSSON

Why is the Russian Bear still asleep after ten years of transition?

RUSSIA HOLDS A TREMENDOUS AMOUNT OF RESOURCES—minerals, oil, forests etc. For example, its forests are dispersed over 11 time zones on a territory that contains more than 20% of the world’s growing stock (Nilsson & Shvidenko, 1998). One has to multiply the Canadian forest resources about three to four times to reach the volumes encountered in Russia. An efcient but sensible exploitation of these resources could serve as a driving force in the transition towards a market economy that started with the dismantling of the Soviet state in 1991.1 However, after almost 10 years of transition, timber production is smaller than ever. For example, in Arkhangelsk,2 one of Russia’s largest forest regions, harvesting reached a peak in 1987–88 with a total of around 25 million m3. Since then cutting has decreased signicantly, and in 1996 the harvesting level was only about 29% of that in 1988. Between 1990 and 1996 the production of commercial wood dropped from 19.4 million m3 to 7.2 million m3 and in 1994 production fell below the 1940 level. The situation is virtually the same for the whole of Russia (Moiseyev et al., 1998, pp. 21 ff.; Carlsson et al., 2000). By virtue of its former importance in the Russian economy and its future prospects for wealth creation the forest sector is a good illustration of the Russian dilemma. The nation seems to have it all: resources, people, endless needs to be fullled and, compared with many poor areas of the world, a production apparatus already exists, however underutilised. Yet, despite deliberate efforts to induce the ‘blessings’ of capitalism, the Russian Bear still seems to be asleep. How can this be explained? Answering this question is the task of this article. Presumably the answer is relevant not only for the forest sector but for other sectors of the Russian economy as well. The article aims at increasing our understanding of the creation of a market economy by providing the fundamental insight that there are no easy top-down procedures that automatically lead to this goal.

ISSN 0966-8136 print; ISSN 1465-3427 online/01/060841-27 Ó 2001 University of Glasgow DOI: 10.1080/0966813012007852 2 842 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

Institutions and the development of markets It has been argued that a general problem with many of the proposed measures for improving the situation in Russia is that they presuppose the existence of an already well-functioning institutional framework (North, 1997; Brezinski & Fritsch, 1997; Carlsson & Olsson, 1998a; Stiglitz, 1999; Carlsson, 2000). This objection is easy to understand if one appreciates that institutions should be understood as ‘the rules of the game’ in a society, not as organisational entities (North, 1990; Crawford & Ostrom, 1995). Thus an institutional framework consists of those formal and informal rules that de facto are used by a set of actors. More precisely, institutions can be dened ‘as the legal, administrative and customary arrangements for repeated human interactions … the prevailing institutional framework in a society consists of formal and informal rules’ (Pejovich, 1998, p. 23). This implies that the institutional framework of a society is composed of a large number of institutions. Ramazzotti (1998) discusses the idea of dominant institutions or a dominant institutional setup, i.e. ‘one which is both persistent over time and extensive over economic space. It is the one most likely to affect a great deal of other institutions and related setups’ (p. 7). Thus we can conjecture that the reason why vital markets, for example, in the forest sector, have failed to appear in Russia is because a dominant institutional setup still exits that negatively affects the new and more market-oriented institutions. If so, an overarching institutional umbrella might effectively nullify the restructuring efforts that have been pelting it for almost 10 years of transition. To summarise, the reason for the fact that economic development has failed to generate welfare for the Russian people is to be found in its institutional framework. Institutions make the world predictable. In a market economy, institutions, such as the bank system, commercial law, conduct of trade, well-dened property rights systems etc., are essential. For example, a reliable credit system distributes economic risks among parties. Thus resources can be acquired on xed terms, rms can condently make investments and plan for the future, and so forth. A basic assumption behind any suggestion to deliberately change institutional arrangements is that institutions affect strategic choice and that the behaviour of each actor depends on his or her expectation of what others may do (cf. Coleman, 1988, 1990; Knight, 1994; Benham et al., 1995; Gaddy & Ickes, 1998b). North (1997, pp. 2ff.) has suggested four institutional features that are associated with low-cost transaction and creditable commitment, so essential for the functioning of any market economy:

· the cost of measuring, · the size of the market, · enforcement of rules, · attitudes and perceptions.

The rst, the cost of measuring, has to do with the fact that when no, or poor, standards exist with regard to the quality of goods and services, the behaviour of agents etc., every single transaction might be subject to endless deliberations. The same applies when property rights are ill-dened. For example, in the Russian forest THE RUSSIAN DETOUR 843 sector no branch organisations, such as, for example, the Scandinavian forest measuring societies, have yet been developed, and it is a well-known fact that property rights are poorly dened (Sheingauz et al., 1995; Petrov, 1997; Fell, 1999). The second feature is the size of the economy. When interpersonal exchange dominates, friends, relatives or clans are the main players. When markets grow exchange becomes more impersonal and more elaborate (and expensive) ways of constraining the parties might occur. However, market competition has demonstrated its capability to (cheaply) constrain the actors. The third feature is the enforcement of rules. When parties dispute or break the rules they should have recourse to cheap ways of solving their differences. This is the logic behind the idea of third-party solutions. The legal system in a society performs this function. It should also be emphasised that the cheapest enforcement occurs when people have internalised certain kinds of behaviour as norms. When it comes to the Russian forest sector we have strong indications that the third prerequisite, that of effective enforcement, has still not been developed (Hendley et al., 1997; Hendley, 1998; Fell, 1999; Hendley et al., 1999; Pappila, 1999). The fourth feature of importance for understanding institutions and the development of markets has to do with the mindset of the actors. Many authors have emphasised the cultural aspects of the Russian people as an important ‘variable’, and perhaps also an obstacle, for transforming Russian society to a democratic market economy (Kaminski, 1992; Kharkhordin & Gerber, 1994; Benham et al., 1995; Obolonsky, 1996; Gareyev et al., 1997; Jensen, 1997; Kennaway, 1997). Two main attitudes prevail, one emphasising the special experiences of almost 80 years of ‘Soviet thinking’ and the other stressing the inheritance from the period before this, from Tsarist times. In essence, however, both lines of argument are based on the same idea of a still existing collectivist attitude pulling in another direction than what is suitable for the current transformation of society. This attitude tends to foster and retain rules that are not suitable for a market-oriented forest sector. In this connection the problem of trust is central (Rose et al., 1997; Huemer, 1998; Mishler & Rose, 1998; Fell, 1999). Clearly, beliefs and attitudes nourished during decades of communist rule still prevail and affect people’s conduct.

While the subjective models individuals employ may be, and usually are, a hodgepodge of beliefs, dogmas, ‘sound theories’, and myths, there are usually elements of an organised structure to them that make them an economising device for receiving and interpreting information (North, 1997, p. 9).

Although formal rules may change overnight as the result of political or judicial decisions, informal constraints embodied in customs, traditions, and codes of conduct are much more impervious to deliberate policies (North, 1990, p. 6).

How do we identify movements towards markets? It would be presumptuous to assess Russia’s performance simply by comparing it with the situation in Western countries. The evaluation criteria that we use should therefore rather be seen as a set of ‘baseline principles’. Thus we assume that a 844 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON specic institutional conguration is conducive to a sustainable Russian forest sector and useful for the whole economy if the following conditions are met:3

· constitutional rules are acknowledged and transparent, · the structure of property rights is settled and well-dened, i.e. private actors can acquire property or get the right to utilise property for their own benet, · rules and regulations from ofcial authorities are regarded as legitimate, and apply equally to similar actors, · the market decides the price of property and goods, · decision making regarding collective choice and operational rules is decentralised, · private investors can realise the returns on their investments, · rules are enacted aimed at preventing the devastation of natural resources, · legitimate authorities take measures against violations of rules.

In the subsequent parts of this article we shall illustrate what has been demonstrated in our previous studies,4 namely, that these criteria are poorly met in the Russian forest sector. This article, like the whole investigation, is based on the fundamental assumption that efcient markets are built from below, albeit with the assistance of the political structure, and that the central actors in this ‘construction project’ are the managers of individual rms.

Market building and the virtual economy The guiding hypothesis explaining why vital markets have failed to appear in the forest sector is that enterprise managers generally have weak incentives to restructure and thereby to reduce their rms’ distance to the market. We conjecture that the behaviour in the forest sector is basically dictated by the logic of the ‘virtual economy’ as described by Gaddy & Ickes (1998a). In line with this theory, the main reason why the forest sector does not seem to move towards a market economy, i.e. why rms have not yet restructured in order to shorten their distance to the market, is that the virtual economy provides an incentive structure which, in fact, discourages managers from doing so. Consequently, the current failure in the forest sector cannot be explained by bad management, lack of money or absence of customers. Neverthe- less, some argue that the ‘lack of money’ in the forest sector should mainly be blamed on bad management. This argument might have some merit, but it is more likely to confuse us regarding the institutional aspects of the problem. In order to understand some of these institutional hurdles one must start from the assumption that individuals act in a rational way, under given circumstances. Thus, with Gaddy & Ickes (1998b, p. 2), we assume ‘that managers are rational and that the environment induces them to postpone (avoid) restructuring’.5 Being one of the cornerstones in the former socialist economy, the forest sector is an especially good ‘case’ for testing this hypothesis. It can also be assumed that the forest sector is a fairly good representative for the industrial sector in general and that our conclusions will be relevant for other sectors of the Russian economy as well. What are the characteristics of a virtual economy and what logical effects on business behaviour would such an economy have? THE RUSSIAN DETOUR 845

The new system can be called Russia’s virtual economy because it is based on an illusion about almost every important parameter: prices, sales, wages, taxes, and budgets. At its heart is the pretence that the economy is much larger than it really is. This pretence allows for a larger government and larger expenditures than Russia can afford. It is the real cause behind the web of wage, supply, and tax arrears from which Russia cannot seem to extricate itself (Gaddy & Ickes, 1998a, p. 1). This type of economy might continue to work only if it is insulated from market competition, e.g. through an extensive use of barter, which effectively breaks the market-based price signals and allows the use of ctitious prices of goods and services quite separated from their market values. This practice maintains the ‘pretence’ of value creation, while industry might in fact be a ‘value destroyer’ (Gaddy & Ickes, 1999a). Consequently, if this assumption is right, there are ‘hoards’ of would-be unemployed workers, engineers, bureaucrats etc. in Russia today.

Business behaviour in a virtual economy The managers of Russian enterprises have strong incentives to continue to run their rms independently of their protability. The social responsibilities associated with running rms are part of the explanation. Our investigations, as well as other studies, show that barter, tax offsets and other non-monetary solutions are common features in enterprises’ activity. In addition, the lack of effective bankruptcy and arbitrage systems contributes to postponing ‘creative destruction’ of rms in the sense Schum- peter envisaged as a driving force of a market economy (Swaan, 1996, pp. 229 ff.). Thus rms can continue to produce although their outputs are paid for by other means than with cash. Such production is aimed at generating ‘soft goods’ that can only be traded in virtual ‘quasi-markets’ rather than in real commercial markets. Why then do managers avoid restructuring? Most Russian forest rms have a substantial distance to travel before they can meet the demands of competitive wood markets. Their rst option should be to invest in making production more effective but, as we have discussed above, this solution has its own problems. The other option, according to the Gaddy & Ickes (1998b) virtual economy theory, is to invest in ‘relational capital’, e.g. to perform services for the local authorities, to negotiate for privileges, etc. (Figure 1). Thus the more fraternising with bureaucrats, the more tax offsets, privileges etc. one can obtain, the more investments are made in this kind of ‘capital’. Moreover, and given the fact that in most cases the distance to competitiveness is signicant, such ‘investments’ are cheaper and thus preferred. These circumstances have the nasty effect that we cannot, in fact, conclude that an enterprise that shows relatively high production volumes is more successful than a similar enterprise producing smaller volumes. Such an enterprise might as well be a ‘value destroyer’ and a producer of ‘soft goods’ still having a long distance to travel before it can survive in a competitive market. Whether forest rms choose to invest in relational or physical capital depends, among other things, upon the initial (inherited) stock of such capital in their possession. The managers will simply prefer the type of investment that is most protable and it is obvious that the Soviet type of integrated forest industrial system 846 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

FIGURE 1. BUSINESS BEHAVIOUR IN A VIRTUAL ECONOMY (AFTER GADDY &ICKES, 1998b).

(that was inherited in 1991) provides a rich fund of relational capital from which to prot. It should be emphasised that the slope of the viability line in Figure 1 basically reects the institutional setup. The more rms have to invest in relational capital in order to stay viable the steeper the line would be. This also tells us that the intercept point to some extent could be regarded as the ‘corruption level’. However, even in a society with very low corruption rms must invest in relational capital, such as networking or goodwill activities. The restructuring boundary in Figure 1 is the demarcation line separating rms that would engage in restructuring rather than make relational investments (Gaddy & Ickes, 1998b, p. 25). To summarise, whether a rm chooses one strategy before another depends on where it is located in the space in Figure 1, i.e. it depends upon the quality of the capital it already possesses, and the costs for moving in one direction or the other, as well as on how its investment decision will inuence future protability. Why should a director strive to generate cash if this money ends up in the hands of tax authorities or in the pockets of criminal groups? Moreover, it is risky to be the rst to enter a world of uncertainty: Enterprises that move too fast to the market economy bear a disproportionate share of the tax load. Thus the decision to invest in distance reduction depends on expectations about what other enterprises will do. This is why multiple equilibria arise…. If all other enterprises chose to keep Dkt 5 0 [i.e., no investments in tangible capital] then an enterprise that invests faces high taxes which make no-investment the dominant strategy for the enterprise. If all other enterprises are investing, however, informal activities may be very costly, and hence formal production may be the dominant strategy for the enterprise (Gaddy & Ickes, 1998b, p. 27). Cooperation is an evolutionary product, but the Russian state is ‘new’ and the present situation in Russia might as well be characterised as a kind of Prisoner’s Dilemma, i.e. a dominant, negative equilibrium exists. In such a world it is better to defect independently of what the other players do. In his seminal book, The Evolution of Cooperation, Robert Axelrod (1984) has demonstrated that an overall winning strategy is to cooperate when others do and to answer with defection when other THE RUSSIAN DETOUR 847 players do not cooperate. This requires, however, that the ‘shadow of the future’ is fairly long, i.e. we are rather certain that the game will continue for a while and that not everyone begins their interaction with the assumption that they will be cheated.6 A basic prerequisite for this is the existence of rules and norms—institutions—that compel people, e.g. enterprise managers, to take the rst step and, thus, invite others to cooperate rather than defect or totally abstain from interaction.

Business behaviour in the Russian forest sector Applied to the Russian forest sector, the discussion above gives rise to a number of methodological as well as substantive questions. What indicators do we have that rms are actually operating in a virtual economy as has been depicted above? How should the institutional framework of the Russian forest sector be characterised? For example, do we have any indications that ‘cost of measuring’ is too high, that ‘enforcement of rules’ is lacking, that inappropriate ‘attitudes and perceptions’ prevail? Is ‘the size of the market’ still too small for real competition to arise? And, more interesting, is all this reected in the behaviour of the forest rms? For example, do they invest in tangible or relational capital? How extensive are their engagements in the production of soft goods? Do they have ‘real’ customers and can they acquire enough timber? How are payments made and do they have problems with broken agreements? And, if so, do they have access to reliable third party solutions? And so forth. The answers to these questions are based on a study conducted among 221 Russian forest rms in eight Russian regions. In order to provide a possibility to compare the Russian results with more ‘normal’ market circumstances a mirror study has also been conducted. In addition to the Russian rms the database contains information about 24 Swedish forest rms. The ndings are summarised in Table 1. The rst issue to be discussed is investment. While investing is a major prerequisite for the renewal of the outdated production apparatus it can be noticed that, at the time our investigation was made, only 36% of the Russian rms that we studied had made any investments (Table 1). It should also be mentioned that joint ventures invest signicantly more (56% of them) than other types of rms. Export-oriented rms are likely to invest more, the same is generally true for newer enterprises as well as for rms that are not owned by the state. Most of the rms that do invest utilise their own nancial resources without any involvement from the banks. This is reected in the poor contacts that forest rms generally have with the banking system. Only 17% of the rms report that they have such relations. One would expect that a lack of timber would not be a problem in a country that has among the world’s biggest forest resources. However, as Table 1 indicates, 44% of the rms perceive a shortage of wood. Typically these are larger processing industries that require huge amounts of wood. They are the rms that in the Soviet era constituted the backbone of a centralised forest management and delivery system.7 It can also be noted that almost two-thirds of the Russian forest rms in our survey do not export any of their products. Given that the local market for wood is underdeveloped, this is striking. Another indication of the malfunctioning of the supply system is that there are greater shortages of timber in regions with large 848 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

TABLE 1 ATTRIBUTES OF FOREST FIRMS IN RUSSIA AND SWEDEN (%)

Russia (n 5 221) Sweden (n 5 24)

Mean number of employees in rms surveyed 431 58 Activity of rms Forest management 8 8 Harvesting 24 4 Sawmill/harvesting 25 33 Sawmill 31 33 Pulp/paper 4 4 Trading/consultant 8 17 Background of rms/ownership Public 24 29 Privatised 42 0 New private 34 71 Investing in company Yes 36 85 No 64 15 Social responsibilities Yes 54 83 No 46 17 Export of production . 40% of the volume 24 21 , 40% of the volume 10 4 No export 66 75 Bank relations Yes 17 82 No 83 18 Amount of timber supply Enough 56 78 Shortage 44 22 Method of payment for sales Cash 56 100 Barter and cash 44 0 Arrangement of payment for sales On delivery 37 0 Before delivery 48 4 After delivery 4 96 Mixed 11 0 Violation of buying agreements Big problem 44 0 Small problem 30 4 No problem 26 96 Violation of selling agreements Big problem 59 0 Small problem 23 12 No problem 36 88 Obstacle for operation of rm Taxes 49 8 Forest legislation 17 25 Business/export legislation 16 25 No big problems 18 42 Important change in forest sector Taxation system 23 20 Forest legislation 18 30 Business legislation 13 25 Ethics/politics 11 25 Investment/technology 19 0 State coordination 17 0 THE RUSSIAN DETOUR 849 exports, thus indicating a general inability to respond to increasing demand (cf. Piipponen, 1999).8 Buying and selling wood not only require suppliers and customers. It is also a matter of payment and contracting. In essence, these problems are institutional, i.e. they are linked to the existing ‘rules of the game’. First, it should be noticed that, like many Russian rms, forest enterprises are also heavily engaged in barter trade, while this behaviour is totally absent among the Swedish rms.9 What is more striking, though, are the sales arrangements. While only 4% of the Russian rms accept payment after delivery this is the most common procedure among Swedish forest rms. It is easy to imagine how this expression of lack of trust affects economic activity. As can be seen in Table 1, Russian enterprises encounter signicant problems when they sell and buy their products. Violation of agreements is the rule rather than the exception. In comparison, none of the rms in the Swedish group regards violation of agreements as a big problem. Russian rms have extensive social responsibilities, such as provision of housing and transport for their labour, health care, child care and provision of fuel wood. A majority of the Russian forest rms have such responsibilities. It should be noted, however, that Swedish enterprises also engage in social activities, but here the engagements are different. Typically, Swedish rms are engaged in different kinds of sponsorship, for example, support of local clubs or individual athletes. One rm even buys textbooks for a local school. Some of the larger Swedish companies provide housing for some of their employees, but never for the entire work force as the Russian rms might do. The representatives of the forest rms were asked what they regarded as the most binding restriction for running their enterprise. The answers are summarised in Table 1. It should be noted that nding a market is not mentioned as a major problem, while the tax system is said to be the biggest hurdle. This result certainly reects a number of well-documented odd features of the Russian tax system, such as the multitude of taxes and tariffs, the lack of transparency of the system, and the draconian sanctioning practice.10 Other obstacles mentioned by both Russian and Swedish rms can be attributed to forest and business legislation. When asked to suggest changes that might possibly improve the situation both Russian and Swedish managers suggest lower taxes and changes in legislation. It should be noted, however, that the existing forest legislation is regarded as a bigger problem among Swedish than among Russian enterprise leaders. From the comments it becomes clear that it is the perceived strictness of the environmental legislation that is the problem. It should be noted, however, that this attitude most probably illustrates the fact that the Swedish institutional framework is transparent and well-dened, meaning that both monitoring and sanctioning work quite well. Accordingly, rule compliance is also high. There- fore, in the eyes of individual Swedish business leaders the environmental clauses are regarded as a restriction on the protability for the individual rm. Finally, one major difference between Russian and Swedish rms should be mentioned. Around 20% of the Russian rms call for a general renewal of technology and about the same amount suggest that the state should coordinate the forest sector. Nothing similar can be observed among the Swedish rms. In fact, there are a number of Russian rms that openly wish to ‘become state-owned again’. This can be 850 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON interpreted as an indication of the fact that the disintegration of the Soviet management system has not been replaced by alternative and well functioning ways of organising the sector based on market economic principles. If the situation is chaotic and market mechanisms do not work, the calls for formal coordination are understandable.

Production, productivity and employment How can the current situation in the Russian forest sector be explained? Answering this question is the task for the subsequent sections of this article. First, the relation between productivity, production and employment will be discussed. Second, the Gaddy & Ickes hypothesis will be tested; do the rms in our sample behave in accordance with what is anticipated by their theory of the virtual economy? Finally, we demonstrate what type of attributes, such as size and ownership, explain different types of enterprise behaviour. In this section we concentrate on the rst issue, productivity. It should be noted that while production in the rms interviewed has dropped by around 40% during the last ve years, employment has decreased by only about 25%, which indicates inadequate restructuring efforts. The same pattern was found in a study by Nilsson & Shvidenko (1998). In Figures 2 and 3 changes in employment and production for 123 rms interviewed are related to an estimate of productivity change (production volume in tons

FIGURE 2. EMPLOYMENT CHANGE RELATED TO PRODUCTIVITY CHANGE IN 123 RUSSIAN FOREST ENTERPRISES 1993–1998. THE RUSSIAN DETOUR 851

FIGURE 3. PRODUCTION CHANGE RELATED TO PRODUCTIVITY CHANGE IN 123 RUSSIAN FOREST ENTERPRISES 1993–1998. or cubic metres related to the number of employees in 1998 and 1993).11 In this way the gures indicate restructuring efforts manifested in changes in the competitive position of the rms during the last ve-year period. As shown in Figure 2, a number of rms have been able to maintain or increase their productivity since 1993 (those above 1.0 on the vertical axis). However, only seven have simultaneously increased their employment. Around 30 rms exhibit a market behaviour similar to that of a typical Western forest enterprise, i.e. they decrease employment and increase productivity. From Figure 2 it could also be concluded that the vast majority of the companies nd themselves in a very difcult position with stagnating or decreasing productivity and decreasing employment. Fourteen rms have even increased their employment despite decreasing productivity. These observations are consistent with the virtual economy thesis. In Figure 3 productivity changes are related to the changes in production volumes. Productivity decreases are obviously heavily dependent on the large reductions in production that have taken place during recent years in most Russian forest enterprises. The simple linear regression applied ts well to observed changes (R2 5 0.67) among the rms with decreasing production (i.e. those below 1.0 on the horizontal 852 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON axis in Figure 3). Thus the possibility to reduce employment at the same rate as production decreases seems to have been limited in most companies. Only a few rms have been able to increase productivity along with a decreasing production volume. In fact, our calculations show that among all rms a decrease in production is accompanied by an equal proportional reduction in productivity (elasticity, b 5 0.69, t 5 10.51, n 5 118). Figures 3 and 4 show that the forest sector decline might be even more severe than previous analyses have indicated (cf. Backman, 1998). Only few companies in our data set seem to have started any restructuring and transition process in a market- oriented direction. This conclusion is further supported by Figure 4. As can be seen, state/publicly owned rms behave differently compared with other types of enterprises. For example, when production decreases in state-owned rms productivity decreases in almost the same proportion (b 5 0.98, t 5 11.67, n 5 27). This can be compared with new private rms where the productivity change is much lower (b 5 0.53, t 5 4.67, n 5 19). Thus, it can be concluded that state-owned rms are much less adaptive than new private rms. Old publicly owned but privatised enterprises seem to have the same types of problem. Even if the production volume

FIGURE 4. PRODUCTION CHANGE RELATED TO PRODUCTIVITY CHANGE AMONG DIFFERENT TYPES OF RUSSIAN FOREST ENTERPRISES 1993–1998 (N 5 123). THE RUSSIAN DETOUR 853 shrinks they do not adjust their workforce accordingly, something that inevitably affects productivity. The ndings from the data on productivity can be summarised as follows:

1. Most enterprises have decreased their productivity between 1993 and 1998. This suggests they have not successfully restructured. 2. An even greater share of enterprises have decreased their output. 3. For public rms the relationship between decrease in output and decrease in productivity shows unit elasticity. This, too, is consistent with no restructuring. It suggests totally passive behaviour, since this is the result one would get if one just kept the same number of employees while output dropped. For example, if output is cut in half while the enterprise retains the original labour force, productivity drops by half. 4. Even the best sub-group, the new private rms, has not been that good at dealing with the output drop, since when output declines, productivity also declines (although not as much as for state enterprises). This also suggests that these enterprises may not be adjusting by curtailing employment so much as by increasing output.

However, employment change behaviour differs among the three sub-groups. While, on the average, public and privatised companies are still characterised by decreasing production and employment, the new private rms have been able to increase production as well as employment. One consequence of the Gaddy & Ickes theory of the virtual economy is that we cannot, in fact, be sure that a rm showing a positive production rate is in any market sense successful. Higher production rates might also reect an increase in production of ‘soft goods’ exclusively traded in the virtual quasi-market. This also means that the productivity measure is ambiguous as well. Consider the possibility that a rm keeps the same number of employees while increasing its output of soft goods. As a consequence it will show an apparent rise in productivity. Thus, we need other ways to analyse the behaviour of the rms that capture investments in both ‘relational’ and ‘tangible’ capital. This is the topic for the next section.

Forest rms in the virtual economy In order to capture the Russian forest rms’ location in the ‘restructuring space’ depicted in Figure 1, we have to nd indicators that capture whether a rm operates in the relational sphere or is oriented towards reducing its distance to the market. To capture this, an empirical specication of the Gaddy & Ickes concepts ‘social relation’ and ‘involvement in the virtual economy’ versus ‘transition rms’, i.e. rms that are trying to reduce, or that are actually reducing, their distance to the market, was made in the following way. The degree of ‘relational capital orientation’ versus ‘distance to market reduction’ was estimated by two indices that theoretically might vary from one to 10. In the social-relational capital dimension we nd rms that obviously do not make efforts to transform to the market or try to act on monetary and market terms. 854 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

Such a company will get one ‘point’ every time its behaviour ts the following criteria: · use of barter in buying arrangements, · use of barter in selling arrangements, · negotiates but does nothing more to enforce broken buying agreements, · negotiates but does nothing more to enforce broken selling agreements, · has multiple social responsibilities, · says that lack of privileges is the most binding restriction for operating the rm, · calls for privileges for the company in question concerning important forest policy changes, · wants to become public again after being privatised or calls for ‘state coordination’, i.e. a state command economy to be reintroduced in the forest sector, · increasing employment while decreasing productivity, · increasing production while decreasing productivity. As a contrast, a company is regarded as a ‘market distance reducer’ if it: · invests in equipment, buildings or education of the workforce, · has bank relations on the buying side, · has bank relations on the selling side, · is not involved in barter on the buying side, · is not involved in barter on the selling side, · uses arbitration courts to enforce broken buying and/or selling contracts, · regards workforce discipline and lack of entrepreneurial tradition and/or business ethics as important obstacles for operating the rm, · identies poor workforce skill as an important binding restriction for the rm, · calls for efcient business legislation enforcement as a necessary change in policy in the forest sector, · operates with increasing productivity. It should be noted that these indices are deliberately constructed by variables that reect both actual behaviour and attitudes. We believe that this is necessary in order to be able to capture the character of the problem. The outcome of this calculation is illustrated in Figure 5. It should be evident that the Russian forest rms line up fairly well along the two dimensions that are believed to capture market behaviour (distance) and some kind of aptitude for avoiding restructuring and transition to the market (relational intensity). Only 6%, or 12 enterprises, clearly display a kind of market behaviour, i.e. they have a low value on the distance index, meaning a relatively short distance to travel towards becoming competitive on the market while, simultaneously, their investment in relational capital is fairly low.12 It can also be seen that more than 60% of the rms have a long distance to travel towards the market while 4% seem to compensate for the long distance with higher relational intensity. We regard the rms located in the lower right square in Figure 5 (32%) as unviable and those in the upper right group as typical relational capital-oriented enterprises. For the middle group the situation is unclear. When analysing these groups (indicated by the four blocks in Figure 5) it should THE RUSSIAN DETOUR 855

FIGURE 5. DISTRIBUTION OF RUSSIAN FOREST FIRMS ACCORDING TO THEIR DISTANCE TO THE MARKET AND THEIR INVESTMENT IN RELATIONAL CAPITAL (% and n).

be noted that there are some, but rather few, attributes that signicantly affect the likelihood of market-oriented behaviour.13 Thus we nd that the overall likelihood of a forest company acting as a transition rm is fairly low, 7.4% (note that this says nothing about the success or protability of the rms). However, if the enterprise is an exporter the likelihood increases to 20.5%. The most problematic situation for a forest rm is probably when it has not succeeded in traversing towards the market and when its relational capital is poor; 32.5% of the rms have this problem. However, the likelihood that we nd very big companies in this predicament of having poor relations is fairly low, 21.4%, while this situation is more common among the smallest rms. Similarly, the likelihood of nding larger enterprises in the relational capital-oriented group is signicantly higher, 40.6%, than for smaller ones (21.4%). The explanation is, of course, that larger enterprises have better access to non-market solutions. One might suspect that the rms in a weak position along the relational capital dimension and with a long distance to market competitiveness, i.e. in the ‘low-long square’ of Figure 5, in general represent rms in a catastrophic situation. This would, for example, be indicated by an exceptionally large and rapid production decline and, as a matter of fact, there are some indications of this. A statistical check reveals that during the last 5-year period about 45% of the 179 rms located in the four squares forming the lower right corner in the matrix have experienced a larger reduction in volume produced than the average. Among rms with a short distance to the market seven out of 15 (45%) have maintained or increased their production, while only two have reduced their production more than the average rm. Depending on where rms are located in the matrix (Figure 5), it can be expected that their managers have different perceptions of problems and that they suggest different remedies for their solution. This is discussed in the next section.

Voices from the margin As we have seen, transition rms constitute a marginal group which shows attributes and acts more in line with our image of rms in developed market economies. Given 856 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

FIGURE 6. ‘IF IT WERE POSSIBLE TO CHANGEANYTHINGRELATED TO THE RUSSIANFORESTSECTOR, WHAT WOULD YOU CHANGE?’

that this is the most strategic group for developing a market economy, it is particularly important to nd out how the leaders of these enterprises comprehend the current situation. Figure 6 shows the answers to one of the questions in our survey from the 7% of transition rms compared with all the rest. The question was: ‘If it were possible to change anything related to the Russian forest sector, what would you change?’. Transition rms clearly emphasise policy changes related to business legislation, better business ethics, work discipline, etc., while rms that do not belong to this group call for state intervention and coordination and give higher priority to problems associated with technology, nance and investments. The 15 enterprises that we have classied as transition rms, i.e. those trying to or actually reducing market distance, emphasise the unpredictable and often contradictory business legislation as a basic problem. An efcient mechanism for enforcing decisions made by arbitration courts is also demanded as an important policy change needed to improve business in the forest sector. These enterprises also identify high transaction costs, due to inefciency of the banking and communication systems, as big problems that must be solved. The poorly skilled workforce and the traditions still remaining from socialism among public ofcials in the forest sector are also recognised as severe problems. THE RUSSIAN DETOUR 857

Transition rms more often call for privatisation of forest lands as well as more open systems for leasing parcels of the forest fund. Different suggestions aiming at facilitating long-term agreements and long-term planning in different areas, such as taxation policy and especially rules related to value added tax, problems related to ination, re protection and improvement of the forest resource in the long-term perspective, are also demanded.

The regional dimension In order to investigate whether there exists an obvious regional dimension of the persistence of a ‘virtual economy’, the two indices (dimensions) used above, ‘relational intensity’ and ‘distance to market’, have been compared. Figure 7 illustrates how the companies in each region are distributed according to these two dimensions. Each observation in the gure represents the average value among the rms in each region. From Figure 7 we can conclude that Moscow, Khabarovsk and Murmansk are more market-oriented than the other regions. Efforts to reduce distance to the market are slightly more prevalent in these regions and the relational capital orientation is lower. The opposite seems to be the case for companies in the other regions, particularly Krasnoyarsk and Irkutsk. However, all in all, regional differences are small or almost non-existent, while the differences between the companies within each region are considerable. In summary, our investigation gives weak support for the existence of signicant regional differences. When it comes to the forest sector, the sweeping

FIGURE 7. DISTRIBUTION OF RUSSIAN FOREST FIRMS BY REGION AND BY THEIR RELATIVE INVOLVEMENT IN THE VIRTUAL ECONOMY. 858 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON changes in the Russian economy or, if one prefers, the inheritance from Soviet times have not separated out any successful region that has clearly managed to move closer to efcient market behaviour. This also might give support for the thesis that the logic of the virtual economy has become a general feature of the Russian economy.

Making an aquarium of the sh soup? The result of our investigation among Russian forest rms clearly gives support for North’s statement about the persistence of ‘informal constraints embodied in customs, traditions, and codes of conduct’ (North, 1990, p.6). Despite deliberate efforts to change the rules of the game, such as allowing free pricing, privatisation of rms etc., the logic of the old Soviet system still decides much of enterprises’ behaviour. Thus the old logic still serves as a dominant institutional setup deciding the degrees of freedom for the players. For example, the extensive barter trade would not be possible without relatively well-established patterns of contacts involving actors from the highest political and administrative hierarchies, banks, etc., down to the single manager of a forest rm. Our study also supports Gaddy’s & Ickes’s theory of the virtual economy. First, it has, in fact, been possible to arrange the rms along the two major dimensions stipulated by the theory, ‘distance to the market’ and ‘relational capital’. It should be emphasised, however, that our indices capture how rms actually behave as well as managers’ comprehension of, and opinions about, the current situation. We believe that using such a combination of quantitative and qualitative indicators is essential for understanding Russia’s inability to develop a market economy. Second, it has also been demonstrated that rms in our sample largely behave in accordance with what is assumed by the theory. For example, large publicly owned companies are more deeply rooted in the virtual economy than smaller ones and newly established rms, larger rms call for state coordination, and so forth. Thirdly, the application and test of the virtual economy thesis have also made it possible to sort out what a transition rm typically looks like. Thus, a typical transition rm is an enterprise that is heavily exporting and has leaders who call for better business manners, ethics, competence and skills. It might be surprising that no other variable than exporting seems to have any signicant explanatory power. For example, we nd no signicant differences between regions, it does not matter whether the rm is engaged in harvesting, processing or sawmilling, nor does it seem to play any decisive role whether enterprises are joint ventures or not. A typical virtual economy rm, on the other hand, can be characterised in the following way: it is large, low-exporting and has managers who call for state coordination. As the answers regarding modes of payments, violation of rules etc. show, our investigation gives further support for our notion that an ‘institutional deadlock’ is a general characteristic for all the regions studied. In the terminology of game theory, Russia seems to have reached some sort of negative equilibrium. As Gaddy & Ickes (1999b) have indicated, the virtual economy may not be an unlucky detour on the road towards an efcient market economy. It may be an entirely new system that is now being entrenched in Russian society. It should not be forgotten that the virtual economy is quite benecial for a number of people who might unfortunately THE RUSSIAN DETOUR 859 be exactly the ones who are expected to change the system—managers of rms, politicians, bureaucrats and other decision makers. Thus the way out of this system may well be very problematic (Gaddy et al., 2000). It requires a number of things: · that the payoff is better for producing tangible goods than for engaging in the ‘soft goods’ trade, · that those who take the rst step towards market behaviour will not be dispropor- tionately punished, · that law and order is established, · that the current pattern of performing ‘business’ is not further entrenched, something that will have the effect that newer generations of business people will ‘imitate’ current behaviour (Gaddy & Ickes, 1999b), · that changes towards market behaviour are supported by the people, and thus that people believe that changes will make life better. Can the current situation in the Russian forest sector be deliberately changed and, if so, how can such a change be achieved? It should be emphasised that there are no easy remedies available to be prescribed as a general solution to the current problems. If, as we have discussed earlier, public authorities constitute an integrated part of the virtual economy, we cannot expect these people to stick their necks out and take independent decisions that would pull the rug from under their feet. Obviously, there is little support to be expected from those actors who benet from the operation of the virtual economy. Thus, to move towards achieving the goals listed above, one must seek the support of those people in society who might have an incentive to pull and push in the direction indicated above, people who would benet if these features were actually in operation. Who are those people? They are likely to be found among ordinary consumers and citizens as well as among small business managers and owners. One way of stimulating the establishment of such pressure from below would be to target international donor programmes and other types of nancial support towards small businesses, joint ventures and entrepreneurs. Another solution is to deliberately support NGOs and other independent forces as well as the efcient working of political organisations. One should not forget that there are a number of enterprises in Russia that work well, both Russian owned and among those partly owned by Western rms. Russian authorities should clearly show that they support such enterprises, for example, by giving them favourable conditions, while at the same time making conditions more difcult for enterprises staying in the virtual economy. All activities and decisions that lead to a better separation between the political-administrative sphere and the civil society are benecial for the development of a democratic society and a market economy. Some more specic ideas on how the situation might be changed are discussed in the concluding section. There is an old saying stating that ‘it is possible to make sh soup out of an aquarium, but it is not possible to make an aquarium from sh soup’. The reason is simple: creating living systems—aquariums as well as market economies—requires vital units that can serve as basic building blocks. However, such vital units are to a large extent lacking in contemporary Russia. For example, there is no tradition of 860 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON privately owned commodity-producing companies, a powerful middle class is still basically missing, and political preferences among people still reect and support attitudes associated with the old Soviet regime. If people believe, or in fact experience, that a major prerequisite for a large manufacturing rm to stay in operation is that it continues to receive privileges, it is likely that they will also support such policies. Currently, we seem to have a situation where the most mobilised parts of the population are those who are the most supportive of state intervention, typically those to the left on the political scale, i.e. mainly supporters of various communist parties.14 The other side of the coin is the apparent lack of trust in Russian society, something that is also indicated in our investigation.15 If, as some of our respondents say, most actors assume that the others will cheat, we have a classical case of Prisoner’s Dilemma, and the collective outcome is inferior to that which would have been achieved through cooperation. This attitude also has the peculiar consequence that, even though people (workers, engineers etc.) are aware of the fact that decision makers (managers, politicians and bureaucrats) might acquire resources in an inappropriate way, they have poor incentives to change the situation. ‘Those who presently are in charge have already milked the cow, new bosses will only start all over again, so why change?’ Axelrod (1984) has demonstrated that small ‘worlds’ of cooperation might spread even in a world of ‘cheaters’. ‘Never start by defecting, cooperate when your partner cooperates, defect when he does!’ This is the most successful strategy for the evolution of cooperation. Thus, the movement towards a market economy in Russia will benet from the creation of groups of rms that ‘cooperate’ in the market sense of the word, groups of rms that have learned that their partners do not start their interaction by cheating, that good manners will be rewarded accordingly. Consequently, the policy advice is to support the establishment of such groups of rms.16 Building institutions takes time and market institutions are not built from above. However, political authorities might provide an institutional framework that enables a market economy to be developed (Eliasson et al., 1994; Silk & Silk, 1996; Stiglitz, 1999). The authorities should ensure that those who are among the rst to act in ‘proper’ ways do not have to pay a disproportionate share of the burden by being, for example, extensively taxed. Consequently, the most important task is to reduce the payoff from investing in relational capital. A thorough taxation reform could signicantly contribute to this. Since Gazprom and a few other large state monopolies act like some kind of engines for providing resources that are consumed in the metabolism of the Russian virtual economy, stopping this infusion would have decisive effects. As Gaddy & Ickes (1998b) have emphasised, only making credit restrictions harder will not solve the problem; such policies might even drive rms deeper into the virtual economy and will probably affect those rms that should not be affected. Hence, more efforts should be made to support the creation of new private rms and joint ventures. But, given that undemocratic solutions are ruled out, all sweeping changes of the political system, including reform of bureaucracies, the legal system and so forth, can only be made with the support of the people (Rose et al., 1998). THE RUSSIAN DETOUR 861

What should be done? The question of what should be done to change the current situation, as described above, is intricate. As indicated, people do not act in a vacuum, i.e. their actions are embedded in an institutional context. Kiser & Ostrom (1982) have elaborated the idea of three worlds of action. Every institutional arrangement, they argue, is shaped by three layers of rules, constitutional rules, collective choice rules and operational rules.17 With reference to the Russian forest sector, constitutional rules specify what kind of ownership forests may have and, indirectly, who is eligible to share the benet of their use. Constitutional rules also specify the division of labour between federal and regional authorities. Collective choice rules regulate how decisions are made concerning the forests in order, for instance, to decide leasing terms, levels of harvesting or the technological input. Operational rules, nally, regulate the daily activities, i.e. the intensity of harvesting, methods of regeneration, modes of transport etc. The three layers of rules form a hierarchy, indicating that rules on a higher level decide the degrees of freedom for those on a lower level. ‘Constitutional decisions establish institutional arrangements and their enforcement for collective choice. Collective decisions, in turn, establish institutional arrangements and their enforcement for individual action…. Constitutional choices precede and constrain collective choices’ (Kiser & Ostrom, 1982, pp. 209–210). In this perspective a constitution can be dened as a system of rules specifying the terms and conditions of governance, while governance itself ‘includes the setting of rules, the application of rules, and the enforcement and adjudication of rules’ (Feeny, 1988, p. 172; Carlsson, 2001). Thus the forest rms in our investigation are subjected to the logic of this hierarchy. Consequently, different problems must be solved at different levels.

The constitutional level On this level constitutional rules can be enacted and changed. In Russia, the rst thing that has to be done is to dene what issues and domains the federal level is supposed to handle. Thus the division of labour between federal agencies and the subjects of the federation, oblasti etc., should be claried and settled. For example, the dual subordination that is inherited from the Soviet era should be abolished—today the regional forest committees are subordinated both to the successor of the Federal Forest Service (Rosleskhoz, abolished in May 2000), as the central authority, and to the executive authority of the oblasti etc. Generally, all ambiguities and contradictions in the federal constitution, which have been identied by many experts, should be sorted out. When it comes to the forest sector, this applies to property rights as well as collisions between the wording in the constitution, the Federal Forest Code and a number of other legal acts, e.g. those concerning environmental protection. One obvious decision is to permit private ownership of forest land, something that is allowed in the constitution but not in the Forest Code. Another alternative would be to transfer forest ownership to the oblasti etc. Whatever decisions might be taken, all 862 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON constitutional issues that are unsettled create problems on lower levels of government and society. It should be emphasised that this focus on constitutional issues does not neglect the fact that a number of political problems, e.g. the role of the parliament versus the president, as well as many macroeconomic questions, must be solved in order to establish a solid foundation for a vital forest sector. But, once again, if constitutional issues are undened, or in a ux, there is nothing to build on.

Collective choice level The notion of collective choice rules refers to the fact that all collective decisions are dependent on rules that stipulate how such decisions should be made, i.e. a framework for collective action. Economic history tells us that once a constitutional order is established, subsequent levels and their players can develop their own rules. This has proved to be a basic prerequisite for the evolution of markets. Thus the collective actors in the forest sector must dene their mutual relations. For example, this means that tax authorities should act independently and that tax revenue, or more typically tax arrears, should not be used as ‘trading goods’ in local virtual economies. Another example is the regional units of the former Federal Forest Service, the decisions of which should be dictated by professional concerns rather than by regional political matters. One feature that has confused this necessary division of labour is the creation of quasi non-governmental organisations, such as the regional Unions of Forest Industri- alists. These unions are deliberately composed of local politicians, bureaucrats, industrial leaders, trade union representatives etc., with the ofcial aim of providing political and administrative coordination of the regional forest sector. In other studies we have characterised the Russian forest sector as trapped in an institutional deadlock (Carlsson & Olsson, 1998b, pp. 52 ff.). Another way of describing the situation is to say that the virtual economy in fact provides a coherent political and administrative system with its own logic. In such a system tax authorities and other public agencies do not act independently, nor do industries, trading organisations, central actors in the transport sector etc. The following list—which could indeed be made longer—indicates what must be done on the collective choice level in order to open up the institutional deadlock and thus make the forest sector work better.

· Federal and regional policy programmes that are in line with the principles of a market economy should be worked out. For example, this means that they should not rely on the idea of political and administrative coordination of business activities. · A thorough taxation reform should be enacted. In general, and not only when it comes to the number of taxation rules, the whole system of fees etc. should be diminished, should be more transparent and, as a consequence, easier to enforce. · Politicians and bureaucrats should withdraw from direct involvement in individual enterprises. For example, regional bureaucrats should not as a rule take over and run rms that are found to be unviable. THE RUSSIAN DETOUR 863

· All democratic means to create law and order should be utilised. · By virtue of their credit practices, banks and other credit institutions should encourage entrepreneurship, exports and joint ventures with foreign companies. · Forest enterprises should create their own independent branch organisations, the aims of which would be to draft and settle binding agreements concerning rules of conduct, standards etc. · Infusion of ‘soft money’ to the forest sector from ‘prosperous’ state monopolies should be stopped. This also requires that the worst ‘economic zombies’, i.e. value destroyers, are shut down. · The bankruptcy system as well as the arbitration courts must be made more efcient. · Education and training of people for new tasks and technologies must be developed, and democratic citizenship should be encouraged.

Operational choice level The operational choice level is the arena of the individual actor, typically the rm and its staff. However, decisions on this level are enabled or hindered by higher levels of rules. A typical operational decision is how to utilise the internal resources of the rm. From our analysis it is obvious that the Russian forest companies face a number of intertwined problems, which are all connected to the lack of, or the embryonically developed, market institutions. This is manifested in a concentrated way in the widespread and deeply rooted lack of trust that characterises the relations between business partners (cf. Fell, 1999). The forest industry is composed of a chain of actors, from the forests to the end users, who have to interact and transact with one another. If, as in Russia, transaction costs, owing to weaknesses in business legislation, enforcement and unclear denition of property rights, are extremely high, sometimes prohibitive, there are good arguments for ‘backward’ vertical integration of the rms. ‘In-house monitoring’ might be able to compensate for the lack of efcient market institutions. Coordination in an organised form within the rms is sometimes more efcient, i.e. cost-saving, than a market solution (Coase, 1937). For example, in the Nordic countries a high degree of integration, both backwards toward the forest resource and forwards towards the end users, has characterised the industry since the late 19th century. Subcontracting also exists. The extent of subcontracting has varied from time to time depending on technological and institutional changes in the industry. For example, today almost all harvesting is arranged by subcontracting with the involvement of both very large and very small rms. The same goes for a large part of the transport work. In Russia, the present situation of unclear property rights, ad hoc rules and irrational transport pricing—in short the high transaction costs—has resulted in a sharp production decline in the forest sector. Integration backwards along the chain from the end-users to the forest might therefore be a rational decision. In this way, for example, the managers of processing plants may gain better control over transactions and, as a consequence, reduce the total costs. It must be emphasised, however, that this ‘solution’ is triggered by an absence of viable markets in different segments of the forest sector. Under other economic circumstances such integration may even increase both transaction and production costs. 864 L. CARLSSON, N.-G. LUNDGREN & M.-O. OLSSON

It is, however, important to emphasise that such a coordination and integration process, introducing a ‘visible hand’ (Chandler, 1977) in the sector, must be the result of different companies’ own decisions concerning mergers etc. Such solutions are not possible to arrange efciently by intervention from the old political structure within the forest sector (Joskow & Schmalensee, 1997). Finally, it should be emphasised that the three worlds of action as described above constitute a totality within which both the ‘visible hand’ of the state—and other public authorities—and the ‘invisible hand’ of the market operate. These two hands might, and sometimes must, be coordinated, but, in principle, they should be able to move independently, all for the purpose of making Russian democracy and capitalism work. LuleaÊ University of Technology UmeaÊ University

1 A number of persons have been involved in collecting the data upon which this article is based. We gratefully acknowledge the help and support from these friends and colleagues. Special thanks are due to Clifford Gaddy, The Brookings Institution, and Paul Gregory, University of Houston, for valuable comments on a rst version of this article. We also gratefully acknowledge nancial support from the Kempe Foundation and the Swedish Royal Academy of Science. 2 The authors of this article are working on the Forest Project at the International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria. The Arkhangelsk study is one among a number of case studies dealing with institutiona l aspects of the Russian forest sector that have been published by the project. A brief account of the project design is given in the Appendix. 3 These are the evaluation criteria used in our IIASA case studies. 4 See the Appendix. 5 Hendley (1999) provides a number of examples of how enterprises might develop strategies to survive in the virtual economy. 6 For an analysis of how this concept might apply to the management of common-pool resources see Barkin & Shamaugh, 1999. See also Axelrod, 1997. 7 For example, in Tomsk we noticed how one of Russia’s biggest plants for particleboar d was depending on a system of raw material supply that was tailored for deliveries of full-length trees by train directly to the factory premises. Since the logistics of this system no longer worked the plant had to rely on other types of wood and other methods of delivery. As a result the plant did not get sufcient amounts of timber. 8 Moscow oblast’, with its concentratio n on furniture production, is an interesting example of the inability to utilise local resources. See Kleinhof et al., 1999. 9 For an illustration of how this trade might be organised in the forest sector see Ivanova & Nygaard, 1999, pp. 64 ff. 10 Between 1991 and 1996 the Russian taxation code was changed 256 times. This has given the system a quality of unpredictability . Taxation experts have characterise d the tax penalty regime as ‘draconian’, with nes of 100% for the rst violation, 200% for the second etc. (Rogfalk, 1996, pp. 7 ff.). According to a survey conducted within the framework of the New Russian Barometer, 56% of the population are of the opinion that there is no need to pay taxes if you do not want to do so. If caught, 27% think paying bribes could solve the problem (Rose, 1998, pp. 16 ff.). 11 All leskhozy as well as all rms younger than ve years are omitted in this comparison. A leskhoz should be considered as a public authority rather than an enterprise operating in the emerging Russian market economy. 12 As predicted, the vast majority of the Swedish rms (75%) is to be found in this square of the matrix. We regard this as a rough validity test of the indices. 13 The following calculations are done with ANOTA (Analysis of Tables), a statistical technique to explore possibly existing relationship s between categorical variables (Bethlehem, 1990). A full presentation of statistical calculation s is available from the authors. 14 By comparing the turnout in the 1995 State Duma election and support for communist/left-wing parties we have done a rough estimate of this relation. Such a calculation indicates that a higher participation rate is positively correlated with more support for the communists and other left-wing parties (0.45). For Our Home is Russia, former president El’tsin’s party, the corresponding gure was 2 0.19 and for the ultra right-wing Liberal Democratic Party of Russia it was 2 0.03. This tendency THE RUSSIAN DETOUR 865 is further strengthene d by the relative success of the communist parties in the 1999 State Duma election. (Data on the turnout and results of the Duma elections in 1995 and 1999 were obtained from the web site of the Centre for Russian Studies at the Norwegian Institute of International Affaires at URL: http://www.nupi.no/ ForskNor/forsk-set-no.htm. ) 15 In this context some authors want to emphasise the anti-legalistic heritage from the Eastern Roman Empire compared with the early establishment of law and order through the Catholic Church in Western Europe (cf. Berman, 1983). 16 Hendley (1999) gives interesting examples of the different ways of operating in the Russian economy. She also provides evidence of the existence of rms functioning in accordance with market principles, e.g. rms that are not entangled in barter trade etc. 17 For an illustration see Tang (1992) and Ostrom (1992).

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Pappila, Minna, The Russian Forest Sector and Legislation in Transition, IIASA Interim Report IR-99-058 (Laxenburg, Internationa l Institute for Applied Systems Analysis, October 1999). Pejovich, Svetozar, Economic Analysis of Institutions and Systems (London, Kluwer Academic Publishers, 1998). Petrov, Anatoly, Development of Property Rights in Forestry in the CIS at Transition Period, URL: http://www.metla./con/iufro95abs/rsp11.htm (15 October 1997). Piipponen, Minna, ‘Transition in the Forest Sector of the Republic of Karelia, Russia’, Fennia,177, 2, 1999, pp. 185–233. Ramazzotti, Paolo, ‘Hierarchicall y Arranged Institutions and Knowledge-Based Power’, paper presented at the 1998 European Association for Evolutionary Political Economic (EAEPE) Confer- ence on ‘Why is Economics Not an Evolutionary Science’, Lisbon, 5–8 November 1998. Rogfalk, Mats, The Taxation System in Russia. With the Aim of Development. Draft Report, 1996–12–17 (Moscow, Ministry of Finance, Swedish–Russian Cooperation Project) (in Swedish). Rose, Richard, Getting Things Done in An Anti-Modern Society: Social Capital Networks in Russia, Studies in Public Policy 278 (Glasgow, Centre for the Study of Public Policy, University of Strathclyde, 1998). Rose, Richard, Mishler, William & Haerpfer, Christian, Getting Real: Social Capital in Post- communist Societies, Studies in Public Policy 278 (Glasgow, Centre for the Study of Public Policy, University of Strathclyde, 1997). Rose, Richard, Mishler, William & Haerpfer, Christian, Democracy and its Alternatives (Oxford, Polity Press, 1998). Sheingauz, Alexander, Nilsson, Sten & Shvidenko, Anatoly, Russian Forest Legislation, IIASA Working Paper WP-95–45 (Laxenburg, Internationa l Institute for Applied Systems Analysis, May 1995). Silk, Leonard & Silk, Mark, Making Capitalism Work (New York, New York University Press, 1996). Stiglitz, Joseph E., ‘Whither Reform? Ten Years of the Transition’, Keynote address at The Annual World Bank Conference on Development Economics, Washington DC, 28–30 April 1999. Swaan, W., ‘Behavioural Constraints and the Creation of Markets in Post-Socialist Economies’, in B. Dallago & L. Mittone (eds), Economic Institutions , Markets and Competition (Cheltenham, Edward Elgar, 1996), pp. 221–240. Tang, S. Y. Institutions and Collective Action (San Francisco, ICS Press, 1992).

Appendix A note on the project design and research results The research reported in this article was performed in a study called ‘Institutions and the Emergence of Markets—Transition in the Russian Forest Sector’. This study has been an ongoing activity since April 1997 within the Forest project at the Internationa l Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria. The conceptual basis for the study is largely built on the ideas of Douglass C. North, Elinor Ostrom and others concerning the nature of social change and the importance of institutions in society. The project has conducted a series of case studies of the institutiona l embedding of the forest sector in eight Russian regions (the Murmansk, Arkhangelsk, Moscow, Tomsk and Irkutsk oblasti, Krasnoy- arsk and Khabarovsk kraya and the Republic of Karelia). With the collaboratio n of Russian scholars in the study regions, data have been collected on the structure and functioning of the regional forest sector, including the state of the forests, the social organisation of the respective regions, and the rules governing transactions among actors in the regional forest sector. Data were compiled from publicly available sources (Western and Russian scientic books and reports and ofcial statistical data) but also through a series of interviews with representative s of some 25–35 forest enterprises in each of the study regions. To allow some comparison and illustration interviews were also conducted with 25 Swedish forest companies. Results of the study have been published in journals and the IIASA series of Interim Reports. Reports in this series can be obtained free of charge via the institute’s web site at URL: http:// www.iiasa.ac.at. The Internationa l Institute for Applied Systems Analysis (IIASA), located in Laxenburg, Austria, is an independent , non-governmental , interdisciplinar y research institution that specialies in natural and social scientic research methods and models for use by policy makers, the scientic community and the public worldwide. IIASA is an internationa l institution, with sponsoring member organisa - tions in 15 countries.For further information see the IIASA homepage at URL: http://www.iiasa.ac.at/

505 Systemic Interventions to Promote Institutional Change in the Russian Forest Sector

Mats-Olov Olsson1 Umeå University

Abstract Institutions govern the behavior of all actors in a society. The Russian transition to a market economy is mainly a matter of reshaping society’s institutions to make them more conducive to a market efficient behavior. But how can suitable institutional changes be achieved? This article discusses the experiences gained through a series of policy exercises with stakeholders in the Russian regional forest sector. The purpose of the exercises was to initiate a participatory policy process leading to the elaboration of implementable proposals for a new regional forest policy. The prospects of such policy exercises to make an impact are best if the systemic interventionist manages to affiliate with active regional stakeholder groups and if support from the regional authorities and external financial sources can be secured. Such support will establish an effective incentive structure that will contribute to the legitimacy of the policy process. In the current Russian situation there is a lack of organized stakeholder groups with whom to conduct a dialogue.

With the disintegration of the Soviet Union in 1991 a fundamental social change was initiated in Russia. This was a very complex process that came to be known as transition, a concept that denotes a set of interrelated changes in a large number— if not all—of the existing institutions in society. Understanding why and how institutions change is a challenge for the social sciences. Based on previous research of the prerequisites for institutional change in the Russian regional forest sector this article examines the potential for achieving or stimulating institutional change in the forest sector through a systemic intervention by an outside observer/analyst, in which policy exercises were used as a “tool” for engaging regional forest stakeholders in a participatory policy formulation process.

Background and Purpose

In a study called “Institutions and the Emergence of Markets—Transition in the Russian Forest Sector” an attempt was made to understand the institutional framework governing the Russian forest sector and the changes in this framework that have taken place since the disintegration of the Soviet Union in 1991. To this end a series of case studies were conducted in eight Russian regions, among them the regions of Murmansk, Karelia, and Arkhangelsk (cf. Figure 1).2 While the focus in the initial case studies mainly was on contextual factors determining the rules (institutions) governing actors’ behavior in the regional forest sector and on the character of those rules, the policy exercises were undertaken with the purpose of assessing the possibilities of initiating participatory policy formulation processes among stakeholders in the Russian regional forest sector.3 In this article the experiences gained in the three policy exercises conducted by the International Institute for Applied Systems Analysis (IIASA) in the regions of Review of Policy Research, Volume 23, Number 2 (2006) © 2006 by The Policy Studies Organization. All rights reserved. 506 Mats-Olov Olsson

The Russian Federation

Murmansk Republic of Oblast Karelia Arkhangelsk Oblast

Khabarovsk Krai

Moscow Tomsk Oblast Oblast

Krasnoyarsk Irkutsk Krai Oblast

Figure 1. The Eight Russian Regions Studied in the IIASA Project

Murmansk, Karelia, and Arkhangelsk in the autumn of 2000 and the early spring of 2001 will be reviewed. The feasibility and efﬁcacy of using policy exercises as a tool in a participatory approach to the formulation of Russian regional forest policies will be assessed. The policy exercises that are discussed here were conducted in three Russian regions characterized by their vast territories, huge natural resource endowments, and sparse populations. Some basic socio-geographical data about the three regions are summarized in Table 1 (data for the two northernmost counties of Sweden have been included for comparison). Together with the Komi Republic and the Vologda County (Oblast) the counties of Murmansk and Arkhangelsk and the Republic of Karelia form the Northern Economic Region of Russia. The total area of the Murmansk and Arkhangelsk Counties and the Republic of Karelia is 728 thousand sq. km, which is about 4.3% of the total Russian territory. The total population of the three regions amounts to more than 3.2 million people, corresponding to a mere 2.2% of Russia’s total population. The area has a population density of only 4.4 inhabitants per sq. km. This means that we are looking at a huge and very sparsely populated territory. Just to indicate the order of magnitude we can note that the total area of our three regions is only slightly smaller than that of Belgium, The Netherlands, Germany, and Poland taken together. (In contrast, the total population inhabiting those four countries amounts to slightly more than 146 million, which is roughly the same as the total Russian population size.)

Assessment Criteria

The primary purpose of this article is to assess the value of policy exercises as a tool in establishing and stimulating or supporting participatory processes among Russian forest stakeholders with the purpose of formulating regional forest poli- Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 507

Table 1. Population, Territory, Forest lands, and Growing Stock in Murmansk, Karelia, Arkhangelsk, and Northern Sweden, 1998

Percent

Northern Indicator Totals Total Murmansk* Karelia* Arkhangelsk* Sweden**

Population (1,000 inh.) 3,813.5 100 27 20 40 13 Total area (mln.ha) 106.9 100 14 16 55 15 Forest fund (mln. ha) 60.8 100 16 24 49 11 Forest land (mln. ha) 43.4 100 12 21 52 15 Growing stock (mln. m3) 4,187.3 100 5 22 58 15 *Source: Data for 1998 from Komistat, 2000. **Source: Data for northern Sweden (the counties of Norrbotten and Västerbotten) in the year 2000 were obtained from Statistics Sweden (http://www.regionfakta.com [retrieved on April 24, 2003]). cies. The secondary purpose of the article is to assess in what respect the experiences gained by IIASA through the policy exercise workshops conducted in Mur- mansk, Karelia, and Arkhangelsk could contribute to our understanding of certain important issues related to participatory policy processes. A number of criteria were deduced for assessing the two main issues focused in our study:

Issue A: What are the speciﬁc prerequisites for the successful establishment of a policy process in the Russian regional forest sector? To what extent are such prerequisites in place in Russia today? The following assessment criteria might be deduced under Issue A: [A:a] the existence of a problem must be recognized and acknowledged by a group of individuals; [A:b] the problem must be of such a kind that group members believe that some action on their part is desired or required to solve the problem; [A:c] the society in which these individuals live must at least allow, but preferably also stimulate and support, their action. Issue B: To what extent can the necessary prerequisites for a policy process in the Russian regional forest sector be created, imposed or “fostered” from “the outside”?

The following assessment criteria might be deduced under Issue B: [B:a] the analysis of the situation made by the “outside observer” must be found relevant and accurate by the Russian regional forest stakeholders; [B:b] the “outside observer” must seek afﬁliation with a regional actor (public authority, business association, interest group, political party, nongovernmental organization [NGO], etc.) with an interest in establishing the proposed policy process; [B:c] the initiative group formed by the “outside observer” and the selected regional actor must establish its legitimacy as a new actor—a systemic interventionist—among forest stakeholders, public authorities and citizens of the region; [B:d] the policy process suggested by the systemic interventionist must be regarded as legitimate by forest stakeholders, public authorities and citizens of the region; and [B:e] the systemic interventionist must make it plausible that the suggested outcome of the policy process will make a difference; that realistic possibilities exist or can be created for implementing the policy suggestions that are elaborated. On the basis of the assessment of the policy exercises in the three regions some conclusions might be ventured concerning the general prerequisites for participatory policy processes and for generating such processes. 508 Mats-Olov Olsson

IIASA’s most immediate and straightforward objective with organizing policy exercise workshops in Murmansk, Karelia, and Arkhangelsk is simple enough to assess. The question is: Did IIASA’s policy exercises generate long-term, self- sustaining, participatory policy formulation processes in any one of the three regions? If so, how come? If not, why? The design and performance of the policy exercise workshops that IIASA conducted in Murmansk, Karelia, and Arkhangelsk will be discussed in subsequent sections of this article. But before coming to this assessment a short review will be made of recent theoretical advances concerning the Russian transition, institutional change, and participatory policy processes.

Some Theoretical Concepts and Empirical Facts

While one can easily find reasons to doubt the intention of the Russian political leadership to really work for Russia’s transformation to a Western-type democracy, there is more to show for the view that Russia has actually abandoned its former economic system (the command economy) and is currently changing and adapting to the rules and laws governing a market economy. The window of opportunity opened by Gorbachev’s perestroika policy was soon taken advantage of by Yeltsin and his economic advisors. With a very active support from Western (mostly United States) financial aid and consultants the group of reformers surrounding Yeltsin managed to topple the Soviet Union and establish the Russian Federation as a liberal market oriented democracy (cf., for instance, Wedel, 1998). The “shock therapy,” as the reformers’ program was soon to be labeled by its critics, entailed rapid privatization of state enterprises, price liberalization, and the introduction of so-called hard budget constraints for all enterprises. In certain respects the results of the reform measures taken were devastating. Output volumes in the Russian industry fell dramatically; the financial system was entirely disrupted, producing problems with serious repercussions for enterprises’ investments and the cash-flow routines of all economic actors (leading to the unlawful wage and payment arrear crises of the first half of the 1990s). Apart from the social distress that privatization and the shock therapy measures caused among broad layers of the population—turning many citizens against everything related to markets and politics, which people perceived as corruption (see, e.g., Pomer, 2001)—it also produced a whole new informal economic system in which many rules governing normal market behavior were set aside. The theoretical underpinning of this system, which has become known as the virtual economy, was made by Clifford Gaddy and Barry W. Ickes, two American scholars who picked up and elaborated on a definition of the post-Soviet Russian economy suggested by an economic committee of the Federal Duma (Gaddy & Ickes, 1998a).4 The virtual economy allows enterprises to insulate themselves from market competition by resorting to barter trade with other companies operating according to the same rules. Commodities are exchanged between enterprises operating in the virtual economy at artificially high nominal prices (negotiated between the trading partners themselves), a procedure that inflates trade volumes and ultimately leads to a pretence that the Russian economy is much larger than it actually is. The cash such an economy nevertheless needs (for paying workers’ salaries, etc.) is acquired through sales to Russia’s hard currency earning natural resource industries. In Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 509 effect, companies operating in the virtual economy managed to avoid the consequences of the early reformers’ most cherished shock therapy measures, price liberalization and the introduction of hard budget constraints. And those consequences would most likely have been disastrous, immediately displaying the market insufficiency of many existing enterprises in the new Russia. In this situation the behavior of the new enterprise owners and their managers must be seen as entirely rational in that they managed (at least temporarily) to avoid bankruptcy by moving into the virtual economy. The basic problem with the virtual economy is that its operation distorts resource allocation; it prevents resources from finding their most efficient use. Consump- tion patterns that result from artificial prices are not capable of correctly inform- ing producers about efficient production adjustments. Therefore, investments in the virtual economy are likely to be suboptimal from a market economic point of view. In this sense the virtual economy is inefficient and contributes to a continued waste of resources in Russia. Some observers also fear that the virtual economy, which has actually allowed many features of the old Soviet system to survive, is becoming that deeply entrenched in the new Russian economy that it will severely hamper, or even entirely prevent, the further development of the Russian economy toward a full-fledged market system. It should, however, be clearly acknowledged that the shock therapy reforms did in fact produce some intended and good effects, and arguably reformers did not have all that much scope for alternative actions (Tompson, 2002). Privatization eventually did create some good owners with a genuine interest in improving corporate governance (Sutlea, 1998).5 It certainly triggered the establishment of a large number of new (mostly small) enterprises that were forced to operate and survive in the new emerging market segment of the Russian economy. This process engaged an increasing number of Russian citizens, who were thereby pulled into the new market system and forced to learn to live by the new rules. The reforms contributed to the introduction of an entirely new incentive structure affecting all actors in the emerging market segment of the economy. The possibility of earning profits became the basic driving force governing the behavior of the new business owners and enterprise managers. The policy measures introduced through the reforms in the early Russian transition phase should be regarded as efforts to change earlier prevailing rules-in-use. Thus, transition entails institutional change. Previous study has produced insights about existing institutional problems hampering the development of a modern Russian forest sector (cf., for instance, Carlsson, Lundgren, & Olsson, 2001). It was found that the rules-in-use constituting the virtual economy could be regarded as the dominant institutional set-up in the present-day Russian economy.6 Institutional change in Russia either means spontaneous alterations of existing rules governing the behavior of economic actors or the design and installation of new rules. The task for Russian policymakers is to stimulate the establishment of rules that will foster an efficient business behavior on the part of actors in the emerging Russian market economy. The existing property rights regulation is a fundamental institution in every con- ceivable economic system, including the virtual economy. In Russia the forest property rights regulation stipulates that all forests in the country are owned by the 510 Mats-Olov Olsson

Table 2. Assessing the Institutions in the Russian Regional Forest Sector

Evaluation Criteria Criteria vs. Reality

• Constitutional rules are acknowledged and Some examples to illustrate malfunctions in the transparent. Russian forest sector: • The structure of property rights is settled and well • Many companies are only privatized in defined, (i.e., private actors can acquire property name and ownership has often remained unclear. or get the right to utilize property for their own • Effective bankruptcy and arbitrage procedures benefit). are lacking. • Rules and regulations from official authorities are • Worthless company shares are traded for tax deficits regarded as legitimate and apply equally to similar and other public dues. actors. • A significant increase of non-market transactions, • The market decides prices of property and goods, such as bartering. and costs should reflect the real costs. • Even though rules are enacted to prevent • Decision-making regarding collective choice and devastation of forest lands, authorities lack the operational rules is decentralized. means to monitor and implement them. • Private investors can realize the returns on their • Pricing of timber is a farce. investments. • Property rights are ill defined, rules collide. • Rules are enacted to prevent the devastation of natural • Investment is insignificant. resources. • Legitimate authorities take measures against violations of rules. Source: Adapted from Carlsson, Lundgren, & Olsson (2001).

state.7 But ownership is only one type of property right, albeit the most advanced in that it alone allows “alienation”—the transfer of ownership to a new owner. Other property rights rules stipulating rights of access of varying scope for different agents might in fact be even more important and interesting to consider (Ostrom & Schlager, 1996). In the Russian forest sector, such rules seem a lot more fuzzy and insecure than the basic right of ownership. To assess the institutional problems hampering developments in the Russian regional forest sector some kind of “baseline criteria” are needed. In our previous studies such criteria were derived from textbook requirements for a liberal market economy (cf. Carlsson et al., 2001). Through surveys performed with 221 forest enterprise managers in eight Russian regions a number of deviations from the behavior implied in the baseline criteria were identified. Examples of such deviations are given in Table 2. Actors in the Russian forest sector realize that changes in currently existing rules- in-use leading to an inefficient business behavior are necessary. The problem is how to reach decisions about suitable and feasible measures for improving on this problem situation. The low level of social trust is a major obstacle for institutional change in today’s Russia. This in combination with the existing weak state power8 raises serious obstacles for achieving much-needed institutional changes in various sectors of the Russian society. Engaging citizens in the elaboration of policy proposals (including proposals for institutional change) would surely improve possibilities of modifying the institutional framework and making it more conducive to an efficiently functioning market economy. Such citizen participation in the elaboration of new policies might be channeled through civic organizations, a mode of operation that would also entail improvements in the functioning of democracy. But Russia is at a disadvantage in this respect as well. Civil society is underdeveloped and comparatively few citizens are enrolled in any civic organizations (Howard, 2002). An Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 511 important question in this context concerns the possibilities to invigorate civil society and enhance social trust, the two interacting features that can be seen as fundamentally defining a society’s social capital. As is suggested by Raiser (1997, p. 11): “governments can attempt to influence positively the interaction between formal and informal institutions by engaging civil society in a policy dialogue. However, this will depend on the given level of trust in government and its formal institutions. When social capital is low, the government’s best chance is to enhance its credibility through signaling reform commitment and hoping that real economic improvements will in time feed back into a higher level of social trust.” Thus, a crucial task for the state in a transition country would be to try to gain social trust by modifying incentive structures so that actors move toward changing the rules governing their behavior in a direction that will improve economic efficiency. Raiser, Haerpfer, Nowotny, and Wallace (2001) have presented some empirical evidence indicating that changes in the social capital of transition countries are indeed taking place. Some evidence was found that trust in public institutions is positively correlated with “civic participation.” They argue that public policies aimed at reducing the high income inequalities that have emerged during the transition could be important for increasing trust in public institutions and they suggest that governments might seek to build trust in such institutions “by offering a dialogue to members of the public and consulting over important policy changes.” They conclude: “Low trust in public institutions is one of the predicaments politics in transition countries are faced with. But it is a predicament politics can deal with at least in many important respects” (p. 27). The management of natural resources has always been a high-priority area for government control. The operative management activities have often been entrusted special government agencies—in the case of forests this agency was typically the state forest service (variously named in different countries). Governments have kept a decisive say in the management of important natural resources even if they have not always been the lawful owner of the resource. The degree of popular influence over the management and use of such resources would then be determined by the degree to which people are able to influence political processes, that is, it would be decided by the workings of democracy. During the last decade or so governments have been meeting increasing difficulties in their natural resource management, at least this seems to be the case for forest resources. A fundamental reason for these difficulties is of course that a number of independent actors (state authorities, government agencies, and enterprises—both state-owned and private, civic organizations, private citizens) are engaged in various ways in the actual management and use of a nation’s forests. These actors have (at least partly) different objectives and different cultures of natural resource utilization causing conflicts and (often) an inefficient and unsustainable resource use.9 These developments have made people engaged in forest sector issues—forest managers, users, and researchers—start thinking about how to improve forest management performance and avoid conflicts that are detrimental for the efficiency and sustainability of forest use. Suggestions for improvements have often included calls for an increased pluralism in forest management10 and collaborative or participatory approaches for engaging stakeholders in the development of efficient forest policies have frequently been suggested (see, e.g., Buchy & Hoverman, 2000; 512 Mats-Olov Olsson

Burley, Seppälä, El-Lakany, Sayer, & Krott, 2001; Carter, 1999; Kennedy, Thomas, & Glueck, 2001; Warburton, 1997). Since transition did not often bring about a change of (or in) the people in charge of important social functions, such as, in our case, Russian forest managers and forest users, reform measures proposed by such circles are sure to be viewed with suspicion not only by the general public, but also by the new emerging group of business managers with a modern outlook and (often Western) economic training. Efforts to reform the Russian forest policy through participatory processes engaging broad stakeholder groups (business managers, politicians, citizen initiative groups, etc.) should therefore be both welcome for its democratic content and efficient in the sense that it would stimulate profound institutional changes. Methodologically the event reported in the present article—an externally initiated activity aiming at influencing the performance of an economic sector in a region of a foreign country—might be characterized as a systemic intervention with the purpose of improving on an existing problem situation. The approach is compatible with (and inspired by) modern systems thinking, especially recent developments in critical systems thinking (CST) as elaborated, for instance, in Flood and Jackson (1991) and Midgley (2000).11 However, while being inspired by, and in fact using, various aspects of these methodological approaches, the purpose here is not to assess the value of various methods of systemic intervention. It is rather to assess the efficacy of the chosen approach—the use of policy exercises—to see if this approach really can contribute to intended and much-needed changes in the institutional framework. In its previous research, IIASA studied the rules-in-use—or institutions— governing the behavior of actors in the Russian regional forest sector. More specifically, the focus was on actors’ behavior on the regional timber procurement arena, extending from the management of forest lands at one end of the spectrum, via timber harvesting to wood utilization at the other end.12 The study was inspired by an approach elaborated over many years by Professor Elinor Ostrom of Indiana University, Bloomington, and her associates around the world. Their Institutional Analysis and Development (IAD) framework constitutes a general research design for the study of natural resource management.13 The framework attributes great importance to factors relating to (a) the resource itself, (b) the society, and (c) the institutions governing resource use. In IIASA’s study of the Russian regional forest sector the structural configuration defined through these three factor groups is assumed to condition actors’ behavior on the regional timber procurement arena. Information about the situation in the eight Russian regions that were part of IIASA’s study was obtained through official statistical sources, various existing scholarly analyses, and the project’s own surveys among regional forest enterprise managers in the respective regions. The information thus obtained was analyzed and the results reported in a series of case studies published by IIASA.14 The natural conditions affecting the forest resources differ significantly between the three regions that are discussed here. While Karelia and Arkhangelsk are forest rich regions with long traditions of large-scale forestry and forest utilization, Mur- mansk has hardly any forests at all and the forest sector means very little to the regional economy.15 Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 513

The virtual economy dictates a speciﬁc behavior on the part of the actors of the system, a behavior that in many respects drastically deviates from what is typical in a well-functioning market system. In comparison with the situation in a market system, managers of companies operating in the virtual economy will take very strange (but, in the virtual economy context, rational) decisions concerning, for instance,

• company personnel: not laying off labor despite decreased demand for the company’s products; • investments: favoring investments in so-called “relational capital” at the expense of investments in modern production technology and management competence; • product development: not seeking to develop new products despite decreasing demand for existing products and/or signs of growing demand for products that the company would be able to produce; • marketing and sales: not exploring the potential benefits of marketing nor striving to find new (cash paying) customers; • business contracts with suppliers and customers: trusting only personal relations, always expecting, and trying to safeguard against, breach of agreements; • relations with public authorities: seeking to negotiate favors and alternative ways of fulfilling company obligations toward the state, like paying taxes in kind rather than in cash, thereby making public affairs less transparent.

Examples of this type of behavior were clearly to be seen in the material gathered through the survey among regional forest sector decision makers performed within the previous IIASA study.

The Policy Exercise Workshops in Murmansk, Karelia, and Arkhangelsk

The conceptualization of the policy exercises performed in Murmansk, Karelia, and Arkhangelsk is a result of IIASA’s previous experiences in the field and reflec- tions upon recent accounts of participatory policy formulation approaches that have been attempted elsewhere. A policy exercise can be seen as a tool for disseminating the results of analyses of problem situations to problem stakeholders, that is, to people and organizations who are affected by the results of the research and for whom it should be of most concern. Such exercises might also be used to open and invigorate a discussion and a continuous dialogue with the problem stakeholders about the results of the research and its policy implications. Thus, the policy exercise can be seen as a tool that might be used in a participatory policy formulation process. The objectives of the policy exercise, as communicated to the problem stakeholders, were (1) to foster exchange of knowledge and information and mutual learning through effective face-to-face communication (confrontation), (2) to syn- 514 Mats-Olov Olsson thesize policy-relevant and useful information through the integration of disparate sets of formal and informal knowledge, and (3) to identify policies for alternative and plausible futures. A policy exercise might be a relatively long event, lasting for months, even years. The policy analyst’s engagement in such a process should be limited to occasional well-defined interventions in the form of policy exercise workshops. Between June 2000 and March 2001 the IIASA group of analysts conducted four policy exercise workshops with regional forest stakeholders in Tomsk (a pilot study), Murmansk, Karelia, and Arkhangelsk.16 In each case local organizers, mainly the same persons who had served as project collaborators in the previous case studies, handled the practical arrangements. The local organizers acted on general instructions provided by the IIASA group. The instructions envisaged an ideal workshop format with 25 to 50 participants, a program starting with introductory plenary presentations followed by group discussions chaired by local group facilitators. Selecting a representative group of forest stakeholders to participate and identifying suitable candidates to serve as working group facilitators were seen as the most pressing problems for the local organizers to deal with. Seeking sanction and support for the policy exercise workshops from the regional administrations and forest sector authorities was also seen as an important task for the local organizer.17 The workshops attracted 19 regional participants in Murmansk, 64 in Karelia, and 55 in Arkhangelsk. However, the number of participants taking an active part in the group sessions was significantly lower, 15, 40, and 25, respectively. The composition of the participant groups was also biased to some extent. IIASA’s analysis of the institutional problems hampering the regional forest sector in the respective regions was presented during the introductory plenary session in each one of the three workshops. Russian researchers, forest officials, and NGO representatives also gave short presentations during these plenary sessions. Discussions in the working groups (there were four such groups in the Kare- lian workshop, two in Murmansk and Arkhangelsk) were lively and covered a large number of issues. In all three regions the workshop deliberations resulted in some kind of final document, the contents of which was subsequently brought to the attention of the respective regional administrations. The local/regional mass media also paid some attention to the workshop deliberations. The coverage was best of the Karelian workshop (including several newspaper articles and a regional TV broadcast), while in Arkhangelsk the workshop was only briefly noted in a university newsletter and a short TV news broadcast. The presentations made by IIASA in the workshop plenary sessions were intended as food for discussion in the subsequent group sessions. Each one of the reports from the previous IIASA case studies of the forest sector institutions in eight Russian regions were rounded off with a number of conclusions about the current situation and recommendations on how to achieve changes that would make the forest sector function in a more market efficient way. Not unexpectedly, it was found that a large number of functional deficiencies among the forest enterprises were dependent on problems at various levels in society (cf. Carlsson et al., 2001). Some problems typically belong to the constitutional level (e.g., ambiguities concerning property rights, contradictions between the constitution and the forest Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 515

Table 3. Overview of Measures Recommended in IIASA’s Previous Case Studies of the Institutional Problems Hampering the Russian Regional Forest Sector

At the Constitutional Level

᭺ All ambiguities concerning property rights should be sorted out. ᭺ Collisions between the constitution and subsequent laws must be eliminated. ᭺ Different types of ownership should be allowed. ᭺ A number of political problems e.g., the role of the parliament versus the president, as well as many macroeconomic questions, must be solved in order to establish a solid foundation for a vital forest sector.

At the Collective Choice Level

᭺ Federal and regional policy programs that are in line with market economic principles should be worked out. No political, administrative coordination of business activities. ᭺ A thorough taxation reform should be enacted. The whole system of taxes and fees, not only the number of taxation rules, should be simpliﬁed. ᭺ Politicians and bureaucrats should withdraw from direct involvement in individual enterprises. ᭺ Banks and other credit institutes should encourage entrepreneurship, exports, and the establishment of joint ventures with foreign companies. ᭺ Forest enterprises should create their own independent branch organizations. ᭺ The infusion of cash to the forest sector from “prosperous” state monopolies should be stopped. ᭺ The bankruptcy system and the arbitration courts must be made more efﬁcient. ᭺ Education and training for people to learn new tasks and technologies must be developed; democratic citizenship should be encouraged. ᭺ All democratic means should be utilized to create law and order.

At the Operational/Enterprise Level

᭺ Learn from others; there are a number of good examples. ᭺ Increased efforts at product development. ᭺ Focus more on the economics and less on the engineering. ᭺ Educate and develop the workforce, e.g., in English, modern business accounting, quality management, etc. ᭺ Reward good behavior, work ethics should be held in high esteem, business leaders should act as moral vanguards. ᭺ For larger industries, vertical integration might prove proﬁtable. ᭺ The coordination and integration process must be the result of the companies’ own decisions. It cannot be implemented if the old political structure intervenes in the forest sector. code), some problems must be handled on the collective choice level (e.g., taxation reforms, improved bankruptcy legislation, policy programs should be elaborated, entrepreneurship should be encouraged, education and training of personnel should be organized), while others could be attacked and solved by the actors in the forest sector themselves (these are problems at the operational choice level, such as improved product development, enterprise management should focus on economics rather than engineering, the education of the workforce should be improved, good market behavior rewarded). A number of recommendations could be seen as generally valid for all eight regions taking part in the case study project. Table 3 gives an overview of these general recommendations. In addition to these general recommendations more speciﬁc measures were also suggested in the reports on individual regions taking part in IIASA’s previous study. (See Olsson, 2004a, for a more detailed account of these recommendations.)

Assessing Performance and Outcome

Which were, in retrospect, the most central parameters determining the outcome of IIASA’s policy exercises in Murmansk, Karelia, and Arkhangelsk? A number of 516 Mats-Olov Olsson factors that pertinently inﬂuenced the performance and outcome of the exercises can be discerned. Already during the policy exercise workshops it was soon evident that the format chosen for these meetings actually worked more or less as intended. It even seems that the kind of informal discussions, for which the policy exercise offered a venue, was in fact similar to what many participants had previously experienced in their ordinary work. Therefore, it can be concluded that the factors of greatest importance for the performance and outcome of the policy exercises primarily pertained to the preparatory phase and the general prerequisites for the arrangements as well as the follow-up activities (the support that the initiated activities received in the region), rather than to the format and facilitation of the actual workshops. The discussion in this section is divided into four parts, each one focusing on an issue of importance for the outcome of the policy exercises. (By inserting references to the earlier stated criteria—[A:a–c], and [B:a–e]—attention is drawn to a number of features of relevance for the assessment.)

Pertinent Topics in All Workshop Discussions

The discussions in the three policy exercise workshops dealt with several inter- linked issues and the way these issues were approached revealed participants’ awareness of the existence of an institutional deadlock problem. While discussions no doubt were stimulated by the results of IIASA’s analyses presented in the initial plenary sessions [B:a], the impression nevertheless was that many workshop participants were aware of the difﬁculties caused by the strong interdependences characterizing the institutional framework governing actors’ behavior in the forest sector [A:a]. Several topics discussed in the working groups were common to all three regions [A:a]. This fact alone indicates that the forest sector in Russia is indeed facing spe- ciﬁc problems that need to be addressed in order to make the sector more adapted to the new socio-economic situation. The following basic problem was seen as underlying most other problems that the forest sector is currently facing.

The Regional Forest Sector Is Not Competitive so the Main Task Must Be to Improve Its Eco- nomic Efficiency—The last 10 years or so, when the Russian forest sector has been increasingly exposed to market competition, have cruelly but clearly revealed the serious inefficiency that characterizes the operations in many (perhaps most) forest sector enterprises. Only when market forces started to exert a decisive influence by showing which products were in demand and which were not, enterprise managers were forced to consider alternative ways of allocating resources (investments, inputs) and to strive for maximum productivity. As it turned out the foreign demand for much of the output of Russian forest enterprises was very low (except for raw timber). The new situation has taught actors in the sector that significant gains could be made by improving efficiency and product quality in the forest sector. This would make the sector contribute much more than it does today to the country’s welfare. The problem is how to achieve such improvements. While the efficiency problem seems to have been duly recognized by actors in the forest sector of all three regions—and the significance of this insight should not Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 517 be underestimated [A:a]—there was more disagreement about which measures might help improve the efficiency situation. A number of suggestions were made during the workshop deliberations.

Existing Capital in the Regional Forest Sector Is Largely Obsolete. There is a Huge Need for Investments, Both in Equipment and in Education—Obsolete capital and the consequent need for investments is actually nothing that characterizes only the transition period. Already during the late Soviet era capital maintenance and investments were entirely inadequate. Thus, this is a problem that Russian enterprise managers are already quite familiar with [A:a, A:b]. In the 1990s, meeting competition from foreign well-equipped and efficient producers has only aggravated the problem. Since Russian enterprise managers, like their colleagues in the Soviet Union, rather tend to be engineers than economists the problem of improving technology and the organization of production is something that they know a great deal about (which, incidentally, probably is why the issue of investments was considered so important in the workshop discussions). The difficulty with increasing investments is also readily understood: lack of financial resources [A:a]. Thus, this problem is intimately connected to the problem of an insufficient supply of risk capital. However, discussions among the forest stakeholders concerning the investment problem did not so much focus on the problematic relations with the banking sector. It rather dealt with the need for a regional investment policy, that is, a political initiative to elaborate a policy that might attract foreign investors [A:b, A:c]. The need for improvements of forest related education was also mentioned as a problem that seriously hampered a further development of the forest sector [A:a]. (For example, the efficiency of timber harvesting is negatively affected by a lack of competent drivers of modern harvesters.) There seemed to be a growing awareness among the forest enterprise managers in our three regions that they might have to get engaged themselves in the solution of the education/training problem [A:b]. Traditionally they would have looked upon educational activities as belonging entirely to the public sphere.

Forest Legislation is Inconsistent and to Some Extent Inadequate. Consistent Regional Rules (e.g., Rules Regulating Forest Harvesting) Should Therefore be Elaborated—Regional forest stakeholders in Murmansk, Karelia, and Arkhangelsk were also highly con- scious of the fact that the current forest legislation was deﬁcient in several respects [A:a]. Not only do regional regulations often contradict the Federal Forest Code, but there are also many inconsistencies in the rules regulating harvesting and forest utilization. The fact that local characteristics will necessarily affect forest management and forest utilization makes it essential to elaborate special local/regional rules taking local/regional speciﬁcs into account. The rules prohibiting the use of modern harvesting methods (e.g., more selective cutting and less clear cutting) were considered an especially annoying anomaly in the current forest legislation.

Soviet Forest Management and Forest Utilization Produced a Heavy Legacy in the Form of Environmental Degradation. The Task for a Future Market Efficient Forest Sector Operation Is to Minimize Negative Environmental Consequences of Forest Utilization—The extensive clear cutting of large areas along transport routes that was practiced during Soviet 518 Mats-Olov Olsson times (and to a significant extent still today) has created tremendous environmental disturbances in the forests of all our three regions. The work of environmental NGOs has brought the serious forest degradation problems to the attention of the general public both in Russia and abroad. The fact that environmental degradation today is of much concern to many people (who are also voters and consumers) has forced forest enterprises to prove to their customers that the products they sell have been produced in an environmentally sound way [A:a]. This has made forest certification an increasingly important issue for forest enterprises in many parts of the world. Today certification is a hotly debated issue also in Russia. The discussions during the workshops indicated a growing awareness and acceptance on the part of all regional forest stakeholders of the need for forest certification [A:b]. There was a noticeable tension between participants representing the forest industry and representatives of environmental NGOs. But it could be clearly seen that the former group was being increasingly forced to listen to the views of the envi- ronmentalists. (The discussion about the harvesting moratorium in Karelian old- growth forests demonstrated this fact.)

The Fact That a Substantial Share of the Russian Forest Enterprises Operates Within the So- Called Virtual Economy Is a Problem for the Further Development Toward an Efficient Market System. The Task Is to Push the Regional Forest Sector on to the Road Toward the Establishment of a Market Efficient Institutional Set-Up—The institutional set-up defining the so-called virtual economy conditions the behavior of many actors in the Russian timber procurement arena (as in other sectors of the Russian society). As has already been indicated, this institutional set-up dictates a behavior that is highly inefficient from a market economic point of view. As might be expected, the real- ities behind the notion of the virtual economy are all too familiar to Russian citizens and they have a more or less well-developed knowledge of the workings of the system [A:a, B:a]. Since it is a system perpetuating many of the nonmarket traits of the old Soviet economy it is not altogether obvious to everyone which features of the system are good and which are bad for the possibility to enhance enterprises’ market efficiency. The most difficult issue concerns the sequencing of policy measures that need to be taken. No immediate conclusions were reached during the discussions. However, the issue of how to escape the grip of the virtual economy should be seen as related to another common topic that was discussed in all three regions, namely, the lack of coordination between various actors in the regional forest sector.

The Regional Forest Sector Lacks Coordination. There Is a Need for Some Kind of a Branch Organization. A Regional Forest Policy Should Be Elaborated—Different workshop participants had varying reasons for bringing up the issue of lacking coordination in the forest sector [A:a]. Some saw the lack of coordination simply as a lamentable result of the breakdown of the Soviet command economy and advocated the establishment of a new form of (central) coordination, with or without state interference, but with the authority to direct activities among the regional forest enterprises. This would mainly provide an answer to the difﬁculties caused by lack of information (and/or lack of management competence) in individual enterprises. Other participants rather saw the need for better coordination between actors in Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 519 the regional forest sector as a prerequisite for the possibility to elaborate a number of interdependent policy measures that would have to be taken simultaneously in order to achieve desired improvements in the workings of the sector [B:a]. These stakeholders also meant that coordination has to be developed from below in a bottom-up approach, where various forest stakeholders voluntarily agree to form certain structures (from informal working groups to formal branch organizations) to help identify and further develop their interests [A:b, B:a]. Workshop participants in all three of our regions advocated the formation of some kind of branch organization. It was also suggested that one way of approaching the issue of coordination was to try to establish a process for the elaboration of a regional forest policy, in which the goals for the future development of the sector should be set down and means to achieve these goals should be identiﬁed [A:a].

Actors in the Russian Forest Sector Lack Adequate Information About Domestic and Inter- national Forest Markets—Several of the topics discussed in the three workshops were related in the sense that they ultimately have to do with the lack (or inaccessibil- ity) of information about the forest sector (both in Russia and abroad) [A:a]. This is a legacy from Soviet times when information necessary for running the forest sector was available and of use only to certain actors, primarily those working with economic planning. The problem has both a technical side (how to compile or ﬁnd existing relevant information and make it accessible to users) and a competence side (how to make actors for whom such information is of use—typically enterprise managers—realize their needs and develop the skills to use it). Suggestions for various ways to come to grips with the information problem were discussed in the three regions [A:b]. In Karelia, for instance, stakeholders called for a comprehensive forest inventory (a cadastre) through which not only timber volumes would be estimated but also the minimum price (stumpage fee) that the owner (the state) should ask for standing timber. (Such a price calculation is actually what the market is good at doing.) In Murmansk the same kind of information problem made workshop participants suggest the establishment of a regional information center for the forest sector [A:b]. These suggestions testify to the fact that the Russian regional timber markets still are severely malfunctioning or that actors’ do not have the competence to access and interpret existing market information.

Contextual and Organizational Factors

Some characteristics of the regional economy of which the forest sector is a part as well as certain qualities of the organization of the policy exercises are likely to inﬂu- ence the performance and outcome of the activity. Five features of relevance in this context will be discussed here.

1. The Signiﬁcance of the Forest Sector for the Regional Economy—As might be expected, conducting a policy exercise in a region where the forest sector means much for the regional economy, where the forest sector is large and contributes a substantial share to the regional production, is different from doing it in a region where the forest sector means little for the regional economy [A:c]. The (institutional) prob- 520 Mats-Olov Olsson lems facing the sector may well be similar, but the importance of ﬁnding solutions to these problems varies.

2. Availability of External Funding and Support for the Policy Exercise—IIASA’s initiative to organize policy exercises was at first met with skepticism by Russian regional administration representatives and forest officials. But it was eventually found that there could be no harm in allowing this kind of experiment [A:c]. While this was reason enough for motivating a one-time event, a policy exercise workshop, it was not, as it turned out, enough to motivate a full-fledged policy exercise, which might be a fairly long-term affair, sometimes extending over several years. To get acceptance from regional administrations and forest authorities for a longer-term policy exercise process it is likely that substantial (external) funding (to be released when the recipient met certain criteria) would have been necessary [A:c, B:d, B:e].

3. Accuracy of IIASA’s Previous Analysis (Presented in the Case Study Reports)—Russian versions of the previous IIASA case study reports were made available in advance to all participants in the policy exercise workshops. If participants had not found the analyses and conclusions in those reports reasonably interesting and at least partly valid, it would undoubtedly have discouraged many stakeholders from participating and possibly prevented IIASA from ever engaging in the policy exercise project. It was often stated by the Russian participants that the kind of “view from the outside” that the IIASA case study reports offered might be of great value for developing the regional forest sector in the new market context [B:a].

4. Sanction from the Regional Administration—In the existing political context it seemed necessary for IIASA to strive for official sanction for the policy exercises from the regional administrations, at least for exercises in those regions where the forest sector occupies an important position in the regional economy [B:b]. In the transition the forest management system previously in operation was largely pre- served in its original shape. Many of the people working in the forest utilization sphere—those in public authorities as well as in enterprises—also remained in their previous positions (at least initially). Organizations may have been restructured, sometimes moved into a different ministerial structure, and so on, but by and large they have tended to keep their duties as well as their personnel. This means that a significant degree of path dependence characterizes the administration of forest utilization today. In regions where the forest sector is particularly important for the regional economy (in our case Karelia and Arkhangelsk) the regional administration wants to guard its position and make sure that it is well informed about developments. As executive power the administrations are also able to determine much of the sector’s functioning (through granting certain financial support, coordination with other sectors in the economy, legislative initiative, state orders, etc.). In short, organizing a successful policy exercise without at least a passive support from the regional administration might not even be possible [B:c].

5. Sanction and Support from Forest Authorities—The forest management authority in Russia is an old and well-established organization. The situation is similar, even Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 521 if not so pronounced, for the public authorities in charge of forest industrial activities. In these organizations you ﬁnd the people in Russia who have the best knowledge about the current situation in the country’s forests and who are very engaged in their future well-being. Even if it can be expected that organizational changes sooner or later will affect the structure of the forest management and forest industrial authorities, it would be strange, even foolish, not to strive for the support from the individuals working in these organizations when making an external systemic intervention with the aim of improving regional forest policies [B:b, B:c, B:d].

Issues of Legitimacy and Trust

Key issues in securing the legitimacy of the external interventionist’s initiative to conduct policy exercises with Russian forest stakeholders have to do with the (1) selection of participants, (2) their competence, and (3) their conduct.

1. Selection of Participants: Methods and Outcomes—The selection of participants should ideally be affected by many considerations, such as participants’ membership in relevant interest groups, their experience and knowledge of forest sector problems, their innovative ideas about how the current problems might be solved, and so on. In practice, however, the selection of participants to IIASA’s policy exercise workshops was to a certain extent arbitrary, and dependent upon the endorsement that the workshop was given by the regional authorities and the “forest establishment” [B:b]. Arbitrary in the sense that it was largely dependent upon the local organizer’s relation to the forest sector officials in the regional administrations (including the regional forest management), to people working in the forest industry as well as to people doing forest-related research. Official endorsement of the workshops was most pronounced in regions where the forest sector occupies an important role in the regional economy, which is the case in Arkhangelsk and, first of all, in Karelia. Official endorsement created an interest in the event that was clearly reflected in the number of participants representing the regional administration and forest management [B:b, B:c]. Karelia is the prime example of this profile. Here official endorsement of IIASA’s initiative was significant. In Arkhangelsk, the initiative was also officially endorsed, but for some (unknown) reason this endorsement was not so clearly reflected in the number of participants representing public authorities. Here, as was reflected in the composition of the workshop participant group, the sanction for IIASA’s initiative was instead stronger from people working with forest- related research. In Murmansk, a majority of the participants represented operative units in the forest sector (leskhozy and forest enterprises) and not administration or research. Not unexpectedly, it seems that in regions with a large forest sector the reformation of the sector is an important concern for politicians and top bureaucrats—the personal power and welfare of these individuals depend on how they are able to cope with the forest sector problems, while in regions with a small (insignificant) forest sector the people working in the sector are left to sort out their own problems. 522 Mats-Olov Olsson

Apart from the people working in regional administrations (including the regional forest management) and people working with forest related research, there are two other forest stakeholder groups in Russia that were expected to take an active part in IIASA’s policy exercises, namely, top- and middle-level executives of forest enterprises (including leskhozy, the operative units of the regional forest management) and representatives of various environmental NGOs. To a Western observer/analyst it would seem most appropriate and efficient if forest enterprise representatives were to engage deeply in an endeavor to make Russian regional forest policies more efficient. As it turned out, however, the workshops in Karelia and Arkhangelsk managed to engage comparatively few business enterprise representatives (24 and 22% of all participants, respectively) and an even smaller share of NGO representatives (11 and 2%, respectively, incl. media representatives). This might be seen as a somewhat peculiar turnout in the eyes of a Western observer, while it would hardly surprise a Russian analyst. On the contrary, a large and active participation on the part of business actors and laymen would probably (still) be considered even a bit suspicious in the sense that, in and of itself, it questions the ability of the “appropriate authorities” (regional bureaucracies in collaboration with researchers) to come up with suitable solutions to the forest-related problems. The fairly low participation rate of business actors and NGO representatives could be a reflection of the fact that the Russian civil society is still underdeveloped. Even today there is a “Soviet touch” of omnipotence to the bureaucracies of the state executive (in our case the regional administrations). Organized civic activity (channeled through civic associations as well as private enterprises) has not yet acquired a position in the Russian society corresponding to what it has in advanced market economies. In contrast to the situation in advanced market economies the initiative for policy changes in Russia is thereby mostly left with individuals and organizations that are not appointed by the electorate, and, since opinions are not efficiently channeled through civil society organizations, there is nothing guiding or constraining the policy decisions of the bureaucracy. A pertinent problem with this situation is that it allows the adoption of policies that are guided by shortsighted political (or even personal) concerns rather than a consideration for economic efficiency [B:c, B:d].

2. Participants’ Competence: Stakeholders’ Understanding of the Institutional Deadlock Problem—Ideally, stakeholders’ competence should also be taken into account in the selection of participants to a policy exercise [B:c]. This immediately raises two problems. The first and obvious one concerns the very limited information and knowledge that an outside interventionist could obtain about the competence of individual stakeholders in the Russian regional forest sector. Here one is of necessity forced to trust the judgment of the local organizer and the people who take an active interest in the arrangement. The second and more fundamental problem concerns the issue of what kind of competence one should be looking for and what kind one could possibly hope to find in this particular situation. Clearly, Russian forest stakeholders know much about the workings of the regional forest sector. But, with the objective of using the policy exercise as a tool for developing policies for improving the functioning Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 523 of the sector in its new market environment, one would ideally also like to find participants who in addition to their knowledge about the current Russian forest sector problems had a solid experience of the workings of a market economy. Obviously, such a broad and varied competence is extremely rare in today’s Russian society, where the transition from a command economy to a market-oriented system has only just begun. In this situation one could not automatically expect that Russian forest stakeholders would easily understand and appreciate the analysis of the institutional problems besetting the regional forest sector that had been made by IIASA and that was used as a background material to set the stage for the discussions during the policy exercise workshops. However, once the participants’ bewilderment concerning the very concept of institutions had been settled—Russians would rather use concepts like “the economic mechanism” to refer to what is often called “the institutional framework” in IIASA’s reporting—it became clear that the issues discussed in the previous IIASA case studies were familiar and the content of the reports was found to be relevant for the problem situation as experienced by many workshop participants [B:a]. It is especially notable that the institutional deadlock, which is seen in IIASA’s analysis as a fundamental problem for a further development of the Russian market economy, seemed to be intuitively understood by many workshop participants [B:a]. It was clear to many workshop participants that a profound institutional change (a change affecting the whole institutional framework) is required to improve the functioning of the Russian forest sector. However, realizing the deep complexity of the institutional change issue might also hamper stakeholders’ search for an understanding of the situation that would suggest possible ways out of the institutional deadlock.

3. Participants’ Conduct: Quality of Discussions, Outcomes—Discussions among participants in small working groups constituted an important feature of the IIASA-led policy exercise workshops in all three regions. The idea was to have three to four such working groups in each one of the workshops. As it turned out, the number of people prepared to take part in the group sessions varied, only allowing four working groups in Karelia and two groups in Murmansk and Arkhangelsk, respectively. Furthermore, the quality of the discussions in the working groups was also affected by a certain bias in the composition of participants. The most striking feature was the comparatively low share of business representatives among the workshop participants in Karelia and Arkhangelsk [B:c, B:d]. While discussions in the various working groups were lively and often touched upon highly relevant topics, they also tended to be a bit unstructured and without a clear focus. Participants seemed familiar with the format of the meeting (highly informal discussions in small groups), but at the same time not able to make discussions converge in time to allow the formulation of clear and consistent conclusions. True, the deliberations in the working groups and in the subsequent plenary sessions of the workshops did provide the basis for formulating a document in which the main outcomes of the discussions were laid out. But while these documents indeed do provide a record of the workshop deliberations that would be valuable for a working group charged with the task to continue developing spe- 524 Mats-Olov Olsson ciﬁc proposals to be part of a regional forest policy, workshop participants instead seemed to look upon the documents as some kind of input to a future process potentially to be driven by someone else, most likely the regional administrations, without further stakeholder interference [B:d, B:e]. The democratic deﬁcit that is a legacy from Soviet times might explain this passivity on the part of the regional forest stakeholders participating in the workshops. While traditionally discussions were encouraged in the elaboration of solutions to problems, no one expected operative decisions to be taken by any others than members of the political elite (in practice, by top echelons of the regional communist party structure). Thus, again, this reminds us of the still fragile Russian civil society, in which organizations have only limited possibilities to channel people’s opinions and thereby offering a platform for civic activity.

Long-Term Effects

Developing well-founded suggestions for a modern regional forest policy is a demanding task and something that cannot be done through a one-time workshop, irrespective of the good quality of the people participating in the event. Ideally, the workshops arranged by IIASA in Murmansk, Karelia, and Arkhangelsk were to become the first initiating event in a longer-term continuous participatory policy process eventually resulting in well-founded suggestions for a regional forest policy. As already noted this outcome of IIASA’s initiative did not materialize in any of the three regions. The question is, why? Let us first note, however, that even if the desirable outcome (in the form of a long-term participatory policy formulation process) did not materialize in any of the three regions, the policy exercise workshops nevertheless did make a certain impact on ongoing regional policy processes. It was reported from all three regions that the final documents from the workshops were brought to the attention of the relevant forest authorities and the regional administrations. In the case of Mur- mansk we have no indication of whether or not the workshop affected the regional forest policy. In the case of Karelia and Arkhangelsk, several participants in the workshops were actually already engaged in ongoing policy processes relating to the regional forest sector. In Karelia the regional government had established a working group that had just started its work to revise the regional forest policy. In Arkhangelsk the suggestions made in the final document of the IIASA workshop were fed into a forest legislative process of the regional parliament. In Murmansk, and especially in Karelia, the IIASA workshop was given ample media coverage. Several possible reasons might be presented for the failure of IIASA’s policy exercise workshops to trigger the intended long-term effect in the form of full- fledged policy exercises. One way or another these reasons all have to do with legitimacy and trust and the problem of finding the right stakeholders to work with [B:b, B:c, B:d]. These factors are furthermore intimately linked so that competent and interested stakeholders are easy to recruit for the process if they see the process as legitimate. But the legitimacy of such a process might also emerge from the fact that trustworthy stakeholders take part in it. Organized forest stakeholder activity in the Russian regions is still to a large extent directed by the public authorities (the forest management and forest indus- Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 525 try departments in the regional administrations). It seems that IIASA correctly appreciated the existing situation realizing that endorsement for the policy exercise initiative had to be sought from the regional administrations [B:b]. Such endorsement was also obtained. The regional authorities agreed to see the initial policy exercise workshop through, without actually making any further commitment to support a longer-term policy formulation process. Had IIASA been able to channel external financial support for implementing the policy suggestions elaborated in a proper long-term policy exercise, a more profound interest for the whole project might have been obtained from the regional authorities [B:e]. That might also have stimulated workshop participants to engage in the continuous policy formulation processes that were to succeed the initial policy exercise workshops. One should, however, note that, in the presence of a strong civil society with powerful civic organizations, endorsement from the regional administrations would probably not be decisive for the implementation of a full policy exercise.

Conclusion: Lessons Learned

As previous research has shown (Carlsson et al., 2001; Olsson, 2004a) the development of the Russian regional forest sector is seriously hampered by deficiencies in the institutional framework governing actors’ behavior. The behavior dictated by the institutional set-up characterizing the so-called virtual economy was found to be especially detrimental in this context. At the same time it was found, however, that being aware of existing problems does not allow any easy solutions that would immediately improve the situation. The reason is that forest sector institutions (like all institutions governing certain behaviors) are interdependent so that changes in one set of deficient rules presuppose simultaneous changes in others. Thus, it was found that the situation is characterized by an institutional deadlock. In such a deadlock situation finding and implementing efficient policy measures that will improve the institutional framework is a non-trivial task. What should characterize such efficient solutions and how could these solutions be found? By studying existing interdependencies it might be possible to identify a feasible and efficient sequencing of reforms that might help dissolve the deadlock and modify the existing institutional set-up making it more conducive to increased market efficiency (cf., for instance, Dewatripoint & Roland, 1996). It is also necessary to create an adequate incentive structure in society making actors want to make market- efficient decisions about their actions. In order to be implementable, solutions to these problems should be elaborated in a dialogue with relevant stakeholders. For practical purposes stakeholders’ views must be channeled and aggregated through various interest groups. Such organized opinion formation would greatly facilitate the establishment of efficient policy dialogues. Thus, an active civil society will improve the efficacy of a participatory policy formulation process. As previously noted, Russian civil society is underdeveloped. This fact seriously complicates a solution to the problem of inefficient institutions. However, while a well-developed civil society would facilitate participatory policy processes in Russia, such processes—if they could be established—might also stimulate the development of civil society. Thus, there is an obvious interdependency between the dynamics 526 Mats-Olov Olsson of civil society and participatory policy formulation processes. The systemic interventions that IIASA initiated in several Russian regions through its series of policy exercises can be seen as a measure intended to improve regional forest policies as well as to stimulate a further development of Russian civil society. The assessment of these initiatives that has been made in this article presents a somewhat mixed picture. With reference to the issues raised at the beginning of the article it can be concluded that some prerequisites actually exist for the successful establishment of a participatory policy formulation procedure in the Russian forest sector. So, for example, there are Russian regional forest sector stakeholders who perceive the serious institutional problems that have to be solved for the sector to become more competitive and who also have ideas about what the possible solutions to these problems might be. Moreover, it can also be concluded that the form of the policy formulation procedure suggested by IIASA (using the policy exercise “tool”) might work as intended in the Russian context. In principle, stakeholders are prepared and able to make use of the policy exercise format. Given the right (moral and financial) support from both domestic authorities and—in the case of an externally initiated systemic intervention—the initiator of the process, participatory policy formulation processes might indeed work and produce intended results in the form of implementable policy proposals. However, as has been recounted in this article, the outcome of IIASA’s policy exercises did not fully meet prior hopes or expectations. While discussions during the initial policy exercise workshops functioned as intended and generated a number of relevant and interesting policy suggestions, the initiative did not trigger any longer term activity in the form of a continued ordered discussion among the regional forest stakeholders with the purpose of elaborating an implementable proposal for a regional forest policy. A number of structural features of the situation restricted actors’ behavior and effectively prevented the execution of a full-fledged policy exercise. Two such features seem especially important in this respect. The first concerns the systemic interventionist’s affiliation with actors in the arena, the rules of which the policy exercise is supposed to influence. Did IIASA really seek the sanction and support of the most suitable actor(s) in the regional timber procurement arena? The regional administrations and the existing regional forest authorities might well be ambivalent in their support of participatory policy formulation processes. Such initiatives might be seen as a criticism of existing practices for which these authorities are responsible. Furthermore, officials might see the initiative as a threat to their established positions in the regional power hierarchy and the material benefits they can obtain through their positions. The result might be a formal support of the procedure suggested by IIASA, while in practice this support is not intended to produce many concrete results. This actually touches upon a second, and even more fundamental, feature of relevance for the failure of IIASA’s initiative to generate a full-fledged (long-term) policy exercise, namely, the fact that a practical prerequisite for establishing policy dialogues is the existence of partners with whom to conduct the dialogue, for instance, in our case various forest sector stakeholder organizations. Some such organizations exist, but not very many. Thus, again, the lack of stakeholder organizations illustrates deficiencies in the Russian civil society. In the current Russian situation an external systemic interventionist (like IIASA, a research institute) Systemic Interventions to Promote Institutional Change in the Russian Forest Sector 527 might benefit from the help of forest sector organizations in other countries when identifying suitable Russian stakeholder organizations with which to affiliate in an endeavor to initiate a participatory policy formulation process in the Russian regional forest sector.

Notes

1 The research on which this article is largely based was conducted between April 1997 and Decem- ber 2001, when the author was a member of a small team of researchers in the Forestry Project at the International Institute for Applied Systems Analysis (IIASA) in Laxenburg, Austria. The IIASA core team of researchers that worked with the institutional framework study consisted of four people including the present author. In addition, some 15 PhD students very actively contributed to the study during their participation in the institute’s Young Scientists Summer Program in the summers of 1997 through 2000. Five Russian researchers also made important contributions to the study both in their capacity as local coordinators of the survey that was made among Russian forest enterprise leaders and as coauthors of several IIASA reports. Information about IIASA can be obtained from the institute’s website at http://www.iiasa.ac.at. 2 The five other regions included in the study were Moscow, Tomsk, Krasnoyarsk, Irkutsk, and Khabarovsk. A summary and digestion of the results of the eight case studies was published in the September 2001 issue of Europe-Asia Studies (cf. Carlsson, Lundgren, & Olsson, 2001). A complete listing of about 50 publications produced by the “institutional framework study” can be found in Olsson (2004a, Appendix A) and at http://www.didaktekon.se/mats/ii-publ.htm. 3 A first (pilot) policy exercise was conducted in Tomsk Oblast in June 2000. The experiences gained through that event were reported in Olsson (2001). The present article is largely based on an extensive report issued by IIASA in the summer of 2004 (Olsson, 2004a). 4 The theory of the virtual economy has subsequently been elaborated by a number of scholars. The presentation here is based on several publications by Gaddy and Ickes (1998a, 1998b; 1999a, 1999b; 2002a) and other authors discussing their theory (see, e.g., Åslund, 1999; Carlsson et al., 2001; Chang, 1999; Ericson, 1999; Gaddy, Ickes, Mazharov, & Volgin, 2000; Phillips, 1999; Slay, 1999; Woodruff, 1999). Gaddy and Ickes have recently (2002b) compiled a book based on the material that they issued earlier as journal articles, chapter contributions to edited volumes, working papers, and manuscripts available via the Internet. 5 A broad scan of the available literature on privatization and corporate governance in Russia testi- fies to this fact (cf., for instance, Sutela, 1998, 2003). As a result of subsequent business legislative reforms it seems that the changes initiated through the privatization program have actually produced a slight improvement in corporate governance (cf. Vasilyev, 2000). 6 See Ramazzotti (1998) for an elaboration of the concept of dominant institutional set-up. 7 Recent articles in the press indicate that changes in forest land property rights are contemplated by the government. Since the spring of 2004 a draft of a new Forest Code is being elaborated in the Ministry of Economic Development and Trade. Here for the first time private ownership of forest lands is suggested under certain conditions. (The draft code and various comments on the proposal can be found at http://forest.ru/rus/legislation/.) 8 This was true for the Russian transition period at least until Putin’s presidency. It seems that Putin after 3 years in office has managed to stabilize state power to the point where Western observers become cautious. Thus, for instance, M. Steven Fish (2001) warns: “Putin’s path may lead directly to hard authoritarianism. Yet it is also possible that some aspects of it will—even if inadvertently— spur a resumption of democratization. In whichever direction it leads, Russians are to a large extent getting what they want.” The importance of the role and function of the state during transition has been increasingly noted in the literature. See, for example, Alexander (1998) and Solnick (1998). 9 There are also other factors that have gained an increasing importance during the past decade and today these factors are causing a profound rethinking of forest management policies and practices all over the world. As Anderson and Crowder (1998) have pointed out, property rights patterns have shifted in some regions of the world (notably in Central and Eastern Europe). Political power has become more decentralized (giving regional and municipal authorities increasing influence). Democratization and multi-party politics have emerged with the decline of centrally planned, one- party states. Demographic transitions have shifted the population structure toward higher urban- 528 Mats-Olov Olsson

ization (with changing perceptions, interests, and objectives in forest management). Governments are being downsized due to financial restrictions making them only hold on to basic functions (such as policymaking, planning, legislation). Functions earlier belonging to a single natural resource management institution have become increasingly contradictory (cf. conservation and production) and sometimes various functions have eventually been separated through institutional reform and the break-up of organizations. 10 For instance, the FAO journal Unasylva, No. 194 (1998) contains a number of articles presented at a FAO hosted workshop in December 1997 on “Pluralism and Sustainable Forestry and Rural Devel- opment”. 11 For an overview of systems thinking see, for example, Olsson (2004b). In the last 10 to 20 years a large literature has emerged on “participatory processes,” or “participatory development,” “action research,” and so on. Recent examples and theoretical elaborations of such approaches can be found, for instance, in Nelson and Wright (1995), Stringer (1999), and Clarke (2000). 12 This approach covers the rules-in-use governing almost all activities in the forest sector, the notable exception being rules governing the behavior of final wood product users and the rule system affecting final wood demand. 13 The IAD framework has been used in numerous studies of resource management around the world. Good overviews of the approach are given, for instance, in Ostrom, Gardner and Walker (1994) and Ostrom (1995, 2005). 14 The surveys consisted of interviews conducted with about 25 to 35 forest enterprise managers in each one of the eight regions that were part of our case study set. Questions in the survey mainly related to the behavior of the respondents in their capacity of managers working in a new and unfamiliar market context. The surveys were conducted with the help of local Russian study coordinators. The answers were reported in writing (in both Russian and English) and delivered to IIASA where the information was coded into a database and further analyzed. The Murmansk case study was authored by Ivanova and Nygaard (1999) and Jacobsen (1999). The Karelian and Arkhangelsk case studies were authored by, respectively, Piipponen (1999) and Carlsson, Lundgren, Olsson, Yu, & Varakin (1999). 15 A detailed description and analysis of the forest sector in the three regions is given in Olsson (2004a). 16 See Olsson (2001, 2004a) for detailed accounts of these exercise workshops, including programs, lists of participants, and final documents. 17 IIASA received generous financial support for the purpose from the Swedish Council for Planning and Coordination of Research (FRN), the Västerbotten County Administrative Board, and the Kempe Foundations.

About the Author Mats-Olov Olsson is a political scientist working at the Centre for Regional Science (Cerum), Umeå University, Sweden. His research has mainly focused on the socioeconomic changes in the Soviet Union and, subsequently, the profound transformation process of the Russian society. Between 1997 and 2001 he worked at the International Institute for Applied Systems Analysis (IIASA) in Austria in a study of institutional changes in the Russian regional forest sector.

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EUROPE-ASIA STUDIES Vol. 60, No. 5, July 2008 (forthcoming)

The Russian Virtual Economy Turning Real: Institutional Change in the Arkhangel’sk Forest Sector

MATS-OLOV OLSSON

Abstract The article reports on an attempt to assess recent developments of the Russian ‘virtual economy’, a system that some have argued, represents an alternative form of economic interaction to the modern market economy. In the virtual economy enterprises are engaged in informal non-market transactions with other enterprises and the public sector in accordance with rules that are alien to a market economy. Structural and behavioural changes that have taken place in the Russian economy after 1998 are studied with the help of official data and two surveys (from 1998 and 2005) of 15 forest sector enterprises in Arkhangel’sk Oblast’, a region in Russia’s north-west with a largely forest-based economy. The outcome of the assessment indicates that the virtual economy is contracting in the Arkhangel’sk forest sector as well as in Russia at large, and that it will eventually disappear altogether, even if it is likely to exert a profound influence on the behaviour of Russian enterprises for some time yet.

IN THE DRAMATIC CHANGE PROCESS THAT UNFOLDED IN THE YEARS FOLLOWING the disintegration of the Soviet Union, Russian society was forced to enter a fundamental institutional reconfiguration. Not only the entire legislation, but much of people’s norms and rules of conduct had to change radically. The dismantling of the Soviet command economy led to a spectacular reduction in production volumes, while simultaneously it became clear that great difficulties had to be overcome in order to change the economic mechanism. It was envisaged that the ‘visible hand’ of central planning would be replaced by a system of rules that would allow the economy to self-organise and adopt a market-based form of resource allocation. Clearly, the country’s rich resource endowments opened up great prospects for a positive economic development in the long-term. This was based on the assumption that an institutional framework conducive to an

Partial financial support for the research reported in this article was provided by Formas—the Swedish Research Council for Environment, Agricultural Sciences and Spatial Planning. Dr. Mikhail Yu. Varakin of the Arkhangel’sk State Technical University conducted the surveys among forest enterprises in Arkhangel’sk Oblast’. Valuable comments on earlier drafts of the article were received from Lars Carlsson, Nils-Gustav Lundgren, Sten Nilsson, Karl-Göran Edstedt, Lars Olsson, and from an anonymous referee and the editors of this journal. These contributions are hereby gratefully acknowledged. 2 MATS-OLOV OLSSON efficient market-based economy could be established. Since the onset of transition in the early 1990s, the pressure for change in the institutional set-up has remained extremely high in Russia. However, institutional change is no simple and straightforward process that could easily be controlled and governed. 1 It soon became evident that severe rigidities hampered the profound reorganisation of society necessary to make it comply with the requirements of a modern market economy. To the surprise of many observers, the reform package introduced by the Russian government with financial support from international organisations did not produce the fast and efficient changes in the economy that were expected. Rather than forcing Russian enterprises to restructure their activity to become more market-efficient, many enterprises turned away from market interactions and instead engaged in informal exchange with other enterprises in a similar predicament, thus establishing what has come to be known as the ‘virtual economy’. A debate has developed on whether the virtual economy constitutes a fundamentally new mode of economic interaction or if it merely represents a detour on Russia’s road to a modern market economy. In this article the development of the Russian forest sector is used as a means to answer this question.

The theory of the virtual economy The theory of the virtual economy was launched and popularised in the late 1990s by the American scholars Clifford G. Gaddy and Barry W. Ickes (2002).2 This theory aims to explain why it has been so difficult to make Russian enterprises modify their behaviour to suit the demands of the emerging market economy. It argues that a largely outmoded production capital and a serious lack of market economic competence, as well as a suboptimal geographical distribution of production, were the main aspects of the legacy of the Soviet era that system change in Russia was supposed to overcome. The problems were of a magnitude that threatened many (if not most) Russian enterprises with bankruptcy if they were forced to cover their factor costs by product sales at prices established on truly competitive markets. The situation that emerged in Russia as a consequence of the far-reaching economic reforms of the first half of the 1990s—including the privatisation of state owned enterprises—did not entirely correspond with the outcome expected by the reformers. The rapid privatisation could perhaps be seen as a revolutionary change—a great

1 According to institutional theory, actors in society base their decisions on some set of established rules or norms. Such ‘rules-in-use’ or ‘institutions’ can be formal or informal. The former are the result of collective decisions often manifested in legal codes, while the latter have emerged in the course of actors’ interactions. ‘Institution’ in this sense should not be confused with ‘organisation’, even if special organisations are sometimes established to monitor and enforce actors’ compliance with specific institutions. The most important property of both formal and informal institutions is their obligatory character. Actors are expected to comply with the rules-in-use and such expectations are held not only by actors directly affected by the expected behaviour, but by ‘society’ as a whole. Understanding actors’ behaviour as guided by rules or institutions means that changes in behaviour can be interpreted as changes in the rules or institutions governing that behaviour or vice versa. These are the defining distinctions of institutions emphasised, for instance, by North (2005) and Ostrom (2005), and elaborated on by Streeck and Thelen (2005). 2 The book was preceded by a number of papers and research memoranda by the same authors (Gaddy & Ickes 1998a, 1998b, 1998c, 1999a, 1999b, 1999c) and other authors discussing their theory (Phillips 1999; Åslund 1999; Ericson 1999; Slay 1999; Chang 1999; Tompson 1999; Woodruff 1999; Gaddy et al. 2000; Carlsson et al. 2001). THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 3 historical discontinuity—in that it immediately removed formal ownership of the means of production from the hands of the state. On the other hand, state control over the use of these means of production had largely vanished long before that.3 In reality, central economic planning hardly functioned at all in the late 1980s (Naishul’ 1985; Braguinsky & Yavlinsky 2000). Instead a parallel ‘informal’ economy had emerged that interacted with the officially recognised economy and solved many of its rigidity problems. Thus, the changes in enterprise behaviour that were introduced as a consequence of the disintegration of the Soviet system were not, after all, particularly dramatic. In terms of enterprise managers’ behaviour, at least initially, the new privatised economy largely meant continued business as usual. A large share of the newly privatised enterprises chose to withdraw from market-based monetary exchange and revert to barter trade at negotiated prices. Their behaviour also displayed a number of other characteristics that would seem odd in a market context, such as seeking tax exemptions or tax offsets, rather than making investments in modern technology and improving their competitive capacity. With large numbers of enterprises, not only in the forest sector, adopting similar behaviour, a special enclave—a virtual economy with its very specific institutions—was established in the emerging Russian market system.

What determines the future of the Russian virtual economy? Whether a virtual economy enterprise is going to become more market competitive or whether it is going to stay—and perhaps even improve its position—within the virtual economy will be largely determined by whether it chooses to favour investments reducing its ‘distance to the market’ (d) or ‘relational capital’ (r), that is, investing in modern production equipment and competence or exploring its relations with political power (Gaddy & Ickes 2002, p. 65). Thus, the question is what determines the owners’ or managers’ decisions to invest in either d or r. A decisive factor is, first of all, the enterprises’ initial resource endowments or, in other words, where the enterprise is located in the ‘r-d space’. More precisely, it depends on what pay-off structure the individual enterprise faces. For enterprises with a large stock of r it might pay off to continue investing in r. For enterprises with a short distance to the market (enterprises having a fairly modern production capital) investments in d might be most profitable. This means of course that, if the goal is to force Russian enterprises to become viably market competitive, such measures have to be taken that support and stimulate investments in d, ‘distance reduction’. In principle, numerous policy measures affecting enterprises’ investment behaviour can be envisaged. Previous research has pointed out several areas where public intervention might contribute to improving enterprises’ market behaviour (Gaddy & Ickes 2002, 2005; Carlsson et al. 2001). However, it should be noted that the problem is not only to improve the legislation. It is also a matter of enforcing existing laws and making economic actors behave in accordance with the legislator’s intentions. In a recent article Gaddy and Ickes (2005) outline the several existing transparent and non-transparent routes for redistributing the profits produced in the Russian oil and gas

3 Desai & Goldberg (2000) note that property rights over enterprises had already been allocated de facto during the Soviet era. See also Cox (1996) for a more detailed description of how property rights gradually changed during the Gorbachev period. 4 MATS-OLOV OLSSON industries and argue that the virtual economy will not—and, in fact, cannot—be abandoned until the redistribution of these natural resource rents has become entirely transparent. Enterprises operating in the virtual economy are partly being sustained through informal rent sharing by the large oil and gas producers (allowing some customers to pay lower than world market prices for purchased oil and gas). Thus, the oil and gas companies have in effect taken over the task previously performed by the state of subsidising unprofitable enterprises. In this way such enterprises are not faced with the hard budget constraints that would force them to restructure their activities to become market viable, instead they are allowed a continued existence in the virtual economy. The reason for the oil and gas companies to go along with this practice is the fact that property rights in Russia are still not sufficiently secure. By performing this task they hope to attain a trade-off, sparing them even more prominent state interference in their activities. The sheer magnitude of the oil and gas industries, their large contribution to the entire Russian economy (in 2005 estimated at 25% of GDP), brings them a power that constitutes a threat to the Russian state. This, in combination with a resource extraction ideology largely inherited from Soviet times, seeing rents of natural resources as a ‘gift of nature’ to be employed for the benefit of the whole economy, makes the state try to maintain a strong influence over the resource sector, which in turn prevents a behaviour of the resource extractive industries guided by normal market based rules. According to this line of reasoning there cannot be a sustainable market based economic development (and abandoning of the virtual economy) in Russia until there has been a thorough reorganisation of the energy sector, opening it to competition, releasing it from existing rent-sharing schemes, and securing its property rights (Gaddy & Ickes 2005; Ahrend & Tompson 2005b). The question is if there are any observable signs that the institutional deadlock at the core of the virtual economy is actually being disentangled.

Previous research on the virtual economy in the Russian forest sector On the basis of the theoretical and practical considerations outlined above, a multiple case study design was developed for the task of examining the character of the economy prevailing in the Russian forest sector (Carlsson, Lundgren & Olsson 2001). The research found that the behaviour displayed by many of the forest enterprises in the studied regions largely conformed to what could be anticipated on the basis of the theory of the virtual economy. Case studies were carried out in eight regions of Russia. The focus was on the ‘timber procurement arena’ and emphasis was laid on an analysis of the characteristics of the resources, the society and the rules-in-use (or institutions) governing actors’ behaviour in the forest sector. In each one of these regions between 25 and 35 forest enterprise representatives (mostly CEOs) were surveyed. 4 In researching the unruly Russian

4 The institutions governing actors’ behaviour in the forest sector of eight Russian regions were the object of a four-year study (1997–2001) conducted by a group of researchers at the International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria. The regions that provided cases in this study were: the Republic of Karelia, the Oblasti of Murmansk, Arkhangel’sk, Moscow, Tomsk, and Irkutsk, and the Krasnoyarsk and Khabarovsk Kraya. The results of the study were published in a series of IIASA Interim Reports and various journal articles. See http://www.didaktekon.se/mats/ii-publ.htm for a THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 5 transition, where old established rules-in-use (institutions) were challenged both by the actors who were supposed to be guided by them and by a weak government, frequently issuing directives intended (with or without much success) to modify actors’ behaviour, it seemed necessary to directly approach the actors themselves to find out which rules actually governed their behaviour and what motives they had for complying with certain rules while violating others. In this way it was possible to identify and characterise the existing institutional set-up governing actors’ behaviour, and the actors’ reasoning behind the adoption of new rules of behaviour could be analysed. The surveys of enterprise representatives were accompanied by analyses of contextual features (in particular the character of the resources and society) based on information (in the form of previous research, official documents, and public statistical data) pertaining to the forest sector and the whole economy of the selected regions, and (to some extent) of the country at large. The case studies revealed institutional obstacles to the development of an efficient forest sector in all eight Russian regions. They showed that very similar institutional problems were experienced in all the regions studied, despite their quite varying preconditions in terms of raw materials, climate and economic structure.

A case study of Arkhangel’sk: objectives and approach The purpose of this article is to report on the findings of a single follow-up case study of Arkhangel’sk Oblast’ and to compare it with the findings relating to the same region in the previous research reported above. Its aim is to investigate whether the behaviour of business actors in the Arkhangel’sk forest sector is still guided by the specific institutional arrangements that characterise the virtual economy. There is evidence that many of the characteristic traits of the virtual economy survived the 1998 financial crisis (when the devaluation of the ruble improved the conditions for domestic production), and that it is too early to dismiss the influence that this large special enclave has on Russia’s economic performance (Hanson 2002, 2003; Gaddy & Ickes 2001, 2005). On the other hand, there are also indications that developments in Russia in recent years have opened opportunities and created positive incentives for many enterprises to move from the virtual economy and face competition from firms operating in the emerging Russian market economy (Hanson 2003; Åslund 2007). Therefore it is hypothesised in this article that, since the end of the 1990s, forest enterprises in Arkhangel’sk Oblast’ have tended to leave the virtual economy and have increasingly acted in accordance with rules governing business behaviour in a market system. As will be further argued below, the observed behaviour of the Arkhangel’sk forest sector enterprises can be seen as an example of what is happening in other sectors of the regional economy, and in the economy of Russia at large. The theoretical underpinning and the specific design of the present follow-up case study of the institutional obstacles for an efficient forest sector in Arkhangel’sk Oblast’ is based upon the methodology employed in the 1997–2001 series of case studies. There were several motives for selecting Arkhangel’sk Oblast’ as the single case in this

complete listing of publications from the study with links for downloading most of the papers. Information about IIASA can be obtained from the institute’s website at http://www.iiasa.ac.at. 6 MATS-OLOV OLSSON follow-up study. Arguably, prerequisites for enterprise restructuring should be favourable in regions with a highly diversified economy and in regions with a large production of products for which there is a high international demand (like oil and gas). Con- versely, prerequisites for enterprise restructuring should be comparatively unfavourable in regions with an undiversified economy dominated by a sector (or sectors) in great need of radical modernisation (such as the Russian forest sector). Thus, Arkhangel’sk Oblast’, with its highly undiversified economy dominated by the forest sector, may be considered a critical case (Yin 2003) for assessing the extent to which restructuring has actually been achieved, not only among Arkhangel’sk forest enterprises and the regional forest sector, but in the whole regional economy, and, as is further argued below, in the whole Russian economy.5 Several propositions of importance for the present follow-up study might be generated on the basis of the results of the earlier studies. For instance, no significant regional differences were found in the degree to which business behaviour was guided by the specific rules-in-use constituting the Russian virtual economy, despite the fact that natural and general socio-economic conditions varied greatly between the regions included in the study (Carlsson et al. 2001). Other studies have indicated that the institutions constituting the virtual economy guide the behaviour of most Russian market non-viable enterprises irrespective of the sector to which they belong (Aukutsionek 1998; Guriev & Ickes 2000; Desai & Idson 2000). 6 These findings underpin the proposition that information gained through the new survey among Arkhangel’sk forest enterprises could also be regarded as (at least partially) indicative of the situation in the Russian forest sector and the economy at large. And, conversely, information about developments in the Russian economy reflecting the pervasiveness of the rules-in-use characterising the virtual economy should allow us to expect a similar situation to prevail in the Arkhangel’sk region. Thus, it can be argued, if our hypothesis—that forest enterprises in Arkhangel’sk Oblast’ are increasingly behaving in accordance with normal market institutions—cannot be refuted, this would indicate that the virtual economy may actually be vanishing not only in this specific region, but all over Russia. The assessment made in the present follow-up case study of Arkhangel’sk Oblast’ uses the same interview design as in the older study. The study also uses a review of recent research of the ongoing institutional change process in Russia and, in particular, the effects of these changes on the regional forest sector. In addition, the assessment uses a number of statistical indicators describing the development of several structural features of the economy as well as indicators describing changes in the behaviour of

5 Two arguments of different nature actually are at play here. The first argument—relevant for selecting the sector to study—says that if it can be shown that restructuring takes place in the Russian forest sector, chances are good that it also takes place in other sectors of the economy. The other argument—relevant for selecting the region to study—says that if we want to ascertain whether restructuring is indeed taking place in the Russian forest sector then Arkhangel’sk is a good case to look at, since the region’s economy is heavily dependent upon the forest sector, and it can be expected that serious efforts will be made in Arkhangel’sk to achieve a higher economic efficiency through restructuring of the regional forest enterprises. 6 However, it must be assumed that market non-viable enterprises (should any exist) belonging to sectors favoured by a high world demand for their output (for example, the energy sector) and located in, or in the vicinity of, large central cities (such as Moscow and St Petersburg) are in a significantly more favourable position to actually restructure their activities to become more market competitive than enterprises belonging to other sectors and in less central and dynamically developing locations. THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 7 economic actors (enterprises and their managers). Structural changes in the economy are important in that they condition the behaviour of economic actors. Thus, such changes might either facilitate or hamper enterprises’ efforts to improve their market efficiency.7 As far as possible, the changes depicted through these indicators of economic structure and the behaviour of economic actors were specified for three levels of aggregation: the national, the regional and the enterprise level. Arguably, it is necessary to perform the analysis at all three levels in order to arrive at viable conclusions concerning the character of the institutional changes that have taken place in the Arkhangel’sk forest sector and in the Russian economy at large. In the sections that follow, the results of the new Arkhangel’sk case study are discussed and related to the results of the previous study. This discussion is followed by an account of the regional and federal level analyses performed on the basis of previous research and relevant statistical indicators. But before proceeding to the discussion of the new Arkhangel’sk case study it may be useful to examine the significance of the forest sector for the Arkhangel’sk regional economy and the economy of Russia at large.

The importance of the forest sector for economic performance Despite its considerable size Arkhangel’sk Oblast’ only occupies 3.4% of the total Russian territory and it is home to about 1% of the total Russian population. The region’s contribution to the Russian national economy is comparatively small. At the beginning of the 2000s it accounted for 0.9% of Russia’s GDP and industrial production, and it held 1.2% of the country’s total production capital. Its shares of Russia’s total capital investments and exports were 1.1% and 0.7% respectively. According to official statistical data for 2003, industry in Arkhangel’sk accounted for close to 40% of gross regional product (GRP), while the corresponding share for Russia is slightly below 30%. Agriculture and trade, which, respectively, accounted for 5.6% and 20% of the Russian GDP, only contributed about 2% and 12% respectively to the Arkhangel’sk GRP. On the other hand, construction and transport contributed somewhat larger shares to the GRP than they did for Russia as a whole. Looking at the structure of industrial production we also find significant differences between Arkhangel’sk and the Russian Federation. The most pertinent difference is the huge size of the Arkhangel’sk forest industry compared to Russia (Figure 1). Wood, woodworking and pulp and paper account for nearly half (44.5%) of total industrial production in the region, while the corresponding share for the entire country is barely 5%. In 2002 the region contributed a third of the total Russian production of pulp. In terms of employment the Arkhangel’sk forest sector accounted for 42% of total industrial employment. The corresponding share for the country at large was around 6%.8

7 In the longer term the opposite is also true of course; actors’ behaviour can modify the economic structure. These change processes are in fact interdependent, with the purpose of increasing the functional compatibility between the economic structure and the behaviour of economic actors. 8 Data on total number of industrial workers (in 2004) from Rosstat (http://www.gks.ru/bgd/regl/ brus05/IssWWW.exe/Stg/06-03.htm, accessed 13 March 2008) and number of workers in the forest industrial complex (as of 2005) from a speech by Ivan Materov (deputy minister of Minpromenergo 8 MATS-OLOV OLSSON

rgy Ene Fuel urgy etall rgy Russia s m etallu cal errou s m emi ing Arkhangelsk F errou troch ork r on-f d pe tal w pape d N l an , me lp & Foo mica ilding , pu ther Che e bu rking O achin dwo M d, woo Woo

Source: Calculation based on data from Goskomstat Rossii (2004).

FIGURE 1. THE CONTRIBUTION OF VARIOUS INDUSTRIAL BRANCHES TO TOTAL INDUSTRIAL PRODUCTION IN ARKHANGEL’SK AND THE RUSSIAN FEDERATION IN 2002 (%)

The Russian forest sector still makes only a small contribution (around 4%) to the total Russian export value. However, about a tenth of the total forest sector exports from Russia originate from Arkhangel’sk. Only Irkutsk Oblast’ contributes more (around 20%) to total Russian exports of forest commodities. In terms of its share of total regional exports the Arkhangel’sk forest sector is extremely important contributing around 75% to the total regional export value.9 The large export share is another indicator of the importance of the forest sector for the regional economy.

Assessing the market adaptation of forest enterprises in Arkhangel’sk As noted above, this article is based on two survey investigations designed to capture changes in business leaders’ outlook and enterprises’ behaviour conducted in 1998 and 2005 among managers of forest enterprises in Arkhangel’sk Oblast’. The first survey was made in the period April–November 1998 and comprised interviews with 25 forest enterprise representatives; in the second survey, made in the period April–June 2005, interviews were conducted with representatives of 15 of the same 25 forest enterprises

Rossii, the Russian Ministry of Industry and Energy), 20 May 2005, available at: http://www.minprom. gov.ru/activity/wood/appearance/1, accessed 14 March 2008. 9 Sources for the export data are: Goskomstat Rossii (2004); Arkhangel’sk Oblast’ Administration, data on foreign trade, available at: http://www.arkhadm.gov.ru/economy/foreign.asp, accessed 14 Feb- ruary 2006; data on the commodity structure of exports and imports 2003 and 2004, available at: http://www.gks.ru/bgd/regl/brus05/IssWWW.exe/Stg/25-04.htm, accessed 14 February 2006; and Min- promenergo Rossii (2005). THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 9 that took part in the previous survey.10 Efforts were made to include a proportionate number of the different categories of enterprises that took part in the 1998 survey (Olsson 2004, 2006). A word of caution is needed before proceeding to the analysis of the survey. Since the selection of the comparatively small number of enterprises that took part in the two surveys in Arkhangel’sk does not meet the requirements for a proper statistical sampling, the results of the analysis can only serve as an illustration of some development tendencies discussed in this article. Actually, a case study research design does not aim at statistical generalisation—if that were a goal, some other design (for example, one involving statistical sampling) would have been used. A case study (both single and multiple) rather aims at analytic generalisation, ‘in which a previously developed theory is used as a template with which to compare the empirical results of the case study’ (Yin 2003, pp. 32–33). It is the latter logic that is applied in the present study. The purpose of the present analysis is to assess whether the behaviour of these enterprises has become more adapted to the requirements of a market economy. In other words, do enterprises display a more market efficient behaviour today compared to 1998? Are they, as we hypothesised initially, actually leaving the virtual economy to be increasingly guided by rules governing business behaviour in a market economy? Thus, as discussed above, observed changes in the behaviour of enterprises and in the perception and attitudes (‘mental models’) of their managers, will be interpreted as indications of changes in the rules-in-use or institutions governing actors’ behaviour.

Investment behaviour among 15 forest enterprises in Arkhangel’sk As noted above, business managers in the Russian transition may pursue two kinds of investment behaviour—they may invest in ‘distance reducing’ capital (d) or ‘relational’ capital (r). Examples of the former kind of capital are modern production equipment or skills that are required to make production more efficient. By relational capital is meant measures that will improve the enterprise’s relations with public authority officials, the purpose being to obtain various kinds of future benefits. In practice, enterprises will invest in both kinds of capital. In the Russian virtual economy investments in r are typically pursued at the expense of investments in d. In a well-functioning market economy the opposite behaviour predominates. Consequently, investments in d should have highest priority for a Russian enterprise striving to leave the virtual economy to engage instead in normal market operations.

10 The two surveys in Arkhangel’sk Oblast’ were both made by the same resident Russian scholar. The interviews were based on a questionnaire originally constructed by a group of researchers at the International Institute for Applied Systems Analysis (IIASA) for a survey of some 220 forest enterprise representatives in eight Russian regions conducted in the period 1998–99. The same questionnaire was used in the 2005 round of interviews in Arkhangel’sk. Respondents’ answers to the questions posed in the two surveys were encoded in a database. Most of the variables compiled in the database describe the situation for the 15 respondents (enterprises) in 1998 and 2005. The questions used in the 1998 survey also provided information about some aspects of the situation in 1988 and 1993. All in all, the new dataset contains 210 variables describing basic facts, such as size, type of company, production profile, ownership and social commitments for each of the 15 surveyed enterprises; some aspects of the enterprises’ input (purchases); output (sales) situation; and some institutional factors restraining managers’ behaviour. The questionnaire form used on the two survey occasions is reproduced as Appendix A in Olsson (2006). 10 MATS-OLOV OLSSON

TABLE 1 QUESTIONS USED TO ASSESS THE INVESTMENT BEHAVIOUR OF 15 FOREST ENTERPRISES IN ARKHANGEL’SK OBLAST’ IN 1998 AND 2005

Relational capital orientation 1. Uses barter in buying arrangements 2. Uses barter in selling arrangements 3. Negotiates but does nothing more to enforce broken buying agreements 4. Negotiates but does nothing more to enforce broken selling agreements 5. Has (multiple) social responsibilities 6. Claims lack of privileges to be the most binding restriction for operating the firm 7. Calls for privileges for the company in question concerning important forest policy changes 8. Wants to become public again after being privatised or calls for ‘state coordination’, i.e. a state command economy to be reintroduced in the forest sector 9. Increasing employment while decreasing productivity 10. Increasing production while decreasing productivity Market orientation (market distance reducers) 1. Invests in equipment, buildings or education of the workforce 2. Has bank relations on the buying side 3. Has bank relations on the selling side 4. Is not involved in barter on the buying side 5. Is not involved in barter on the selling side 6. Uses arbitration courts to enforce broken buying and/or selling contracts 7. Regards workforce discipline and lack of entrepreneurial tradition and/or business ethics as important obstacles for operating the firm 8. Identifies poor workforce skill as an important binding restriction for the firm 9. Calls for efficient business legislation enforcement as a necessary change in policy in the forest sector 10. Operates with constant or increasing productivity

Enterprises could be characterised by their command of distance reducing (d) and relational capital (r). Thus, in principle, a group of enterprises could be compared by the ‘amount’ of d and r capital at their command. Plotting their command of r against their command of d in a two-dimensional diagram (‘r-d space’) indicates the degree to which various enterprises are engaged in the virtual economy. In the synthesising report from the 1998–99 survey investigation of forest enterprise behaviour in eight Russian regions it was possible to ‘measure’ their propensity to invest in either relational or distance reducing capital (Carlsson et al. 2001). The data describing the situation for all of the 221 forest enterprises that took part in our 1998–99 survey indicated that merely 12% of the enterprises seemed to be favouring investments in distance reducing capital (d). These enterprises might be characterised as market actors (short d, low r). The rest were either operating in the virtual economy, relying heavily on relational capital (high r) while having a long ‘distance’ to go before becoming market efficient (large d) or to be found in the most difficult position, being far away from market efficiency (large d) without recourse to relational capital (low r) that might to some extent compensate for their market inefficiency. By going back to 15 of the 25 forest enterprises in Arkhangel’sk Oblast’ that took part in the previous survey and comparing the answers given by the respondents on the two occasions it is possible to construct a diagram showing how the positions in the r-d THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 11

Note: Numbers in the plot refer to the individual enterprises that took part in the surveys of 1998 and 2005. (For 2005 enterprises have been marked white text in black squares).

FIGURE 2. FOREST ENTERPRISES IN ARKHANGEL’SK OBLAST’: CHANGE OF POSITION IN THE R-D SPACE 1998–2005 space of the respective Arkhangel’sk enterprises have changed in the last seven years. The measures used to place the respective enterprises in the r-d space were estimated through a very simple (unweighted) addition of the ‘yes answers’ to the 20 question listed in Table 1. The same 20 questions were used for the assessment on both survey occasions. It could be noted that the questions used for the assessment intentionally try to capture aspects of firms’ actual behaviour as well as some aspects of their managers’ attitudes (or ‘mental models’), which are of great importance for forming the rationale for managers’ decisions to comply (or not comply) with the existing system of rules governing business behaviour and which ultimately play an important role for institutional change (North 2005). Plotting the sum of positive answers to the two sets of questions listed in Table 1 gives every enterprise a unique position in the r-d space. The positions in 1998 and in 2005 for 12 of the 15 surveyed enterprises are plotted in Figure 2. (Three forest management enterprises—leskhozy—were dropped from the set, since they are public authorities and as such are not allowed to perform commercial operations in the Russian economy.) An enterprise located towards the lower left corner of the diagram would indicate a highly market relevant investment behaviour relying on capital that promotes market efficiency (d) without making (much) use of relational capital (r). An enterprise found far out towards the upper right corner of the diagram would indicate a behaviour favouring relational capital and avoiding a restructuring of production activities to become more market efficient—a behaviour largely guided by the institutional set-up characterising the virtual economy.

12 MATS-OLOV OLSSON

TABLE 2 BASIC CHARACTERISATION OF THE 15 SURVEYED ARKHANGEL’SK FOREST ENTERPRISES

Period of establishment 1881-1931 1943-48 1964-72 1985-91 Total

Number of enterprises in the survey 4 3 3 5 15 of which: Size: Large (> 343 employees) 3 2 1 0 6 Medium (55-342) 1 1 0 4 6 mall (< 55) 0 0 2 1 3 Ownership: State owned 0 2 1 1 4 Old public—privatised 4 1 2 3 10 New private 0 0 0 1 1 Joint venture 1 0 0 1 2 Type of activity: Forest management (leskhoz) 0 1 0 1 2 Forest management/harvesting/sawmilling 0 0 1 0 1a Harvesting 0 2 1 2 5 Sawmilling/processing 4 0 1 1 6 Harvesting/Sawmilling 0 0 0 1 1

Note: aThis is an agricultural leskhoz, a forest management unit sorting under the Ministry of Agriculture. (Agricultural leskhozy are allowed to perform certain operations in the market.)

The general impression that is conveyed by the plot in Figure 2 is that the 12 Arkhangel’sk forest enterprises have indeed reduced their ‘distance to the market’ in the seven-year period since 1998. Many of them have also simultaneously reduced their investments in relational capital. Table 2 summarises some basic characteristics of the 15 Arkhangel’sk forest enterprises that took part in our two surveys. The table shows that the largest enterprises in our survey were also the oldest—one established already in the late nineteenth century—and they were all sawmills or wood processing enterprises. All of them were privatised and one is today a joint venture. Four of the 15 enterprises in our group are state owned (three of them are forest management enterprises, leskhozy, and one is an old harvesting enterprise). There is only one new private enterprise in the group. In terms of type of activity we find five harvesting companies (lespromkhozy), six sawmilling and processing companies, and one harvesting and sawmilling company in the surveyed group. It could be noted that there is no pulp and paper company among the 15 enterprises in our group. Figure 3 illustrates some aspects of the structural and behavioural changes that have taken place among the surveyed forest enterprises in Arkhangel’sk Oblast’ in the seven- year period since 1998. The general picture conveyed in the figure supports the impression given in Figure 2. The number of surveyed enterprises displaying market oriented behaviour has increased between 1998 and 2005. However, the figure also reveals some seemingly contradictory evidence. So, for instance, it could be noticed that the number of joint ventures decreased, as did the number of enterprises that made investments. The number of enterprises that exported part of their production was the same in 2005 as in 1998. THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 13

Number of enterprises 02468 10 12 At the time of the survey the enterprise ... … was a joi nt ventur e

… was a s ubsi diary to a holding c ompany

… had changed director in the last few years

… had increased employment in the last five years

… had increased production in the last five years

… had increasing labour productivity in the last five years

… was making investments

… exported som e of its produc tion

… could purchas e enough raw materials (wood)

… had no problem s with purchase agreem ents

… had no problems with sales agreements

… saw financial problems as the most serious restriction

… cal led fo r an i mp roved r eg ion a l fo re st po li cy

1998 2005

FIGURE 3. SOME RESULTS OF THE SURVEYS MADE AMONG REPRESENTATIVES OF FOREST ENTERPRISES IN ARKHANGEL’SK OBLAST’ IN 1998 AND 2005

In order to understand what distinguishes enterprises that display a faster adaptation to the requirements of a market economy from those that remain entrenched in the Russian virtual economy, it might be useful to compare the enterprises that have improved their positions the most in the r-d space depicted in Figure 2 with those that have remained in an unfavourable position throughout the period of investigation. Comparing the three enterprises in our survey that changed their command of d and r in the most favourable direction between 1998 and 2005—that is, the enterprises that favoured investments in d at the expense of r thereby obtaining resources allowing them to act in a more market-efficient way—with the three that kept a comparatively inefficient mix of d and r capital, several interesting differences were found. It could be noted that none of the three most swiftly market adapting enterprises were state owned. They were instead private companies having passed the stage of insider ownership now mainly being owned by juridical persons. All three invested in equipment and skills making their activities more market efficient. Their interactions with suppliers and customers had become more institutionalised (long-term contracts for purchases and sales, harvesting from leased lands), ensuring a secure input supply. This also reduced their problems with violations of business agreements. All three of them had new managers appointed in the previous few years before the survey. It could also be noted that the behaviour of all 15 Arkhangel’sk forest enterprises that were revisited in 2005 had changed in a number of respects indicating an improved adaptation to rules governing enterprises’ normal market behaviour. So, for instance, our survey revealed that many enterprises had been incorporated into large holding companies, no one used barter trade any more, and all had some relations to the banking system (typically using banks to arrange payments). While most enterprises had de- 14 MATS-OLOV OLSSON creasing output volumes until around 1998, almost all of them increased their production after this year. More enterprises had increasing productivity and decreasing employment in the period 1998–2004 than in the preceding five-year period. While many enterprises reported problems with the implementation of business agreements in the period 1993–98, almost no enterprise reported such problems in the subsequent period. In 1998, about half of the interviewed enterprises reported having problems with wood supply. No enterprise reported having such problems in 2005. Thus, market relations seem to have started making an impact resulting in the re-establishment of inter- enterprise delivery networks. As for managers’ attitudes to and understanding of the emerging Russian market system, our interviews indicated that very few thought it important to try to influence politicians to improve conditions for business. Surprisingly few (less than one third) complained about the tax legislation and implementation. Two thirds stressed the importance of capital investments (noting the financial difficulties making actual investments insignificant) and the necessity to restructure enterprises’ activities to become more efficient in the new market environment. All this indicates that managers have a rather good understanding of the requirements of the emerging market economy and are disposed to take efficiency improving measures given the opportunity. However, analysing the results of the two surveys also revealed certain facts that could not be interpreted as an indication that forest enterprises in Arkhangel’sk Oblast’ have fully embraced a market-efficient behaviour. First it could be noted that very few of our 15 enterprises made investments or exported some of their produce. Close to half of the interviewed enterprise representatives stated that obsolete technology (due to lack of capital) was the single most binding restriction on their activity. Managers hereby indicated an understanding of the importance of financial intermediation, which is a severely deficient part of the business structure embedding Russian enterprises today, but they saw no solution to the problem and had difficulties avoiding its consequences. It could also be noted that surprisingly few of the interviewed Arkhangel’sk managers (two of 15) mentioned a lack of entrepreneurial tradition and management competence as important problems for the development of their business. Product development and difficulties with finding new markets were recognised as a problem by only one respondent in our 2005 survey. Two respondents mentioned problems with current business practices. More emphasis would probably have been laid on these problems if managers’ old ‘mental models’ had been discarded altogether and replaced by a more advanced understanding of the workings of a market economy. Very few of our 15 enterprises reported belonging to a business association. Engaging in such associations would be useful in a situation where the state is unable to provide efficient business services (Pyle 2006). A more widespread engagement in business associations could have been seen as an indication of a market-adapted business behaviour.11

11 It should be noted, however, that several forest enterprises in Arkhangel’sk today are members of business associations, such as the ‘Pomor Industrialists’ founded in 1999 and the ‘Association for small and medium sized forest sector enterprises’ founded in 2003 (Olsson 2006). THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 15

Structural and behavioural changes in the Russian economy As indicated above, the analysis of the new survey among forest enterprises in Arkhangel’sk Oblast’, the main results of which were discussed in the previous section, needs to be supplemented by a broader analysis of indicators describing structural and behavioural changes in the regional and federal economy to enable a more reliable assessment of the recent development of the Russian virtual economy. In this section, we will see if and how changes that could be observed in the institutional set-up governing the Arkhangel’sk forest sector are also reflected in the indicators describing structural and behavioural changes at the regional and federal levels.

Inflation, demonetisation, barter and arrears After 1992, when prices were liberalised, the Russian economy was beset by an extremely high inflation rate that reached a peak of 2,509% (Klein & Pomer 2001, p. 441). Price liberalisation immediately revealed the large gap between the production structure of the earlier planned economy and a structure that would be able to meet market demand for goods and services. When attractive commodities and services were offered in insufficient quantities, their prices increased dramatically. Since the rapid inflation was not accompanied by a corresponding increase in wages the result was that citizens and enterprises alike soon found themselves without enough cash to pay for the goods and services they wanted to buy. According to Makarov and Kleiner (2000, p.55), reverting to so-called ‘non-monetary exchange’12 offered a natural solution to the problem—‘natural’ since all actors in the new Russian economy already had an ‘in-kind perception’ of economic exchange. They suggest that:

Essentially, today’s bartering arose on the basis of the former system of in-kind perception, accounting, and distribution of industrial products, from which the new reality has eliminated: (a) the system of hierarchical subordination of enterprises to ministries and interministerial bodies; and (b) the restrictions on direct business ties between enterprises. [emphasis in original]

In this view the emergence of barter in Russia was really a path-dependent phenomenon offering a familiar solution to a problem that would otherwise be difficult to cope with (Goldman 1998). Carlsson et al. (2001) see the barter solution as a result of an institutional deadlock, emphasising the fact that several simultaneous institutional changes are required in order to force the economy to switch to a monetised system of exchange that is more transparent and easy to monitor and that ultimately is more efficient in that it reduces transaction costs. However, inflation rapidly decreased in the years following its peak in 1992. In the years after 2000 the rate stayed below 20%, approaching 10% in 2005. The price changes in Arkhangel’sk Oblast’ were quite similar to that of the country at large (Olsson 2006). Observers of the barter and payment arrear phenomena in Russia have distinguished several features of the system that

12 Non-monetary exchange or non-monetary transactions is shorthand for a whole set of exchange types, such as barter (direct and ‘pure’ or channeled via intermediaries); offsets (sachety) where debts are paid for by goods or services; money surrogates such as promissory notes (vekseli) issued by enterprises, banks or government; and debt swaps and cross-cancellations of debt. Here ‘barter’ denotes all of the enumerated types of non-monetary transactions. 16 MATS-OLOV OLSSON

Source: Commander et al., (2002, p. 282).

FIGURE 4. DYNAMICS OF PAYMENT ARREARS AND BARTER 1993–99 prevented an efficient exchange of commodities and services, inviting, or even forcing, as it were, actors to devise clever (and not always law abiding) ways of overcoming the obstacles while simultaneously making handsome profits in the process.13 Bank lending to enterprises declined in Russia in the course of transition. Banks found it easier and more profitable to engage in funding the government’s deficit than extending credits to the industrial sector with its weak creditworthiness (Tompson 1997, 2000). Without recourse to bank credits, enterprises had to agree on inter-firm trade credits to satisfy their need of working capital. In this way large payment arrears were built up between enterprises. In a study conducted by Commander et al. (2002) of 350 enterprises in 34 regions of Russia the primary reason given by the surveyed firms for using non-monetary transactions were liquidity problems. By resorting to non-monetary transactions enterprises were able to continue their operation despite the lack of cash to pay for inputs, wages, and taxes. In this way payment arrears grew rapidly both for debts among enterprises and debts to government authorities (for tax) and to state owned enterprises (for utilities, such as energy). In Figure 4 Commander et al. (2002) have illustrated the correspondence between the development of overdue payables to employees (wage arrears), overdue payables to general government (for example, tax arrears), and overdue payables to suppliers (payment arrears to enterprises’ trading partners). The authors also note that the overdue payables of enterprises increased far more rapidly than overdue receivables, indicating an increase in overdue payables to the state. They conclude:

13 See, for instance, Goldman (1998); Hendley et al. (1998); Clarke (1998); Guriev and Ickes (2000); Woodruff (1999); Desai and Idson (2000); Yakovlev (2000); Makarov and Kleiner (2000); Commander et al. (2002); Earle and Sabirianova (2002); Ivanenko and Mikheyev (2002); Javeline (2003); Guriev and Kvassov (2004); Kim and Pirtillä (2004). Yakovlev (2000) reviews various forms of barter (including offsets and veksels) that can be found in the Russian economy. THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 17

Notwithstanding the complex nature of arrears between various levels of government and the infrastructure monopolies, it is clear that the private sector has run up high net payables to the public sector as a whole, including the budgetary entities and the public utilities. This suggests that the principal asymmetry at work has been not so much the transfer of liquidity across firms, but the transfer of liquidity of the budget and utilities to firms. This points to an infusion of net credit and implicit subsidy to the private sector (Commander et al. 2002, p. 283).

Data recently published in the Russian Economic Report issued by the World Bank14 indicate that non-monetary transactions in Russia continued to rapidly decrease after 1999. In 2000, they still accounted for slightly over 30% of total sales, only to be further reduced to slightly over 10% in 2004. The World Bank report also contains data showing that the stock of overdue payables (arrears) in Russia was shrinking as well, from about 37% of annual sales in 2001 to slightly below 15% in 2004. The development of arrears (overdue payables and receivables, tax arrears, and wage arrears) in Arkh- angel’sk Oblast’ displayed a similar pattern as for the country at large. The share of overdue payables in Arkhangel’sk Oblast’ was 38% of total payables in 2001, decreasing to 13% in 2005.15 The situation is similar with wage arrears. In Arkhangel’sk the share of tax arrears of total tax debts was close to 90% in 1999 decreasing to around 50% in 2005.16

Investments in physical and human capital The reform package supporting the transition in Russia was supposed to make enterprises restructure their activities to become better equipped to meet market competition. However, as it turned out, a great part of Russian enterprises refrained from restructuring, instead turning to operating in the virtual economy. Physical capital investments dropped dramatically after 1990. By 1998, investments were down to a mere fifth of their 1990 level—in Arkhangel’sk Oblast’ the level was even lower, about 14%. How- ever, after 1998 investments started to recover. As can be seen in Figure 5 the dynamics of investments in Arkhangel’sk Oblast’ resembled that of the country at large, even if growth rates were higher in Arkhangel’sk in the period 1999–2003. Despite their increasing volume after 1998 total investments in Russia were still, by 2004, below 40% of their level in 1990 (the corresponding figure for Arkhangel’sk Oblast’ was slightly over 50%). Total investments in Russia have always been very unevenly distributed between the various sectors of the economy with industry always receiving the main share. In the mid-1990s, slightly over one-third of total investments in the Russian economy were made in industry. The share was about the same in Arkhangel’sk, but while the share for Russia increased moderately and reached just over 40% in 2002, in Arkhangel’sk industry’s share of total regional investments grew to nearly 60% in 2000 and reached

14 Russian Economic Report, No. 11, 2005, p. 7, available at: http://ns.worldbank.org.ru/files/rer/RER _11_eng.pdf, accessed 20 February 2006. 15 Overdue receivables have decreased in a similar fashion. Data on overdue payables and receivables were obtained from the websites of Rosstat (http://www.gks.ru) and Arkhangelskstat (http:// www. arhangelskstat. ru). Both websites accessed 9 February 2006. 16 Data were obtained from Goskomstat Arkhangel’sk (2004, pp. 110); and the Arkhangelskstat website, available at: http:/www.arhangelskstat.ru/index.php?id=114, accessed 9 February 2006. [For more details about this development, see Olsson (2006).] 18 MATS-OLOV OLSSON

120

100

40 Index (1990=100)

0 1990 1995 2000 2004 Year

Russia Arkhangelsk

Source: Data from Rosstat, available at: http://www.gks.ru/, accessed 25 February 2006.

FIGURE 5. INVESTMENTS, PHYSICAL VOLUME, 1990-2004. INDEX (1990=100) close to 78% in 2002. While the share of industrial investments allocated to the forest sector has remained around 1–1.5% for Russia at large throughout the period 1990– 2004, the forest sector dominated regional industrial investments in Arkhangel’sk, accounting for shares varying between 22% (2002) and 68% (1999) of total industrial investments. Over two-thirds of these investments were made in the pulp and paper industry. Thus, in summary, it should be noted that investments in physical capital increased after 1998. The financial crisis of that year was a probable cause for the increased investments. The crisis resulted in more favourable conditions for domestic production—the ruble devaluation made domestic products cheaper compared with imported substitutes—creating incentives for business to restructure and expand. Alongside investments in physical capital however, a successful restructuring of Russian enterprises also requires investments in human capital. Changes in the performance of the educational system should thus be indicative of the potential for economic development. As is well known, the level of education was high in the Soviet Union. Figures confirm that investments in education have been substantial in Russia. Develop- ments in Arkhangel’sk Oblast’ follow a similar pattern. The impression conveyed by data is that authorities and citizens alike continued to appreciate the value of higher education. For example, while the share of students engaged in higher education in a sense reflects the size of investments made in human capital, the relative number of students graduating from higher educational institutions might be said to reflect the result of these investments. There has been a rapid growth in the number of students per 10,000 inhabitants graduating from higher educational institutions, especially after 2000. Arkhangel’sk significantly improved the value of this indicator relative to the Russian average, from a level slightly below half at the start of the period to over 80% of the country average by 2004, as can be seen in Figure 6. THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 19

Per 10,000 inh. 20

0 1990 1995 2000 2004 Year Russia Arkhangelsk

Source: Russia in Figures, 2003; Statistics of Russian Education, Internet web portal Statistika Rossiiskogo obrazovaniya, available at: http://stat.edu.ru, accessed 25 February 2006.

FIGURE 6. YEARLY ADDITIONS TO WORKFORCE COMPETENCE. YEARLY NUMBER OF SPECIALISTS GRADUATING FROM STATE HIGHER EDUCATIONAL INSTITUTIONS, 1990–2004

Transition could be expected to create a demand for managers with a modern, market oriented education.17 Available data on course enrolment and graduations show that the share of the total number of students in higher education engaged in (and graduating from) the study of courses belonging to the discipline ‘Economics and Management’ increased significantly between 1998 and 2003.18 In 1998, 12.8% of students in higher education studied economics and management—in 2003, the share had increased to 22.2%. Those were figures for Arkhangel’sk Oblast’. Corresponding numbers for the country at large were 20.4 and 26% for the respective years. The observed tendencies constitute a support for the further development of the emerging Russian market system.

Enterprise structure, changes in production and employment After the disintegration of the Soviet Union the inherited enterprise structure underwent a rapid transformation. The number of enterprises in Russia increased dramatically, indicating that entry barriers were being dismantled. In Arkhangel’sk, the number of enterprises increased from slightly over 3,000 in 1990 to close to 23,000 in 2004 (a 7.6 fold increase). For Russia the number of enterprises increased more than 13 times, from close to 290,000 to 3.8 million in the same period. In relative terms, for Arkhangel’sk this meant increases from less than 5 enterprises per 1,000 inhabitants of working age in 1990, to slightly over 23 in 2002. (In 1990, the level for Russia at large was very similar

17 In the Soviet era managers were often engineers focusing on the technical side of the production process. 18 Data available via the web portal Statistika Rossiiskogo obrazovaniya [Statistics of Russian Education], available at: http://www.edu.ru/, accessed 25 February 2006. 20 MATS-OLOV OLSSON

TABLE 3 ENTERPRISES BY OWNERSHIP IN ARKHANGEL’SK AND RUSSIA, 1995 AND 2004 (%). Arkhangel’sk Russia

1995 2004 1995 2004 State ownership Number of enterprises 18 18 23 <10c Employment 55 49 42 36 Investments 36 14c 38 22 Private ownership Number of enterprises 65a 67 63 77c Employment 20 40 34 52 Investments 10 27c 13 46 Mixed ownership Number of enterprises – 4 – – Employment 25 10 22 9 Investments 40 11c 46 16 Foreign and Joint ventures Number of enterprises 0.22b 0.29c 0.3b 0.29c Employment 0.5 6.4c 0.6 3.5 Investments – – 2.7 15

Notes: a1996; b1998; c2002. Sources: Goskomstat Rossii (2004), Goskomstat Arkhangel’sk (2004), Rosstat (http://www.gks.ru, accessed 25 February 2006). to that of Arkhangel’sk, but by 2002 the share had increased to 43.5 per 1,000 inhabitants.)19 By 2002, as much as 63% of all Russian employees worked in private enterprises and, according to an estimate by the European Bank of Reconstruction and Development, the private sector accounted for 70% of GDP (Ahrend & Tompson 2005a). Comparing Arkhangel’sk with Russia at large we find that the private sector, measured as the number of privately owned enterprises, had already reached a dominant position by the mid-1990s (see Table 3). In Arkhangel’sk the share of state owned enterprises still remained the same in 2004, while for the Federation as a whole the share had decreased to 10% by 2002. However, looking instead at how many people the various types of enterprises employed, we find that even by 2004 the state sector was still dominating the scene. An important shift in the enterprise–employment configuration characterising the period after 1995 was the fact that enterprises with mixed state–private ownership lost much of their importance as employers. This development indicates a decreasing need for state support of recently privatised enterprises in the latter half of the 1990s. The interpretation would be that many privatised enterprises actually became gradually more

19 Still, these are comparatively low numbers. In old market systems such as that of northern Sweden, the ‘enterprise density’ is much larger. During all of the 1990s there were about 50–52 enterprises per 1,000 inhabitants of working age. Data for these calculations were obtained from Russia in Figures (2003), Goskomstat Rossii (2004) and Facts and Perspectives 2003, a compilation of regional information about Sweden based on official data from Statistics Sweden (available at: http://www.regionfakta.com/, accessed 5 June 2003). THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 21 competitive in the emerging market environment, being able to increasingly rely on their own resources. The development could possibly also be seen as an indicator of a progressing decrease in the size of the virtual economy, with its characteristic reliance on ‘relational capital’. The relative number of employees in foreign and joint venture enterprises was expected to grow as a consequence of the transitional reforms in Russia. Even if the number of foreign and joint venture enterprises in Russia increased by almost 28% between 1998 and 2002 (in Arkhangel’sk by more than 56%), their share of the total number of enterprises still remained low (0.3%). However, in terms of employment the foreign and joint venture capital made a much greater impact and their importance for the country’s economic development is illustrated by their increasing contribution to total capital investments. The feature of the new market economy that probably was the most important for Russian citizens was the emergence of a large number of small enterprises. The small enterprise sector is important in several respects.20 In their daily activities, these firms have been forced to meet and cope with the competition introduced through the emerging Russian market economy. Thus, in general, small enterprises do not operate in the virtual economy. By their engagement in these enterprises (as employees or customers) people learn about adequate market-economic behaviour. Thus, the emergence of new small private enterprises has made an important contribution to changing the ‘mental models’ (North 2005) that produced the institutional framework governing the behaviour of Homo sovieticus and that to a significant extent survived in the form of the virtual economy after the disintegration of the Soviet Union. Available data suggest that small enterprises in Arkhangel’sk comprised slightly over 22% of the total number of enterprises in 2002. 21 Thus, the emergence of small enterprises has meant quite a change for a country where only 15 years earlier there were practically no such enterprises. However, data also show that small enterprises together do not employ a large number of people. In 2002, the small enterprises of Arkhangel’sk Oblast’ only employed 6% of all occupied in the regional economy. (While the share of small enterprises in Russia at large was roughly the same as for Arkhangel’sk, their share of total employment was much higher, at 11%.) The 1998 financial crisis triggered several important changes in the Russian economy. The emergence and growth of large holding companies based on natural resource extraction and industrial production is a prominent feature affecting the structure and organisation of the Russian enterprise sector. While originally these financial- industrial groups (FIGs) had been controlled by banks with a primary interest in making money on speculation, they successively developed into holding companies with a widely diversified production orientation. Since 1998 these holdings have been restructuring their activities to become modern production-oriented corporations (Clarke 2004).

20 By a small enterprise what is meant is a company in which the average number of employees does not exceed 100 (in industrial production, civil engineering and transport), 60 (in agriculture, science or engineering), 30 (in retail trade or consumer services), or 50 (in other sectors or types of business), and for which the state ownership share does not exceed 25% of the charter capital (SME Resource Centre 2004). 21 Data from Goskomstat Rossii (2004). 22 MATS-OLOV OLSSON

To some observers this trend proves that the Russian economy is now leaving the stage of initial privatisation of state property and entering a phase of consolidation, when property is redistributed and, in the process, rearranged to produce more market- efficient enterprises. Thus, the process could be seen to indicate that Russian enterprises and managers are becoming better adapted to the demands of a normal market system. However, other observers have noted that these holding companies often acquire property for purposes other than improving current and future profitability and with consequences for the operations of subsidiaries that seem far from what is normal in a well developed market system. For instance, Barnes (2003, p. 155) argues that ‘leading economic actors … are still engaged in a complex struggle for property that transcends simple processes of privatisation or consolidation and shows no sign of abating’. Controlling property is important since it brings a certain amount of safety in terms of secure input supplies and as a source of wealth that can be of help in the event of hostile takeover attempts. Property is also ultimately a source of political power. Clarke (2004, p. 419), reporting on a case study of management style in Russian holding companies, notes that management practices in the holding companies still display a ‘high degree of continuity with, or even a reversion to, Soviet traditions’. Managers of subsidiaries are thus allowed to keep their ‘production orientation’ while leaving questions of profit making to the senior managers of the holding company. However, as Clarke (2004) also notes, holding companies are likely to invest in the modernisation of production and the development of new products of their acquired subsidiaries in order to improve their productivity and profitability. Due to the non-transparency and the high speed of the property redistribution process that has contributed to a dramatic concentration of capital and economic power in Russia after 1998, there are no reliable data available that describe the process in more detail. Some estimates22 indicate that the large financial-industrial groups today account for a significant share of total industrial output in Russia. According to a World Bank (2005) report, 22 FIGs accounted for 38.8% of total sales and 20.2% of employment in 32 subsectors of Russian industry.23 The results also indicate that FIGs’ control of the country’s pulp and paper industry is around 30% in terms of both employment and sales while their control of the timber industry is very much smaller. According to information in the media, vertically integrated holding companies have become very important for the development of the forest sector of Arkhangel’sk Oblast’. For instance, in the first five months of 2005, close to 70% of total timber harvesting in Arkhangel’sk was made by enterprises belonging to four large holding companies.24

22 See, for instance, Dynkin (2003); Barnes (2003); Guriev and Rachinsky (2004); Clarke (2004); and the World Bank (2005). 23 The estimate was made on the basis of a survey investigation performed during 2003. (The sampled enterprises together accounted for 86% of total sales and 43% of total employment in the 32 subsectors of industry to which they belonged.) More about this analysis can be found in Guriev and Rachinsky (2004). 24 According to data given in Lesnye Novosti, summarised in a press survey of Arkhangel’sk Oblast’ published by the information agency REGNUM on 17 June 2005 (available at: http://www.regnum. ru/news/471838.html, accessed 25 January 2006) the four holdings were OOO IlimSeverLes, GK Solombal’skii LDK and Lesozavod No. 3, GK Titan, and PLO Onegales. The ownership of three of these four holding companies has been mapped out in a World Bank survey of ownership concentration in Russia as of 2004. [See World Bank (2005) and the CEM database available at: http://ns.worldbank. org.ru/cem/eng/setcriteria.asp, accessed 25 April 2006.] THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 23

While output increase is no certain sign of a restructuring taking place among Russian enterprises—the increased output might consist of ‘virtual goods’ to be distributed on ‘virtual markets’—one may argue that such an increase together with improvements in labour productivity and income indicates a more normal market oriented enterprise behaviour. After a dramatic decline at the beginning of the 1990s, output levels started to recover in the second half of the decade, but still by 2004 total industrial production in Russia had only reached 70% of its 1990 level. The decline was even more serious in the forest sector. In Arkhangel’sk Oblast’ industrial production decrease was less pronounced and by 2003 industrial output was again above its 1990 level. It is not clear, however, whether the strong economic growth in Russia observed in recent years can be regarded as a sign that enterprises are in fact improving their efficiency, leaving the virtual economy, and exposing themselves to the competition of the market. Analysts of the Russian transition, such as Gaddy and Ickes (2005) and Ahrend (2006), draw attention to the still ongoing ‘covert’ redistribution of value (rents) from the natural resource sectors (mainly oil and gas) to other sectors of the Russian economy, a practice with roots in the Soviet system. In this way the very large profits made in the resource extraction sectors are in effect propping up the performance reports of enterprises in other sectors of the economy, a behaviour that could make us believe that the influence of the virtual economy is vanishing, while it actually might be quite the opposite (at least for some enterprises). Table 4 illustrates the dramatic decrease in production of forest products that took place in Arkhangel’sk Oblast’ between 1990 and 1995–96. A similar development was to be seen in the whole country (and in the whole economy). However, after 1995–96 production recovered and output levels of most forest commodities started to increase. For some commodities, like commercial wood, round wood and saw logs, output levels increased only moderately—in 2004 output volumes still had not reached half of their 1990 level. For other commodities, like fibreboard, paper and pulp, by 2004 volumes exceeded 80% of their respective 1990 levels. For only two commodities, cardboard and plywood, output levels by 2001 had climbed above their 1990 levels. Plywood production in particular, displayed a striking development after 1996. Changes in employment per se are an inherently ambiguous indicator of the development of the Russian virtual economy. Improving the efficiency of the Russian economy entails fundamental changes affecting the structure and functioning of the entire system inherited from the Soviet Union. Thus, changes are required in a large number of parameters, such as the location of production, the selection, quality and quantity of all commodities and services produced, the maintenance and renewal of production facilities (capital investments) and the establishment of an incentive system promoting productivity improvements (Ericson 2002). These aspects must all be taken into consideration when assessing the meaning of the changes in employment that have taken place in Arkhangel’sk Oblast’ in the transition period. Total employment in Russia decreased between 1990 and 1998 by slightly over 15%. After 1998 total employment increased again, but by 2004 it was still 13% below its 1990 level. Industrial employment decreased by 38% in the period 1990–1998, and by 2004 it still remained at approximately the same level. These figures indicate a shift in the relative size of the various branches of the economy. While industry’s share of total 24 MATS-OLOV OLSSON

TABLE 4 EMPLOYMENT AND FOREST INDUSTRIAL PRODUCTION IN ARKHANGEL’SK OBLAST’ 1990–2005, SELECTED PRODUCTS (PHYSICAL VOLUMES), 1990=100

1990 1994 1996 1998 2000 2002 2005

Employment Total employment 100 87 80 74 78 81 82a Industrial employment 100 76 69 – 65 66 66 a Production of certain wood products Timber harvesting (1000 cub. m) 100 41 36 35 40 38 39 Commercial wood (1000 cub. m) 100 40 35 34 42 39 43 Round wood, (1000 cub. m) 100 44 39 49 Saw logs (1000 cub. m) 100 46 32 30 40 39 40 Fibre board, (1000 sq. m) 100 67 57 56 81 83 84 Paper (1000 tons) 100 45 53 54 75 81 86 Pulp (1000 tons) 100 56 47 56 80 86 95 Cardboard (1000 tons) 100 59 53 73 99 107 125 Plywood (1000 cub. m) 100 48 34 64 93 131 164

Notes: aData for the year 2003. Sources: Employment data: For 1990–95: Goskomstat Arkhangel’sk (1997, p. 12); for 1996–2002: Goskomstat Arkhangel’sk (2003, p. 37, 2004, p. 31), Arkhangel’sk Oblast’ Administration (data available at: http://www. dvinaland.ru/economy/timber.asp?print=yes, accessed 2 February 2006), Komistat (2000, p. 20). Production data: Goskomstat Rossii (1996); Arkhangel’sk Oblast’ (1997); Goskomstat Arkhangel’sk (1997, p. 59); Komistat (2000); Russia in Figures (2003); Goskomstat Arkhangel’sk (2003, p. 15, 2004, p. 77), Gos- komstat Rossii (2004), Arkhangel’sk Oblast’ Administration (data available at: http://www.dvinaland.ru/ economy/timber.asp?, accessed 2 February 2006), and Arkhangel’skstat (data available at: http://www. arkhadm.gov.ru/ economy/timber.asp, accessed 13 March 2006). employment decreased from 30% in 1990 to slightly over 20 in 2004, the employment share for trade increased from close to 8% to over 17% in the same period. In Arkh- angel’sk Oblast’ total employment decreased even more dramatically between 1990 and 1998 after which it started to increase again reaching, by 2003, 82% of its level 13 years earlier (see Table 4). The decline in industrial employment was even more dramatic, and by 2003 it had only reached two thirds of its 1990 level. The figures indicate a structural shift in employment similar to that of Russia at large. Looking at regional forest sector employment we find that its share of total industrial employment has varied between 40% and 50% throughout most of the period. In 1995, the Arkhangel’sk forest sector employed close to 81,000 people, in 2004 the number was down to 65,000. In 1993, unemployment in Arkhangel’sk was similar to the average Russian level of around 5% of the economically active population. By and large the unemployment level in Russia and in Arkhangel’sk continued to increase until 1999, reaching 13% and 15%, respectively, of the economically active population. By 2002, however, the unemployment level had been significantly reduced to 8% for both the Russian Federation and Arkhangel’sk Oblast’ (Goskomstat Rossii 2004). The fact that unemployment numbers did not reach even higher levels, which might have been expected in view of the Soviet legacy of high labour intensity with accompanying low labour productivity, may be due to the workings of the virtual economy that often seems to allow enterprise managers to hoard labour. Still, THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 25

Change in GRP per employee

140

130

120

110

100 Index (1997=100) 90

80 1997 1998 1999 2000 2001 2002 2003 Year

Russia Karelia Arkhangelsk Murmansk

Source: Calculation based on data from Rosstat (http://www.gks.ru, accessed 25 February 2006); Goskomstat Rossii (2004).

FIGURE 7. PRODUCTIVITY CHANGE IN RUSSIA, KARELIA, ARKHANGEL’SK, AND MURMANSK 1997–2003. CHANGE IN TOTAL GRP PRODUCTION RELATED TO CHANGE IN TOTAL EMPLOYMENT. INDEX (1997=100) unemployment numbers reported by the official statistical agency can be expected to underestimate real unemployment levels (Carlsson et al. 1999). At the same time the numbers also hide the fact that many unemployed are actually gainfully occupied in the ‘shadow economy’, since people are forced to perform some work in this large unofficial sector in order to survive (Ivanova & Nygaard 1999). Despite the many shortcomings of the Russian privatisation process there is evidence that privatisation did indeed improve enterprise performance (Ahrend & Tompson 2005a, pp. 32 ff.). The 1998 financial crisis stimulated domestic production in Russia and the emerging large corporations seem to have initiated a restructuring of their subsidiaries making them more market competitive. After a recovery period in 1999–2001 enterprises eventually started to invest in new equipment and processes. Figure 7 illustrates the overall productivity change in the regional economies of Karelia, Arkhangel’sk and Murmansk as well as Russia at large. In the period 1997–2004 real Gross Regional Product (GRP) per employee annually increased by about 5.4% in Arkhangel’sk, the average for Russia being 5% per year. Labour productivity in industry displayed improvements in the order of 8% per year between 1997 and 2003 (Ahrend & Tompson 2005a, pp. 19–20). The Russian pulp and paper industry yearly gained around 12% in productivity, while the gain was about 4% per year for the woodworking industry. 26 MATS-OLOV OLSSON

Changes in the Russian economy of ambiguous significance Some observed development tendencies are ambiguous to interpret. While population characteristics are generally considered important for economic development it is difficult to assess the relation between changes in various population variables and changes in the Russian virtual economy. The declining total population of Arkhangel’sk Oblast’ might be seen as a result of the emerging market forces exerting their influence on resource allocation. But it might also be seen merely as a consequence of the general turmoil caused by the transition. Whatever the interpretation we should note that the development of the economically dependent demographic variables (such as life expec- tancy and infant mortality) indicates that the economy of Arkhangel’sk Oblast’ has not (yet) significantly improved to make a very positive impact on these variables. Institutions regulating enterprises’ smooth and orderly entry into and exit from the market are essential for the efficient functioning of a market economy. While market entry barriers seem to have been largely dismantled in Russia, the rules governing market exit (close-downs, bankruptcies) are still not functioning well despite several revisions of the legislation on insolvency. The legislation is still being reformed, but, reportedly, much remains yet to be done before the legislation becomes efficient (Tompson 2004). Reports have it that bribes, pressure on the local legislature and regional administration officials are quite common in these processes (Zhuravskaia and Sonin 2005). A cautious assessment might be that the reformation of the bankruptcy legislation—if it continues according to current plans—will contribute to the elimination of the Russian virtual economy, by increasing the transparency of bankruptcy proceedings and ensuring law-abiding and fair regulations of the redistribution of property rights. The Russian banking system has never been efficient in the market economic sense of providing financial services to enterprises (Tompson 2000). Banking in Russia always had other main objectives. However, the banking system is currently being reformed after the crises it went through in the late 1990s, the purpose being to make its services better able to support the development of Russian business life. The provision of efficient banking services is especially important for the further expansion of the SME sector that is considered crucial for the long-term development of the Russian market economy. There are signs that the Russian banking sector is slowly opening up, allowing foreign banks to enter the market. This ongoing development, if it is allowed to continue, will bring actors into the Russian banking market who will provide efficient financial services and better risk assessment competence (which is still rare in Russia). Thus, the current development of the banking sector will no doubt contribute to the further dismantling of the Russian virtual economy.

Concluding remarks On the basis of the previous analysis the following can be concluded: Russian enterprises have in fact been increasingly acting in accordance with institutions governing business behaviour in a market economy. A tentative corollary of this development is that the virtual economy is gradually being dismantled. This does not mean, however, that it is now time to entirely discard the notion of the virtual economy THE RUSSIAN VIRTUAL ECONOMY TURNING REAL 27 and its implications. As long as the non-transparent redistribution of resource rents continues, as Gaddy and Ickes (2005) have indicated, the virtual economy continues to exert a negative influence on resource allocation in the Russian economy. From a market efficiency point of view, resources continue to be suboptimally allocated. This means that policies aiming at final elimination of the causes and effects of the virtual economy should have a high priority. The fight for the complete dismantling of the virtual economy and, for that matter, for the final passing of the transition period in Russia, is still likely to last several years. How long it will take to reach a more mature stage of the market economy largely depends upon the public policies pursued. From a strictly economic point of view there are good reasons to introduce efficiency- improving policies. Clearly the turmoil created by the transition process has prevented foreign investors from heavily engaging in the Russian economy, despite potentially large and fast profits. Risks have simply been considered too high.25 Another reason for the low foreign interest is the fact that many Russian industrial enterprises privatised in the early 1990s were in fact not viable in the emerging market environment. As elaborated above, this has to do with the peculiar structure and geographical location pattern of the industry that was an outcome of the operation of the Soviet command economy. Foreign investors who nevertheless entered the Russian market were often met with a fierce resistance from domestic actors using their political clout to prevent foreign capital from gaining access and making a significant impact. This ‘isolationist’ behaviour was made possible through the dominance of the virtual economy, with its characteristic alliance between economic and political actors, who had too much to lose with the introduction of proper market economic principles to guide actors’ behaviour. This also means, as pointed out by Gaddy and Ickes (2002), that incentives for Russian policymakers to work for the reformation of the system and a definitive dismantling of the virtual economy are ambiguous, since by advocating necessary reforms they do not only risk losing their influence over the economy, but also to become unpopular among Russian citizens and voters who realise that they will be forced to cope with the (frictional) problems that are likely to be an unavoidable consequence of the reform measures taken. The declared intentions and the actual policy decisions taken by the highest political authorities, in particular the Duma and the president, are therefore of great importance for the continued reformation of the Russian economy. However, even with a clear commitment from the highest authorities, a reform process aiming at the ultimate elimination of the Russian virtual economy may take considerable time. The resistance to reform can be expected to be strong among many actors in the Russian economy, especially among owners and managers of enterprises still operating in the virtual economy. It is therefore difficult to estimate the time it will take for the Russian virtual economy to be definitely dismantled. However, considering the kind of change that is necessary for achieving this goal it is obvious that a fairly long time—several years, perhaps even decades—will be required. While actors’ behaviour might in principle change rather fast, the basic underlying structural problems that have to be solved for the Russian economy to attain market

25 In an ‘update for investors’ Gaddy, et al. (2000) advised potential foreign investors to make special considerations when assessing risks and potential profits associated with investments in Russian enterprises under the influence of the institutions characterising the virtual economy. 28 MATS-OLOV OLSSON efficiency will require a long time, irrespective of the speed by which necessary institutional changes are introduced. At the bottom of the problem lies the existing production structure inherited from the Soviet era. As previously noted, the geographical location of industry resulting from Soviet investment policy is highly suboptimal in a market economic perspective. With the introduction of market economic principles to guide business investment behaviour in Russia a tremendous pressure will emerge for changing the existing suboptimal economic structure (both in terms of its geographical location and production orientation). Changes in this structure occur partly as a result of a process of self- organisation in the economy, and partly as a result of public intervention. Both processes are amenable to policymaking aimed at modifying existing and/or introducing new institutions (rules-in-use) to govern the behaviour of economic actors. On the one hand, policies could be developed with the purpose of facilitating (smoothing) the self- organisation of the Russian economy to make it better adapted to meet market demands. These would be policies introducing improved institutions—institutions that are adequate for the efficient functioning of a market economy—to guide business behaviour. On the other hand, more direct (public or state) interventions are probably also necessary to facilitate, stimulate or even to force necessary changes in the Russian economic structure. Such changes might include the allocation of budget resources for the closing down of old or opening up of new companies and improving various aspects of the infrastructure. These interventions should also preferably be prescribed by well- elaborated policies. In this context, institutional change might entail the introduction of efficient rules to guide the elaboration of such intervention policies. A crucial problem for all policy implementation is that people who are affected by the changes suggested by the policy must find the design process and the intended outcome of the policy well-considered, realistic, and fair. If they do, the policy will acquire legitimacy and policy implementation will have a greater chance of success. In the Russian context, the forms for elaborating public policies could be expected to be especially important. To gain legitimacy it would seem necessary to very clearly denounce the policy elaboration and implementation methods used in the command economy and instead introduce modern participatory policy formulation approaches. Furthermore, since redistribution is a pertinent issue in most of the policies that might be envisaged to improve the Russian market economy, equity issues must be duly considered for policies to gain necessary popular sanction and support. If this is overlooked policy implementation will necessarily suffer.

Umeå University

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International Institute for Tel: +43 2236 807 342 Applied Systems Analysis Fax: +43 2236 71313 Schlossplatz 1 E-mail: [email protected] A-2361 Laxenburg, Austria Web: www.iiasa.ac.at

Interim Report IR-07-037

Assessing the Structural Prerequisites for an Efficient Russian Political Market Mats-Olov Olsson ([email protected])

Approved by Sten Nilsson Deputy Director and Leader, Forestry Program 17 December 2007

Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work.

Contents

1 Introduction ...... 1 1.1 Purpose and Structure of the Article ...... 3

2 Theoretical Approach...... 3 2.1 What Is Driving Institutional Change?...... 3 2.2 The Political Market ...... 5 2.3 Conceptualizing the Efficiency of the Russian Political Market...... 8 2.4 Assessing the Efficiency of Russia’s Political Market...... 10

3 The Constitutional Embedding of the Russian Political Market: Specifying the Structure and Empowering the Actors ...... 12 3.1 Constitutionalism and Semi-Presidentialism...... 13 3.2 Popular Representation...... 16 3.3 Territorial Division of Power, Federalism...... 19 3.4 Guaranteed Citizens’ Rights, Social Resources and Public Procedures...... 23 3.4.1 Free Elections...... 23 3.4.2 Mass Media...... 25 3.4.3 Civil Society...... 28

4 Discussion and Assessment...... 33 4.1 On the Progress of Democracy in Russia ...... 34 4.2 On the Development of Efficiency in the Russian Political Market ...... 37

5. Concluding Remarks...... 42 5.1 Is the Russian Political Market Democratic and Efficient?...... 42 5.2 Value of the Criteria as a Tool for Assessment...... 43 5.3 Disentangling the Russian Political Jumble ...... 44

References ...... 45

ii Abstract

Applying the market metaphor the first part of the article outlines a conceptual model for assessing the efficiency of the Russian political system. In the Russian transitional context the development of democracy also has to be included in such an assessment. Using Robert Dahl’s classic criteria of democracy and Douglass C. North’s factors determining transaction costs a scheme is suggested for assessing the efficiency of the Russian political market, looking at the structure of this market as well as actors’ behaviour (agency). In the second part of the article, essential structural developments of the Russian political market are analysed and the implications of these developments are discussed. The conclusion is that a number of recent reforms affecting the structure of the Russian political market will improve the prerequisites for efficiency of citizens’ participation in political life. Finally, the usefulness of applying the market metaphor in analyses of the political system is discussed.

iii Acknowledgments

Funding for the research reported in this paper was provided by The Swedish Research Council for Environment, Agricultural Sciences and Spatial Planning (Formas) and the Faculty of Social Sciences, Umeå University. The Centre for Regional Science of Umeå University also contributed to the finalization of this report. Their generous support is hereby gratefully acknowledged. Valuable comments on previous versions of this paper were given by Professor Lars Carlsson and Dr. Lars Ohlsson.

iv About the Author

Mats-Olov Olsson was a research scholar in IIASA’s Forestry Program between 1997 and 2001. Together with a group of researchers he was engaged in the study “Institutions and the Emergence of Markets ʊ Transition in the Russian Forest Sector”. Since January 2002, Mr. Olsson returned as a research scholar to his home institute, the Centre for Regional Science at Umeå University, Sweden.

v Assessing the Structural Prerequisites for an Efficient Russian Political Market Mats-Olov Olsson

Democracy is a device that ensures we shall be governed no better than we deserve. (George Bernard Shaw)

1 Introduction Arguably, the disintegration of the Soviet Union, which actually started long before 1991, and the subsequent transition period in Russia aiming at transforming the crumbling command economy into a modern market system, was the most important geo-political event of the 20th century and its repercussions are still very much influencing world developments today. Through a series of far-reaching reforms, changes were introduced not only in the institutions governing business behaviour in Russia, but also in the structure and functioning of the political system, a process that has become known as the dual transition. The ambitious and utterly complex goal of simultaneously converting the Soviet economic and political system into a democratic market economy based on private ownership was fraught with a high risk of failure, which caused deep concern among reformers and observers early on in the transition process (Sukhotin & Dement’ev, 1991; Kuz’minov et al., 1993; Elster, 1993; Ordeshook, 1995; Frye, 2003). Severe problems have constantly been encountered along the road forcing the political leadership to change policies during implementation and to devise new policies to remedy the problems created by previous reforms, thus increasing the uncertainty that actors in society have had to cope with, ultimately reducing people’s expectations of a positive future and jeopardizing the legitimacy of the entire reform program. The fundamental problem that has to be solved in the dual economic and political transition in Russia is how to change the institutional framework that evolved in the Soviet period to make it conducive to the emergence and efficient functioning of a market economy and a democratic political system. Douglass North (1997:2) briefly defines institutions as “the rules of the game in a society; more formally, they are the humanly devised constraints that shape human interaction. In consequence they structure incentives in exchange, whether political, social, or economic.” Institutions should be distinguished from organizations, the former being the rules of the game, the latter “groups of individuals bound together by a common objective function (economic organizations are firms, trade unions, cooperatives; political organizations are political parties, legislative bodies, etc.)” (p. 1).

1 North (1997) further argues that institutions are essential for the creation and operation of efficient markets underlying economic growth. Good institutions should provide “low-cost transacting” in economic as well as political markets. Four “major variables” determine these so-called transaction costs. First, there are costs incurred in measuring the “valuable attributes of the goods and services or the performance of agents in exchange.” Secondly, transaction costs depend upon the size of the market and whether exchange is personal or impersonal. In personal exchange, where the need for detailed specification of what is being exchanged and enforcement of contracts have to be detailed, transaction costs are higher than in impersonal exchange, where competition guarantees more efficient transactions. Thirdly, transaction costs increase with the need for enforcement of contracts in situations where parties come to dispute the conditions of exchange. In well-established market economies an elaborate legal system has allowed the development of “a complex system of contracting that can extend over time and space, an essential requirement for a world of specialization” (p. 3). In North’s conception, the fourth variable determining transaction costs has to do with ideology (North, 1997:3): Ideology, consisting of the subjective ‘models’ individuals possess to explain and evaluate the world around them, not only plays an essential role in political choices, but also is a key to individual choices that affect economic performance. Individual perceptions about the fairness and justice of the rules of the game obviously affect performance; otherwise we would be at a loss to explain a good deal of schooling, as well as the immense investment made by politicians, employers, labour leaders, and others in trying to convince participants of the fairness or unfairness of contractual arrangements. The importance of ideology is a direct function of the degree to which the measurement and enforcement of contracts are costly. If the measurement and enforcement of contract performance can be done at low cost, then it makes very little difference whether people believe the rules of the game are fair or unfair. But because measurement and enforcement are costly, ideology matters. Thus, to summarize, efficient markets are impersonal and exchange is characterized by low transaction costs, that is, parties to an exchange incur minimal costs for quality measurements and contract enforcement, and they trust the fairness (and enforceability) of the rules governing the exchange. In this conception, institutional change aims at installing new or modified rules that contribute to transaction cost decrease. The problem of how to achieve such change is still largely unresolved. Previous research on the transformation of the Russian forest sector (see, for instance, Carlsson, Lundgren & Olsson, 2001; Olsson, 2006) identified a number of institutional deficiencies hampering the efficiency of actors’ behaviour on the “timber procurement arena”.1 It was also found that the further development of a market efficient Russian forest sector would be facilitated by ʊ in fact, would even require ʊ an improved functioning of the Russian political system.

1 This research was conducted by a small group of researchers (of which the present author was a member) at the International Institute for Applied Systems Analysis (IIASA) in the period 1997–2001. Work was subsequently continued by the present author in his home institute, the Centre for Regional Science of Umeå University, Sweden. A complete listing of reports published by the IIASA project can be found at http://www.didaktekon.se/mats/ii-publ.htm. Information about IIASA can be obtained from the institute’s website at http://www.iiasa.ac.at.

2 1.1 Purpose and Structure of the Article In this article I seek to structure the complex problem area relating to the functioning of the Russian political system and to outline a framework for assessing the efficiency of actors’ political interaction, focusing on the rules (institutions) governing behaviour in the Russian political market. In so doing, I take the departure in Douglass North’s writings on what drives institutional change and what makes the functioning of the political market so important. In the first part of the article I set out by summarizing some recent thoughts developed by North and colleagues on what drives institutional change. In a following section I discuss the meaning of the political market concept and what might be understood by efficiency in the context of such a market. Next, a set of criteria is distinguished, by which the efficiency of actors’ behaviour in the political market can be assessed. It is argued that both the way Russian political life is structured and the way the actors of the system behave must be taken into account when assessing the efficiency of the country’s political market. In the second part of the article, I use recent research findings to exemplify some of the changes in the structure of the Russian political market that seem most important with respect to its potential efficiency. In the concluding section it is discussed to what extent the Russian political market has become more or less democratic and efficient since the beginning of the 1990s. It will also be possible to draw some conclusions about what features of this development are insufficiently understood and thus in need of further study. Finally, the usefulness of applying the market metaphor for assessing political processes is ascertained.

2 Theoretical Approach

2.1 What Is Driving Institutional Change? Improving the efficiency in actors’ market behaviour ʊ be it in the economic or in the political market ʊ requires changes in the institutional framework. Thus, the crucial question is: how do institutions change? And, much more specifically and relevant for this article, in what way must institutions change in order to contribute to decreased transaction costs? In recent writings North has emphasized the importance of the cognitive processes behind individual and collective learning and how such learning manifests itself in the emergence of institutions (cf., Mantzavinos, North & Shariq, 2004; North, 2005). When theorizing about institutions, it is useful to distinguish between two aspects: external and internal. From an external point of view, institutions are shared behavioral regularities or shared routines within a population. From an internal point of view, they are nothing more than shared mental models of shared solutions to recurrent problems of social interaction. Only because institutions are anchored in people’s minds do they ever become behaviorally relevant. The elucidation of the internal aspect is the crucial step in adequately explaining the emergence, evolution, and effects of institutions; it is this that makes for the qualitative difference between a cognitive approach to institutions and other approaches (Mantzavinos, North & Shariq, 2004:77).

3 For the further discussion, it is important to note that institutions consist of “formal rules (constitutions, statute and common law, and regulations), informal rules (conventions, moral rules, and social norms), and the enforcement characteristics of each” (Mantzavinos, North & Shariq, 2004:77). Informal rules emerge spontaneously in the interaction among members of a social group in a process of collective learning. The emergence of formal rules has to do with the necessity of coming to grips with individuals (or groups) who do not abide by the established informal rules. Such behaviour is more likely to appear in large groups where impersonal relationships between members dominate, rather than in small groups (tribes and the like). Mantzavinos, North & Shariq (2004:78) present an argument explaining the emergence of states as an evolutionary response to the need for protection that appears in large impersonal groups: Thus, in an evolutionary process characterized by collective learning, division of labor, and competition or cooperation among entrepreneurs, one or more protective agencies remain in the society. Since their primary function is to offer protection in exchange for goods or money, they constitute the protective state or states taxing constituents for the supplied protection. But isn’t there any difference between protective agencies and protective states? The only analytically important one seems to be that protective agencies appear at the first stages of the evolutionary process, whereas protective states are, in a way, the outcome of that process. Greater stability is characteristic of the protective state, since both rulers and citizens have already gone through a learning process. Citizens have realized that the costs of exiting a protective state are quite high […]; and rulers have learned how other rulers react and which technologies of oppression are most successful. The difference is therefore one of degree rather than of kind. The authors further maintain (p. 79) that, despite recent progress in political science, there does not yet exist any “general theory of how political markets work and how protective states come to assume more and more functions, offering a bundle of public goods rather than merely protection”. In their opinion such a general theory would “explore the transaction-cost characteristics of political markets and the role of ideology in shaping political outcomes”. The development of a theory of ideology, the authors suggest, “could have as a starting point the evolution of the shared mental models of the political actors that give rise to and legitimize new political rules.” Finally, one more notion of central importance for North’s conception of institutional change should be mentioned. This is the notion of path dependence, a concept denoting rigidities preventing fast or drastic changes in established behaviour. Mantzavinos, North & Shariq (2004) speak of cognitive, institutional and economic path dependence, where cognitive path dependence (that appears when “shared learning” repeatedly comes to the same result thus stabilizing mental models) leads to a path-dependent formation of institutions used to solve a variety of social problems in a particular way. This results in “increasing returns” of the institutional framework, creating disincentives for institutional change (institutional path dependence). A constant institutional framework (entailing a stable incentive structure) will favour a certain type of technological development, which ultimately results in economic path dependence. The authors (p. 81) end their article by calling for further research “in order to develop theories of how political markets function, of the emergence and effects of ideology, and of the relation between formal and informal institutions”. This article hopes to make a contribution to this research agenda.

4 2.2 The Political Market Drawing upon North (1990; 1997) this article sets out to study the efficiency of the political system in much the same way as one would do to assess the efficiency of the economic system, through changes in the costs of transaction. The criterion for improved efficiency is that interactions in the market can take place at reduced transaction costs, i.e., all costs relating to a market transaction, apart from the direct production costs of the commodities or services that are exchanged. This is understandable when we think of transactions in the market for goods and services. But what about transactions in the political market? First of all, what do we mean by a political market? The concept of market, as used in economic and political discourse, traditionally refers to an abstract (metaphorical) “place” where suppliers of a certain commodity or service meet potential customers to establish the minimal price at which the supplier is willing to cede the property rights of the commodity or service in his possession to the customer. Multiple suppliers and customers are assumed to compete in this idealization of a market. Prices thus established reflect scarcity relations between the commodities and services that are offered in the market. In a perfectly functioning market (another abstraction/idealization) such prices (and the profits they generate) will guide the producers in their efforts to make maximally profitable decisions concerning production and investments. Customers who want to buy a specific commodity or service has to monitor the supply of the product offered in the marketplaces in order to find an acceptable price relative to the desired quality and quantity. There are also a number of other issues that have to be resolved, issues that can broadly be labelled the terms of trade (time of delivery, forms of payment, enforcement of contracts, insurance, etc.). Expenditures (in time and money) related to such monitoring activities constitute transaction costs. Efficient markets are characterized by minimal transaction costs. In general, transactions conducted in large impersonal markets guided by well-functioning rule systems (institutions) incur lower transaction costs (i.e., are more efficient) than transactions in small, personalized markets. How can the economic market metaphor be applied to the field of politics?2 First, it is necessary to distinguish what it is that is being exchanged in political markets and who the parties to such transactions are. In general, the “products” exchanged in political markets are one way or another related to institutions (rules-in-use) that govern various aspects of people’s behaviour, often to the formation of such institutions (ideas and views suggesting new or modified rules-in-use), including the procedural rules governing how collectively decided institutions should be established. The “products” exchanged in political markets may be of a very general character, such as ideas and proposals for policies intended to impose restrictions applicable to all actors and spheres

2 Attempts at conceptualizing political activity as actors’ interaction in a marketplace has a fairly long history in economics, business studies, and political science. Downs (1957) is an often cited precursor of this line of research. In Monroe (1991) Downs’ legacy is reviewed and commented upon by a number of his followers and critics. For a recent overview of the theorizing on why, how, and with what consequences politics, conceived as interaction in a marketplace, can be influenced by various actors, see Getz (2002). The principal characteristics of political markets and their function has been outlined, e.g., by North (1990); Bonardi, Hillman & Keim (2005).

5 in society, but they may also be ideas or proposals for rules of more limited scope, rules intended to govern the behaviour of some actors (individual citizens and organizations) with regard to very specific issues. The “products” offered in the political market are paid for by “support” of the actor supplying the product. This payment may consist of electoral support (votes), information, or sometimes financial support for political campaigns, etc. In principle, we could expect to find the same actors in political markets as in economic markets. The ultimate actors in the political as well as in the economic system are individual citizens. But, depending upon the framing of the analysis, actors might be distinguished on various levels of aggregation, from individuals, to informal and more formal groups of individuals, such as households, enterprises, and other kinds of organizations (political parties, business associations, labour organizations, NGOs of various inclination, etc.).3 Table 1 summarizes the principal differences between economic and political markets.

Table 1. Comparison of Economic and Political Markets Characteristics Economic Political Definition/boundary Substitute goods/services Political issue Demanders Customers Citizens, firms, interest groups, voters, other governments (foreign or subgovernments) Suppliers Firms, individuals Elected and nonelected politicians, bureaucrats, legislators, members of the judiciary Product Good, service Public policy, regulation, deregulation Nature of exchange Money, other goods (barter) Votes, information, financial support Source: Bonardi, Hillman & Keim (2005:400).

A good starting point for comparing economic and political markets is to look at the character of the principal-agent relations that exist in the two kinds of market. In economic markets, the principal’s problem of making the agent behave in the desired way normally is viewed hierarchically and as an employer-employee relation, where enterprise owners recruit a CEO obliging him by contract to make the enterprise perform in the best interest of the owners (for simplicity let us assume that this means seeking to maximize profits). The CEO, in turn, is responsible for the recruitment of other enterprise employees under such conditions that profit maximization can be reached. This behaviour is institutionally embedded in provisions made in various legislative acts (e.g., constitutional stipulations on property rights and legislation

3 A substantial share of the literature on political markets deals with enterprises’ political activity under labels like “corporate political agency,” “issue management,” “Corporate Political Action Committees” (so-called PACs), etc.

6 regulating the labour market) with details relevant for individual instances laid down in contracts between the parties. This way principals know how to sanction irregular behaviour on the part of his agents and there are organizations (public and private) to settle disputes that might arise. The principal-agent relations in economic markets seen from the opposite perspective of a consumer ʊ the principal being the buyer of a product or service supplied by the agent, an enterprise ʊ is likewise embedded in a fairly clear and operational institutional framework. The institutional embedding of the principal-agent relations in operation in political markets is quite different. A fundamental difference compared to economic markets is that the political market is coercive in that the state extracts money for its operation from all taxpayers in the country. Citizens/taxpayers are thereby actors in this market whether they wish to be so or not. But as actors they have a right (and they ought to consider it important) to know that their tax payments come to best use. Furthermore, political markets are highly competitive and much of the interaction (exchange) in this market aims at forming coalitions to promote certain political goals, often entailing a temporally extended, recurring negotiation process, quite unlike the separable one-time deals that are concluded in economic markets. In the political market constitutional stipulations play a much greater role for the way these relations are enacted. A country’s constitution identifies political bodies in charge of the legislative, the executive and the controlling powers in society and it stipulates how these bodies are allowed to exercise the powers given them and through whom (i.e., requirements on officials and how these officials should be selected). The character of these constitutional rules also determines in what kind of governance (variants of democracy or dictatorship) these bodies are to function. In a democracy, which is what we will be dealing with here, the constitutional rules supplemented by other legislation define the form and character of the principal- agent relations that are to apply between the central and regional authorities (rules defining federal relations), between citizens and their representatives to the parliament (rules governing political parties, electoral rules, procedural rules, etc.), between various officials of government and employees in governmental bodies (rules governing bureaucracy) (cf., Shepsle & Bonchek, 1997; Mitnick, 1993; Keim & Baysinger, 1993). Compared to the rules governing principal-agent relations in economic markets the rules governing these relations in political markets are more ambiguous and difficult to enforce. Obviously, there are instances of rule violations that are immediately recognized and for which there are clear and implementable sanctions. Political agents (such as elected members of parliament ʊ legislators) often behave in a way that their principals (citizens ʊ voters) would not approve of without the latter being able to enforce any sanctions at all against the former, at least no immediate sanctions. The reasons for such “market failures” are partly to be found in inadequacies in the system of rules guiding the behaviour of principals and agents, but partly also in the fact that transactions in the political market and the “products” exchanged are of a very different nature compared to those of economic markets. For instance, information necessary to reach decisions on transactions are harder to come by in political markets than what is normally the situation in economic markets. Typically, different actors in the political market have access to information of varying scope and quality (asymmetrical information). Add to this the fact that the “products” exchanged in political markets are of an entirely different character than products exchanged in economic markets. The ideas and promises of new or modified institutions that are the

7 “goods” traded in the political market often are of a public-good type, i.e., the benefits of the transaction (if they are eventually realized) in principle accrue to everybody in society, while the “cost” paid is often carried by a few. This makes political markets much more volatile than economic markets and developments in political markets are therefore also rather more difficult to predict. Actors in political markets are thus faced with greater uncertainty compared to actors in economic markets. Thus, the incentive structure of actors in political markets is quite different compared with that of actors in economic markets. All of the mentioned features characteristic of political markets tend to raise transaction costs. Clearly these costs will be high in political markets that are “immature” in the sense that well-functioning institutions (formal as well as informal rules) have not (yet) been established. However, it is reasonable to assume that in such markets (like in all markets) actors’ behaviour will change through a learning process that will ultimately affect actors’ “mental models” leading to (formal or informal) collective decisions on changes in the institutional framework that will make costs of transactions decrease, thus improving the efficiency of operations in political markets.

2.3 Conceptualizing the Efficiency of the Russian Political Market Assessing the performance of the Russian political market necessarily entails a comparison of observed behaviour and its structural constraints with some kind of norm. The behaviour observed in another society could in principle serve as such a norm. However, that would not reveal anything about the position of the Russian political market in the total set of existing political markets.4 Another approach would be to construct a kind of “ideal-type” for comparison by defining from “first principles” a (theoretically) ideal political market. To enable an assessment we then need to identify, on the basis of this definition, a set of criteria that together normatively define a democratic political system, criteria against which the structure and functioning of the Russian political market can be assessed. This is the avenue chosen here. Robert Dahl (1971) has suggested several requirements that together might be used to define a kind of ideal-type democracy. Dahl (1971:2) argues that a democratic government must be responsive to the preferences of its citizens and allow them “unim- paired opportunities” to formulate and signify preferences and have their preferences “weighted equally in conduct of government.” To allow these opportunities Dahl lists a number of guarantees that citizens must be given: 1. Freedom to form and join organizations; 2. Freedom of expression; 3. Right to vote; 4. Eligibility for public office 5. Right of political leaders to compete for support; 6. Alternative sources of information; 7. Free and fair elections; 8. Institutions for making government policies depend on votes and other expressions of preferences.

4 Unless, of course, it had already been established what relative position in the total set of existing political markets that specific society occupied with which Russia was to be compared.

8 Dahl notes that two different “theoretical dimensions” emerge from this listing. Actually, the guarantees specify how public contestation should be achieved and they also indicate that the degree of participation (inclusiveness) in democracy may vary. By combining the two dimensions Dahl deducts four types of regimes that he uses to illustrate the process of democratization. One of these types he calls “polyarchy” characterized by high public contestation (liberalization) and high participation (inclusiveness). Systems characterized by low public contestation and low participation he calls “closed hegemonies”. Democratization consists in a movement from closed hegemony towards polyarchy, i.e., from low to high “values” on both the contestation and the participation axes. By observing how the Russian regime that emerged after the disintegration of the Soviet Union ʊ Dahl notes that the Soviet regime was highly inclusive, but not allowing public contestation ʊ opens up to public contestation, the degree of democratization in Russia can be assessed. However, as Dahl also points out, a more complete characterization of democracy would require more dimensions than the two he explicitly discusses. Dahl’s characterization of democracy and democratization nevertheless indicates a number of criteria for assessing the development of Russian democracy, distinguishing whether or not the system is becoming more democratic with time, approaching what Dahl labels polyarchy. But the characterization also draws attention to the fact that in practice many different ways of implementing Dahl’s eight guarantees may exist, ways that could in principle produce a large number of unique variants of democracy. The functioning of these different democracy variants may be more or less efficient in terms of the transaction costs that are incurred in the operation of the system. Thus, in principle, an assessment of the efficiency of the Russian political market would need to establish the specific type of democracy (of all possible and acceptable variants) that would potentially incur the lowest transaction costs. The assessment would then consist in measuring the deviation between the actually existing variant of Russian democracy and the “optimal” variant that might potentially have been selected. (This issue could be seen as a parallel to the issue of allocative efficiency in economic markets.) However, in the present context, noting that democratization in Russia is increasing public contestation, the choice of democratic system (i.e., the selected variant of democracy) will not be questioned, it will rather be taken as a given, assuming that it represents people’s preferences. Nevertheless it must be noticed that the variant of “democracy” existing in Russia today has undergone structural changes since it was originally installed at the beginning of the 1990s and that these changes have presumably affected the transaction costs that actors incur in their operations in the Russian political market. Changes in actors’ behaviour in the political market might also be due to other (non- structural) factors influencing transaction costs, such as changes in perceptions, incentives, ability to access and interpret information, etc., most of which might be said to be consequences of individual and/or collective learning. Thus, behavioural changes could take place independently of changes affecting the structure of the observed variant of democracy. And as a result of changed perceptions, the actors in a given political market might rearrange their capacities and efforts in a way that increases the efficiency of their operations (reduces their transaction costs). This issue could be seen as a

9 parallel to so-called X-efficiency in economic markets (Leibenstein, 1966), i.e., the issue of how best to use given resources in a given production structure. To sum up: Democracy is a system of governance allowing all citizens real influence over collective decisions about public affairs. A democratic political market is defined by the existence and enforcement of sets of rules, or institutional systems, that (a) establish a structure within which citizens can exercise their right to influence collective decisions, and (b) guide citizens’ actual behaviour when exercising that right. These institutional systems are themselves established (and can be changed) through citizens’ exercise of their rights to influence collective decisions. An efficient market is one in which actors’ behaviour incurs minimal transaction costs. With reference to political markets ʊ and based upon the four factors that North claims determine transaction costs (cf., Section 1 above) ʊ this would entail the following: 1. Formal rules (institutions) exist that facilitate citizens’ assessment of the character and political programs of various market actors (politicians, bureaucrats), i.e., rules that facilitate citizens’ decisions whether or not to support an actor or group of actors (e.g., a political party). 2. Measures are taken to increase the size of the political market, making the political market more impersonal (or public), which tends to increase efficiency (by decreasing transaction costs). 3. People have rights and capacities to assign responsibility for failures or malperformance of individual politicians or political parties. 4. Collective learning exists that may result in changed (shared) mental models (ideology), with the help of which actors interpret their situation and decide on future actions.

2.4 Assessing the Efficiency of Russia’s Political Market Assessing efficiency changes in the Russian political market in principle entails an attempt at answering two separate questions: (a) How have the structural prerequisites for the efficient operation of the Russian political market developed during transition? and (b) How have other prerequisites (such as those related to learning) affected actors’ behaviour in the Russian political market? The first question aims at establishing how the structure of the political market limits the potential efficiency of actors’ behaviour, the second question aims at estimating to what extent actors realize the efficiency gains (reduced transaction costs) that are feasible within the existing structural constraints.5

5 It should be noted that the discussion in this paper does not concern “politicized” economic markets. Such markets often seem to be the focus of interest when economists claim to be discussing the efficiency of political markets. Their discussions may, for instance, deal with the efficient collection and spending of tax revenues for the provision of “welfare” (health services, education, defence, etc.). It may also deal with the production of goods and services in markets where government regulation is making a significant impact on supply and demand relations, such as may be the case in certain production activities in the private sphere affected, for instance, by government’s environmental regulations (cf., for instance, Breton, 1999).

10 Thus, in principle, when assessing the efficiency of the Russian political market, both its structure and agency characteristics should be taken into account.6 Dahl’s (1971) criteria, discussed in a previous section, mainly specify certain rights and freedoms that citizens should be guaranteed for the system of governance to be characterized as a democracy. They indicate principal ways through which citizens should be allowed to exercise their political power. By stating that there should be free and fair elections, Dahl indicates that citizens could exercise their power indirectly, through elected representatives. Implicitly he thereby also acknowledges that there must exist in a democracy a hierarchical organizational structure within which these representatives should operate. The final guarantee listed by Dahl speaks of the necessity of institutions to ensure that voters’ preferences be duly taken into consideration in government policies.

Table 2. Institutional Criteria for an Efficient Political Market I. The (formal) institutional set-up of an efficient democratic political market should: C1 establish citizens’ freedoms and rights to take certain actions, such as the freedom to form and join organizations, freedom of expression, right to vote, eligibility for public office, and right of political leaders to compete for support. C2 sanction the existence of certain resources and procedures in society, such as alternative sources of information, and free and fair elections. C3 impose certain restrictions on the conduct of government, such as institutions for making government policies depend on votes and other expressions of preference. C4 be internally consistent, i.e., rules must not be contradictory and give rise to incoherent behaviour. II. In an efficient democratic political market the behaviour of a majority of actors should: C5 (a) conform to the behaviour sanctioned by established institutions, and/or (b) not be overly influenced by, or contributing to, corruption.

By reformulating Dahl’s criteria in institutional terms we arrive at three kinds of rules that establish the structure of a democratic political market (cf., C1–C3 in Table 2). Dahl’s criteria also imply a hierarchical grouping of the institutions (rules-in-use) existing in a society. Typically, certain institutions limit the scope of others at lower levels in the hierarchy. Therefore, as suggested by Kiser & Ostrom (1982), it is useful to distinguish institutions operating at the constitutional choice level from institutions operating at the collective choice level, and from those that govern behaviour at the operational level. As explained by Kiser and Ostrom (1982:209): “Constitutional decisions establish institutional arrangements and their enforcement for collective choice. Collective decisions, in turn, establish institutional arrangements and their enforcement for individual action.” This observation leads us to a fourth “consistency” criterion (C4) with important implications for the efficiency of political markets.

6 Integrating the analysis of structure and agency has been suggested by, for instance, Sewell (1992); Mahoney & Snyder (1999); and, in the context of the post-soviet transition, by Jones Luong (2002).

11 Finally, the required character of actors’ behaviour in a democracy is specified in a fifth criterion (C5). Under category I four criteria specify the structural characteristics of an efficient democratic political market and under category II the behavioural characteristics of an efficient democratic political market are specified. Two questions will be explicitly addressed in the remainder of this article: (1) To what extent are the criteria listed in Table 2 met in contemporary Russia? and (2) To what extent do the criteria work as a general tool for assessing political markets? To answer the first of these two questions the criteria listed in Table 2 will be applied to ascertain (a) whether formal rules (officially expressed in legislation) exist through which a clear structure of the Russian political market is specified; (b) how these rules compare with rules derived from an “ideal-type” definition of democracy; and (c) to what extent the behaviour of various actors in the Russian political market complies with the rules of the sanctioned institutional set-up and to what extent it is affected by corruption. The second question will be addressed in the concluding section. Citizens exercising the freedoms and rights that, according to Dahl (1971), democracy should guarantee all members of society might, in principle, establish a political system characterized by a highly arbitrary conduct of government. By adding the requirement that good democracy should sanction the rule of law (which is actually implied by C5 in Table 2), the risk for arbitrariness in the conduct of democratic governance is reduced.7 The adoption of this normative requirement on good democracy puts constitutionalism at the centre of interest. “Constitutionalism is the theory that seeks to devise institutions which will implement the Rule of Law in the public sector” (Lane & Ersson, 2000:287). In the sequel, the suggested approach to the assessment of the efficiency of the Russian political market is illustrated by focusing on the constitutionalization process and its effects on the structure of the Russian political market. The issue of agency ʊ various actors’ behaviour in the political market ʊ is not further pursued in this article, despite its importance for a comprehensive assessment of the efficiency of the Russian political market.

3 The Constitutional Embedding of the Russian Political Market: Specifying the Structure and Empowering the Actors In this section the formal aspects of the structure of the Russian political market will be focused. Four issues are discussed. First, we have a look at how the division of power has been implemented in Russia after the disintegration of the Soviet Union. To do so we look at the constitutionalization process and identify the most pertinent problems with the adopted constitutional provisions. Second, the structure of the electoral system

7 Archie Brown (2001b) bases an assessment of Russian democracy on Dahl’s democracy criteria to which he adds two criteria of his own; political accountability and the rule of law. It seems that the latter is necessary to limit the potential arbitrariness of democratic governance, while the former can be subsumed under the other criteria Dahl suggests (such as the right to vote, eligibility for public office, the right of political leaders to compete for support, and free and fair elections). See, for instance, Morlino (2004) for a discussion of the quality of democracy.

12 is analysed as it emerges in the institutions regulating popular representation in the country’s governance. Third, the territorial structure of governance is discussed as it is reflected in the development of Russian federalism, and finally, we review the development of some constitutionally sanctioned citizen rights, social resources and public procedures that together structure the principal-agent relations between those who govern (occupy political office) and those who are governed (citizens, voters) in Russia.

3.1 Constitutionalism and Semi-Presidentialism Arguably the most important issue to take into account in an assessment of the efficiency of Russia’s political market is the introduction of Rule of Law. It is therefore important to establish to what extent the constitutionalization process has gained ground in the Russian society. In this context it is also interesting to look at how the mode of governance established in the constitution affects policymaking and the development of democracy. A country’s constitution is a formal legislative document distinguishing what is to be meant by state organs and state competences (powers). The constitution divides various competencies, typically the executive, legislative and judicial powers, between various state organs, often the head of state, the parliament and the judiciary (Lane & Ersson, 2000). Existing constitutions are typically of two kinds, “thin” and “thick,” the former requiring procedural accountability, representation and division of power, while the second, in addition, requires rigid rules for changing the constitution, a bill of rights, minority protection, as well as judicial review. Nations observing all rights stipulated in their constitution, so-called fully constitutional nations, are characterized by state stability and it seems that it is not primarily the constitutional format that matters for the longevity of states, but rather the fact that a constitution exists restraining the exercise of state power (Lane & Ersson, 2000). Leaving aside the dramatic events leading to the disintegration of the Soviet Union in late 1991 and the subsequent constitutional turmoil ending with the attack on the Russian parliament in early October 1993,8 we merely note that, with the adoption in December the same year of the new constitution, Russia formally left its undemocratic Soviet past behind and seemed to enter a more orderly transition towards modern democracy.9

8 See, for instance, Ahdieh (1997) who has analysed the constitutionalization history 1985–1996; Sergeyev & Biryukov (1993) who give a contemporary account of early events and the prehistory of the constitutional change in Russia; Colton & Skach (2005) who concisely summarize the limited scope for action that the situation offered various actors in the turbulence preceding October 1993; and Ellison (2006) who recounts in detail the dramatic events of the Yeltsin years. 9 However, this interpretation of the events can be strongly contested. As many observers have argued there is much in the recent political developments in Russia indicating that liberal democracy is rather losing ground (cf., for instance, Hahn, 2004; Ross, 2005; Fish, 2005; Stoner-Weiss, 2006b; Holmes, 2006; and Hanson, 2007). Recent Freedom House ratings of political rights and civil liberties put Russia in the “non-free” category of countries (cf., http://www.freedomhouse.org). However, all observers are not entirely pessimistic. Sakwa (2005), for instance, analysing the 2003–2004 Russian elections and prospects for democracy, finds that recent electoral reforms initiated by President Putin might produce more favourable conditions for democracy ʊ the character of developments will become more clear only after the next election cycle (2007/8); see also Moraski (2007).

13 With the disintegration of the Soviet Union, the primary task of constitutionalism in Russia could be seen as the establishment of basic institutions that should define, distribute and constrain state power while simultaneously being conducive to the reformation of the country’s economic and political system. The mode of governance sanctioned by the 1993 Russian constitution has been labelled semi-presidentialist. The system was actually established already in the years preceding the constitutional referendum (Huskey, 1996; Colton & Skach, 2005; Skach, 2007). Semi-presidentialism combines a popularly elected head of state (president) with a head of government (prime minister) responsible to the legislature. Many believed that this system combined the best of both presidentialism and parliamentarianism and that it would be an ideal constitutional arrangement for countries in transition. The system was also adopted by a majority of the transitional countries (Skach, 2007; Sedelius, 2006). Observers have noted that while semi-presidentialism might work well enough in countries with a consolidated majority government, where both the president and the prime minister have the same majority support in the parliament, there are considerable problems with this arrangement in countries, like Russia, with a so-called divided minority government, i.e., with a parliamentary situation in which neither the president nor the prime minister has a majority support (Colton & Skach, 2005). In a semi- presidential system there are inherent tensions between the president, the prime minister and the legislature. In the Russian case such tensions are likely to be especially severe due to the unusually strong powers that the 1993 constitution bestows upon the president. For instance, the president is empowered in many cases to bypass the legislature and rule by decree, he can dissolve the lower house of the parliament (the State Duma), he has unrestricted rights to appoint ministers (except prime minister), the presidency and his bureaucracy are immune from legislative oversight (Weigle, 2000; Willerton, 2005; Colton & Skach, 2005). Actually, formulations in the Russian constitution defining the president as the head of state can also be seen as “a norm granting the president the power to be head of the executive and to decide fundamental political issues” (Fogelklou, 2003:189). While Yeltsin refrained from making use of the full spectrum of his constitutional powers, president Putin, after his election to the post in March 2000, has taken a number of far-reaching measures that together have enhanced the powers of the presidential office even further. The new constitution provided for subsequent additional federal constitutional legislation to enact more specific restrictions on the power invested in various state organs. Such legislation has since been introduced and it is still being introduced.10 Thus, it can be argued that the Russian constitutionalization process still is in a transitional phase (Fogelklou, 2003). Russia is not (yet) a fully constutionalized country, even if some of the social benefits of constitutionalization has already been reached, such as a degree of state stability. The Russian constitution has also been characterized as potentially thick (Fogelklou, 2003), i.e., it includes a bill of rights, it is rigid in the sense that the stipulations for changing the constitution are fairly demanding, and it regulates the functions of a constitutional court (Art. 125). However, looking more to the actual functioning of the constitution, it has to be characterized as thin: “Constitutional values do not gain deep ground in society and the president’s accountability is poorly

10 Several examples of this ongoing introduction of new legislation are discussed by various analysts in a volume edited by Sharlet & Feldbrugge (2005).

14 developed. The main functions of the constitution are to legitimize and legalize decisions but it will not affect the outcomes of the political process very much” (Fogelklou, 2003:194). Constitutionalization embraces an institutional component, the establishment of constitutional structures. But the process also requires psychological underpinning in the form of development of a legal consciousness. Both aspects are of crucial importance for the success of the Russian transition. However, a serious problem with the Russian transitional reforms has been their emphasis on building constitutional structures while neglecting the development of legal consciousness (Ahdieh, 1997, Stoecker, 2003). The fact that court rulings in Russia are often not enforced in practice has led to a situation where legal norms are frequently disobeyed, with detrimental consequences for legal consciousness. This phenomenon is most likely related to the Russian political culture that has always allowed political decisions to be taken by members of the elite and the elite has basically used the law to further its own interests.11 However, as Ahdieh (1997) argues, while constitutionalization initially was a “story of the elite,” arguably, there has been a “transformation of mass psychology” in Russia during transition, resulting in (or perhaps as a result of) a previously unknown public engagement in the political process. This is leading to a transformation of elite-mass relations, where, as Ahdieh (1997) claims, the absolute divide between the elite and ordinary citizens is beginning to be bridged. These developments implicate a certain learning process among Russian citizens, the elite as well as the masses, with potential consequences for changes in shared mental models and institutional change. A prominent feature of the Russian constitution is the limited scope for action it reserves for the legislature. Compared with other post-socialist transition countries Russia has a weak parliament with negative consequences for the development of political parties and democracy (Fish, 2006). The parliament has hardly any say in the appointment of government. But then again, the power and influence of the government is also severely restricted by the current constitution, a fact that has made the government largely incapable of performing its normal tasks of economic and social policymaking (Sokolowski, 2003). The constitution formally specifies the powers of control (including, ultimately, the power of dismissal) of the parliament, the government and the president, but in practice no one of the three parties can safely exercise this power. This tends to lead to frequent stalemates or deadlocks in policymaking (Soko- lowski, 2003). These are all due to structural features based in the Russian constitution, features that impede the efficiency of the Russian political market. During Putin’s presidency some of the structural causes of this inefficiency have been eliminated.

11 The Soviet authoritarian political culture entailed a striking disregard for the rule of law (Alexander, 2000). Instead a whole range of informal institutions sidestepping, as it were, the formal legislation, guided the behaviour of most Russians. This “unrule of law” (Gel’man, 2004) survived the disintegration of the Soviet Union and still exercises a prominent influence on actors’ behaviour in Russia’s economic and political markets. The Russian elite, which is largely derived from the old Soviet nomenklatura, is content with the current state of affairs that does not interfere with the preservation of its favoured position in society. Ordinary citizens have learned to make things work in informal ways and they do not expect any sudden improvements in the rule of law. In neither group there is a particularly well-developed legal consciousness. In fact, since both groups are favoured by the status quo there seemed to be little “demand for law” in Russia in the early 21st century (cf., Hendley, 1999; Pistor, 2002).

15 Thus, in summary, the constitutionalization process in post-soviet Russia, entailing a number of constitutional choices (not least semi-presidentialism in its specific form) has undoubtedly made a profound but somewhat ambiguous impact on democracy and the efficient functioning of the country’s political market (cf., for instance, Ahdieh, 1997; Schleiter & Morgan-Jones, 2005; Colton & Skach, 2005; Sedelius, 2006; Fish, 2006; Skach, 2007).

3.2 Popular Representation The manner in which citizens are allowed (and able) to express their political opinion and to bring this expression to bear on actual policymaking is perhaps the most important feature of democracy and, in our conception, the efficient operation of the political market (cf., Fish, 2006). In this context electoral rules are of central importance, but also the structure and functioning of the assemblies and offices whose officials citizens elect. Thus, for the assessment of these aspects in their Russian context it is necessary to look at the rules for electing parliamentary deputies and the president as well as the division of power between the legislature and the executive. It is also essential to look at the formal rules guiding the establishment and functioning of political parties through which citizens’ opinions can be channelled (cf., Lipset, 2000). All of Dahl’s (1971) democracy criteria relating to the freedoms and rights of all citizens to take part in political life and influence the country’s government (inclusiveness and public contestation) were formally sanctioned by the 1993 Russian constitution.12 While the Russian constitution stipulates that political diversity and a multi-party system shall be recognized (Article 13), the specific rules explaining how this multi- party system should be established and function are laid down in separate legislation.13 The Russian parliament, the Federal Assembly, consists of an upper house, the Federal Council, where the 89 Subjects of the Federation each has two representatives, and a lower house, the State Duma, consisting of 450 deputies elected in a two-tier system, with one half elected through a majoritarian system and the other half elected by proportional federal party lists, with a five percent entry threshold (Hutcheson, 2003).

12 Dahl’s freedoms and rights of citizens are specified in a “bill of rights” spelled out in Chapter 2 of the Russian Constitution (the “freedom to form and join organizations” is sanctioned in Articles 13, 30, and 31; the “freedom of expression” in Article 29; the “right to vote” and the “eligibility for public office” and the “right of political leaders to compete for support” in Article 32; “free and fair elections” in Article 3). The regulation of “institutions for making government policies depend on votes and other expressions of preferences” are expressed in Article 10 and 11 of the Constitution, establishing the division of state powers into a legislative, an executive, and a judicial power that should be exercised by, respectively, the Federal Assembly, the President and the Government, and the courts of the Russian Federation. Further regulation concerning this division of power is given in Chapter 3 on the federal structure, in Chapter 4 on the President, in Chapter 5 on the Federal Assembly, in Chapter 6 on the Government, and in Chapter 7 on the judicial system. In addition, the Constitution establishes citizens’ right to private property (incl. land) and a free use of their abilities and property for lawful entrepreneurial and economic activities (Article 35, 36, and 34, respectively). 13 In 1995, the law “On Public Associations” (Law No. 82-F3) was adopted to govern the operation of political parties. After Putin was elected president, this law was replaced in July 2001 by the law “On Political Parties” (Law No. 95-F3) supplemented, in June 2002, by the law “On Fundamental Guarantees of Electoral Rights” (Law No. 67-F3) and some other minor changes to the State Duma and presidential election laws (Hutcheson, 2003). In December 2004, further amendments were made to the Law on Parties.

16 There was no connection between these two modes of election to the State Duma, which, in effect, resulted in two separate election campaigns (Huscheson, 2003). While this arrangement was originally created with a view to stimulate the emergence of a strong party system, in reality it turned out to hamper this goal, instead establishing a system beset with a number of principal problems (Ishiyama, 2000; Hutcheson, 2003; Thames, 2005). One of the most pervasive problems was that the system generated a plethora of parties, mostly small, short-lived, and with a limited territorial penetration, basically with presence only at the federal level (Stoner-Weiss, 2001; Golosov, 2003a, b; Riggs & Schraeder, 2004; Oversloot & Verheul, 2006). Another consequence was the fact that the system allowed ample scope for candidates running in single-member district races to win seats in the Duma without the support of a party. Instead the system favoured candidates running as so-called “independents,” whose success often hinged on the support of party substitutes, e.g., in the form of local elites (regional executives and/or business circles) ʊ a practice that has been labelled “machine politics,” the operation of which has hampered the development of political parties in Russia (Moser, 1999; Hale, 2003; 2005; 2006; Golosov, 2002; Orttung, 2004; Riggs & Schraeder, 2004; McFaul, 2005; Gel’man, 2006; Oversloot & Verheul, 2006). The party system was also dysfunctional in the sense that it could not usefully serve as a link between society/citizens and the state. Instead the system rather served the self- interested political elite (Riggs & Schraeder, 2004; Turovskii, 2006). The Russian party system is highly fluid and unstable. Political parties come and go or reshape/rename between electoral rounds, they are underinstitutionalized, and they have weak organizations and underdeveloped internal routines (Rose, 2000; Stoner-Weiss, 2001; 2006a; Riggs & Schraeder, 2004; Oversloot & Verheul, 2006). As a result accountability suffers.14 Parties are actually formed by members of the elite to serve as their basis for gaining access to the Duma in order to have a chance later to become candidates for the presidency. Rather than being an answer to citizens’ demand for specific political agendas, parties in Russia are established to support the interests of their leaders and Duma candidates this way establishing what has been labelled a “supply-side democracy” (Rose, 2000; Riggs & Schraeder, 2004). A characteristic feature of Russian party politics has been the special significance of certain parties, so-called “parties of power,” enjoying the support of the Kremlin (cf., for instance, Smyth, 2002; Oversloot & Verheul, 2006; Knox, Lentini & Williams,

14 It seems that public accountability has also come to suffer from the rules allowing elected deputies (those representing a political party as well as “independents”) to join so-called factions in the Duma. As Riggs & Schraeder (2004) observe: “Access to committee and other leadership assignments is granted to factions formed after elections, rather than to the electoral parties themselves, with no requirement that factions must be representative of electoral results in some fashion. It is only after the election that winning candidates show their true colors; independents reveal their political alignments, party candidates allied with one party simply for electoral advantage bolt to join a different faction; and others are seduced away by opportunities to satisfy their personal ambitions. After each election, the composition of the Duma’s ‘party’ system has been strikingly different from what the voters chose and continues to change throughout the period between elections. In effect, this erects a barrier that prevents the electorate from judging who is accountable for the work of the legislature and thus insulates legislators from the demands of the electorate.” See also Weigle (2000) and Smith & Remington (2001) for a more in-depth discussion of the role of factions in the Duma and the possibility of factions having a positive influence on accountability.

17 2006; Gel’man, 2006; Hale, 2006).15 Being an emergent feature of “supply-side democracy,” parties of power represent the interest of the authorities, not the citizenry. Efforts to create parties of power can be traced through the entire Russian transition period, but success was limited and temporary until Putin was appointed president in 2001.16 At the regional level governors and regional elites tended to stay out of national politics, which might threaten their privileged power position should country-wide political parties become entrenched in the regions and in the process enforce increased accountability (cf., Stoner-Weiss, 2001; Knox, Lentini & Williams, 2006). However, in the campaigns before the 1999 Duma election, regional leaders started creating their own political parties. “Unity” was one of the parties established late in this campaign, but largely due to support by the prime minister at the time, Vladimir Putin, it gained popularity and emerged as one of the winners in the 1999 Duma election. By subsequently (in December 2001) merging with Fatherland-All Russia, Unity became the still successful United Russia, “a pro-Kremlin party designed to consolidate Putin’s control over the Duma” (Knox, Lentini & Williams, 2006:7). Thus, as Hutcheson (2003:30) concisely states, “the electoral system has had significant effects on the development of parties in Russia.” When taking up his new position, President Putin stated that one of his most important tasks would be to reform the party system (Hutcheson, 2003). With the new Law on Parties (adopted in July 2001) requirements on political parties in Russia became much more demanding. So, for example, parties now had to be all-Russian (interregional and regional parties were no longer allowed), parties also had to have larger membership numbers and a much greater territorial penetration (at least 10,000 members and branches of 100 or more members in at least half the 89 federation subjects). The law also bestowed large supervisory powers on the “registration body” (Hutcheson, 2003). In a subsequent amendment to the law (adopted in December 2004) several of these requirements were made even more demanding (Rabinovich, 2007). Hereafter parties are required to have at least 50,000 members or more than 500 members in at least 44 regions of Russia. Furthermore, with these amendments a strictly proportional electoral system has been introduced. Independents can no longer seek to win seats in the Duma by gaining a simple majority of the votes, all deputies must now be elected on the basis of party lists, and parties must receive a minimum of seven percent of the votes to gain any seats in the Duma.17 The same rules are to apply also in elections to regional legislatures. As a consequence of these amendments of the law the number of registered parties in Russia has been significantly reduced. In April 2007, there were seventeen parties

15 Oversloot & Verheul (2006) distinguish seven different types of parties in Russia, but see the parties of power as “the most interesting, and quitessential, element of Russia’s party system ʊ and political system as a whole…” (p. 393). 16 Concise overviews of the history of the Russian parties of power are given by, for instance, Knox, Lentini & Williams (2006) and Oversloot & Verheul (2006). Gel’man (2006) outlines a theory of the emergence of parties of power in the Russian political market. 17 The president also introduced other structural changes in the Russian political market, such as the decision to appoint regional leaders (governors) by presidential nomination rather than through popular elections and the establishment of the Public Chamber (Obshchestvennaya palata) as an instrument for improved dialogue between the civil society and political authorities ʊ some have resembled it to a “third chamber” of the parliament with a supervisory function, a “chamber” to which deputies and bureaucrats are not eligible (cf., Oversloot & Verheul, 2006). The chamber and its work is presented on the official website at http://www.oprf.ru/.

18 officially registered (Stykow, 2007). Only a few of these parties are expected to actually compete for seats in the upcoming (December 2007) federal Duma elections and merely four or five parties are expected to reach the seven percent of the votes necessary for obtaining seats in the parliament.18 Observers of the Russian political scene are concerned that the system, as it has developed during Putin’s second term in office with United Russia as its dominant party of power, relying on “imposed consensus” among the Russian elite, does not allow sufficient scope for other parties to channel a real opposition to the sitting government and president (Gel’man, 2005; 2007; Wilson, A., 2007). In what has been interpreted as a Kremlin orchestrated move, three Russian parties (Rodina, the Party of Life, and the Party of Pensioners) were merged in October 2006 forming a “leftist” loyal opposition under the name of “Just Russia” (Spravedlivaia Rossiia). Besides voting in local, regional, and federal level legislature elections Russian citizens are likely to see it as equally, or even more, important to vote in the presidential elections. Moreover, being popularly elected to the post is probably the single most important factor bestowing legitimacy on the Russian presidency. The president is elected by direct majority vote, with a run-off election between two candidates should not the first election round give the winner an absolute majority of the votes. The presidential elections take place three months after the elections to the Federal Duma. These are the fundamental institutions guiding the election of the Russian president. Both institutions have been criticized for the restrictions they entail for democracy. Simultaneous presidential and parliamentary elections, it has been argued, would stimulate the establishment of an efficient party system, and the second-round run-off presidential elections tend to encourage uncompetitive parties and candidates to manipulative bargaining for favours ʊ e.g., cabinet posts in exchange for support (cf., Ordeshook, 1995). The rules governing presidential elections may be clear enough, but combined with the currently dominating “supply-side democracy” they are open to profound manipulation (Rose, 2000; Willerton, 2005; Ellisson, 2006:138 ff.). Hence, while citizens’ rights to influence the workings of the Russian political market is formally secured through constitutional and legal stipulations concerning the electoral system, the significance of these institutions are partly offset by the constitutional rules regulating the division of power between the executive, legislative, and judicial state organs, rules that give the executive (especially the presidency) the greatest real power to influence policymaking (cf., Section 3.1).

3.3 Territorial Division of Power, Federalism Many features of importance for the functioning of a democratic political market have to do with the basis of Russia’s federal organization. Being a huge and incongruent country with large variations in climatic and economic conditions, Russia is typically

18 The results of the elections to regional legislatures held in March 2007 indicate that at most four (or possibly five) parties will gain seats in the Duma through the upcoming December elections. Apart from the current party of power United Russia (ER), the following parties are believed to stand the best chances of reaching the parliament: the Russian communist party (KPRF), Zhirinovsky’s nationalist party (LDPR), the newly formed Kremlin sanctioned loyal opposition party Just Russia (SR), and, possibly, the right-wing Union of Right Forces (SPS) (see, for instance, Itogi, 2007; Stanovaia, 2007).

19 suited for a federal organisation (Kahn, 2002). In fact, the size and diversity of Russia (with its 170 million square kilometres, 145 million inhabitants, and 172 nationalities divided between 89 constituent units, so-called subjects of the federation) makes it, according to Ross (2005), “one of the largest and most ethnically diverse multinational federations in the world.” Such large differences ʊ or asymmetries ʊ contained in a single state formation constitute an inherently complex problem for democratic governance. The federalist institutional set-up is expected to structure citizens’ behaviour so that often highly diverse local, regional and federal interests are reconciled while simultaneously allowing an efficient, fair and sustainable exploitation of resources. In principle, this task requires highly developed and well-functioning democratic institutions. Thus, the prerequisites for successfully establishing federalism in Russia were far from favourable. Russia “inherited” a federal order ʊ in name if not in substance ʊ from the Soviet Union.19 Gorbachev’s perestroika encouraged regional elites to act more on their own accord to solve regional problems. This de facto ended the Communist Party’s hegemonic role in Russian history (Brown, 2001c; Fish, 1995; Stoner-Weiss, 2006b). Regional party bosses started to build their power base at the regional level. In many cases these party functionaries were subsequently appointed governors in their regions and soon became sovereign rulers of their own fiefdoms (Blakkisrud, 2003; Nicholson, 2003).20 In his power struggle with Gorbachev, Yeltsin appealed to Russia’s regions and encouraged their strive for self-government and independence.21 This was the start of a period ending not until 1998, during which regional governors had more or less unchecked powers, even including the power to influence federal employees working in their regions (Orttung, 2001), a development that resulted in a weak federal state power, with due problems for introducing and implementing reforms, economic as well as political. The development resulted despite the fact that Yeltsin, after being elected president, worked hard to restrain the power of the regions and to re-establish federal authority on the basis of the new constitution of 1993. Already through the 1992 Federation Treaty, Yeltsin managed to moderate the “centrifugal forces,” ending up with a system mostly resembling a confederation (Alexander, 2004). To keep the federation intact Yeltsin had to return some of the power that had been reined in through the constitution. This he did by signing bilateral agreements with more than half of the Russian regions. Sometimes clauses in these treaties even violated the constitution (Huskey, 1999; Alexander, 2004; Ross, 2005; Stoner-Weiss, 2006a). The federal system that emerged in Russia during the 1990s could be characterized as a loose “asymmetrical federalism” that was weakly institutionalized and included various autonomy and consociational mechanisms (Hahn, 2005). When Yeltsin turned the presidency over to Putin, it soon was clear that Putin aimed at attacking a number of the causes he saw of the weakness characterizing the Russian state at the turn of the

19 Ross (2005) calls Soviet federalism “a sham” and notes that Gorbachev in 1989 admitted that Russians had not yet experienced living in a federation, that the Soviet Union was, in fact, a centralized and unitary state. 20 White & McAllister (1996) report that “In the Russian presidential administration, by 1994, fully 75 per cent were former members of the communist ruling group; 74.3 per cent of the Russian government, and as many as 82.3 per cent of the local elite, were from the same origin”. 21 Yeltsin’s famous advice to Russia’s regions to grab as much sovereignty as they could swallow should be seen in this context (see, e.g., Huskey, 1999).

20 millennium, a weakness that threatened a further development towards an efficient market economy and democracy in the country. Some of the measures taken by Putin with the aim of establishing a “dictatorship of law” have made observers fear that the president’s ultimate goal is to de-federalize Russia and convert it into a unitary state (cf., Ross, 2005; Hahn, 2005; Konitzer & Wegren, 2006), while others have seen the federal reforms of the early 2000s as a shift in “federalist paradigms” due to an “ideational change” (Rodin, 2006) that could be seen as a result of a political discourse reflecting learning among the actors in the Russian political market. A number of centrally initiated and interdependent reforms with impact on federal relations have been introduced during Putin’s presidency. Perhaps the most spectacular of the measures taken was the establishment (through presidential decrees issued in May 2000) of seven so-called federal districts headed by presidential envoys (Alexander, 2004; Ross, 2005; Chebankova, 2005).22 The envoys have strong formal powers. Apart from the duties to monitor regions’ compliance with the constitution, federal legislation and presidential decrees, and supervise the selection of personnel to regional offices of the federal bureaucracy, their task was also to restore the pre-eminence of federal law, something which made them central in a huge effort to bring regional legislation into conformity with federal law and the constitution (Ross, 2005; Chebankova, 2005; Petrov & Slider, 2007). They were also instrumental in overseeing the bilateral treaties between the federation and individual regions. Largely through their efforts, 28 of the existing 46 bilateral treaties had been annulled by April 2002, and by the summer of 2004 only eight such treaties were still operative (Ross, 2005). It should be noted that bilateral treaties are constitutionally sanctioned (Art. 11). However, according to a law, adopted in 2003, any future power-sharing treaties would have to be approved by both houses of parliament (Hahn, 2005). Putin has also enforced several other reforms affecting federal-regional relations. For instance, changes in the election of deputies to the upper house of the parliament were introduced. Regional governors and heads of the regional legislative used to be members of the Federal Council, but after changes in the law (adopted in July 2000, and in effect as of January 1, 2002), these delegates should be appointed by the regional assemblies and chief executives (the appointment of the latter subject to approval by the regional assemblies). In September 2000, Putin decreed the establishment of a so-called State Council, an advisory body meeting once every three months. Members are all regional executives. Observers doubt that the council will have much real power; its main purpose seems to be to give regional leaders a direct channel to the president (Ross, 2005). However, while these reforms formally mean a sharp change compared with the previous order, observers tend to believe that their practical effects will not be all that dramatic (cf., Alexander, 2004; Ross, 2005). In July 2000, Putin also enforced amendments to the law stipulating general organizational principles of regional legislative (representative) and executive state organs giving the president the right to dismiss popularly elected governors and to dissolve regional legislatures (subject to approval by the State Duma). However, the requirements for doing so were very demanding (violations of the constitution) and it seems that in practice this reform has not been used by the president to dismiss regional

22 A detailed review of the federal district reform and its implementation in the seven districts is given in Reddaway & Orttung (2004).

21 executives, much less dissolve any regional legislature (Ross, 2005). But since this law also demanded that regional legislation in violation of federal laws or the constitution must be brought into accord with federal norms it seems to have been of help for prosecutors in their work to challenge regional unconstitutional legislation (Hahn, 2005). After the Beslan hostage tragedy (in September 2004), Putin started a second round of federal reforms. Actually, the reforms were planned well before September, but Putin used the momentum given him by the tragedy to move forward with the declared purpose of strengthening internal security (Ross, 2005). On October 29, the Duma adopted Putin’s proposal to abolish direct elections of regional governors. According to the new law it is the task of the regional legislature to approve of the president’s nominees for the post. Failing (twice) to do so gives the president the right to dissolve the legislative assembly and appoint an acting governor until a new assembly has been elected. As some observers have noted (cf., Fish, 2005; Stoner-Weiss, 2006b; Shevtsova, 2006; Carothers, 2007; Colton, 2007), these reforms seem to be moving Russia in an increasingly authoritarian direction. Others (see for instance Willerton, Beznosov & Carrier, 2005), have argued that Western analysts have exaggerated the negative effects of the reforms, contending that the reforms have only had “a moderate impact on centre- periphery relations.” Several other reforms with implications for federal-regional relations have also been discussed or enacted.23 The previously noted changes in rules guiding party formation and electoral order also have an impact on federal politics. The requirement that all deputies to the State Duma be elected from party lists under proportional representation with an electoral threshold of seven percent and the raised party membership demands aims at reducing the number of parties in the parliament. These reforms, some observers fear (see, e.g., Ross, 2005; Chebankova, 2007), will strengthen the Kremlin’s grip on parliamentary politics, at both regional and federal level. Finally, Hahn (2005) notes that a consociational mechanism in operation during Yeltsin’s presidency ʊ a mechanism mandating a “conciliation procedure” in case a federal legislative bill met with protests from the legislative or executive branch in more than 30 of the 89 regions ʊ has been de facto eliminated by Putin. Due to a ruling by

23 For instance, in late 2001 and early 2003, rules were established concerning the merger of federation subjects (Ross, 2005; Hahn, 2005). The benefits of such mergers have long been discussed, goals of reducing the total number of subjects from the present 89 to 45 have been mentioned, even if such a dramatic reduction has been considered unrealistic. So far, the reforms have led to mergers of some autonomous oblasts with the regions in which territory they are located, thus contributing to eliminating what Hahn (2005) has called administrative-structural asymmetry. The development has been of great concern for Russia’s twenty-one ethnic republics and eleven autonomous okrugs, where it is feared that eventually all ethnic regions will be swallowed up by the territorially defined regions (Cashaback, 2003; Ross, 2005). Inter-budgetary relations have also played a significant role for the practical implementation of Russian federalism (cf., for instance, Alexander, 2004; Hahn, 2005). Under Yeltsin, tax revenues were roughly divided 50–50 between the federation and the regions, but there were huge differences in agreed upon exemptions (stipulated in the bilateral treaties) leading to a situation where some regions could keep and others had to contribute much more than the established 50 percent share. The fiscal federal relations will be affected by a local self-administration reform approved in 2003 to be gradually implemented from 2006 (cf., Lankina, 2005). But the distribution of tax revenues between the federal, regional and local level is still very much the topic of ongoing debates (Hahn, 2005).

22 the Constitutional Court in connection with the adoption of the new Land Code in 2004 no conciliation with the regional authorities had to take place despite protests from both the legislative and the executive branch in 35 regions. Thus, it seems that “the federal parliament can now exclude regional legislatures from the federal law-making process and pass bills without taking into account opinion in the regions” (Hahn, 2005:164).

3.4 Guaranteed Citizens’ Rights, Social Resources and Public Procedures Among the guarantees and freedoms that Dahl (1971) considers essential for a democratic regime (cf., section 2.3) are free and fair elections, freedom to form and join organizations, freedom of expression and alternative sources of information. All of these features are instituted and specified in various articles of the Russian 1993 constitution.24

3.4.1 Free Elections As Michael McFaul (2005:61) notes: “Competitive elections are the most dramatic institutional change that distinguishes the old Soviet dictatorship from the new Russian political system.” So far, in the period since the disintegration of the Soviet Union, popular elections to the Russian parliament have been held four times (1993, 1995, 1999, 2003) with a fifth election coming up in December 2007. There have also been four presidential elections (1991, 1996, 2000, 2004) with a fifth election scheduled for March 2008. The rules governing elections have been stable throughout the period since 1993. Elections have also been competitive in the sense that there was a choice to be made by the voters between different parties and candidates. But the conditions for candidates and parties standing for election have been highly varying, mostly depending upon the rules for financial support of election contestants and the fact that media freedom in Russia has decreased, especially during Putin’s presidency (cf., for instance, Gel’man, 2001; Hale, 2003; McFaul, 2005; Ledeneva, 2006).25 Thus, the electoral playing field has become increasingly uneven. Obviously, the manner in which political parties and individual politicians fund their operations is of importance for their ability to compete in the electoral arena. This is nothing specific for Russia. Rules for funding political parties are typically specified in the legislation of most democratic countries, transparency guaranteed through public audit. Such rules are also found in the Russian law on parties. Here requisites are

24 In Article 3:3 of the Russian Constitution it is stated that the supreme direct expression of power of the people shall be referenda and free elections. Article 81:1 rules that the President shall be elected for four years by citizens of the RF on the basis of universal, equal, direct suffrage by secret ballot (more specific rules of presidential elections should, however ʊ according to Section 4 of the same Article ʊ be determined by federal law). Article 96 provides the corresponding rulings for elections to the State Duma. Article 13:4 states that public associations shall be equal before the law; Article 31 stipulates that citizens have the right to assemble peacefully, without weapons, hold rallies, meetings and demonstrations, marches and pickets. Article 29:1 ensures that everyone shall be guaranteed the freedom of ideas and speech, according to Section 4 of the same article everyone shall have the right to freely look for, receive, transmit, produce and distribute information by any legal way, and, according to Section 5, the freedom of mass communication shall be guaranteed and censorship shall be banned. 25 The situation of the media in Russia is further discussed in the next section.

23 specified for parties to obtain state financial support (Oversloot & Verheul, 2006).26 Parties can also muster financial support through membership dues or subsidies from individual citizens and enterprises. While the level of membership dues is not regulated by law, maximal levels are specified for donations (Ikstens, Smilov & Walecki, 2002:59 ff.; Wilson, K., 2007). As reported by Kenneth Wilson (2007), recently published data show that parties were very heavily dependent upon private donations for funding their activities, the overwhelming part of which coming from large corporations. Furthermore, as some observers claim (cf., for instance, Gel’man, 2001; Wilson, K., 2007), the greater part of the funds used for political campaigning are “unofficial” ʊ the official (visible) part may be likened to the tip of an iceberg.27 Large capital interests, in the form of financial-industrial groups (FIGs) typically controlled by oligarchs, contribute funds and can often provide parties access to media (Hadenius, 2002; Oversloot & Verheul, 2006). Thus, money transactions in this arena are far from transparent.28 And, still, perhaps the most significant resource bias in the system does not primarily have to do with direct money payments. Observers have noted the immense advantage that incumbents have in the Russian political system (cf., for instance, McFaul, 2005; Hale, 2003) through their control over so-called “administrative resources.” The party in power, the sitting president or, at the regional level, republican presidents and oblast governors, can freely use the bureaucratic apparatus to serve their own interests and gain advantage in electoral campaigns. Such “machine politics” has been prominent, especially at the regional level (Hadenius, 2002; Hale, 2003; 2005; 2006; Ledeneva, 2006; Oversloot & Verheul, 2006; Wilson, A., 2005). These are all structural factors that have allowed political parties to be captured by the state rather than vice versa, which is normal procedure in democracies, where representatives of political parties occupy positions in the state in relation to electoral success (Oversloot & Verheul, 2006).29 Another consequence is that political parties have been supplied by the Russian elite, rather than being formed in response to citizens’ demand (Rose, 2000). The same factors have also limited the reach of political parties ʊ political parties on the federal level have had difficulties to become established in the regions (cf., Stoner-Weiss, 2001; 2006a) ʊ and it has favoured candidates running in single member districts, whether they have been members of political parties or so- called independents. However, with the recently introduced modifications in the electoral rules (e.g., the requirement that all candidates be elected via party lists, cf.,

26 According to the law, parties obtaining at least three percent of the list vote in Duma elections, or who get at least 12 single-member district candidates elected, or who collect at least three percent of the votes for their presidential nominee receive state funding. 27 Gel’man (2001:179–180) illustrates his discussion with a story of how Yeltsin’s reelection in 1996 was supported by “extra-legal (though not always illegal) payments of cash of, to put it mildly, either doubtful origin, or so-called ‘black cash’ (chernyi nal).” 28 As Oversloot & Verheul (2006) point out, business support of political parties only rarely lead to lawsuits. The prosecution of oligarch Khodorkovsky should probably be seen as an exception. Khodorkovsky sponsored several different political parties (SPS and the CPFR) seemingly with political ambitions of his own. 29 In fact, the emergence of “parties of power” in Russian politics (cf., for instance, Smyth, 2002; Knox et al., 2006), and Putin’s recently “invented opposition” (the Just Russia party) are indications of the state capturing party politics (Sestanovich, 2007). In his recent analysis of party funding, Wilson (2007:1098) maintains that parties are also to some extent captured by large corporations that actually “buy” (through donations) places on party lists “with a view to securing direct influence in the state legislature.”

24 above), the structural prerequisites for Russian political life have changed with potentially significant behavioural effects.

3.4.2 Mass Media Freedom of speech and of expressing opinions is central for the development and functioning of democracy (Dahl, 1971; Sen, 1999; Morlino, 2004). As already noted, the 1993 Russian constitution guarantees these freedoms. However, to serve the development of democracy there must also exist public media of various forms, through which citizens can inform, and be informed, about important events in society and existing differences of opinion (political as well as non-political). This is absolutely essential for citizens’ ability to assess their situation and arrive at well-founded opinions that can guide their political behaviour, their participation in democratic governance. The media situation in Russia today is of course radically different from that of Soviet times, when media and journalists mainly served the interests of the state and, ultimately, the Communist Party of the Soviet Union (CPSU), the sole “party of power” in those times. Through media the authorities could efficiently distribute such information that they considered important for citizens to know. For example, in 1980, the two largest Soviet newspapers, Pravda and Izvestia, had a circulation of, respectively, close to 11 and 7 million, volumes that gave them a leading position in the world (Oates, 2005). In 1990, right before the disintegration of the Soviet Union, more than 8,400 newspapers, magazines and periodicals were published. Television also grew fast in the Soviet Union, from reaching merely five percent of the population in 1970 to about 99 percent in 1990 (Oates, 2005).30 With Gorbachev and glasnost’ the media situation started rapidly to change in the latter half of the 1980s (Lipman & McFaul, 2001). New topics were now covered by the media, topics that had not been allowed earlier. The authorities soon lost control over what was transmitted through the media. In connection with the August 1991 coup attempt against Gorbachev, media played a very active role in support of continued reforms defying a return to old Soviet authoritarian rule (Oates, 2005). The legal underpinning of Russian media is still the Law on the Mass Media (N 2124-I) adopted already in December 1991. This law is, in the words of Richter (2005), “one of Russia’s most liberal laws and one of the world’s most advanced laws regulating the field.” The opportunities given by this law and the dramatic political changes taking place in the period after the disintegration of the Soviet Union prompted a reformation and revitalization of the media in answer to citizens’ demands for uncensored information and initiated discussion. However, the chaotic first years of transition, with its dramatic economic regression and lack of business rules adapted to the needs of media in an emerging market economy, had severe consequences for the media world in terms of reduced circulation, and close-down of many newspapers and magazines. While trying to attract funding from business through advertising, most newspapers and magazines were still dependent upon government subsidies in one form or another. As Sara Oates (2005:121) explains:

30 As Oates (2005:117) points out: “This was a remarkable technological achievement in a country as vast as Russia, in which 13 per cent of homes still lacked running water and 60 per cent had no telephone lines by the 1990s (according to official statistics).”

25 Those [publications] that did survive had to deal with twin pressures from funding sources in the government and the demands of their advertisers. Even if advertisers have no direct interest in editorial content, they do demand popular content, a desire that can run counter to the government’s need to inform or even propagandize the viewers and readers. In this sense, the Russian media have the worst of both worlds, beholden to both government and commercial sponsors. In such a market structure, in which media enterprises faced a very demanding financial situation, but where at the same time a tremendous business potential existed, it is hardly surprising that the media sector soon was invaded by the emerging “oligarchial capital” (Belin, 2001). The primary goal of this invasion was television, which had successively taken the lead over both radio and printed media in the competition for Russian media consumers. For most of the seven year period after 1993, oligarchs Vladimir Gusinsky and Boris Berezovsky dominated the media scene in Russia through their ownership of national television networks and several national newspapers.31 According to observers of Russian media (e.g., Oates, 2005), the outlets owned by the two tycoons published a varied and often critical commentary of current events, such as the first Chechen war (1994–1996). This relative media freedom was possible mainly because President Yeltsin, even if he thought media reports and judgements incorrect or unfair, remained a supporter of a free press (Becker, 2004). But Yeltsin also allowed business tycoons to become closer engaged in government, and there are ample reports of how his re-election to the presidency in 1996 (when there was a real threat that he would lose the position to Communist Party leader Zyuganov) was helped by the business controlled media turning around an unfavourable public opinion (Coalson, 2000; Belin, 2001; Hoffman, 2002; Oates, 2005).32 A similar, and perhaps even more biased media coverage, now primarily staged by state television, in favour of incumbents, also influenced the outcomes of the 1999 parliamentary and the 2000 presidential elections (Belin, 2001; White, McAllister & Oates, 2002; White & Oates, 2003; Becker, 2004; Hale, 2004). Studies of the press and electoral behaviour has also shown that television indeed had a strong or even decisive influence on citizens’ voting behaviour (cf., for instance, Colton, 2000; White, McAllister & Oates, 2002). All the more worrying then that unusually dirty methods were widely used in media coverage of opposition parties and candidates. Misinformation, or so-called kompromat, created by “election technologists” was a common (and seemingly popular!) feature in television (Belin, 2001; White & Oates, 2003; Oates, 2005).33 In the period since 2000, during Putin’s presidency and, according to several assessments, largely orchestrated by him, the ownership structure of the Russian media has changed significantly, mainly due to the “expulsion” of the media tycoons Gusinsky and Berezovsky on what seems to be administration managed charges of financial fraud

31 “Gusinsky, head of the banking concern Media-Most, founded the NTV television channel in 1993. […] The Media-Most group also controlled the influential Segodnya (Today) newspaper, the weekly news magazine Itogi (Results) and the Echo of Moscow radio station. […] Brerezovsky, a former Soviet official turned Russian entrepreneur, owned a substantial share in the First Channel (then called Public Russian Television) as well as controlling interests in the commercial TV-6 station and three major newspapers” (Oates, 2005:122). 32 Hoffman (2002, Chapt. 13) gives an especially vivid account of how the oligarchs (Gusinsky and Berezovsky) helped Yeltsin win the 1996 presidential election. 33 See Ledeneva (2006, Chapt. 3) for an analysis of the kompromat phenomenon and its effects on political life in Russia. See also Wilson (2005) for a detailed elaboration on the concept of “political technology.”

26 (Belin, 2001; Lipman & McFaul, 2001; Oates, 2005). Both oligarchs were subsequently forced to sell their shares in their television and print-media networks and both eventually left Russia in order to avoid legal prosecution (Orttung, 2006). While still at this time observers of the Russian media found some grounds for optimism concerning media’s independence from state control (cf., for instance, Belin, 2001; Lipman & McFaul, 2001) the situation has since then continuously deteriorated. As a consequence, media coverage of the 2003 parliamentary and the 2004 presidential elections was basically under Kremlin’s control (McFaul, 2005; Oates, 2005). Developments in the Russian media market during the last few years have given several causes for concern. As one observer notes (Oates, 2005:128): “It is clear that the main aim of most of the media in Russia is not unbiased or even balanced reporting; rather they seek to maintain the current elites in power.” Simultaneously, and perhaps unexpectedly, surveys indicate that Russian citizens appear to trust their state controlled media (White & Oates (2003:33): … there is considerable support for the idea that television, as in the Soviet years, should support the state and its various objectives. […] One of our more unexpected findings was that Russians had a more positive view of their media under Putin than during perestroika or in the early postcommunist years. Even more strikingly, relatively few thought it was the job of the media in any case to provide a broad and objective diet of information. Many thought a free media would be ‘dangerous’, and that it was more important for the media to encourage the development of a stable and well ordered society. One reason for their confidence in Russian Public Television was that it was ‘authoritative’ and ‘patriotic’. Despite the prevailing “media climate,” independent journalism still exists in Russia ʊ the small newspaper Novaya Gazeta and various internet sites are often mentioned as examples ʊ that seeks to report on current social, economic and political problems in society. However, journalists engaged in such critical scrutiny risk becoming banned from publishing, or losing their jobs, even their lives. According to a rating by the Committee to Protect Journalists (CPJ), Russia is the third most dangerous country in the world for journalists, after Iraq and Algeria.34 Since 1992, CPJ has registered 44 unnatural deaths among journalists in Russia, 14 of them died after 2000 during Putin’s presidency.35 Other international ratings show how Russia’s score for press freedom has successively decreased. The Freedom House score for Russia’s media independence decreased from 3.75 in 1997 to 6.00 in 2006.36 This could be compared with the average score for new EU member countries of 1.94 and 1.88 for the respective years.

34 See statistics on the CPJ website at http://www.cpj.org/killed/killed_archives/stats.html. 35 The organization “Reporters Without Borders” claims that 21 journalists have been killed since Putin became president in March 2000 (Russia ʊ Annual Report 2007, retrieved on May 29, 2007, from http://www.rsf.org/article.php3?id_article=20823&Valider=OK). 36 Ratings are based on a scale of 1 to 7, where 1 is the highest score. Among “Non-Baltic Former Soviet States” Russia’s media freedom rating for 2006 placed it on a par with Azerbaijan, and before Belarus (6.75), Kazakhstan (6.75), Turkmenistan (7.00), and Uzbekistan (7.00). (Data from Table 4 Independent Media Ratings History and Regional Breakdown, in Nations in Transit 2006 published by Freedom House (http://www.freedomhouse.org/), table retrieved on May 29, 2007, from http://www.freedomhouse .org/uploads/Chart96 File115.pdf).

27 In their Press Freedom Index for 2006, the organization Reporters Without Borders ranked Russia 147th, North Korea had the lowest rank (168) of all.37 In such a situation it is hardly surprising that bad journalistic practices, such as self- censorship and a corrupt culture of “paid-for-journalism” (hidden advertisements), have become wide-spread among Russian journalists (Becker, 2004; Oates, 2005; O’Reilly, 2006). To make the situation for free media and independent journalism even more difficult, media owners and journalists are poorly protected by a weak judiciary (Becker, 2004). Despite the concern evoked by the previous summary of developments in the Russian media landscape, it is still essential to remember that the situation today radically differs from the situation before perestroika. Although media’s election coverage has been biased Becker (2004) finds that the media situation nevertheless has improved “in terms of autonomy, control of content, pluralism and ideology/language”.

3.4.3 Civil Society Institutions governing civil society constitute another structural constraint that strongly affects actors’ behaviour in the Russian political market. As already noted, the 1993 Russian constitution guarantees freedom of speech and organization (Articles 29, 30 and 31). Russian civil society was subsequently regulated through a federal law “On Public Associations” adopted in 1995 (Squier, 2002). Until then it had been subject to the Law on Associations of 1990, which was inadequate to the task since “structures and processes that had regulated group activity were no longer in place” in the early postcommunist Russia (Weigle, 2002).38 The importance of civil society for the quality and efficient functioning of democratic governance has long been argued by political scientists (cf., Putnam, 1993; Diamond, 2001; Amnå, 2005).39 The meaning of the concept civil society seems notoriously difficult to define in a precise way. It refers to organized collective activities at the intermediate level between the public and private spheres, between the state and its citizens/households ʊ it is also sometimes called the “third sector” separating it from the state, with its execution of coercive power, and business, with its profit motivated activity (Evans, 2005; Henry & McIntosh Sundstrom, 2006). Here, we primarily think of civil society as civic organizations, engaging citizens in work aiming at producing certain goods or services that are not produced, or produced in insufficient quantities, by the state or the business sector. Civic organizations might also be engaged in work aiming at influencing public opinion with the purpose of prompting political actors (including state authorities) to change certain policies. Such civic organizations are also commonly known as NGOs ʊ non-governmental organizations. This conception of civil society excludes business firms, media companies, groups employing violence to

37 See current index at http://www.rsf.org/rubrique.php3?id_rubrique=639. The only former Soviet republics with a lower ranking were Belarus (rank 151), Uzbekistan (rank 158), and Turkmenistan (rank 167). 38 See Weigle (2000; 2002) for a detailed account of the emergence of Russian civil society and its legal foundations in Russia. 39 Arguments indicating that, in general, the relationship between popular engagement in civil society does not automatically foster democratic values and help promote democracy have also been voiced; see, for instance, Theiss-Morse & Hibbing (2005).

28 achieve their goals (e.g., terrorist groups), criminal organizations and other organized corrupt activity in society, even if the activity of such social formations impose far- reaching restrictions on activities in all sectors of society and, thus, significantly shape the environment in which civic organizations function. Specifying the meaning of civil society in this way has been wisely suggested by Henry E. Hale (2002), who thinks that the general object of discussion should not be civil society, but rather the issue of how to organise state-society relations. Hale also draws attention to an important distinction in our view of state-society relations with consequences for how these relations are assessed. He notes that there are (at least) two conceptions ʊ or models ʊ of state-society relations, the liberal and the statist models, the former emerging from the historical development of state-society relations in the US, the second closer related to the situation in many European countries. In the US, the manner in which state-society relations is organized has always been determined with a view to limiting the power of the state (avoid “tyranny”), while in the European tradition, the organization of state-society relations aims at preserving the state from too much (incoherent and damaging) influence by society (avoid “anarchy”). Arguably, analyses of the Russian civil society tend to be biased depending upon which view (model) of state-society relations the analyst adopts. Actual developments of state- society relations in Russia seem to mainly conform to the statist model, while much of the critical views about this development has been influenced by the liberal model of state-society relations. Civic organizations emerged in Russia already during the last decades of the 19th century and continued to develop into the first decades of the 20th century (Bradley, 2002; Evans, 2005; Conroy, 2006). Religious organizations (in the Russian Orthodox Church) performed important charitable work (Evans, 2006a). While the Bolshevik revolution of 1917 initially stimulated popular activity and artistic creativity, the Soviet state (ultimately the CPSU, the Communist Party), as it was gradually entrenched, aimed at increasing its control over social organizations (Evans, 2006a). From the mid 1920s, voluntary, independent civic organizations were being closed down or converted into state controlled organizations, such as the communist youth organization Komsomol (Evans, 2005). While, in the 1960s, there appeared numerous “social groups” with a basis in scientific institutions, often with a nature preservation agenda, it was not until Gorbachev’s perestroika from the mid 1980s that civic initiatives were encouraged and many new citizen initiated informal groups independent from the state appeared in Russia (Evans, 2006a). At this time Gorbachev also changed the relation of the state to the Russian Orthodox Church. Through a new law adopted in September 1990 most restrictions on religious activities were removed (ibid.). Legal social organizations in the Soviet Union were expected to assist the regime in achieving its goals, but they also often tried to help its members and to promote their interests. As Evans (2005:100) has observed, this “dualistic functioning of most Soviet social organizations is worth noting, because it has affected their activities and the prospects for their survival in the postcommunist period.” Evans (2006a) also notes the importance in the late Soviet era of the patron-client relations existing between the state and social organizations, or rather, between representatives of the state (or the CPSU) and representatives of the social organizations ʊ personal relations that might allow social organizations some influence over policymaking, even if this ultimately took place on terms decided by the state representative. Similar patron-client relations have

29 long prevailed (and could be expected to still prevail) in post-soviet times, indicating that for civic organizations to gain some influence over policymaking it is still necessary to have access to the political power, through personal interaction with representatives of the executive, a practice that maintains the private nature ʊ or patron-client relations ʊ of public affairs (cf., Shevtsova, 2006).40 Despite the lively development of civil society in the Gorbachev years, the 1990s witnessed a decline in civic activity. Many reasons for this decline might be envisaged. Both material and psychological incentives for joining and working with civic organizations dwindled. In the economic recession, especially during the first half of the 1990s, people had to focus on basic needs leaving little or no time for civic activities (Evans, 2002; Domrin, 2003). With the weakening rule of law and the state having been captured by business interests, allowing a handful of people, the so-called oligarchs, to enrich themselves in a legally dubious manner, the legitimacy of the state and people’s trust in public authorities and institutions all but disappeared. In this situation civil society was not left with much scope for successful work and influence on policymaking (Howard, 2002). Psychologically, due to a general scepticism of politics inherited from the time of Soviet one-party rule, citizens were reluctant to engage in organized social or political activity, and, even more seriously, due to a kind of “postcommunist syndrome” most citizens had come to “share feelings of powerlessness, passivity, pessimism, fear of further changes, and nostalgia for a paternalistic state,” feelings that discouraged them from engaging in civic activities (Evans, 2002).41 State control of NGOs working in Russia has increased since Putin took office as president in 2000 (cf., for instance, Evans, 2006b). At the same time it should be noted that Putin in his speeches has talked very positively about the importance of Russian civil society.42 Even if nice words are no evidence of real commitment, the stand taken by the president nevertheless is significant since, as Weigle (2002) puts it, “[t]he very public recognition of that fact [that civil society is essential for the consolidation of democracy] legitimates the goals of civil society in official discourse and offers a presidential commitment to steer federal resources toward the institutionalization of

40 Henderson (2002) argues that foreign aid (NGO support) to building civil society in Russia has also contributed to the establishment of patron-client ties between donor organizations and the NGOs receiving the aid. Rather than building networks of civic engagement of lasting significance in Russia the NGOs pursue short term benefits. 41 Evans (2002), citing several Russian sources, explains that a “new Russian individualism” could be seen as an “unintended attitudinal legacy of the Soviet system, which implicitly fostered the growth of “privatism” in people’s values in reaction to the often phony collectivism that was imposed by the party- state regime.” This individualism is described as “a direct continuation of the opportunistic individualism of Soviet citizens, expressing the outlook of a person who feels free from the norms of the old socialist order and is highly skeptical about the genuineness of other guidelines to conduct, such as those consistent with liberal democracy and civil society.” It is claimed that this “amoral individualism discourages most Russian citizens from participating voluntarily in the work of independent social organizations that attempt to change society from the bottom up.” 42 See, for instance, Malgin et al. (2005;18–20) who note that Putin has emphasized the importance of Russian civil society for the continued development of democracy and economic prosperity in his yearly presidential addresses to the Federation Council. In the 2007 presidential address, Putin (2007) pointed to the work of the Public Chamber and underlined that “It is impossible to imagine the democratic political process without the participation of non-governmental organsations, without taking into account their views and opinions.” In 2007, the government also increased its financial support of public organizations by 300 percent (Putin, 2007).

30 civil society activity.” Weigle (2002) also recounts how a “groundwork has slowly been established for a civil society in postcommunist Russia,” noting that independent groups have “woven a thin but durable web of interaction among themselves and between a bounded third sector and local and regional government.” But support has been inadequate from officials at the federal level, which has limited the influence of civil society on policymaking (Weigle, 2002). However, despite the clear commitment in support of civil society and the rather positive conditions for third sector activities developed at the regional level, observers have pointed to several measures taken at the initiative of President Putin that have raised obstacles for a further development of NGO activities in the country. For instance, in June 2001, the president initiated the organizing of a Civic Forum to take place in November the same year. The original intention seems to have been to create some kind of a corporatist umbrella organization to facilitate communication between civil society representatives and the federal authorities (Squier, 2002; Nikitin & Buchanan, 2002). Due to massive protests from civic organizations the plans were changed and the NGOs acquired a stronger say in the design of the event. Through the joint efforts of several civil society organizations, the main goal set for the forum was to “develop links between civil society activists and the government, not for the representatives of NGOs and NCOs to supplant the State Duma as the legitimate representative of the citizens of Russia” (Weigle, 2002). This move “undercut any attempt on the part of the president to generate populist support or to co-opt third-sector groups into a loyal state apparatus” (Weigle, 2002). In the end, about four thousand representatives of Russia’s NGOs and NCOs participated in the two-day meeting. Most observers seem to agree that the specific outcome of the forum was less interesting compared to what it revealed about the strength of Russian civil society. The event showed that civil society was capable of resisting co-optation by the state, it displayed the ability of many organizations to join forces to reach specific goals, it made state officials more aware of the fact that many civic organizations possess competence that might be useful for solving pressing economic, social, and political issues and that cooperation between state and civil society could help solving such problems (Weigle, 2002; Squier, 2002; Nikitin & Buchanan, 2002). Finally, two recent events affecting the structure within which Russian civil society operates should be mentioned: the establishment of the Public Chamber of the Russian Federation and the amendments to the Law on Public Associations. Both events reached their decisive phase in late 2005. In September 2004, following the Beslan school hostage tragedy, President Putin proposed the establishment of a Public Chamber that was to be an advisory and supervisory body independent from traditional political institutions like the parliament. The proposal was subsequently implemented through a federal law “On the Russian Public Chamber,” adopted by the parliament in March and signed by the president in early April 2005. Members of the 126 seat Chamber were to be appointed in the year to come, one third of the members appointed by the president, and the remaining two thirds elected in a two-step procedure from among NGOs all over the country.43 By December 2005 the selection procedure was finished and on 22 January 2006, the Public Chamber

43 The rather elaborate procedure through which members of the Public Chamber are appointed/selected is further described on the Chamber’s website at http://www.oprf.ru/.

31 held its first plenary session. Members’ term in office is two years from the Chamber’s first session. Among the members (who cannot be parliamentary deputies) many well- known figures in Russia can be found, from religious leaders, pop stars and artists to lawyers, enterprise leaders, and nuclear scientists. According to the law the function of the Public Chamber is to “facilitate coordination between the socially significant interests of citizens of Russia, NGOs, and national and local authorities, in order to resolve the most important problems of economic and social development, to ensure national security, and to defend the rights and freedoms of citizens of Russia, the Russian constitutional system, and the democratic principles of the development of civil society in Russia…”44 The Chamber has established eighteen commissions and several working groups (in which non-members of the Chamber also participate) to discuss various issues under its mandate. One of these commissions deals with the “Development of Civil Society and Public Participation in the Implementation of National Projects.” Public Chambers have also been established in several Russian regions.45 The establishment of the Public Chamber was met with scepticism from many civic organizations, some fearing that this was only another way of the elite to increase its control over Russian citizens, actually as a way for the president to fit civic organizations into the state “vertical of power,” while other critics saw it as a way for government friendly NGOs to obtain benefits for their members (Petrov, 2005; Shevtsova, 2006; Evans, 2006b).46 Proponents of the Chamber would argue that this was a measure taken by the government with the purpose of facilitating communication with civil society and thus something that will contribute to remedying one of the long-standing problems in the Russian society, where citizens and civic organizations in general have been reluctant to directly engage with state authorities (Mekhanik, 2004; Gromov, 2005).47 In the autumn of 2005, the State Duma passed a bill with amendments to the 1995 Law on Public Associations and three other laws with impact on NGO activity. During the parliamentary processing of the bill the proposals caused a lively debate in the media, where commentators feared that the amendments would bring NGOs under tight state control, requiring, among other things, that some NGOs must reregister with the authorities to be allowed continued activity. Speculations had it that these measures were proposed by the government in an effort to counter foreign influence on Russian politics in order to avoid a development in Russia like that which led to the Orange Revolution in the Ukraine (Medetsky, 2005; Rykovtseva, 2005; Yablokova, 2005). The bill was criticized by representatives of many civic organizations and some independent

44 See the Chamber’s website at http://www.oprf.ru/eng/about/, where the mission of the chamber is spelled out in more detail (link last verified on November 22, 2007). 45 See http://www.oprf.ru/structure/comissions/ for a listing of the chamber’s commissions and http://www.oprf. ru/interaction/region_chambers/ for a listing of exsiting regional public chambers (links last verified on November 25, 2007). 46 Evans (2006b:148 ff.) recounts how Putin in the period leading up to the establishment of the Public Chamber in 2005 strived to strengthen the Russian state and how various measures taken as part of his “managed democracy” infringed on the activities of civil society, especially NGOs (often with international funding) working with human rights monitoring and support. 47 See also Doklad (2007), the report on the state of Russian civil society issued by the Public Chamber in the spring of 2007.

32 deputies in the Duma opposed the bill. Already before it had been fully manned the Public Chamber made a statement in December 2005 urging that the passing of the bill should be postponed until January to allow the Chamber to study the proposals.48 During the Chamber’s first plenary meeting on January 22, 2006, both President Putin and members of the Chamber mentioned the amendments to the NGO legislation, the president urging the Chamber to oversee the implementation of the new law (Medetsky, 2006). According to Interfax news agency, the UN High Commissioner for Human Rights, Louise Arbour, expressed concern about the implementation of the amended laws, especially regarding stipulations on NGO registration and tax accounting.49 The amended law required reregistration of foreign non-profit organizations before October 18, 2006. The deadline was subsequently removed and the slow reregistration procedure seems still to be going on in mid November 2007, when, according to a list published on the Federal Registration Service website, 237 foreign NGOs had successfully registered.50

4 Discussion and Assessment The functioning of a market, be it an economic or a political market, rests upon the enactment of certain conditions, such as actors’ free entry and exit, their equal opportunity to compete (i.e., not being discriminated against by public authorities, or other market actors), their having equal access to information, their adherence to rules guiding proper market behaviour, avoiding to cause market imperfections (e.g., through monopolizing certain behaviours), and their strive to minimize negative external effects. As was recounted above, the rules (institutions) contained in the 1993 constitution guarantee Russian citizens a number of rights and freedoms that together define the structure of Russian democracy, thus establishing a playing field for citizens’ political behaviour. One question of concern here is whether or not this playing field has become increasingly even so that it offers equal opportunities for different players, an improved or more advanced democracy. Another question is whether the playing field has developed in a way that allows a better game, a more efficient interaction in the political market. Here we first summarize the most important structural changes affecting the Russian political system that were introduced over the last few years and assess their impact on

48 As reported by several news agencies, see e.g., Interfax “Russia’s Public Chamber urges Duma to put off NGO bill,” December 18, 2005; RIA Novosti “Public Chamber points out minuses in NGO bill,” December 23, 2005. 49 Interfax “UN Rights Commissioner Still Concerned at Russia’s New NGO Law,” February 24, 2006 (retrieved on June 5, 2007 from http://www.cdi.org/russia/johnson/2006-50-10.cfm). Wood (2006) gives an overview of the cumbersome registration procedure for some foreign NGOs administered by the Federal Registration Service as a consequence of the amended NGO legislation. 50 List retrieved on November 22, 2007 from the website of the Federal Registration Service at http://www.rosregistr.ru/docs/inko01.doc. All in all, approximately 500 foreign non-profit organizations are active in Russia, the number mentioned in an Interfax note “Russian Official Says To Continue registering NGOs After 18 Oct” (retrieved on June 5, 2007 from http://www.cdi.org/russia/johnson/ 2006- 211-5.cfm).

33 the development of democracy. In the subsequent section the most important (actual and potential) efficiency effects of these structural changes are assessed.51

4.1 On the Progress of Democracy in Russia Constitutionalization is a still an ongoing process in transitional Russia. It is a process that is open to manipulation by various actors in society. The process was early on captured by Boris Yeltsin, who put his stamp on the version of the constitution that eventually was adopted in 1993. The constitutionalization process should be seen as part of a strive to establish Rule of Law in Russia. A significant fact, which is of some importance in a country undergoing rapid transitional changes, is that the constitution has remained in force without amendments since its adoption in 1993. Thus, it has contributed some degree of stability in an otherwise highly turbulent institutional development [C4]. Opting for semi-presidentialism, despite its inherent risks for conflict between the president, government, and parliament, was a decisive choice made early on in the constitutionalization process, a choice with important consequences for the continued Russian transitional development [C3]. It can reasonably be assumed that this choice was favoured and enforced by Gorbachev and later Yeltsin because they believed that perestroika and, subsequently, the dual transition to democracy and a market economy required a strong leader endowed with vast decision powers enabling the adoption of far-reaching and otherwise unattainable economic and political reforms. It is, however, fair to say that the Russian constitutionalization process in slow progress since the disintegration of the Soviet Union has strengthened the rule of law in the country [C5]. Much still remains to be done, however. The process, which has been mainly driven from the top, has made progress despite the fact that legal consciousness among ordinary Russian citizens has remained weak. Government. One of the set-backs of the Russian version of semi-presidentialism with vast powers bestowed upon the president,52 is that it tends to produce technical cabinets (in which ministerial appointments are not necessarily based on parliamentary majority) with limited ability to actually govern, to initiate and implement policies (Schleiter & Morgan-Jones, 2005; Sokolowski, 2003) [C3]. But this way of forming cabinets might nevertheless be efficient in situations where, as in Russia (before the December 1999 elections), clear parliamentary majorities did not exist. Here, forming a cabinet based upon a (volatile) parliamentary majority might lead to government crisis. Furthermore, as some observers have suggested, countries like Russia and the Ukraine might “leave their dominant mode of technical governance behind as and when parties become sufficiently well organised and electoral mandates sufficiently conducive to the formation of assembly-based governments” (Schleiter & Morgan-Jones, 2005). Political parties. A pertinent problem with the Russian party system has been that it tended to produce many small, short-lived parties with geographically very limited penetration. Developments after 1999, largely determined by institutional changes enacted by the president, have profoundly affected conditions for party life in Russia [C1]. With the emergence of parties of power the president was given a parliamentary

51 Whenever appropriate references to the criteria listed in Table 2 are noted in brackets [C?]. 52 In Sedelius’ (2006) classification the Russian semi-presidentialist system is of a president-parliamentary type.

34 platform, which might be used to support new reform proposals.53 Further changes in the electoral system, especially the recently raised threshold for parties’ entry to the parliament and the fact that all candidates can now only be elected through party lists, will have a clear impact on the work of political parties. The changed institutions will mean that political parties will become the main actors in the Russian political system, something that is likely eventually to produce more ideationally based policy discussions creating a foundation for real political opposition to the party of power, in the end improving political accountability and hopefully stimulating popular participation in politics, thus changing the currently widespread passivity among the Russian electorate, what Evans (2002) has called the “postcommunist syndrome.” While many commentators have been critical towards Putin’s reforms of the electoral system, some have, however, expressed a guarded optimism concerning their effects on democracy (cf., for instance, Hale, 2005; Willerton, Beznosov & Carrier, 2005; Moraski, 2007). Federalism. While Yeltsin might have saved the Russian Federation from disintegration by different concessions to the regions (e.g., through bilateral treaties differentiating various benefits between the regions), his policy failed to eliminate a number of asymmetries which were potentially threatening the survival of the federation.54 Through a series of often harsh measures president Putin has eliminated many of these asymmetries thus strengthening federal state power and installing more orderly and transparent relations between the federal centre and the regions [C3, C4]. In the process, it has been objected, the regions have lost some of their independence. But this, as supporters of the reforms would argue, might still be a necessary sacrifice for the purpose of establishing a federal power structure allowing a more stable and efficient policymaking. Elections. While the existence of regularly recurring free elections must be recognized as an important step in the establishment of Russia as a democratic nation, it must also be remembered that the conditions under which these elections take place are of even greater importance for the development of good governance [C2]. Elections in Russia are (still) subjected to various manipulations producing a system that has been labelled “supply-side democracy.” In such a system parties and candidates for political office do not emerge in response to popular demand, but rather as a result of actions taken by members of Russian elite groupings. Incumbents’ power and the administrative resources that incumbents command often seem to determine actual election outcomes (so-called machine politics). One avenue of manipulative action of special importance for influencing election outcomes operates via biased media output content [C2]. Parties in power and incumbent candidates are favoured by manipulations performed by “election technologists” influencing the media, often using kompromat to discredit political opponents. Media. With perestroika, media in Russia were given freedom to discuss topics that had hitherto been forbidden leading to a critical scrutiny of the many new developments

53 Smyth (2002) explains how the parliamentary situation under Putin, unlike that of his predecessor, could produce support from the party of power (Unity/United Russia) for presidential reform proposals. 54 As Hahn (2005:153) notes: “Yeltsin’s emerging federal state included at least three major forms of federative ‘asymmetry’, a complexity unprecedented in the annals of federalism, ‘official asymmetry’ or constitutionally based treaty federalism, ‘unofficial asymmetry’ between federal and regional laws and constitutions, and the ‘administrative-structural’ asymmetry of Russia’s nested or matryoshka national territorial subdivisions.”

35 appearing in Russian society [C2]. But media were soon “occupied” by the oligarchs who reintroduced a new set of restrictions hampering free journalism. This situation also changed when authorities (with sanction from the president) started harassing the media moguls until they eventually sold their media outlets, once again opening the media to administrative control. Political forces, not least the president, could again use media to influence how Russian citizens cast their votes in elections. Studies have indicated that media coverage of election campaigns have had a clear influence on election outcomes. In addition, media workers trying to do honest work today risk losing their jobs or are being physically threatened, even killed. Thus, the media situation in Russia seems to have deteriorated in comparison with what it was at the beginning of the transition. Letting this situation prevail is, as Fish (2006) has observed, a violation of the Russian constitution with its guarantees of freedom of speech and information. Biased media reporting affects actors’ political behaviour and results in different decisions from those that would have been taken had information about events and discussion on political issues been produced by media less affected by outside actors. President Putin has acknowledged the problems and vowed to take actions to improve the safety of media workers and enhance media’s independence from outside forces (CPJ, 2007). However, it remains to be seen if this commitment will also make any positive real impact on the precarious media situation. Civil society. As has often been noted, especially by foreign observers of the Russian transition, the development of an efficiently functioning democratic political market would be greatly facilitated by a well-developed civil society [C1]. However, a number of assessments have concluded that Russian civil society is still notoriously weak, despite a rapid development at the beginning of the transition period. Many have blamed the problems of civil society development on presidential policies to rein in and control the activity of civic organizations. The Russian authorities claim that the activity of many civic organizations is not positive for society and is performed under the influence of foreign funders with those funders’ interests in mind. Like in many other areas of Russian society the authorities have tried to handle the situation by introducing various administrative restrictions. A recent example is the requirement that some NGOs and NCOs must be reregistered with the authorities in order to be able to lawfully continue their work ʊ a requirement that these organizations have claimed might threaten their continued activity. In a statist perspective on Russian state-society relations, it is perhaps not very surprising that the authorities attempt to get a firmer grip on developments by making the rule system governing civil society activities more stringent and seeking to improve the transparency of NGO funding. Another problem that has hampered the influence of civil society on Russian policymaking has to do with the opportunities for civil society organizations to communicate their views and influence actual policymaking. Henry (2006) has distinguished three types of civic organizations; those based on professionals’ skills, those based on grass-root engagement, and those emanating from, and with remaining close ties to, government circles. For the last category of organizations access to government officials (and funding) is not the main problem. For the other two categories, however, mechanisms for exchanging views and channelling ideas which could influence policymaking are still poorly developed. As Taylor (2006) has noted, the “possibility of a more positive relationship of mutual assistance and partnership between the state and civil society” is nowadays increasingly emphasized in the

36 literature (cf. for instance, Johnson, 2006; McIntosh Sundstrom & Henry, 2006). Civil society should not only serve as a watchdog of the government, but also as a resource. In fact, as Weigle (2002) has argued, Russian civil society organizations rather see a strong state as a prerequisite for a strong society and necessary for civil society development. In this conception, civil society is “vital to ensuring the state’s democratic orientation.” Considering these problems and the attitude held by Russian civil society organizations towards state-society relations, many of the measures initiated in recent years by President Putin must be seen as an acknowledgement of the importance of civil society for the further social and political development in Russia. Despite the still limited evidence it seems that the work of the Public Chamber has a potential to positively stimulate state-society relations, and the significantly increased government financial support of civic organizations indicates recognition of their importance for a continued democratic development in Russia. But even more importantly, it seems that despite the recent bureaucratic obstacles hampering their functioning, Russian civil society organizations are capable of crea- tively adapting to the situation by modifying their behaviour and finding new organizational forms for acting and collaborating with one another with a purpose of influencing developments in society. Henry (2006) notes that a new “green” political party was established in 2005 by members of various environmental organizations in an effort to gain access to policy formulation since nothing previously tried seemed to work.55 Taylor (2006) offers another interesting example of new forms of state-civil society collaboration in Russia. He reports on the emerging “street-level” collaboration between NGOs and law enforcement authorities in a strategy that “targets lower levels of state agencies, and tries to work inside state bureaucracies or alongside state officials performing their normal functions.” In summary, it could be noted that a number of reforms adopted since the beginning of the transition have made a clear impact on the structure of the Russian political market. Arguably, many of the institutional changes that have been introduced through these reforms have modified the structure of the political system, resulting in improved prerequisites for a further development of democracy in Russia.

4.2 On the Development of Efficiency in the Russian Political Market While it seems that the reforms affecting the structure of the political system have improved the prerequisites for democracy in Russia by levelling the playing field in which political market interaction takes place, the question remains whether these improvements have made any impact on the way the game is played. Is it possible to say anything about the extent (if at all) to which the reforms discussed above have improved the prerequisites for increased efficiency by facilitating reduced transaction costs incurred in exchanges taking place in the Russian political market?

55 With some 20 thousand members the new party decided (in April 2006) to enter “Yabloko” forming a green fraction, the purpose being to prevail on the political arena hoping to make an impact in the upcoming (December 2007) parliamentary elections.

37 According to North (as noted in Section 1), four features determine these transaction costs: (1) costs of measuring the attributes of the goods and services that are exchanged; (2) the size of the market and whether exchange is personal or impersonal; (3) the need for enforcement of contracts; and (4) ideology or the “mental models” with the help of which individuals explain and evaluate decision options. After reformulating North’s four “determining features” to suit political markets we take a brief look at some reforms that could be expected to produce an impact on the transaction costs encountered in political market interaction. We indicate what we believe are positive effects of these reforms and note some remaining problems that the reforms did not solve. (1) Structural reforms introducing formal rules that facilitate citizens’ assessment of the character and political programs of various market actors (politicians, bureaucrats), rules that facilitate citizens’ decisions whether or not to support an actor or group of actors (e.g., a political party), tend to decrease transaction costs in the political market. The fact that in the last 6–7 years a certain stability has been introduced in the legal framework (the formal institutional set-up) has facilitated citizens’ understanding of the structure and functioning of the Russian political market and might have contributed to decreased transaction costs. Easy access to comprehensive and accurate information about developments in all spheres of society is decisive for citizens’ ability to assess the character and political programs of various actors in the political market. This kind of information is typically provided by mass media. Formally, the freedom of expression and media are secured through stipulations in the Russian Constitution (Article 29) and through the Law on the Mass Media (N 2124-I) adopted in 1991 and subsequently amended several times, a law that Richter (2005) found to be “one of Russia’s most liberal laws and one of the world’s most advanced laws regulating the field.” In practice, however, media freedom has been increasingly circumscribed, especially during Putin’s reign. When media cannot be trusted to disseminate accurate information, the road is opened for manipulative and corrupt practices influencing public opinion and, eventually, actual political behaviour, contributing to decreased efficiency in transactions conducted in the Russian political market. A stable party structure with political parties that are defined on the basis of ideological consensus and have organizational presence in most parts of the federation would also make it easier for citizens’ to make well-informed political choices. The recently introduced changes in electoral rules raising the threshold for admittance to the parliament and demanding that all candidates be elected via party lists may force the Russian party structure onto such a development path. But this still remains to be seen. (2) Structural reforms aiming at increasing the size of the political market, making the political market more impersonal, will tend to increase efficiency (through a decrease in transaction costs). The fact that legislative acts valid for various territorial levels (federal, regional, local) have been harmonized and made more consistent is likely to make interactions more impersonal and efficient not only in economic markets but also in the political market.

38 Election to the federal Duma entirely based on voting for candidates named on national party lists, as is to be held for the first time in December 2007, will increase the size of the Russian political market and make exchange more impersonal. The common practice in previous elections to have half of the parliamentary candidates elected from single member districts made personal relations important and elections were more open to manipulation by incumbents using administrative resources to their own benefit and large corporations providing financial support for candidates they preferred.56 Through the new law “On political parties” adopted in 2001 several changes in the rules governing funding of political parties were introduced. Some of the changes, such as limits on donations and opening of parties’ accounts to public scrutiny, should contribute to making the political market more impersonal and transparent, thus contributing to increased efficiency. However, according to Kenneth Wilson (2007), there have hardly been any noticeable effects of the reform, it “has not appreciably reduced parties’ donor dependence, nor has it rendered party finance transparent; it has also clearly failed to solve the problems of corruption.” (3) Structural reforms aiming at facilitating enforcement of contracts would mean, if translated into the realm of politics, reforms improving accountability, i.e., citizens’ right and capacity to assign responsibility for failures or malperformance of an individual politician or a political party. The main vehicle for political accountability is the existence of regularly recurring free elections to various political assemblies. In the Russian transition free elections are guaranteed in the constitution, and regular free elections have indeed been held. But, since the elections have not been entirely fair, accountability has suffered to some extent with due consequences for efficiency. The constitutionalization process, with the constitution prevailing without change for quite some time, is arguably very important for the continued growth of law and order in the Russian society and contributing to a gradual improvement in people’s legal consciousness. This development tends to increase social trust, a factor of great importance for the efficiency of actors’ behaviour in the political market. Measures have also been introduced to strengthen state power and the judiciary with the intention to reduce arbitrariness in citizens’ interaction with representatives of the state bureaucracy and in various kinds of disputes that are referred to the judiciary. These are also reforms that potentially improve social trust and the efficiency of the Russian political market. One way to increase the accountability of the Russian government (which is currently appointed by the president) and to make it better equipped to perform its policymaking duties would be to make the selection of its members reflect the majority situation in the Duma. This issue has long been a recurring theme in Russian political discourse and in his presidential addresses to the Federation Council the president has indicated that changes in the appointment of cabinet members along these lines might be made in the future (Mikhailovskaya, 2003). The recent move by president Putin to head United

56 The use of administrative resources (machine politics) has also been further regulated through recent legislative changes (cf., Dimenko, 2007), a structural reform that, in principle, adds formal support to a more efficient political behaviour. Whether this reform will actually change behaviour and reduce transaction costs in the Russian political market remains to be seen.

39 Russia’s list of parliamentary candidates in the upcoming (December 2007) Duma election might perhaps be a first step in an attempt to introduce a government based upon parliamentary majority ʊ with United Russia as the party in absolute majority and Putin as prime minister.57 A better state control over executive assemblies’ financial management ʊ for instance, in the form of improved budgetary control ʊ would be an effective way of increasing accountability, thereby stimulating more efficient patron-client relations in the Russian political market. Despite much talk about the detrimental effects of corruption not enough has been done to reduce its scope and limit its highly negative effects on the efficiency of the Russian political market (cf., for instance, Cheloukhine & King, 2007). (4) Structural reforms aimed at improving individual and collective learning ultimately resulting in changed (shared) mental models (ideology), with the help of which actors interpret their situation and decide on future actions, may contribute to a more efficient political behaviour (reduced transaction costs). Such behaviour might lead to ʊ and might even constitute ʊ institutional change, in case the new behaviour is not compatible with existing institutions guiding a particular behaviour. Individual perceptions about the fairness and justice of the rules of the game obviously affect actors’ performance in the political market. If everyone agrees on current policies and the general political outlook is more or less embraced by all citizens, shared mental models (ideology) will remain stable and social trust will be high. If, however, many citizens do not agree on the political path followed by the governing bodies of the country then tensions will stimulate discourse and possibly result in new (individual and organizational) learning suggesting new ways of approaching and solving problems, something that might eventually lead to the establishment of new shared mental models (ideology) and institutional change. Ideology so conceived cannot be said to have remained stable in Russia during transition. Admittedly, the constitution has not changed since its adoption in 1993, meaning that the basic formal rules establishing the country’s mode of governance have not been seriously challenged, a fact that no doubt is important for the efficient workings of the political market. However, and this seems to be a more representative characteristic of the Russian transition especially in its first decade, a large portion of the total legislative body has been in a kind of constant turmoil with detrimental effects for market efficiency (in economic as well as political markets). And, moreover, informal institutions have been even more unstable, as witnessed by the way people work around many formal rules, such as the tax legislation, to take but one example.

57 The announcement at United Russia’s congress on October 1, 2007 that President Putin was to head the party’s electoral list triggered a flood of often critical or apprehensive comments in the Russian press and in media reports all over the world. Both Russian and western commentators saw the move as a way for Putin to remain in power after his second term in office ends in March 2008. While Russian commentators often discussed pros and cons for the country and for Putin himself of the spectacular decision, western commentators mostly noted that Putin had decided to remain in power through means that in principle sidestepped democratic procedure and confirmed that Russia is once again ruled by one man; see, for instance, Stanovaia (2007); Mikheev (2007); Volkov & Rudakov (2007); Levy (2007); Ludwig (2007).

40 Taken together, the impression purveyed by the highly volatile institutions in Russia is that of a society in which there is a great deal of ideological confusion (mental models tend to be shared by a few) creating a situation where new patterns of behaviour, new approaches to solving common problems, are constantly elaborated and “tested.” Compared to older well-established market democracies Russia displays a rapid ideological development resulting in rapid institutional changes. While such fast and often erratic developments tend to increase transaction costs (reduce efficiency) in the short term, it is nevertheless indispensable for devising improved (more efficient) institutions. What structural features in society can foster the emergence of broadly shared mental models that would make Russian society more ideologically coherent and ultimately contribute to increased efficiency in the Russian political market? What reforms affecting this structure have been introduced already, and with what success? Some reforms discussed above are likely to have an impact in this respect. For instance, the recently introduced changes in the electoral rules are expected to invigorate Russian political parties. Parties are likely to become more prominent players in politics, which eventually should make it more attractive for people to enrol as party members. With more people active in party politics the process of forging ideological consensus should be stimulated. Likewise, support of other civic organizations in Russia could be expected to stimulate political discourse, in the end establishing a structure conducive to a more active popular participation in public policymaking. If such a process is allowed to emerge in an orderly manner without being obstructed by the authorities it should lead to an improved efficiency in the workings of the Russian political market.58 This would mean a modernization of Russian political culture that would increase trust in society and hopefully reduce the “postcommunist syndrome” preventing people from engaging in Russian public affairs. Here it should also be noted that measures affecting the situation in other spheres of society than politics might also produce an impact on ideology and ultimately the efficiency of the political market. Reforms aiming at improving social welfare (reduction of poverty, improved health care, better education, etc.) are examples of such measures. Naturally, this reasoning about possible effects on the efficiency of the Russian political market resulting from the structural reforms discussed above is only valid under the assumption that the reforms actually are, or will be, properly implemented with the purpose of achieving the effects stated. That this is, or will be, the case is, however, far from certain. Developments in Russia after the December 2007 Duma and the March 2008 presidential elections will begin to reveal whether the observed and planned structural reforms of the Russian political market will actually produce the intended effects.

58 As noted above, the Russian authorities’ stance on the issue of civil society has been somewhat ambiguous. But, judging from recent statements by the president, for instance in his 2007 presidential address (cf., Putin, 2007), interactions with Russian civil society is considered very important for the development of democracy and NGOs are this year given significantly increased financial support.

41 5. Concluding Remarks This article has outlined a way to assess efficiency changes in Russian politics. Conceptualizing the problem in an institutional framework, as suggested by Douglass North et al., led to the application of the market metaphor to political life and to seeing changes in transaction costs as an indication of the efficiency of actors’ political behaviour. As is the case with economic markets, the efficiency of actors’ behaviour in political markets is determined not only by the quality of the existing set of rules (formal and informal institutions) that restrict actors’ behaviour, but also by actors’ perception and understanding of these rules and the behavioural decisions they take on that basis. Thus, it was argued, the efficiency of actors’ behaviour in the political market is determined both by the structure established by the existing institutions and by actors’ perception and understanding of the restrictions imposed on their actions by these institutions. While the structure of the rule system limits the potential efficiency of actors’ behaviour in the political market, learning is the fundamental factor determining actors’ ability to actually use the efficiency potential offered by the institutional structure. Consequently, in order to assess efficiency changes in actors’ political behaviour it is essential to analyze the structural changes as well as changes in agency that take place in the political market. Based on Robert Dahl’s (1971) reasoning on what characterizes democratic governance a set of criteria was specified for assessing the character of changes that are believed to affect the political market. In the second part of the article, an analysis was made of the structural changes that have taken place in the Russian political market since the disintegration of the Soviet Union. Here we turn back to the original questions set out in the introduction above and summarize the answers found in our analysis.

5.1 Is the Russian Political Market Democratic and Efficient? The first question we set ourselves (cf., Section 2.4) was: To what extent are the criteria listed in Table 2 met in contemporary Russia? The results of the analysis performed can be summarized in the following way: 1. Formal rules do exist as expressed in legislation (mainly the constitution) through which a clear structure of the Russian political market is specified. A division of power between various state agencies is laid down in the constitution; the adopted mode of government ʊ semi-presidentialism ʊ bestows major powers upon the president [C3]. Dahl’s criteria concerning citizens’ freedoms and rights [C1] and the sanction of certain procedures and resources in society [C2] all find their correspondence in the Russian constitution. 2. The existing Russian constitutional rules compare well with corresponding rules derived from an “ideal-type” definition of democracy [C1-C4], provided that such an “ideal-type” definition is seen as compatible with different forms of democratic governance, such as parliamentarism, presidentialism, and semi-presidentialism. 3. The structure of the Russian political market that was established through the formal rules laid down in the constitution (and in subsequent legislation) has remained stable since its adoption in 1993. However, since the formally adopted rules were often overridden or affected by the influence of informal rules, the formal structure of the Russian political market did not work entirely according to the letter of the law [C5].

42 For example, while elections are considered free in Russia, they are not considered fair, due to manipulations of information disseminated through the media. Furthermore, in practice, the very powerful president has frequently interfered with and modified the set of formal rules that constitutes the structure of the Russian political market. While this interference in Yeltsin’s term in office was achieved mostly through decrees, policies initiated by Putin and the government have increasingly been enacted through legislation passed through the parliament (Remington, 2006). For instance, in the last few years, changes have been introduced that have reduced many of the inconsistencies that were frequent in the existing legislation [C4]. The president has also initiated and sanctioned changes in electoral rules that can be expected to profoundly affect the existence and activity of Russian political parties. These institutional changes will presumably increase the importance of party politics in Russia, thereby promoting citizens’ engagement in political life. Ideally, the reforms will increase political accountability and open opportunities for making government appointments better reflect parliamentary majorities [C3]. However, while many of these changes (on paper) seem to promote democracy (increase peoples’ opportunities to influence policymaking), criticism has also been mounted against some features of the reforms and their expected effects. A common denominator of this criticism seems to be suspicions that the real purpose of the reforms introduced is not in fact to improve democracy in Russia, but rather to strengthen the existing elite’s (or ruling clan’s) grasp of economic and political power, i.e., actually to prevent a further development of democracy. This clearly illustrates the problem of studying developments in today’s Russia. While a study of the changing structure of the political market would give fairly clear indications of the actual functioning of the system in a country with a well-developed democratic market economic system, it is not obvious that similar conclusions can be made on the basis of a corresponding analysis of the political market in transitional Russia. Here informal institutions incompatible or at serious odds with formally adopted legislation influence actors’ behaviour to an extent that might pervert the intended behavioural effects of the formal institutions. This fact only underlines the importance of analyzing agency and not only structure when trying to understand developments in transitional Russia.

5.2 Value of the Criteria as a Tool for Assessment The second question set out in Section 2.4 was: To what extent do our criteria work as a general tool for assessing political markets? Employing the market metaphor to conceptualize interactions in the political system automatically draws attention to the issue of which characteristics determine the quality of actors’ political behaviour. The principal benefit of the economic “market mechanism” is that it ʊ at least in theory ʊ entails an incentive structure that tends to make actors engage in transactions through which scarce resources are allocated to their best use. But, as North (1990) has pointed out, traditional neoclassical theory needs to be supplemented by a theory of institutions and transaction costs. An efficiently functioning economic market operates at minimum transaction costs. The institutional

43 framework embedding market interactions can be more or less conducive to minimizing transaction costs. One might ask what features determine the efficiency of transactions in the political market. Here we have suggested that the transaction costs that actors incur in their interactions in the political market to a significant extent depend upon the quality (structure) of the institutional framework in which this interaction is embedded and upon the degree to which the behaviour (agency) entailed by the existing institutions are enforced (regardless of whether enforcement is coercive or voluntary). As North (1990: 364) claims, “different institutional frameworks will result in different costs of political exchange.” In the Russian transitional setting ʊ where the undemocratic Soviet command economy is giving way to a democratic market system ʊ the criteria to be used for assessing the efficiency of the political market had to prescribe both structural and behavioural characteristics of an efficiently functioning democracy. The criteria selected (cf., Table 2) were framed in institutional terms. With reference to the question posed above, it can be concluded that, at least within the present problem context, the criteria specified have been useful both for selecting which structural political reforms to analyze and for assessing the quality of the institutional changes introduced through these reforms, for determining whether or not they have improved ʊ or (if not yet implemented) have the potential to improve ʊ the structural prerequisites for a more efficient interaction in the Russian political market. However, to allow a more general conclusion about the merits of our approach, the criteria also need to be tested in a wider problem context, where not only the structural prerequisites for political market efficiency are investigated, but where actors’ real market behaviour is also assessed. Thus, both structural and agency changes should be addressed to finally ascertain the quality of this assessment tool.

5.3 Disentangling the Russian Political Jumble Many features of the Russian political market are still insufficiently known. Based on the previous discussion, it would seem particularly fruitful to study the following issues in the nearest future, when several of the recent reforms affecting the political market may start to make an impact on real politics in Russia. First of all, it is important to understand how political power is connected to economic power in Russia. An analysis of how relations between political and economic elite groupings change and what determines such changes would contribute to such an understanding. As was observed above, the Russian constitutionalization process (the introduction of Rule of Law) is heavily dependent upon the development of legal consciousness among citizens. In a more general context, this is an issue that is closely related to political culture. In an action research perspective it would be interesting to study how policy reforms affecting the development of democracy in Russia are initiated and elaborated. How can citizen participation in democratic policy formulation processes be stimulated in a system where citizens’ legal consciousness is weak and where long political culture

44 traditions have assigned the policy formulation privilege to members of the elite? What is required to change this situation? In a more immediate perspective research ought to focus on the effects of the recently introduced reforms. How will the reforms, especially reforms of the electoral system, affect the Russian party system? How will recent reforms affect civil society and possibilities for increased popular interest in and influence on politics? How will the reforms affect the relation between the federal, regional and local levels? How will the president’s position and influence on Russian political life be affected by the reforms? And, more specifically, how (if at all) will the reforms change the relations between the presidency, the legislature and government? Is Russia in fact moving towards parliamentary rule?59 In general, we still know far too little about the interdependence between structure and agency in the political market, how actors’ behaviour depends upon changed structures and how changes in the structure depend upon actors’ behaviour. The continued Russian transition offers a good arena for studying these and similar issues. Finally, there is a very serious issue that deserves much more attention than it has hitherto been given. This is the issue of corruption, an issue that might impose a completely different perspective on the whole Russian transitional development. It is generally agreed that corruption is a major problem in Russian society, and officials, not least the president, constantly acknowledge the problem and state that serious measures will be taken to fight corruption. However, corruption might, as has been suggested by, for instance, Brovkin (1998) and more recently by Stefes (2006) and Cheloukhine and King (2007), be a much more fundamental feature affecting all levels of life in Russia than has been noted so far. If the authors’ claims are corroborated, research about developments in Russia might have to be conducted on entirely different premises than has been the case until this day.

Mats-Olov Olsson Umeå, 30 November 2007

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Appendix A

Case Study Instruction

What data should be compiled about public authorities and organizations relating to the region’s forest sector?

This “Case Study Instruction” is one of a number of instruments used in the collection of data in the IIASA project studying the institutional aspects of the Russian forest sector. The data compilation in the part of our study that concerns public authorities, organizations, etc. should be guided by the questions listed in this document. (To illustrate what kind of information we consider important and interesting we have separately listed a number of comments to the questions.) Information provided with the help of this instruction should be based on the knowledge of the study’s regional coordinator, but it should also (as far as possible) be based on official sources as well as on the knowledge and opinions of individuals (public officials, experts) contacted in the course of the study. All sources used should be explicitly recorded. The guiding principle is that it should be possible for a critical person to control the basis of our reports. Much of the information we need about specific regions might be retrieved from the extensive project database situated at IIASA. Only data which is not readily available at IIASA is compiled through this field work.

Questions relating to this instruction should be addressed to:

Lars Carlsson and/or Mats-Olov Olsson

or via telefax: +43 2236 71313 Questions to guide the data collection on the structure of the forest sector, public authorities and organizations in a specific region

1. What does the region’s forest sector look like in relation to other sectors in the economy? Describe its position and development.

2. How is the forest sector organized in terms of public authorities and organizations?

3. What is the enterprise structure in the region’s forest sector?

4. What other organizations exist in the region which are related to the forest sector? What are their duties and what principles govern their interactions with other organizational structures?

5. What are the most central features of the federal and regional legislation that applies to the forest sector in the region?

6. According to qualified assessments, which components of the forest sector regulations cause most problems for the region today? Why? What changes in the forest legislation are considered necessary in order to make it work more efficiently?

7. To what extent do the various organizations that you have discussed in questions 1-6 currently function in accordance with official intentions?

8. Considering the organizations discussed above, to what extent do leading representatives hold positions in several organizations? Where (by whom) are the most important decisions relating to the activity of these organizations taken?

9. What is the political structure in the region?

10. What aspects have been insufficiently covered in the answers to the earlier questions? Questionnaire form used in IIASA’s interviews with Russian forest sector enterprises

Interview no. Interview conducted by: Date: Name and address of enterprise: Respondent:

SECTION A: GENERAL DESCRIPTION OF THE ENTERPRISE

1. Name of the enterprise?

2. What year was the enterprise established?

3. Give a short description of the enterprise.

4. Type of enterprise? Forest owner/possessor/forest service Harvesting enterprise Processing industry Consultant Other type, describe

5. What are your main products? Today: One year ago: 5 years ago: 10 years ago:

6. What is the actual production volume of the enterprise? Today: One year ago: 5 years ago: 10 years ago:

7. Who is the legal owner of this enterprise? The state, specify: Private person/persons, namely: The enterprise is a corporation owned by other companies, namely: Other, namely:

8. Number of employees? (Counted as full time personnel) Workers, today: Workers, 5 years ago: Workers, 10 years ago: Administration, now: Administration, 5 years ago: Administration, 10 years ago: 9. Do you have any engagements and responsibilities related to activities other than “production”? Housing. Provision of consumer goods: Schools: Health care: Child care: Other:

10. Do you currently make any investments in your enterprise? No Yes, describe content and scale

11. How are your relations to the ”banking system” – can you borrow money, from whom and on what terms? Describe:

SECTION B: INPUT SIDE OF THE ENTERPRISE

12. From whom do you acquire timber/wood? Provider: % of total volume: Provider 1: Provider 2: etc.

13. On what terms is the timber/wood normally acquired?

FOR CONSULTANCY FIRMS:

12 b. From whom do you get your orders/tasks/assignments? Client: % of total volume: Client 1: Client 2: etc.

13b. On what terms do you get your orders/tasks/assignments? Describe:

14. Do you have any alternative supplier(s)? Yes No

15. Can you acquire a sufficient amount? Yes No, what is the explanation?

16. How is the timber/wood paid for? Payment upon delivery: Payment before delivery: Other arrangement, namely: 17. How are payments arranged? Via bank; name of bank: Payments are done by the enterprise itself: Other construction, namely:

18. What will happen if either part breaks the agreement or does not fulfill its duties?

19. Do you regard violations of agreements as a problem? Yes, a big problem Yes, but a small problem Not really a problem

20. Describe how a typical purchase transaction is performed.

SECTION C: OUTPUT SIDE OF THE ENTERPRISE

21. To whom do you sell your ‘products’? Name and type of customers in order of importance (as a percentage of total volume), name all.

Customer: % of total volume: Customer 1: Type: Customer 2: Type: etc.

22. Can you describe how a typical sales transaction is performed?

23. What will happen if either part breaks the agreement or does not fulfill its duties? Describe

24. Do you regard violations of agreements as a problem? Yes, a big problem Yes, but a small problem Not really a problem

25. How do you get paid for your products? Cash or equivalent upon delivery Cash or equivalent paid before delivery Other arrangement, namely:

26. How are payments arranged? Via bank; name of this bank: Payments are done by the enterprise itself Other construction, namely: SECTION D: INSTITUTIONAL ASPECTS

27. Is this enterprise member of any branch organization or equivalent? No Yes, namely:

What are the arguments for this construction?

28. Are there rules or regulations that apply to your enterprise which you regard as an obstacle for your activities? No Yes, describe:

29. Are there other problems which you regard as obstacles for a successful business? Describe No, only minor: machinery/technology: equipment/supply/maintenance: personnel/skill/competence: other:

30. What is the single most binding “restriction” on the activity of your enterprise? Describe

31. Generally speaking, do you find the formal legislation regulating Russian forest enterprises adequate and efficient? Yes No, explain why.

32. If it would be possible to change anything related to the Russian forest sector, what would you change?

33. Other comments of relevance? Appendix B

Institutions and the Emergence of Markets — Transition in the Russian Forest Sector

LIST OF PUBLICATIONS

Most of the reports listed below can be downloaded from IIASA via http://www.didaktekon.se/mats/ii-publ.htm.

IIASA Interim Reports — Case Studies in Eight Russian Regions:

Initial Studies: Carlsson, Lars (1997). Prerequisites for the Evolution of Markets. An Institutional Analysis of the Russian Forest Sector. In Sten Nilsson (ed.), Dialogue on Sustainable Development of the Russian Forest Sector, Vol. 1, IIASA Interim Report (IR-97-009). Laxenburg, Austria: International Institute for Applied Systems Analysis, April, pp. 143–145. Carlsson, Lars and Mats-Olov Olsson, eds. (1998). Initial Analyses of the Institutional Framework of the Russian Forest Sector. IIASA Interim Report (IR-98-027). Laxenburg, Austria: International Institute for Applied Systems Analysis, June. Malmlöf, Tomas (1998). The Institutional Framework of the Russian Forest Sector – A Historical Background. In: IR-98-027 (See entry above!) Lehmbruch, Barbara (1998). Ministerial Spin-Offs and Economic Transformation in the Russian Timber Industry, 1992–1996. In: IR-98-027 (See entry above!) Mashkina, Olga (1998). Measuring Attitudinal Diversity through Q-analysis – An Illustration of a Research Approach. In: IR-98-027 (See entry above!)

Tomsk Oblast: Carlsson, Lars and Mats-Olov Olsson (1998). Institutions and the Emergence of Markets, Transition in the Tomsk Forest Sector. IIASA, Interim Report (IR-98-084). Laxenburg, Austria: International Institute for Applied Systems Analysis, October. (Also available in Russian.) Carlsson, Lars, Nils-Gustav Lundgren and Mats-Olov Olsson (1999). Forest Enterprises in Transition — Business Behavior in the Tomsk Forest Sector. IIASA Interim Report (IR- 99-010). Laxenburg, Austria: International Institute for Applied Systems Analysis. (Also available in Russian.)

Arkhangelsk Oblast: Carlsson, Lars, Nils-Gustav Lundgren, Mats-Olov Olsson and Mikhail Yu. Varakin. (1999). Institutions and the Emergence of Markets, Transition in the Arkhangelsk Forest Sector. IIASA Interim Report (IR-99-021). Laxenburg, Austria: International Institute for Applied Systems Analysis. (Also available in Russian.) Olsson, Mats-Olov (2006). Is the Russian Virtual Economy Coming to an End? Institutional Change in the Arkhangelsk Forest Sector. IIASA Interim Report (IR-06-048). Laxenburg, Austria: International Institute for Applied Systems Analysis, December.

Khabarovsk Krai: Efremov, Dmitry F., Lars Carlsson, Mats-Olov Olsson and Alexander S. Sheingauz (1999). Institutional Change in the Forest Sector of Khabarovsk Krai. IIASA Interim Report (IR-99-068). Laxenburg, Austria: International Institute for Applied Systems Analysis. Mabel, Marian (2000). The Flexible Domestic State: Institutional Transformation and Political Economic Control in the Khabarovsk Krai Forestry Sector. Interim Report (IR-00-037). Laxenburg, Austria: International Institute for Applied Systems Analysis.

Moscow Oblast: Kleinhof, Andris E., Lars Carlsson and Mats-Olov Olsson (1999). The Forest Sector in Moscow Oblast. IIASA Interim Report (IR-99-069). Laxenburg, Austria: International Institute for Applied Systems Analysis. (Also available in Russian).

The Karelian Republic: Piipponen, Minna (1999). Transition in the Forest Sector of the Republic of Karelia. Interim Report (IR-99-070). Laxenburg, Austria: International Institute for Applied Systems Analysis. (This IR is also available in Russian.)

Murmansk Oblast: Ivanova, Lyudmila and Vigdis Nygaard (1999). Institutions and the Emergence of Markets Transition in the Murmansk Forest Sector. Interim Report (IR-99-071). Laxenburg, Austria: International Institute for Applied Systems Analysis, December. (This IR is also available in Russian.) Jacobsen, Birgit (1999). Auctions Without Competition — The Case of Timber Sales in the Murmansk Region. Interim Report (IR-99-072). Laxenburg, Austria: International Institute for Applied Systems Analysis.

Irkutsk Oblast: Blam, Yuri, Lars Carlsson and Mats-Olov Olsson (1999). Institutions and the Emergence of Markets — Transition in the Irkutsk Forest Sector. IIASA Interim Report (IR-00-017). Laxenburg, Austria: International Institute for Applied Systems Analysis.

Krasnoyarsk Krai: Sokolova, Nastassia (2000). Institutions and the Emergence of Markets – Transition in the Krasnoyarsk Forest Sector. Interim Report (IR-00-028). Laxenburg, Austria: International Institute for Applied Systems Analysis. (This IR is also available in Russian.)

Summary Reports: Carlsson, Lars, Nils-Gustav Lundgren, and Mats- Olov Olsson (2000). Why Is the Russian Bear Still Asleep after Ten Years of Transition?. IIASA Interim Report (IR-00-019). Laxenburg, Austria: International Institute for Applied Systems Analysis, March.

Policy Exercises: Olsson, Mats-Olov (2001). Participatory Forest Policy Development - Experiences from a IIASA Policy Exercise in Tomsk, Russia. IIASA Interim Report (IR-01-061). Laxenburg, Austria: International Institute for Applied Systems Analysis, December. Olsson, Mats-Olov (2004). Institutional Change in the Russian Forest Sector: Stakeholder Participation in Forest Policy Formulation in Murmansk, Karelia and Arkhangelsk. IIASA Interim Report (IR-04-030). Laxenburg, Austria: International Institute for Applied Systems Analysis, July.

IIASA Interim Reports on Other Institutional Issues: Fell, Astrid (1999). On the Establishment of Trust in the Russian Forest Sector. Interim Report (IR-99-054). Laxenburg, Austria: International Institute for Applied Systems Analysis. Pappila, Minna (1999). The Russian Forest Sector and Legislation in Transition. Interim Report (IR-99-058). Laxenburg, Austria: International Institute for Applied Systems Analysis. Kallas, Aigar (2000). The Estonian Forest Sector in Transition: Institutions at Work. Interim Report (IR-00-073). Laxenburg, Austria: International Institute for Applied Systems Analysis. Nysten-Haarala, Soili (2000). Development of Constitutionalism in Russia. Interim Report (IR-00-042). Laxenburg, Austria: International Institute for Applied Systems Analysis. Nysten-Haarala, Soili (2001). Russian Enterprises and Company Law in Transition. Interim Report (IR-01-005). Laxenburg, Austria: International Institute for Applied Systems Analysis. Nysten-Haarala, Soili (2001). The Russian Property Rights in Transition. Interim Report (IR- 01-006). Laxenburg, Austria: International Institute for Applied Systems Analysis. Vasenda, Sandra (2001). Waking the Russian Bear: Institutional Change in the Russian Forest Sector. Interim Report (IR-01-013). Laxenburg, Austria: International Institute for Applied Systems Analysis. Nilsson, Sten (2001). Future Challenges to Ensure Sustainable Forest Management. Interim Report (IR-01-039). Laxenburg, Austria: International Institute for Applied Systems Analysis. Also appears in the Proceedings of the workshop on "Forests and Forestry in Central and Eastern European Countries" on 12–14 September 2001 in Debe, Poland, organized by MCPFE – Ministerial Conference on the Protection of Forests in Europe and the Liaison Unit Vienna, Austria. Wignall, Jim (2001). Evaluating the Russian Forest Sector: Market Orientation and Its Characteristics. Interim Report (IR-01-047). Laxenburg, Austria: International Institute for Applied Systems Analysis. Kotova, Maria (2001). Institutional Traps of Russian Forest Enterprises – A Lawyer’s View. Interim Report (IR-01-062). Laxenburg, Austria: International Institute for Applied Systems Analysis. Nilsson, Sten (2002). Supply Forecasts for Timber from the Russian Far East and Links with the Pacific Rim Market. Interim Report (IR-02-001). Laxenburg, Austria: International Institute for Applied Systems Analysis. Olsson, Mats-Olov (2007). Assessing the Structural Prerequisites for an Efficient Russian Political Market. IIASA Interim Report (IR-07-037). Laxenburg, Austria: International Institute for Applied Systems Analysis, December. Books: Nysten-Haarala, Soili (2001). Russian Law in Transition: Law and Institutional Change. Helsinki: Kikimora Publications. Series B.

Published Articles: Carlsson, Lars (1998). Utan plats för individer (No Room for Individuals). Norrländska Socialdemokraten, September 15. (Newspaper article. In Swedish.) Carlsson, Lars and Mats-Olov Olsson (1999). Den ryska skogssektorns institutionella inramning (The Institutional Embedding of the Russian Forest Sector). IIASA-Nytt, No. 30, March. Stockholm: The Swedish Council for Planning and Coordination of Research (FRN), pp. 6–7. Lehmbruch, Barbara (1999). Fragmented Clientelism: The Transformation of Sectoral Economic Governance in the Russian Timber Industry. In: Vladimir Tikhomirov (ed.) Anatomy of the 1998 Russian Crisis. Carlton, Australia: Contemporary Europe Research Centre, University of Melbourne, pp. 238–258. (Based on the author’s contribution to IIASA Interim Report IR-98-027.) Piipponen, Minna (1999). Transition in the Forest Sector of the Republic of Karelia, Russia. Fennia 177:2, pp. 185–233. Abstract. (Based on IIASA Interim Report IR-99-070.) Carlsson, Lars (1999). ‘The Tragedy of the Commons’ and Global Environmental Problems. Minerals and Energy 15(1) pp.41–43. Carlsson, Lars (2000). Towards a Sustainable Russian Forest Sector. Natural Resources Forum, Vol. 24, No. 1, pp. 31–37. Carlsson, Lars, Mats-Olov Olsson, and Nils-Gustav Lundgren (2000). If money only grew on trees - The Russian forest sector in transition., The Forestry Chronicle, Vol. 76, No. 4, July/August. (A Russian version of the paper is also available.) Pappila, Minna (2000). The Russian Forest Sector and Legislation in Transition. Turku Law Journal, Vol. 2, No. 2. (Based IIASA Interim Report IR-99-058.) Nilsson, Sten (2000). International Cooperation for Sustainable Development of the Russian Forest Sector. In: Final Report and Proceedings of the Expert Seminar "Sustainable Development of the Forest Sector in Northern Europe," Petrozavodsk, Russia, October 12–13, 1999, Barents Euro-Arctic Council. Working Group on Economic Cooperation. Joensuu: University of Joensuu, Faculty of Forestry, pp. 35–46. Carlsson, L. (2001). Keeping Away from the Leviathan: The Case of the Swedish Forest Commons. Discussion Paper No 51. Published by the MOST Programme at the United Nations Educational, Scientific and Cultural Organization (UNESCO), Paris: UNESCO. Carlsson, Lars, Mats-Olov Olsson and Nils-Gustav Lundgren (2001). ɋɨɫɬɨɹɧɢɟ ɥɟɫɧɨɝɨ ɫɟɤɬɨɪɚ ɜ Ɋɨɫɫɢɢ - ɨɬɪɚɠɟɧɢɟ ɬɪɭɞɧɨɫɬɟɣ ɬɪɚɧɫɮɨɪɦɢɪɨɜɚɧɢɹ ɷɤɨɧɨɦɢɤɢ (The State of the Russian Forest Sector - a Reflection of the Difficulties of Transforming an Economy), ɉɪɨɛɥɟɦɵ ɬɟɨɪɢɢ ɢ ɩɪɚɤɬɢɤɢ ɭɩɪɚɜɥɟɧɢɹ (Theoretical and Practical Aspects of Management), No. 2, pp. 75-80. (This is an abridged version of an article by the same authors published in The Forestry Chronicle, Vol. 76, No. 4, July/August, pp. 605–610.) Carlsson, Lars, Nils-Gustav Lundgren, and Mats-Olov Olsson (2001). The Russian Detour: Real Transition in a Virtual Economy? Europe-Asia Studies, Vol. 53, No. 6, pp. 841- 867. (Note that this article was based on a previous IIASA Interim Report IR-00-019. See entry above!) Carlsson, Lars (2001). Book Review: Business and The State in Contemporary Russia, ed. by Peter Rutland, Oxford and Boulder, CO: Westview Press. Europe-Asia Studies , Vol. 53, No. 8, pp. 1255–1256. Carlsson, Lars and Mats-Olov Olsson (2001). Policyövningar med ryska skogsintressenter (Policy Exercises with the Stakeholders of the Russian Forest Sector). IIASA-Nytt, No. 34, September. Stockholm: The Swedish Research Council for Environment, Agricultural Sciences and Spatial Planning (Formas), pp. 8–10. Nilsson, Sten (2002). The Real Problem and Needs of Sustainable Development in the Russian North: An Analysis of the Forest Sector. In: A Common Approach to Collaborative Technological Research for Arctic Development. Proceedings of the Joint EU-Russia-Canada-US Workshop, Conference Centre Albert Borchette, Brussels, Belgium, 25–27 October 2001. pp 310–329. Carlsson, Lars and Nils-Gustav Lundgren (2002). Den ryska skogssektorn på väg mot marknadsekonomi? (The Russian Forest Sector Towards Market Economy?). In Persson, Gunnar (ed.), Människor, Hälsa, Miljö. Acta Philosophica Universitatis Lulensis, Luleå Studies in the Arts and Social Sciences 2. Luleå: Luleå Science Press, pp. 5–17. Carlsson, Lars (2002). The Strategy of the Commons: History and Property Rights in Forestry in Central Sweden. In Fikret Berkes, Johan Colding, and Carl Folke (eds.), Navigating Social-Ecological Systems. Cambridge: Cambridge University Press, pp.116–131. Kallas, Aigar (2002). Public forest policy making in post-Communist Estonia. Forest Policy and Economics, Vol. 4, Issue 4. December, pp. 323–332. (Note that this article was based on a previous IIASA Interim Report (IR-00-073). See entry above!) Sten Nilsson (2005). Experiences of policy reforms of the forest sector in transition and other countries. Forest Policy and Economics, Vol 7, Issue 6. November, pp 831– 847. Olsson, Mats-Olov (2006). Systemic Interventions to Promote Institutional Change in the Russian Forest Sector.Review of Policy Research, Vol. 23, No. 2, pp. 505-530, March. (This article is based on a much longer IIASA Interim Report (IR-04-030). See entry above!) Olsson, Mats-Olov (2008). The Russian Virtual Economy Turning Real: Institutional Change in the Arkhangelsk Forest Sector. Europe-Asia Studies, Vol. 60, No. 5, July (forthcoming).

Other Publications: Malmlöf, Tomas (1999). Prospects for Ecological Sustainability in Russian Forestry; An Institutional and Historical Perspective. C/D Extended Essay 1999:02, Department of Business Administration and Social Science, Division of Political Science. Luleå: Luleå Technical University. (Based on the author’s contribution to IIASA Interim Report IR-98-027.) Ivanova, Lyudmila and Vigdis Nygaard (2001). Policy Exercise for Stakeholders in the Forest Sector in the Murmansk Region. Working Paper 2001:106. Oslo: Norwegian Institute for Urban and Regional Research (NIBR). Olsson, Mats-Olov (2004). Barriers to Change? Understanding the Institutional Hurdles in the Russian Forest Sector. Licentiate Thesis in Political Science. Luleå: Luleå University of Technology (203 pp.).