Regulatory Reform in the Russian Federation - National Context

REGULATORY REFORM IN THE RUSSIAN FEDERATION - NATIONAL CONTEXT

Discussion paper

By Konstantin Yanovskiy Head of the Department of Social and Political Analysis Working Centre for Economic Reforms under the Government of the RF Table of Contents 1 Overall context...... 3 1.1 Deregulation as the Russian way to due regulation, and the definition of “deregulation” – Russian specifics...... 3 1.2 Socio-political environment for regulatory reform...... 3 1.3 Key results of the regulatory reform...... 5 1.4 Key future challenges for regulatory reform...... 7 2 The actors...... 11 2.1 The Executive...... 11 2.2 The Parliament...... 12 2.3 The Judiciary...... 12 2.3.1 Judicial system reforms...... 13 2.3.2 Problems of the judicial reform...... 14 2.4 Ombudsman...... 16 2.5 Accounts Chamber...... 16 2.6 Influential NGO’s...... 17 2.7 Trade Unions...... 18 3 The legal environment...... 18 3.1 Hierarchy of the RF Normative Acts...... 18 3.2 The regulatory process...... 19 3.2.1 Transparency and predictability...... 23 3.2.2 Assessment of regulatory alternatives and impacts...... 24 3.3 Initial stage of reforms and decade of revolutionary changes – major developments in the legal framework...... 25 4 The administrative environment...... 26 4.1 Cultural origins of public administration...... 26 4.2 Possible problems in public administration...... 26 4.3 Conflicts of interests:...... 28 5 Co-ordination between levels of government...... 29 5.1 History and current situation...... 29 5.2 Federal and regional bodies responsibilities in the bills preparation...... 29 5.2.1 Current problems of excessive regulation in the regions...... 30 5.2.2 Federal Districts...... 31 6 Selected regulatory issues...... 32 6.1 Reforming regulatory framework for key natural monopolies...... 32 6.2 Price regulation by the state...... 33 6.3 Lowering administrative barriers...... 36 6.4 SME policy...... 38 7 Conclusions...... 38 7.1 General assessment of current strengths and weaknesses...... 38 7.2 The dynamic view: the pace and direction of change...... 39 7.3 Future challenges...... 40 8 References...... 41

2 1 Overall context

1.1 Deregulation as the Russian way to due regulation, and the definition of “deregulation” – Russian specifics Russia has a fairly consistent and almost unidirectional tradition of state management in the economy. If one is to consider main tendencies, then, with the exception of a period between 1861 and 1914, the dominant trend was towards stricter control over any business activities based on undisguised administrative pressure and discretion. Lack of consistent guarantees to basic individual rights led to de facto limitation of economic independence and ownership rights. In that sense, traditions of the socialist system in 1917 - 1991 were rooted deep in the previous history. By the same token, all reforms, starting with the laws on state enterprises (1987) and co-operatives (1988), were breaking away from the strict and all the more inefficient state control over the economy, which embraced all sectors and all spheres and forms of economic activities – enterprises, personal, non- commercial. The thrust of deregulation, for a number of factors to be discussed below, is still the order of the day. And the regulatory reform in Russia should therefore be discussed primarily as a process of deregulation of economy. In the more common and narrow sense, the term “deregulation of economy” means elimination of superfluous (knowingly redundant) barriers to free entrepreneurship put up by the state. In Russia this translates, in particular, in the elimination of any unlawful bans or restrictions to business activities. In other words, deregulation of economy in the Russian context can be understood as implementation of the applicable principles and provisions of the RF Constitution (Article 34 – freedom of entrepreneurship; Article 37, Part 1, - freedom to work, and Article 44, Part 1, - freedom of creativity). If one is to generalise over these aspects of deregulation, it then may be defined as a set of measures aimed to help businesses reduce costs generated by government interference. This latter definition covers also improvement of legislation, elimination of gaps in the regulatory framework or its arbitrary interpretation, and substitution of subsidiary regulations with proper laws. On the other hand, certain traditional proponents of state regulation propose the so-called "de- bureaucratisation" as an alternative to "deregulation", often interpreting the former as the “liberation” of certain “priority” industries and businesses from any rules or requirements provided for by the antimonopoly and budgetary legislation. For example, large military enterprises and affiliated with them (or engaged through electoral interests) regional leaders have huge bargaining power in the relation with branch ministries and agencies. So they have strong incentives to avoid universal, transparent and well- detailed regulations, imposed by the government or legislators that would create equal business conditions for all enterprises. Unclear “soft-constraining” rules leave huge advantages for these enterprises, including possibilities to avoid taxation1, to restructure debts on very favourable conditions, to get official exemptions, to restrict competition, etc.

1.2 Social-political environment for regulatory reform Due to the lack of safeguards of basic rights, poorly defined property rights (because of the State bodies commercial activities and rent seeking, possibilities to use state property for private benefits) and the political uncertainty that reigned until the end of 1999, the demand from businessmen for individual guarantees from the authorities and less so, for uniform order has been growing. As a result, state regulation became a form of appropriation of the administrative rent. The overblown role of the authorities in the investment decision-making, massive redistribution of property, lack of major national capitals coupled with the absence of any significant presence of foreign investors, and a number of other reasons helped reinforce the positions of those entrepreneurs who had “special relationships” with authorities. Some argued that it helped “fuse property and power.”2 Political instability came from the might of political coalitions and the related special interest groups striving either to restore the Soviet-type system of regulation by the state, or to freeze the then existing arrangements. One of the consequences of political instability was frequent rotation of businesses made

1 See V.Kontorovich , М. Mokhtari, S. Caner, “An Econometric Analysis of the Arrears Problem in the Russian Federation “, in the HSE Economic Journal, 1 vol.4 , 2000 2 Yegor Gaydar, “The State and Evolution”, Moscow, 1995, “Eurasia” 3 eligible for individual privileges3. Election of a new president resulted in the substantial weakening of the positions of some entrepreneurs, with equivalent reinforcement of others 4. Such a situation gradually increases the demand for legality from big businesses5. Small and medium business, lacking any opportunities to negotiate with the authorities any acceptable and long-term arrangements, is already displaying such demand (Klyamkin and Timofeev, “Shadow Russia” 2000). The most prominent political coalitions include: - coalition of the supporters of restoration and comprehensive state regulation, which enjoys persistent electoral support of 20 - 30% of voters, and controls from a quarter to half of the supreme legislature and many regional administrations; it was in various times represented also in the central executive authorities, including law enforcement agencies (the RF Communist Party and its satellites in the People’s Patriotic Forces of Russia as well as some more radical parties or groups with similar trappings), “patriots” (Liberal Democrats, at some stages – supporters of General A. Lebed; pro-Nazi groups; later some of the “Unity” electorate; notably, some of them, if not too many, belonged to the anti-Communist coalition that helped to have Yeltsin elected in 1991 and re-elected in 1996; the main pillar of this coalition is the non-adapted or poorly adapted part6 of the workers (including rural workers), pensioners, corps of general managers (particular in defence industry where delays and restrictions in privatisation hampered adaptation); this coalition also comprises some entrepreneurs (for some this is a way to hedge against the risk of having this coalition come to power; others owe their achievements to the devaluing resources of “old connections” and may be pessimistic about their prospects in a more competitive market); - non-conformists with more or less anticommunist sentiments: this is the largest constituency which nevertheless does not have a steady absolute majority; in the past Duma elections, it split between the OVR and “Unity”; it is a foothold for the new bureaucracy, “oligarchic” (i.e. having access to the resources of power) business (these groups replaced the lobby of traditional Soviet-type general managers that broke later into those successfully adapted and those who joined the anti-reformist coalition; defence and law enforcement, together with their related business: the majority of regional elite, with the exception of those reporting directly and obediently to the RF Communist Party, the recognised leader of the anti-reformist coalition);

3 Kontorovich, 2000 4 Zhavoronkov, 2000, “Liberal Mission” “Putin as Liberal?” 5 Summing up a whole series of correspondent statements of his colleagues at the January 2001 Round-Table “Business and Power” at the Higher School of Economics, entrepreneur O.V.KISELEV said: “… We should pay attention to relationships inside business, for we generate negative attitude towards us ourselves. When Moscow was swept with full-out extermination of businessmen in 1994-1995, we have found the willpower to gather at a round- table and realize that this was the road to self-destruction. At that time there has been a succession of several serious assassinations, and it has become clear that if the killings go on, there would be no businessmen left alive within a year. The quality of the assassinations has become so devious that it was impossible to hide. Neither security guards nor special means of protection helped anymore. And so we have formulated an idea – to give up the use of physical violence in competition struggle. We have adopted this charter. At that time, having shed much blood, we have arrived unaided at the first commandment – thou shall not kill. But what happened next? Next, businessmen started settling scores via law-enforcement organizations: the prosecutor’s office, the tax police, the interior bodies. But this means that we are releasing a genie from the bottle. There is a good American film called The Team. It is about a sheriff who created a team to help him fight crime in his precinct. He trained his men well, but he taught them to kill. And at the end of the day, his team has gone out of control and started terrorizing people. We train prosecutors, militia officers, and tax officials, we give them money and tell them that they are free to interfere with business. As a result we find ourselves dealing with our own doing that is so humiliating – the strengthening of the power bodies. This did not happen because of the arrival of new people or because the old ones have become smarter. We ourselves have cultivated their desire and skills to fight against business. This is not to mention the fact that our behaviour has corrupted the institutions of state authority to such a degree that they are no longer state institutions. We ourselves create and support the ties between bureaucrats and business, i.e. we nurture our own grave diggers. And if we fail to realize the entire malignancy of this path and don’t give up competition struggle involving power bodies, we will end up in a situation we have miraculously evaded in 1995 – we will simply destroy each other. If we don’t do it now in 2001, in the coming 2002 Professor Yassin would no longer be able to gather businessmen in this hall. And even if he would, they would be rather specific-looking businessmen: in uniforms. 6 For a more detailed description of the link between adaptation and political orientation, see Yanovsky’s “Outcome of the election as an indicator of demand for institutions: case study of voting results in the first post-revolutionary decade in the transition economies and young democracy states” (USAID project, 2001) 4 Both of these two groups have a strong motivation to desire redistribution of resources through the state apparatus since they have no hope to succeed in a competitive and open economy. - at the same time, the coalition of the supporters of liberal reforms (hard core) comprises most of intellectuals, educated young people, small and medium businessmen and also those who do not belong to the above groups but had suffered from the repression7; the “hard core” comprises those who have supported reforms throughout the entire decade and who prior to the reforms were in opposition to the Communist reformers and voted in all elections for the Democrats (Democratic Russia, Russia’s Choice in 1993; Democratic Choice of Russia, “Go Ahead, Russia,” “Common Cause”, etc. in 1995; “Union of Right Forces” in 1999; and Yeltsin in 1991 and in July 1996); it enjoys a stable support of no more than 8 - 10% of voters. European context Proclaimed “orientation towards European standards and institutions” has become an official path of desired reforms (with the exception of “social state” standards). The theme of European integration grows in the statements made by the new president and government in proportion with the reinvigorated diplomatic activity. In essence, such desire can be reflected in the orientation towards EU regulatory practices (with the exception of social security standards, for which Russian resources will be definitely lacking for a long time to come).

1.3 Key results of the regulatory reform The 90s started with the removal of a number of barriers, which were harming private initiative and establishment of the minimum conditions required for legal entrepreneurship. Abolition of price controls, and retail trade constraints, mass privatisation, liberalisation of foreign trade, partial convertibility of the rouble helped entrepreneurship to rise both as a conspicuous social phenomenon and as a social group with its own interests. However, further reform has radically decelerated, coming under control of a number of opposing groups in the Russian leadership. Frequent change of government leadership (key deputy premiers in 1993-1997, and prime ministers in 1998-1999) and of the structure of the cabinet and spheres of responsibility of its members; intensive, albeit unstable, law-making activity of the Government (numerous decrees, often cancelled 3-4 months after adoption) have also undermined the process8. The first and so far the most significant outcome of the reforms of state regulation pursued by the new president’s administrative office and cabinet (and presented to the public as the program for de- bureaucratisation of economy) was the approval of a package of three laws. Those are the laws: “On registration of companies” (it introduces the single-window principle for registration, and substantially cuts registration costs); “On the licensing of certain types of activities” (a new version of the law reducing the number of licensed types of businesses), and “On the protection of rights of legal entities and individual entrepreneurs subject to state control (supervision)” (it has made certain types of controls more formalised). The laws were signed by the president on 8 August 2001, and at the time when this paper was written had been in effect slightly more than one month.

7 Significantly, the public choice in the politics is always a choice between different goods; since the real choice in the politics is a choice between the packages that comprise, from the point of view of a i-th voter, both goods and their individual case, i.e. anti-goods (“bads”), the influence of the “bads” on the choice could become decisive provided they are assessed by the voter as having the highest absolute value. 8 For details on the reasons and history of these events, see Zhavoronkov, Yanovsky (2001) 5 Box: Main stages of Regulation reforms in Russia between 1990 and 2000 Period of piecemeal reforms in 1987 - 1991 Law on State Enterprise Law on Co-operatives Political reform Outcome: manageability lost Period of radical reforms in 1991 – 1993 The onset of reforms; a new structure of the government devoid of most of the sectoral ministries (Presidential Decree No 172 of 6 November 1991) Law on Competition, Law on Privatisation, Law on Militia (1991) Law on consumer rights (1992) Privatisation decrees (particularly, Nos 66 and 721 of 1992) Decree 1400 of 21 September 1993 The Constitution of 12 December 1993 Onset of stabilisation between 1994 and 1996 Approval of codes: Civil Code, Parts One and Two; Criminal Code; Arbitration Procedure Code. Approval of the federal constitutional laws on the judiciary system and the constitutional court Law on the Fundamentals of Civil Service Stabilisation of the rouble, deepening budgetary crisis Law on budgetary classification False “window of opportunity” (an attempt to continue with radical reforms) in 1996 - August 1998 The onset of reform in the housing and communal utilities sector Sequestered budget An attempt at the defence reform Attempted tax reform, approval of Part One of the Tax Code; approval of the Budgetary Code Law on Judiciary Department of the Supreme Court Draft law “On the licensing of certain activities” (approved in September 1998) Federal Constitutional Law “On Government“ Parliamentary Majority Government, September 1998 - May 1999 Approval of the first zero-deficit budget (for 1999) Completed political stabilisation, May 1999 – present The first package of laws on deregulation of economy Decisions taken on the reform of railroads; debates on the reform in power sector and gas industry Onset of the judiciary reform Tax reform: Part Two of the Tax Code The 1992 reforms and mass privatisation as general deregulation Despite a number of widely discussed inefficiencies, the abolishment of the old administrative system did not lead to any catastrophic consequences, but instead ensured a better manageability of the public service, provided one makes comparison not with the situation in the 70-s (which is not correct), but with the end of 1991. Although the authorities continued to actively interfere in the processes of property redistribution, not always did they succeed. There was a growing proportion of outsiders in most of privatised companies, pointing, on the one hand, to the urgency of the judiciary reform capable of protecting private rights and

6 interests, and to the need to improve specialised legislation on securities and joint-stock companies 9. On the other hand, those developments demonstrated the effectiveness of fundamental laws, and the advantages of the democratic statehood, albeit weak and transitional, before an authoritarian model. Box : Privatisation Public (better, government) sector used to comprise almost 100% of all production capacities and over 95% of land and real property. As a result of privatisation, private sector started to dominate, with the radical change happening over 6 years (1992 - 1998)10. Initially, mass privatisation started with apartments, retail shops and catering facilities, cafes and restaurants. Later, beginning from the summer of 1992, mass privatisation picked up in the industrial corporations sector and featured such majors as Gasprom or oil companies. By virtue of the company law, even 100 percent state-owned enterprises enjoy high degree of autonomy from government authorities. Management of any such company cannot be removed with a simple order even by the Premier himself. And since because of the unsatisfactory transparency of natural monopolies, managing such companies is regarded by special interest groups as an expensive prize, and although the influence of government officers on decision-making in companies is tangible its direction is not obvious. Formally, government control over all such joint-stock companies is secured by the majority in the board of directors. However, since positions of various competing ministries may differ, there are no institutional guarantees to the unanimity of government representatives on the board. Moreover, there are no guarantee that they would heed to the government interests in decision-making (there is no practice of generous remuneration of loyalty to such poorly defined interests, nor is there any punishment for the failure to stay loyal, in contrast to remuneration/punishment for individual loyalty or its absence, respectively11. Formal statements by such companies (which are public joint-stock companies) in accordance with the legislative requirements are published in press and downloaded to their corporate web sites. However, data therein are hard to verify, although government representatives, as directors on the board, should be having substantial opportunities to access information. Deregulation, as a component in the second president’s economic program The drive to liberate business from excessive controls announced by the new Russian president, and certain decisions to streamline some of the administrative procedures as part of the de-bureaucratisation campaign, which we will discuss later, are significant not so much from the point of tangible improvement of administration as from the point of view of the expectations that fundamental rules and procedures will not change for the worse (although the latter is, unfortunately, not obvious). The businessmen’s demand for the rule of law, and efficient regulation in the mid- and long-term perspective better than any government initiative creates more reliable incentives to improve the quality of regulation.

1.4 Key future challenges for regulatory reform Excessive regulation - self-reproduction problems12

9 A.Radygin, R.Entov (2000, IET) 10 The 1991 - 1992 privatization laws provided for a whole set of procedures of “automatic approval” in the absence of any substantiated written refusal by the prescribed deadline. Unfortunately, such rules have remained only in the consumer protection law, making it substantially more effective. 11 A. Chubais described an altogether common example of such behavior when a government representative voted the government block of shares contrary to the unambiguous instructions he had just received from first vice- premiers. See, “Privatization Russian Style,” Moscow, Vagrius, 1999, pp. 296-297 12 A group of experts from the Economic Department of the Moscow State University, led by Prof. Tambovtsev, made some calculations of the costs to businessmen (and hence to consumers since businessmen incorporate their costs in the price for their goods or services) of administrative barriers, estimating them at about 5 - 7% GDP. 7 As argued by Professor A. Auzan13 (head of the foundation “Social Contract”, and president of the Confederation of consumer protection societies), from the historical perspective, the today’s system of excessive regulation has been a reaction of the government apparatus to the big-bang emergence of the market since 2 January 1992, and to its saturation with versatile and previously inaccessible goods, whereas the consumer had absolutely no knowledge or orientation habits to cope with the multitude of goods. It bred a natural desire to urgently help alleviate the problem of information asymmetry, so typical at the start of reforms of the markets of classical goods and services (health care, technological goods), as well as of the markets of basic foods. Box : Excessive regulation - Food safety case The Ministry for Antimonopoly Policy and Support of Entrepreneurship (formerly Anti-Monopoly Committee) is responsible for the implementation of laws bearing on competition and consumer rights. Since in the consumer rights area there is now a network of public associations alongside territorial branches of the Ministry and relevant regional and municipal structures, the situation there does not give any concern. The real concern is triggered by the attempts to reinforce direct administrative controls under the pretext of consumer rights protection. Such concerns are well illustrated by various agencies acting in the area of food safety control. The regulatory basis for this control is provided primarily by Federal Law № 29-FZ of 2 January 2000 “On quality and safety of food products” and relevant regulations: resolutions of the RF Government № 883, of 22 November 2000, “On the organisation and implementation of the monitoring of quality and safety of food products, and public health;” № 987, of 21 December 2000, “On state supervision and control in the area of food safety and quality”, and № 988, of 21 December 2000, “On statutory registration of new food products, materials and goods.” Neither the law itself, nor the regulations offer any detailed procedures that would clearly prescribe the duties of the state authorities and officers in monitoring, or a clear-cut liability for wrongdoing or abuses, including the liability for damage inflicted to a businessman (for instance, as a result of disclosure of any information which is not related to consumer protection and was collected through the monitoring pursuant Resolution № 883). Resolution № 987 provides for the multiplicity of inspections of one and the same facility – by sanitary authorities, Gosstandard, veterinary services, etc., although in some of the inspections the jurisdiction of law enforcement agencies is duplicated14 Resolution No 988 is effectively given a retroactive effect since it could be interpreted as being applicable to most of the types of products (food, tooth paste and mouth wash, and tobacco goods) that have not been exposed to the new registration procedures whenever the manufacturer or the importer fail to prove the facts of sales prior to the effective date of this resolution. Paragraph 4 of Resolution No 988 which describes the registration fee to be collected from the applicant (under the risk of importation or production ban) is nothing else but illegal introduction of still another fee. Federal regulations of this type appear to be striving to stimulate similar regional law-drafting. The Law of the City of Moscow, No 13 of 24 May 2000, “On quality and safety of food products,” which is basically a carbon-copy of the federal law, introduces additional requirements for the entrepreneur. It requires approval of draft contracts relating to the sales of food products, by the authorised entity of the municipal administration while the procedures for such approval are not specified anywhere in the law. Such provisions are the potential source of abuse and hence risk to entrepreneurs. Adaptation of the consumer was a real problem at the start of 1992. However, there was only one decision passed by the government relating to the consumer rights protection: on 7 February 1992 it adopted the Law “On consumer rights protection”15, which helped cut substantial costs of remedies available to the consumers, inclusive that of adjudication. The new institution stimulated commercial activity of

13 At the meeting of the Scholarly Council of the Institute of Economies in Transition discussing the problem of deregulation of economy in Russia on 5 April 2001, see the institute’s site at www.iet.ru 14 Inquiry and investigation – see para 8 (b), and 9 of the “Provisions for statutory registration of new food products, materials and goods” as approved by Resolution No 987. 15 see RF Law “On consumer rights protection” of 7 February 1992, № 2300-1 8 practising lawyers and various specialised non-profit organisations, including the one, which has been for many years successfully steered by Prof. Auzan himself. All other measures adopted by the authorities proceeded from a radically different intent. It would thus appear justified to look into different explanations to the phenomenon of reproduction of excessive regulation, and the source of this problem. Box : Excessive regulation - Product labelling case Another example of conflict of groups of interests concerning “the protection of consumer rights,” besides the already mentioned acts on safety and quality of foodstuffs, is the infamous Government Decree of 17.05.97, #601 “On the Labelling of Goods and Produce on the Territory of the Russian Federation with Forge-Proof Conformance Marks.” The initial objective of the Decree was to create a mechanism for protection of consumer rights, for the purpose of which it was suggested to oblige the manufacturers and sellers of a number of goods to label them with special marks (stamps), each mark accounted for. In reality, however, there have been numerous cases of sale of unaccounted and forged marks (while it is only possible to distinguish them with the help of special equipment). The suppliers of the marks – two Russian companies ZAO Spetsznak and ZAO Kodznak – order them from the American firm Holographic Dimension, whose reputation had once been spoiled by the scandal with the production of false visas on Iraq’s order. At the same time, the manufacturers of equipment, having a high reputation, are interested in protection of their produce. As a matter of fact, their own protection is far more efficient than that provided by the state. All the mark had to offer to consumers was an additional chance to discover the seller company, in case of necessity, with the help of the state authorities (the Trade Inspection), if the company in question had not ceased to exist by that time, and if the mark had not been forged. On the other hand, some economic entities and public organisations have qualified the compulsory labelling as an illegal imposition of another duty by an executive authority. Having encountered criticism and opposition, as a result of which the alcoholic produce has been excluded from the list of goods subjected to labelling, the advocates of labelling had pointed to a high fiscal value of such a mechanism, enabling to monitor commodity currents and detecting produce, manufactured and marketed with violations of the law. To reinforce these positions, they managed to supplement the Decree on October 20, 1998, with a clause on mandatory “…protection of copies of conformance certificates and other commodity accompanying documents and labelling them with special forge-proof marks,” in other words – to introduce compulsory purchase and use of the mark in every transaction. Unfortunately, this position has found support in the Finance Ministry. At the same time, the Ministry in no way agrees that the mechanism of Decree #601 is effective for monitoring commodity currents. However, it assumes that a poor mechanism is better than a total lack of any mechanism of this sort. As a matter of fact, there are no data confirming the efficiency of labelling. The supporters of the decree refer to the effect of inspections held in a number of regions. It is apparent, however, that mass-scale inspections are capable of producing a certain effect, but there is no evidence that it is connected precisely with the labelling mechanism, rather than the very fact of inspections. Besides, it is impossible to ensure regularity and ubiquity of such inspections. And even if it were possible, the fiscal effect would not at all be obvious. Given the current mechanisms of inspection, expenses on economic activity of a majority of companies would become intolerably high, and they would be compelled to leave the markets. Coalitions and interest groups striving for broader state regulation The early 1992 radical economic reforms liquidated or reorganised hundreds of former Soviet and republican ministries and departments. Some of their officers became affiliated with the newly established ministries (some of the Gosplan staff moved to the Ministry of the Economy, etc.). But the majority of staff had to look for other ways to employ their skills.

9 Groups of former bureaucrats and their whole teams announced establishment of “concerns” or joint- stock companies. They struggled to capitalise on their former connections and retain this or other type of control over the previously subordinate enterprises. And their motivation was obviously very high. There were holdings (not infrequently parasitising on companies, such as “Rosstankoinstrument,” 16 which gradually were becoming defunct in the absence of outside investments). But more often than not, whenever their attempts to retain almost direct control were strongly fended off by the newly established agencies (such as GKI (Privatization Ministry) or the Anti-Monopoly Committee), they had to resort to other means of self-preservation. A case in itself was the state’s “trade” administration system. It used to comprise the Trade Ministry, the so-called “Torgs” (entities that supervised state-owned trade enterprises within certain territories), and the state-run retail shops. The true function of that system was distribution of the consumer goods allocated by the state. The direct access that workers of this state “trade” system had to the limited range of consumer goods, which were invariably in shortage under socialism, turned this system into the principal mechanism for the conversion of power and influence in hard cash and material well-being. As the prices were freed, and trade liberalised, as were import operations and currency exchange, the system of administrative distribution of goods collapsed. The trade system workers who might have still retained substantial resources but were quickly loosing ground were faced with a threat of forfeiture of both their former status and the source of income. Therefore they could not but consolidate in an aggressive coalition for economic survival. Today the influence of this coalition has been undermined, the indirect evidence of which is liquidation of the relevant ministry and the incorporation of what was left of this agency in the Ministry of Economic Development and Trade as an autonomous department. However, the fact that the Government’s Resolution №601, Edict №61 by the RF State Committee on standardisation and metrology, dated 22 August 200017, and a block of regulations relating to the 2000 Law “On quality and safety of food products”18 are still in effect, demonstrates that this interest group has retained certain influence on relevant decision-making to ensure self-preservation (ways to collect rent). Each successful “project” on regulation and collection of rent income from businesses which are forced to pay for a variety of permits, or from monopolies which pay to be immune to regulation, strengthens the relevant interest group and encourage other interest groups to replicate the success stories. But since the resources subject to redistribution are rather limited (the status and underlying motivation for the incumbent rent-collecting groups are described with Olson’s model of “stationary gangster”), there is always a stimulus to become better entrenched. This can be done only if one builds up political might, never stopping short of gaining the power. No adequate opposition to such projects or interest groups has ever been observed in the public or reformist government. Worse still, having no stable and massive support in the public (comparable to that in Poland, Hungary, Czech Republic or Estonia), the reformist government tried to look for compromises

16 This entity, quite typical for the Russian economy, has been set up by a group of managers of the former ministry of machine-tool and tool-making industry. In 1992-1993, it successfully lobbied the transferal and retaining under its control of the parcels of shares of machine-tool enterprises. The point at issue almost never was the controlling parcels. The leaders of the holding promised at the workers’ meetings of the enterprises to protect them from “outsiders” (i.e. from external, strategic investors). Considering that 51% of most public joint-stock companies went to the workers; 29% were sold to outsiders at check auctions (as a rule, in small parcels to investment funds, the concentration of whose shares was strongly restricted). Handing 10-20% over to the holding, an external investor lost incentives for the purchase of stocks, as this became too painstaking an undertaking. Hence, the promise was met. The state, not owning control parcels of shares, did not have sufficient incentives to control its agents at the holding either. As a result, it has become a totally uncontrollable entity, continuing to lobby branch interests (“programs of development of the branch,” attempting to gain benefits from the budget), to influence the enterprises’ behavior, using state resources. 17 Edict №61 by the RF state Committee of standardization and metrology, dated 22 August 2000, introduced the Rules for the certification of retail trade services that required certification of all companies and their branches if they did retail trading, and incorporated certain requirements which without any particular need led to additional costs to businesses, as well as contrary to the Constitution and tax legislations, provided for novel and obligatory charges (fee) levied on the entrepreneurs for such certification. 18 For detail see Annex 2 “Survey of the Existing System of Control over the Quality of Foodstuffs in the Russian Federation” 10 with all more or less active interest groups. Ultimately it failed to gain any new allies while the costs of tradeoffs kept narrowing the already limited constituency of deregulation supporters19. Therefore, a stronger (basic) incentive for the intervention by state authorities in the economy is served by the desire to subject business to their control for the sake of preservation for a possibly longer time of the entire set of power-related benefits (including the motivation to maximise long-term rent20). Of all those who governed Russian provinces in the initial years of reform, only two (M. Prussak and K. Titov) managed to retain their positions without direct and cruel subjugation of business or mass media. Political achievements by the Moscow mayor, president of Tatarstan, governor of the Orlov Oblast, St. Petersburg governor aided by the failures of the first St. Petersburg mayor, or the first governors in the Vladimir and Smolensk oblasts, or some other reformers, prove the case of the rational choice in favour of a strategy towards “guided entrepreneurship”21 in the present-day Russia.

2 The actors

2.1 The Executive The Presidential Administration Since 1992, the Presidential administration has evolved out of a tiny ancillary service into a parallel cabinet (in 1996 – 1997, under the leadership of A. Chubais, and, to certain extent, during the times of the left majority government). This service continues to play a significant role today. Among so called “Presidential” (law enforcement and defence) ministries the Ministry of Interior can be qualified as the most immediate subject for regulatory reform. Functional ministries Ministry of Finance, Ministry for Antimonopoly Policy and Support of Entrepreneurship, Ministry of Economic Development and Trade, Ministry of State’s Property - These ministries initiate reforms. Sectoral and, sometimes, “presidential” ministries and agencies (Federal Security Service, for instance) – usually act as an opponent of regulatory reforms, because clear and transparent procedures weaken their powers. Ministry of Finance The mission of the Ministry of Finance is primarily to draft the budgetary law and ensure its implementation. Until 1995, the task was simplified thanks to the “inflationary tax.” With the suppression of inflation and the growth of short-term liabilities in the budget, the key task was to reduce the budget. Under the pressure of the leftist Duma, budgets were approved with major deficits which only continued to grow as all hopes pinned on unreliable and poorly collectible income were dashed. As a result, a ministerial officer would become a super influential person as he had the discretion, given the constant and acute budgetary crisis, as to who could receive all 100 percent financing and who would go without any budgetary funds. With the approval of the law on budgetary classification in 1996, and the budgetary code in 1998, and the creation of the precedent of a sequestered budget (Article 46 of the Budgetary Law for 1997), the decision-making procedures became more predictable and less corruptible. At the same time, persistent attempts to rigidly control all commodity flows for fiscal purposes argue against ranking this ministry among others in the informal “liberal wing of the government.” Successors of sectoral ministries

19 For more detailed discourse of the influence of electoral preferences on the economic policies and institutional framework of reforms, see the paper by V. Mau and K. Yanovskiy “Outcome of the election as an indicator of demand for institutions: case study of voting results in the first post-revolutionary decade in the transition economies and young democracy states”, IET, Moscow, 2001 at www.iet.ru 20 To gain the position of a “stationary gangster,” the ruling group or coalition must first and foremost retain power. 21 The term is similar “guided democracy” in Indonesia – massive support for the affiliated firms and a lot of obstacles or even destruction for all others (especially large) – is quite usual policies in the regions like Kemerovskaya oblast – Kuznetckiy metallurgical works seizure by administration; among the judicial instruments used bankruptcy procedures – see for details “Capture of Bankruptcy: Theory and Evidence from Russia” http://www.cefir.ru/papers.html 11 To the sectoral ministries belong: the Ministry of Press and Information, Ministry of Industry, Ministry of Atomic Energy, Committee of State’s Standards, Ministry of Railroads, Ministry of Communication,…

2.2 The Parliament Pursuant to the relevant article of the amended 1977 Constitution, the Congress of People’s Deputies was endowed with a full range of powers, and could have directly administered not only the government but also the entire judiciary system. A more limited competence of the parliament under the 1993 Constitution did not mean, as it was popular to argue, disallowing the representative authorities to impact the situation. Back at the times of the 1 st Duma its huge powers became quite apparent. As was the case when the agrarian party faction was landed, without any reciprocal obligations on its part (apart from the votes for the budget already tailored to its needs), a post of vice-premier and a horde of other concessions. Each fall, starting with the year of 1994, would open up a season for “major bargaining” where well structured lobbying groups would invariably come as winners. In return the parliamentary coalition that voted in favour of the budget would be promised financial support, so that the more votes you could bring the more money you would get. In the 2nd Duma, Communists had a controlling stake, and they needed only 300 votes to overcome the presidential veto, which they could amass by joining forces with some of unaffiliated MPs, “Our Home Russia,” Yabloko or Liberal Democrats. It is only the 3rd Duma that could benefit the reformers since with the support of the forces controlled by the Presidential administration (“Unity” and “People’s Deputies”) they could get the necessary majority. At the same time, some decisions could be passed given a union of pro-presidential factions with the communists. The 1st Duma tested its authority, inter alia, by refusing to use it. When in December 1994 MP Zadonsky moved to ban any military actions on the territory of Russia and order to publish lists of those who died in action, factions of the RF Communist Party, Liberal Democrats and Agrarian Party left the assembly hall in haste, thus defeating, together with the some of the pro-Kremlin MPs, both of the bills that could have realistically put an end to the war. The 2nd “Red“ Duma was very good at budget bargaining. However, its omnipotence peaked out in the summer – autumn of 1998. The 1998 crisis demonstrated even to the least sophisticated and biased observers that it was wrong to underestimate the influence of the Duma.

2.3 The Judiciary Russia formally has all due elements of the justice system. Courts of first instance are, as a rule, district courts with appeal instances in the regions – oblast or republican courts, and then up to the Supreme Court where the actions are reviewed first by a board for which the instance of appeal is the Presidium of the Supreme Court. Plenary sessions of the Supreme Court (comprising a large body of judges) scrutinise the results of court practice and pass decisions that have en effect comparable to that of the precedent in the Anglo-Saxon law. Before 1997 courts were administratively dependent on the Justice Ministry. Currently, pursuant to a recent law, most of the technical and administrative issues are in the jurisdiction of the Judiciary Department of the Supreme Court. The judiciary functions in accordance with the constitutional law and with the law on the status of judges (recently amended so as to reduce the level of immunity and hence independence of judges). Subject to a separate constitutional law, there is the Constitutional Court, and a system of arbitration (commercial) courts. As a result, most of the problems that Russian courts are facing are guarantees of independence, in the broad sense of the word, staffing, and the undue procedure for the removal of judges (a kind of the corporate Lynch court instead of an impeachment procedure). Other, less important but nevertheless tangible issues are unclear boundaries for jurisdiction and competence (ruling on similar cases are not infrequently passed by different district courts; there is no clarity in the delimitation of competence of commercial courts and courts of general jurisdiction).

12 2.3.1 Judicial system reforms Before the launching of reforms, courts were formally independent administrative bodies, but in reality were controlled by law-enforcement bodies, the prosecutor’s office, and, above all, the corresponding party committees that issued direct instructions concerning the most important cases. In the majority of cases the courts engaged in the settlement of labour disputes – on dismissals (sometimes the courts were relatively independent, particularly in large cities, where an enterprise director had no parallel party status, enabling to exert the necessary pressure), other civil disputes (where they were also independent of the parties), criminal cases (as a rule, with decisive participation of the investigators). Arbitration tribunals were engaged, as a rule, in settling disputes between supplying and consuming enterprises (since the consumer could not randomly change the supplier, arbitration tribunals often turned out to be a handy instrument for it, providing, as a minimum, a legal explanation to the planning and party bodies of the fact of failure to meet the planned targets for the plans’ correction). Therefore, the system in its previous form was not adapted to ensuring the right to defence in court – a crucial element of the legal order. The judiciary reform in the early 9022s failed to improve the efficiency of the system. The idea to carry out reform with the hands of the justices’ corps and traditional bureaucracy in the Justice Ministry proved futile. “Bodies of the judiciary community” – congresses of judges and their qualification boards – make sure that the system rejects those judges who may be inclined to follow the requirements of the new legislation. The immunity of the judge, who may not be expelled, ensures his independence, strictly speaking, of the law itself. This has always been a concern for human rights organisations, and led to numerous reviews in courts of appeal. In the new judiciary reform, as proposed today, steps which are long overdue (reasonable limitation of the powers given to the prosecution office, honouring the government’s pledge to introduce the jury system, approval of the new criminal procedures code, which reinforces the rights of the defendants, introduction of the magistrates system) are offered together with the counter-productive idea of the limitation of the principle of justices’ immunity. Designed to protect law in the law enforcement agencies and defend public charges, the office of prosecution in the past decade managed to get involved in a bitter competition with law enforcement agencies it was supposed to supervise in an attempt to preserve (expand) its competence. Such institution as the prosecutor’s office plays a special role in Russia. During the Communist rule, the prosecutor’s office shouldered practically the entire amount of responsibility for formal observance of the law. It was precisely the prosecutor, rather than the judge, whose status was extremely low. The court merely announced the decisions adopted by the Party and formalised by the prosecutor’s office. In contemporary Russia, even after the adoption of the new Constitution (because of the pace of the process, the Prosecutor’s Office could not yet unfold its lobbyist potential in full measure) this body traditionally continues not only fulfilling the role of the state prosecution, but also formally monitoring “the observance of the law.” The Prosecutor’s Office also issued warrants for arrest, search and other investigative activities, fraught with the violation of the basic human rights. In the present discussion of the judicial reform, the Prosecutor’s Office (represented by Prosecutor General Ustinov) openly demanded to revise the Constitution and preserve the entire volume of its authorities. At the current stage of the process, it is possible to assume that the authority of this institution would suffer no less than that of the court. It has lost the right to issue warrants for arrest (in accordance with the new Criminal Processional Code). However, in the opinion of many respectable human rights champions and lawyers (B.Zolotukhin, S.Kovalev, V.Pokhmelkin), the new Code does not offer sufficient guarantees of equality of processional rights of the prosecution and defence. This means that many opportunities for

22 The Reform was aimed to establish the independence of Court System formal principle; set of Amendments to the 1977 year “Constitution” made appropriate changes in the Chapter 21 “The Justice and the Directorate of Public Prosecution”. The Constitutional Court institution was established (article 1651) and the Judges irremovability (article 164). This principle was properly enacted and developed in the Constitution 12 of December 1993. 13 strengthening the guarantees of personal immunity, private property, and other basic human rights, remain unused. Supreme Court Decision compelled the State Duma to accelerate Attorney’s right to sanction the arrest releases for courts only. Decay of courts’ independence devaluates this achievement. One should point out, even before this changes the Judges (as witnessed Moscow city federal Court ex-judge S.Pashin) very seldom acquiesced to dismiss jailed or to declare “not-guilty” verdict. Courts statistics confirm these statements – in spite of decay of investigating bodies less than 1% of decision is “not guilty”; less than 16% appeals about illegal arrest succeeds; this figure is approximately 1% to general number of convictions of offences too. On December 15, 2001, amendments were adopted to the law on the status of judges in the Russian Federation. Article 12.1 (Disciplinary Responsibility of Judges) introduces the norm “termination “in connection with attainment of the age limit” (so far, it has been set at the level of 65 years). This norm weakens the guarantee of irreplaceability not so much by the very fact of adoption, as by the political context. It has been adopted in the period of weakening of political independence of the State Duma (although the first two compositions sometimes refused to use their more than weighty authority, reluctant to accept the responsibility for the grave situation in the country, but at least demonstrated opposition to the executive authorities, the present composition at a lesser cost supports the reforms conducted by the executive authorities, but has no political independence from it). This creates the danger that the age limit could be changed arbitrarily, proceeding from the current needs of the authorities. However, so far this norm has been introduced with a three-year moratorium. The new edition of article 16, “Immunity of a Judge” is much more hazardous for the guarantees of independence of judges. According to the new edition, the “decision on initiating criminal proceedings against a judge, or on bringing him to account on another criminal case shall be adopted (…) with respect to a judge of another court – by the Russian Federation Prosecutor General on the basis of a conclusion of a judicial collegium consisting of three judges of the supreme court of the republic, territorial, regional court, court of the city of federal significance, court of the autonomous region, court of the autonomous district, accordingly, on the indications of offence in the actions of the judge, and upon consent of a qualified collegium of judges of the corresponding member of the Russian Federation.” This norm opens up the opportunity, considering the precedents of “pushing” through courts absolutely scandalous cases, damaging to the national reputation (such as the indictment of the American businessman Edmond Pope, accused of espionage, by the Moscow City Court)23, to dismiss judges at a minimal cost. Moreover, the law does not in any way regulate the procedure of selection of “three judges” from the numerous compositions of regional courts (and for judges of supreme courts – the Supreme Court that employs over 60 judges only in its collegium for criminal cases). The latter signifies the possibility of persistent selection of three judges until a conformist-minded composition is set. The corresponding procedures have been also introduced for judges of supreme courts (Constitutional, Arbitration, Supreme).

2.3.2 Problems of the judicial reform. The orientation on the German experience (one professional judge per several thousand citizens) is not backed with German financial possibilities. Normative number of Actual number of Normative number of Actual number of workers Year workers of the court federal judges federal judges of the court apparatus apparatus 199824 15732 35734 31815 225188 200025 16742 35734 38379 -

23 The case was based on the evidence of MGTU Professor A.Babkin, who was placed in horrifying conditions of a bullpen and agreed to give any evidence, only to speed up the outcome. In court, he refused from his testimony, pointing out that he had been pressurized. However, this has in no way affected the verdict, see http://www.hro.org/actions/secret/fsb.htm and other referrals on the same site and the chronology of events of this case on site http://www.temadnya.ru/hrono/07dec2000/index.html 24 See the Resolution of the Council of Judges of the Russian Federation of October 30, 1998, Moscow. 14 The judges themselves request an increase of annual financing for an additional 19 thousand judges and over 100 thousand workers of the apparatus in the amount of approximately 170 million US dollars (the Draft Law “On Streamlining the Staff Number of Judges and Employees of Apparatuses of the Federal Courts of Law with the Load Norms” prepared by the Supreme Court envisions an increase of the staff of the apparatus by 123,162 people), in other words, proceeding from the estimated monthly 200-250 USD (after the payment of taxes) per judge and some 50 USD per worker of the apparatus. These sums are obviously ridiculous even for the regions with a minimal cost of the “basket of goods.” Besides, it is necessary to emphasise that the requested increase is not spasmodic, but gradual, and should be completed by 2010. In other words, it is planned to conserve the present situation, where a judge is doomed to choose between humiliating half-starved existence and bribes or, at best, “bonuses,” questionable from the point of view of ethics and avoidance of a conflict of interests, paid by some (for example, Moscow) local and regional authorities. The authority of the judicial corps, to which no requirements are set whatsoever, is extremely low (for example, recently the Duma rejected the amendments submitted by deputy V.V.Pokhmelkin, requiring the institution of a minimal solicitor experience of two years for a candidate to acting judge. As a matter of fact, many of his colleagues who voted against the amendment justified their position with the argument that solicitors are often ex-prosecutors and judges, which in public opinion is nearly synonymous to professional unfitness). This complicates the adoption of decisions of a drastic increase of salaries, without which, in its turn, it is impossible to attract young and talented solicitors to the judicial job. Apparently, it is impossible to solve the problem on the way of increasing the number and “completing” the current judicial corps. It seems expedient to form a new, not numerous but highly paid corporation of judges, residing in several capital centres and enjoying the right to dispose of strictly specified resources of power agencies to ensure the fulfilment of judicial decisions in cases when this is difficult to achieve with usual methods. The aforementioned introduction of the institution of a judicial department at the Supreme Court, taking over a number of powers from the Justice Ministry to ensure the activity of courts, ought to be recognised as a positive step towards minimal independence of courts. A separate issue is ensuring the fulfilment of the court decisions, without which even a high salary would not be able to turn the court into an authoritative institution. In keeping with the Laws “On the court decisions’ compulsory execution process”26 and “On Officers of Justice,” the formation of a relevant federal service, headed by the Russian Chief Law Enforcement Officer, is underway. The formal authority of the new service will be considerably broader in comparison to the former system, but financing remains just as poor, and in a number of cases there are no sufficient available possibilities for pressurising a party reluctant to implement a court decision. The executive authorities represented by the so-called power agencies (the Defence Ministry, the Federal Security Service, and, first and foremost, the Interior Ministry) must support the implementation of court decisions. However, as the problem of delineation of responsibilities between ordinary courts and arbitration tribunals remains unsettled, as well as the issues of jurisdiction, but above all, due to the formal problem of non-isolation of property and commercial activity from power, these bodies function

25 See the Decree of the Plenary Meeting of April 11, 2000 – explanatory note to the Draft Law “On Streamlining the Staff Number of Judges and Employees of Apparatuses of the Federal Courts of Law with the Load Norms” 26 This law establishes the order of issuing decisions on employing a force procedure (arrest of accounts, confiscation of property to meet a claim, sale of the debtor’s property, etc.), including the decisions of foreign courts. It defines the principal rights and duties of police officers in the process of forced execution of a court decision. The law establishes the time and deadlines for execution of the court decision, documents to be exchanged between the parties, etc. At the same time, the law does not contain sufficient norms to encourage the persons equipped with substantial recourses to abide by the executor’s demands. For instance, the possibility for imposing a fine in the amount up to 100 minimal salaries (approximately 400 US dollars), envisioned by article 87, can constitute an incentive only for a poor respondent. The situation of a possible violent resistance has not been specified, albeit the corresponding punishment for such actions is envisioned by the Criminal Code (crime against justice). 15 quite selectively27. For example, in certain cases a special militia squad (OMON) can be used to arrest and escort to the prosecutor’s office a completely innocent person28. In other instances, OMON displays strange indecisiveness (as was the case in Vyborg, Leningrad region, in 1999, during the implementation of a court decision to restore the rights of the legal proprietor of the Vyborg Pulp and Paper Plant, captured by a local criminal gang). Actually, the main discussions of the judicial reform presently boil down to returning to the federal authorities the levers of influencing the judges. Besides the existing random distribution of real estate and other benefits to the judges, new possibilities are expected to appear in the procedure of dismissal of a judge (via the initiation of a criminal case), as well as the facilitation of administrative proceedings against a judge.

2.4 Ombudsman The institution of the Authorised Representative for Human Rights (Ombudsman) has been introduced in accordance with the 1993 Constitution (article 103). The Authorised Representative is appointed by the State Duma and acts in compliance with the Federal Constitutional Law. After the dismissal from office of the first Authorised Human Rights Representative S.A.Kovalev, who, strictly speaking, did not need the existence of this institution both thanks to his extraordinary personal qualities and due the limited administrative efficiency, followed a period where the Duma could neither appoint a new Authorised Representative or adopt the constitutional law by the required majority vote. It happened only in the second half of the cadence of the second State Duma as a result of a peculiar exchange – the post of the defence committee, the control over which was restored by the pro- government faction “Our Home Is Russia,” in exchange for appointment of the renown communist Oleg Mironov to the post of Authorised Human Rights Representative. Directly after his appointment, the man said he had no intention to defend the rights of individual persons, putting lawyers and human rights champions into a state of shock. However, the institution itself has confirmed its effectiveness, independent from personal characteristics, when the new Authorised Representative encountered the inadequacy of administrative and technical possibilities of his apparatus, and not even due to the scope of objectives (according to his first statements, they did not bother him), but because of the formal status (higher than a federal minister), and started displaying increasing need for support of the human rights campaigning community. In exchange for this support, he started declaring the ideas and demands of this community more and more often. As a result, the efficiency of the institution of the Authorised Representative is quite limited, as it does not use even a small portion of its opportunities, but at the same time it definitely plays a positive role. The effectiveness and significance of the institution could gain in quality in the event of adoption of the draft law prepared by the Union of Right-Wing Forces faction, equipping the Authorised Representative with the right to protest against the decisions of courts.

2.5 Accounts Chamber This body can play a prominent role in ensuring the transparency of budgetary execution. However, due to a number of historic circumstances, it has initially found itself under control of radical forces (primarily communists), oriented on the breakage, rather than improvement of the system. This led to a situation where the auditors, appointed by the chambers of the Federal Assembly possessed disappointingly low professional skills, aggravated by high activeness in associating with the press. Following the 1999 elections and appointment of Mr. Stepashin to the post of Chairman of the Accounts Chamber, this body has become, in the author’s opinion, excessively loyal towards the executive authorities. The weakening of independent mass media, the work of which had been abused by Stepashin’s predecessors, make the efficiency of activity of the Accounts Chamber in ensuring budgetary transparency quite limited.

27 see also Yegor Gaydar “The State and the Evolution”, Moscow, Eurasia, 1995; government and governors’ incentives to establish control over property and business to prevent political challenges is widespread in the “Third World” 28 Arrest of Director of Nevinomyssky Azot Viktor Ledovsky, Stavropol Krai. Moscow News, #43, 2001, article Skating Rink by I.Korolkov 16 So far, this institution has not played any prominent role.

2.6 Influential NGO’s Moscow, where the legislative, executive, and judicial authorities are concentrated, is at the same time a city with the most developed elements of civic society. This is where practically all “matrix elements” originated in late 1980’s, such as Memorial (and an entire group of subsidiary organisations – the Human Rights Centre, the specialised Young People’s Legal Culture Centre, the Association of Repressed People, etc., including specialised organisations protecting the rights of entrepreneurs, primarily small ones29), the Confederacy of Consumer Associations (and the related Institute of the National Project 30 – the “Public Agreement” Foundation), not to mention the Moscow Helsinki Group, whose history dates back to the dissident 1970’s. They are joined by some smaller and less extensive and more or less specialised organisations engaged in protection of citizens’ rights (both in court and before a court trial). As a matter of fact, each of them has to its credit tens and hundreds of cases won and precedents created. They take an active and rather qualified part in the discussion of the legal reform. The principal sources of financing are the grants from foreign foundations and donations of domestic businessmen (in particular, “Club 2015”). These organisations enjoy great influence on the intellectual elite and a certain authority, compelling the powers-that-be appreciate their opinion. Alongside the new social institutions based on the remaining property (the property of the Communist Party has been nationalised in 1991, but not the property of its satellites and affiliates), the old “quasi- social” organisations continue functioning: the successors of the children’s, youth, women’s communist organisations, communist trade unions, etc. They have no opportunity to rely on public authority and highly motivated activists, but tremendous heritage enables them to participate in the publication of newspapers, finance political campaigns, and carry out lobbyist activity. They are joined by small entities of similar origin. The old quasi-social institutions take an active part in the struggle for the preservation of administrative barriers (see the section on trade unions), enabling them to continue receiving rent. Some of the new re-distributive coalitions create their own “social” affiliates (including quasi-human rights champion and quasi-consumer organisations), targeted almost exclusively on the weakening of competitors. The Russian Academy of Sciences – the successor of the USSR Academy of Sciences – is a specific institution. Just like the near-communist organisations, it has managed to retain quite an extensive piece of property, once received from the state, including real estate. Moreover, unlike the former, it enjoys a certain social and international prestige. This fact turns it into one of the significant participants of the civic society. Most of its initiatives are aimed at ordinary redistribution of state resources. In this capacity, it equalises the pressure of many other groups (various industrial and agrarian lobbyists, financial groups). Part of the academic community comes out actively for protection of nature. Only a small part is positioned in the field of political economy advice. In this sphere it is usually inferior to the new smaller research centres, relying on young economists and lawyers. Some of these centres have been set up by people, who have experience of work in the Government, and periodically supply government personnel. Their classic representative is the Institute of the Economy in Transition (IET), closely linked with conservative parties (the Union of Right Wing Forces). The most powerful opponent from the “academic camp” is the Central Economic-Mathematics Institute. There is hardly any sense in comparing the efficiency of theoretic models within the frames of this research, but IET is beyond competition as far as the number of elaborated, submitted to the Duma and adopted draft laws is concerned.

2.7 Trade Unions

29 See www.memo.ru site, www.hro.org Internet portal; 30 See www.inp.ru site 17 Typical soviet epoch distributive coalition - still possessing broad powers of control over the activities of an enterprise. The effective Federal Law “On trade unions, their rights and guarantees” of 12 January 1996, № 10-FZ, invests them with the following rights: Article 12, para 2. “Liquidation of an organisation or its subdivisions; change in the form of ownership or organisational and legal status of such organisation; full or partial suspension of production (operations) entailing reduction of workplaces or deterioration of work conditions can only proceed after an early notice (at least three months) to the appropriate trade unions and negotiations with them for the observance of rights and interests of trade union members.” Article 20, para 2. “Trade unions shall exercise trade union control over the occupational safety, and health and environment via their officers, authorised persons (agents) on occupational safety and health, and via their own safety inspections acting on the basis of their terms of reference as approved by the trade unions. To this end, they may have a right of unrestricted access to organisations irrespective of their ownership structure or affiliation, and to their structural divisions or workplaces where members of this trade union may be employed; participate in the investigation of job-related accidents; protect rights and interests of the trade union members bearing on work conditions and safety, or compensation of damage inflicted to their health at the workplace, and in other issues of safety and health, and environment in compliance with the federal legislation.” Para 3. “In case of identification of any abuses that may threaten life or health of workers, trade unions in such organisation and trade union labour inspectors have the right to demand from the employer to immediately eliminate such abuses and at the same time apply to the Federal Labour Inspectorate for immediate action.” Para 4. “In case of failure to comply with the demands to eliminate abuses, particularly whenever there is immediate threat to life and health of workers, trade unions and their labour inspectors may demand that the employer, the supervisory agency and the executive officer should suspend operations until the Federal Labour Inspectorate passes its final decision. The employer and the executive officer must immediately comply with such a demand.” As it follows from the above provisions, trade unions could halt work operations at the enterprise under a vain pretext, as many times as they want, while having no liability for frivolous allegations against the employer. It is still unclear what are those grounds which trade unions could invoke to create their own rules and regulations, and to demand special rights to be able to appeal to supervisory agencies and require obligatory response.

3 The legal environment

3.1 Hierarchy of the RF Normative Acts The principal law that has direct impact and supreme legal force is the Constitution of the Russian Federation (article 15, part 1). Part 4 of the same article 15 also establishes the priority of “commonly accepted principles and norms of the international law and international treaties of the Russian Federation,” which “are components of its legal system.” The federal constitutional laws – acts referring to the Constitution and adopted in accordance with the Principal Law via a complicated procedure (a qualified majority of chambers – 2/3 of the State Duma and ¾ of the Federation Council). They include such key documents as the Law on the Order of Forming the Federation Council, the Law on Authorised Representative for Human Rights, the Law on Government, on the Judicial System, on the Constitutional Court, etc. Complex normative acts – codes – often envision the priority of their norms over special laws. At the same time, a number of judges are guided in their approach with the priority of more recent norms of a special law over earlier norms of a general law, which causes problems and contradictions in the legal practice. This problem is complicated with the fact that the codes are adopted according to the same procedure as the federal laws. Among the Federal Laws, particular significance and frequency of employment belongs to the Laws on Competition, on Consumer Rights, on Mass Media, etc. Laws establishing the elections procedure have a similar ranking.

18 Some of the federal laws require for their implementation additional normative acts (additional federal laws, such as the Law on Agreements on Division of Produce, or Government Decrees, such as the Law on the Quality and Safety of Food Products). They are followed (within the limits of their competence, including spheres of joint jurisdiction) by the charters (constitutions) and laws of members of the Federation (regions). Theoretically, the same force within the limits of their competence belongs to normative acts adopted by representative bodies of local self-government, which are independent, in accordance with article 12 of the Constitution, and are not included among the state authorities. Bylaws – in the descending order of legal force: - Decrees of the President (head of the executive authority of a region, city); - Government Decrees; - Instructions of ministries and agencies, registered in the established order with the Justice Ministry as normative acts.

3.2 The regulatory process The existing administrative procedure of elaborating draft laws by the Russian Federation Government: 1. A Plan of Legislative Activity is drawn up for every concrete year. 2. The Plan of Legislative Activity includes all draft federal laws envisioned by the action plan of the Russian Federation Government in the sphere of social policy and economic modernisation in the corresponding year, formed on the basis of the mid-term programme adopted by the Government (presently, it is the programme for 2002-2004) and proposals of the ministries and agencies. Draft federal laws concerning other areas of the law, besides the economy and the social sphere, are also included in the Plan of Legislative Activity.31 3. In order to introduce proposals on elaboration of a draft federal law to the Plan of Legislative Activity, it is necessary to present the concept of the draft federal law, co-ordinated with the interested ministries and agencies and the Chief State-Legal Department of the Russian Federation President, justifying the need to work out the law and offering a brief description of the sphere and directions of its action, by the moment of approval of the Plan by the Government. 4. After the approval of the Plan, ministries and agencies responsible for the elaboration of the corresponding draft laws, present to the Government the timetables of elaboration of the draft laws. A working group, consisting of the leadership and employees of the interested ministries and agencies, experts, representatives of the deputies’ corps, is formed to handle each particular project.32

31 In the most common situation, the initial intention of a certain department to submit a draft law to the State Duma is entered in the plan of government activities (mid-term or for the coming year), the supplement to which (or the plan itself) contains a list of draft normative acts that should be prepared, with indication of the time schedule (usually approximate). At this stage, it is difficult for the opponents of the idea to assess the significance of the problem. Even if the “direction of the thought” is clear from the name, there are attempts to stop it via a chain of co- ordinations. For this purpose, supporters are mobilized in various ministries, capable of making negative appraisals and, if the situation is favourable for the opponent, even to refuse to issue consent by one of the authorized organizations (most frequently, it is the Justice Ministry, the Ministry of the Economy (presently the Ministry of Economic Development and Trade), and some others). 32 In the event of setting up working groups (which is done for particularly important draft laws), especially the ones whose sessions are attended by Vice-Premiers, they become the arena of open clashes between the positions of the interested departments. It is precisely this stage of discussion that seriously damaged the most radical clauses of the draft laws on the new edition of the law on licensing and the order of holding inspections. Heated debates are often underway even at the cabinet sittings. As a rule, however, the result is known in advance, particularly when the position of the Prime Minister and key cabinet members is clear. In that case, the sitting on that level formally proceeds “unanimously.”In such case, the draft law is put off or changed in the necessary way with the help of deputies and factions of the State Duma and members of the Federation Council sharing the same group of special interests, loyal, or connected with the department in some other way. To all appearances, such destiny awaits the first version of the government draft new edition of the Code of Laws on Labor. 19 5. Following the elaboration of a draft law within the established timeframe, it undergoes co- ordination with all the interested ministries and agencies, and if necessary, is augmented with consideration of the proposed amendments and additions, and afterwards is submitted to the Government. The draft law passes the expertise of the Government Apparatus, the Chief State- Legal Department of the RF President, and if such a need arises, is returned for improvement. If no improvements are required (which is practically never the case), the draft federal law is considered at the Government session and afterwards introduced to the State Duma. 6. In the process of discussion of the draft law by the State Duma, representatives of the agency – author of the draft law take an active part in holding the parliamentary hearings and sessions of the profile Duma committees. This procedure has been applied practically in full volume since 2000; it has been adjusted in 2001. The principal objectives requiring such procedure are: the need to represent a single Government position at the State Duma, raising the quality of elaboration of laws, co-ordinating the legislative policy of the Government with the opinion of the President and his Administration. Box: Typical economic regulatory decision-making procedures in the USSR Drafting of a regulation by the interested group of managers (e.g., from a sectoral ministry and a major enterprise) Looking for support from the territorial (oblast) Communist Party bodies (whenever investments were a case in point). Since all decisions were discretionary, there was no principal difference between the drafting of a regulation and the drafting of the executive order. Formal approval of the project by the relevant (endowed with the right of approval) ministries and agencies. As a rule, it took from six to twelve months. Approval by the relevant entity of the Central Committee of the Communist Party. Execution of the decision (e.g., with a resolution of the USSR Council of Ministers). … and in today’s Russia Drafting of the project by the interested group (of businessmen and civil servants) Informal approval by the administration of the province (oblast) provided it is an investment project and the drafted decision is intended to ensure its success. Formal approval of the project by the relevant (endowed with the right of approval) ministries: investment projects take, as a rule, at least one year. Approval by the relevant department of the administration of the RF Government. Approval by the entities in the presidential administration, including its State Legal Department (mandatory for projects to be formalised as presidential decrees or draft laws proposed by the President). Lobbying in the State Duma and Federation Council (for any federal laws). Execution of the decision in the form of a resolution by the Government (administrative decree), a decree by the President, or a law. There is no single law regulating the procedure of preparation of government draft laws in detail. 1. Article 28 of the Federal Constitutional Law “On the Government of the Russian Federation” envisions the possibility of adopting decisions on submission of the Russian Federation Government bills for consideration of the State Duma exclusively at the sessions of the Russian Government. Strictly speaking, other normative acts touching upon this problem and regulating the order of work of the executive authorities on the preparation of draft laws contain no complete and detailed directives on this score either. 2. The Decree of the Russian Federation President of June 10, 1994, #1185 “On Ensuring Interaction between the Russian Federation President and the Russian Federation Government” merely introduces the procedure of mutual notification of the draft normative acts of the Presidential Administration and the Government. 20 3. The first part of the symmetrical (and complying to the Presidential Decree) Decree of the Russian Government of June 19, 1994, #733 “On Approval of the Provisional Statute on the Legislative Activity of the Russian Federation Government” reviewed the norms of the Decree, the second part – the Constitutional norms of interaction with the chambers of the Federal Assembly. The third part of the approved Provisional Statute dealt directly with the activity of ministries and Government departments. However, what it reflected was far from being the complete actual procedure. For instance, the initiator of the elaboration in this case was only the Government itself, and not the agencies, (which is far from reality). It provided for the “chief executor,” who jointly with the Justice Ministry (authorised to co-ordinate the legislative activity of ministries and agencies) was responsible for the preparation of the draft law for consideration at a Government session. At the same time, the norm concerning the control of a profile deputy chairmen33, and particularly the Government apparatus, over the preparation of the draft law (albeit without any details) reflected the actual (and still existing) state of affairs. 4. The Decree of the Russian Government of April 15, 2000, #34 “On Improvement of the Legislative Activity of the Russian Federation Government” has replaced the mentioned 1994 Decree #733. The new Decree, signed by acting President Putin, spells out in greater detail the powers and duties of the Justice Ministry in co-ordinating the law-drafting process, and explicitly justifies the need to prepare and adopt a plan of legislative activity of the Government. 5. In keeping with the Decree, the Justice Ministry issued an order of January 10, 2001, #3/51, approving the Methodological Rules of Organising the Legislative Activity of the Federal Executive Authorities. Besides genuinely useful and rarely practised recommendations concerning the structure and obligatory components of a draft law, they reflect the order of preparing draft laws by authorised departments and interaction of the federal executive authorities with the parliament via special officials – deputy heads of an agency (state secretaries). The indicated normative acts and the methodological recommendation do not mention the actual mutual co-ordination of bills (draft laws), whereas they often play a crucial role in preparing a draft law. The “necessary co-ordinations” are mentioned, but no explicit list of them is attached. Presumably, it could be “co-executors,” but even this is not obvious from the texts of the Decrees. The special reference contained in all documents concerning the inadmissibility of submitting to the chambers of documents without prior co-ordination with the state secretaries and Authorised Government Representatives in the Chambers of the Federal Assembly, reflects a genuine acute problem of multiplicity of interests of any agency, starting form a non-influential state committee or federal service (having a lower status compared to a ministry), to the Presidential Administration. In other words, the problem lies in the existence of autonomous uncoordinated interests (at least within the frames of the given agency, not to mention the Government). In strict compliance with the theory, individual and group interests prevail over the considerations of loyalty, as soon as the opportunity of rent-seeking emerges, not involving considerable risks34. The existence of such groups of interests and problems related to them has been frequently mentioned at the Government sessions by former Prime Minister Chernomyrdin, who threatened to expel from the cabinet everyone who would try to pursue an independent policy in the Duma, different from the Government position. However, according to the available data, not a single minister has left the post directly in connection with an accusation of disloyal promotion of draft laws, profitable to his agency or group, despite the cabinet position. As a result, as is justly indicated in the preamble to the latest and currently acting Decree of 2000: “The draft laws submitted to the Russian Federation Government by the federal executive authorities are often poorly prepared, are not based on thorough inventory of the acting normative legal acts, and are not duly co-ordinated. There are cases of lobbying narrow departmental interests; the order of planning the legislative activity of the Russian Federation Government requires further improvement.”35

33 In accordance with the division of responsibilities between Chairman of the Government and his deputies, approved by decision of the Premier; the last such document was signed on February 23, 2002 – see http://www.strana.ru/stories/02/02/18/2510/115585.html 34 See R.Tollison (1982)“Rent seeking: A Survey”// Kyklos 35 (#4): 575-602; A.Krueger (1974) The political economy of the rent-seeking society, initially – American Economic Review 64 (#3, June): 291-303 21 Governmental legislative activity plan adoption should prevent independent and even contradicting bills submission by various ministries. However, the situation has not changed. Among the possible explanations – the free press, having strong incentives to highlight governmental mistakes and failures, had been decaying since 2000. Similarly, the political opposition having the same incentives is still not strong enough to substitute free press weakness. Another reason is the fact that the process is closed for control by independent experts, capable of criticising overtly inadequate proposals before they reach the Duma “voting machine.” The Justice Ministry and the Ministries of Economic Development and Finance, that have a certain number of highly qualified experts on their staff, are physically unable to follow the entire current of the departmental legislative activity and reveal even the most striking contradictions. Apparently, this is exactly what caused the emergence of the so far unsupported proposals, discussed in early 2000, on a total ban on departmental lawmaking. Perhaps, a ban on departmental initiative and the possibility of participating in the preparation and co-ordination of draft laws only and exclusively on special decision of the Government could become a compromise solution. Moreover, the number of agencies enjoying the right to participation and co-ordination should be closely restricted.36 It seems that the adoption of a law on the procedure of drafting normative acts (not only the laws) by the federal executive authority, including restrictions on such activity, the order of co-ordination, obligatory nature and the procedure of assessment of the economic consequences of adopting a law (normative act), as well as the procedure of publication (public expertise) of a draft, would enable to considerably raise the efficiency of legislative activity of the Government. Box : Proposals for improvement of administrative procedures applicable to the government A thoroughly prepared draft law has been submitted to the Duma (by MP V.V. Pokhmelkin) bearing on “Administrative Procedures.” So far no signs have been detected suggesting that the draft law would be supported either by the government or by its loyal factions. It appears that the basic tenet of any procedural limitations to the activity of the government authorities and its officers must be the general restrictive principle applicable to the authorities and their officers (anything that is not explicitly prescribed is prohibited), which is not to be found explicitly either in the Constitution or in any civil service laws. This work was conducted absolutely independently from the governmental “deregulation” package, although the spirit and objective of this document coincides with the first, most radical versions of the governmental draft laws. However, it does not cover the procedure of inner state interaction (relations between agencies, federal relations, and the order of preparation of normative acts). It regulates different stages of consideration and settlement of administrative cases: the filing and acceptance of applications, preparation of a case for consideration, holding an administrative session, adoption of decisions, revision of decisions if contested, execution of decisions – everything concerning the relationships of the executive authorities with private citizens. The Draft contains the clause on inadmissibility of adoption and employment of normative legal acts deteriorating the position of citizens and organisations in comparison to the present Law. It stipulates that by-laws can be adopted only in cases directly envisioned by laws. Concrete criteria of inconsistency of normative acts of different legal force have also been specified.

35 The acuteness of the problem is confirmed by the adoption of the Law “On Quality and Safety of Food Products,” drafted, adopted and signed already in the period of beginning of discussions on the need for economic deregulation (January 2000). Meanwhile, the decrees issued in keeping with the Law and considerably increasing the possibilities of discrete regulation, have been adopted already in December 2000, when all discussions have been long completed and the Government was broadly advertising new deregulatory approaches. 36 The costs of decision-making increase exponentially when number of participants increases linearly – see J.Buchanan, G.Tallok (“Calculus of Consent”) and M.Olson (“Logic of collective action”). Every citizen enjoys right to petition the government and propose amendment to bills, if they are made public, so everybody could participate, but very few could block the process if they opposed the bill’s main ideas. Alternative is – growing Government’s incapacity to act in due order, which one could observed in the Russia. 22 The Draft Law is based on the presumption of the applicant’s good faith and the principle of economising a citizen’s efforts. Administrative procedures should be arranged in such fashion so as to be of maximum convenience for the applicant, rather than for the officials who are supposed to consider the application. On this basis, the Bill fixes the provision relieving the applicant from the burden of proving the circumstances that can be established by the body considering the administrative case. The method of solving the problem of streamlining the acting normative acts with the new law envisioned by the Bill does not seem to be optimal. Experience shows that the most effective (although the most time-consuming) method of solving the problem is merely the listing of norms (with the indication of articles or even their parts), losing their force. This list should definitely remain open, and it ought to indicate the most important norms. This approach (article 91 of the Bill) is designated for an Anglo-Saxon, rather than a Soviet judge, the latter being still more typical for Russia.

3.2.1 Transparency and predictability The prevalent distribution of powers overall ensures a certain degree of transparency, primarily due to the disclosures to the members of parliaments of all levels at the time when laws are drafted, especially budgetary laws. The legal framework of transparency is based on paragraph 3, Article 15 of the Constitution of the Russian Federation37, and also on the 1994 law on publication “On the procedures for publication and putting into effect federal constitutional laws, federal laws, or acts by the chambers of the Federal Assembly,” No 5 – FZ, dated 25 May 1994. It refers to the constitutional ban of any unpublished rules. Courts have the right to request any documents, including governmental bills, drafts etc, deemed necessary. Failure to provide such documents at the request of the court creates criminal liability. A recent ruling of the military board of the Supreme Court on departmental instructions on state secrets introduced an important limitation to one of the areas where ministries and departments have been trying to circumvent the publicity and transparency requirement, i.e. arbitrary and unrestricted classification of documents. There are no norms regulating the order of publication of bills (draft laws), especially Government ones (as far as I am aware, both on the federal and the regional levels). There is only the above mentioned Federal Law “On the Order of Publication and Entering into Force of the Federal Constitutional Laws, Acts of the Federal Assembly Chambers.” Its appearance was connected with the constitutional demand to publish normative acts and the danger of recognising as invalid any laws and normative acts concerning personal rights, not published in the established order (part 3, article 15). Seldom, when some agency is interested in the publication of a bill, it hands the text over to journalists. The newspaper “Commersant” has often published such materials, especially in early 1990’s. The agency in question publishes this information itself much more rarely. During the discussion of the first package of laws on deregulation, their drafts were available on the Internet site of the Ministry of Economic Development and Trade. Such is the case when a draft can obviously gain public support and at the same time encounters strong opposition of other departments, especially if they are empowered to co-ordinate the project. However, this example also shows the scarcity of incentives towards the transparency of the process of preparing normative acts. A department can do it without external pressure only in anticipation of public support of its initiative. But this, too, is not always the case – without the existence of strict formal requirements to publication, such actions would inevitably be qualified by colleagues as a violation of the corporate ethics. Even the State Duma has no tradition of publishing bills, although the usefulness of such practice for individual deputies is evident: the overwhelming majority of bills submitted by them does not gain further support, which complicates their reporting to the electors in the future. So far, these ideas have been regarded merely as private initiatives of individual deputies. For example, at different times certain bills

37 “Laws are subject to official publication. No unpublished law can be applied. No regulatory legal acts bearing on the rights, freedoms and duties of individuals and citizens may be applied unless they have been officially made public for universal knowledge.” 23 were published on personal sites of deputies V.N.Bondar (State Duma) and D.I.Kataev (Moscow City Duma). Officials of the Finance Ministry and some other agencies privately voice the opinions concerning high efficiency of procedures of obligatory open publication not only of bills, but also the statistical data necessary for their preparation, analysis and qualified discussion (judicial statistics, statistics of collection of different forms of taxes38, execution of budgets at all levels, minimally modified to ensure commercial secret, etc.). However, unlike deputies, they not only cannot do it as a private initiative, but also hesitate to suggest such ideas to their superiors. So far, a positive moment in ensuring transparency is the spread of the practice of creation and support of Internet sites by various state institutions. As a rule, these sites can provide information on the legislation regulating certain activity, the necessary addresses and telephone numbers. Sometimes more detailed information is available, including some statistic data (Ministry of Finance, Ministry of Taxes and Dues, Ministry of Economic Development and Trade, the Supreme Court, the State Duma). A special section of the site of a commercial information agency (www.akdi.ru/gd/akdi.htm) publishes the bills that have passed at least the first reading.

3.2.2 Assessment of regulatory alternatives and impacts Until recently no regular analysis into the costs and alternatives of regulation has been made or planned. Only in 2001 was a decision taken to set up a commission of the Government on elimination of administrative barriers and assessment of budgetary efficiency. The commission is to make such analysis for the acts already approved or drafted (in the first turn, those drafted and proposed by the government), and develop proposals to cut costs of administrative regulation. The commission has set up working groups39, composed of public servants, academics and non-governmental organisations. Formal requirements (albeit quite poorly detailed) are contained in the Methodological Rules of Organising Legislative Activity of the Federal Executive Authorities, approved by the Order of the Justice Ministry of January 10, 2001, #3/51. Item 25 of the Rules suggests presenting in the explanatory note to the draft law “a forecast of socio-economic and other consequences of implementation of the draft law, and its place within the system of the acting legislation.” In practice, the “forecast” boils down to one, less frequently two paragraphs, containing general and rather optimistic appraisals of the consequences of adoption of the law, without any detailed justifications, not to mention calculations. The legislators’ requirements to a draft law are even more modest. Article 104 of the State Duma Regulations (item d) demands the presentation of a financial-economic specification (in the event of submission of a draft law, the implementation of which would require expenses). Practice shows the prevalence of extremely optimistic assessments (which is often a reason for negative conclusions on draft laws of the Government and the Duma committees). Only the bills on ratification (or termination or suspension) of international treaties (article 189, item c) require the “presentation of the possible financial-economic and other consequences.” The exclusive position of these acts is connected with the fact that item 4, article 15 of the Constitution not merely gives supreme legal power to the norms of international law and treaties, but also, indirectly, via item 1 of the same article, turns them into the norms of direct actions, which can actually be referred to in courts. Russia has not institutionalised the ex-post RIA. Ministries and Agencies who have primarily co- ordinated a bill preparation (i.e. agreed, by authorised representative – minister or his deputy’s visa) have no interest to investigate and broadly comment failures caused by the new Law inefficiency. It is another side of the coin of consensus (it’s the price for a broad concord between ministries and agencies on the stage of bill preliminary discussion).

3.3 A decade of revolutionary changes – major developments in the legal framework Most significant is the scope of change in the last decade of the 20th century. The key developments in the new rules underlying the relationship between the state and private individuals were the approval of the new Constitution, Civil Code, laws on competition, consumer protection and some others.

3838 Based on the US model. 39 Including: Status and prospects of systems, organizational structure, authorities and functions of the federal executive authorities in administrative regulation” “Application of various elements of state regulation vis-à-vis similar activities, and their substantiation.” 24 The Constitution proclaimed the priority of civil rights, including property rights, the freedom of entrepreneurship, basic rights and individual freedoms, over the rights and interests of the state. The Constitution is a direct-effect statute (for the first time in the Russian history). It is invoked in courts. The rules and law enforcement practices are disputed in the Constitutional Court. Applications of individuals to the Constitutional Courts proved successful (the Court ruled to abolish discriminatory practices in Moscow and Krasnodar Krai; ruled as unconstitutional some of the more obsolete rules of the Criminal Procedures Code). For a successful businessman, a remedy in the Constitutional Court, although so far an unacceptably long process, is quite affordable in terms of lawyers’ costs. Although the law “On ombudsman” was approved, this institution is still low-profile and inefficient. In the practical sense, its impact depends in a decisive manner on the ability to rely on non-governmental human rights organisations. The ombudsman’s own logistical and technical resources are meagre40. The Civil Code has introduced the notions of basic civil rights and procedures, borrowed from the European law. It has offered a possibility to accept business customs as law, defined the role of contracts, and put the state and private legal entity on par in most of business legal relations. 41 With the adoption, after the 1993 Constitution, of Part One of the Civil Code in 1994, and later in December 1995 of its Part Two, Russia received the framework for the radically new relations between the authorities and business. Since that time, hundreds of executive decisions by different levels of authorities are repealed annually as violating the Constitution or the Civil Code (1203, 1636 and 2016 successful actions in 1996, 1997, and 1998, respectively42), proving rather a high efficiency of the fundamental acts that offer effective remedies to private persons. Together with the Constitution, the Civil Code was instrumental in helping the government to fend off some of the more detrimental legislative moves of the legislature when it was dominated by left extremists. The Consumer Right Law, as was mentioned, was the first by the time of approval normative act to help stimulate emergence of non-government institutions to be called upon to support this law’s proper application and enforcement. At the same time, the competition law helped establish a relatively efficient, vertically integrated government service. The antimonopoly agency (first a committee, then a ministry) gained important positions, restraining provinces from anti-competitive regulations or enforcement practices; this agency’s efficiency at the federal level remained limited due to the strong pressure from the special interest groups and other ministries with a bigger clout (in decision-making). To streamline and properly define ownership rights, different, more transparent and universal mechanisms of privatisation were needed. Those were introduced with the Presidential Decrees of 1992, No 66 (tenders with a limited range of conditions), and No 721 (request for privatisation of a major enterprise by its chief executive officer) as well as some others. The concept of reform in the property relations is described in detail in the chapter “Privatisation” in the Program of promotion of economic reforms in Russia as approved by the RF Government in June 199243.

4 The administrative environment

4.1 Cultural origins of public administration

40 See the short overview of this institution's history under "Actors". 41 The 1961 Civil Code had some practical implications only for some type of disputes (inheritance, etc.). This act had no impact on the activities of economic agents or regulation of economic activities. The situation changed when, following the adoption of the Laws on State-Run Enterprises and On Cooperatives (Since the late 1920s, cooperatives were the first, quite legal form of private business), they also approved the USSR Fundamental Rules of Civil Legislation. The Fundamental Rules provided for the autonomy of enterprise managers from the directive- giving agencies (the institute of contract and contractual prices was gradually eroding price regulating, while the institute of “full administrative jurisdiction,” as a right to a practically unlimited disposal of the resources of an enterprise, paved the way to the process of spontaneous privatization of the state property through “friendly” (affiliated with the company management) cooperatives. 42 Courts statistics are published regularly in the journal “Rossiiskaya yustitsiya” 43 Moscow,"Respublika," 1992 25 The institute of full administrative jurisdiction was in fact designed for long-term evolutionary reforms. However, the socialist system, as Olson showed,44 could only be efficient as “a private enterprise of the General Secretary”, in which case what was needed was to ensure, with the help of the regularly reproduced massive repression, a high internal transparency of the “firm” for the manager, and ruling out “in-house” coalitions or special interest groups. Between 1956 and the onset of the reforms, the process of disintegration of such a “firm” already went rather far. The adoption of the above regulations constituted a legalisation, or formal recognition, of the break-up of the party and administrative elite that led to the subsequent revolutionary changes in 1991 - 1993. With the financial system collapsing, and a threat of famine getting real, radicalisation of reform of government administration became a must. Since, in the absence of a plausible threat of violence, direct directives are futile, there was no alternative to liberalisation. Parallel with the preparation for the economic reforms that would doom centralised planning in the economy which was managed through administrative price setting and planning, a relatively less palpable change in the structure of executive power took place. In the incumbent executive powers, there is a formal distinction in the status of government agencies. Ministries enjoy a higher status than state committees. At the same time, there is no need to attribute too much significance to those distinctions, since in the early 90s the real clout of the State Committee on State Property Management was immeasurably higher than that of its counterpart today. The chairman of that State Committee then (under the privatisation laws) had the status of a Vice-Premier. The true distinction in the status of various ministries is not so much in the formal attributes as in the personal influence of the ministers. Some exceptions are the Finance Ministry and the “presidential bloc” of ministries (defence ministry, ministry of interior (police), Foreign Affairs Ministry, Security Service, etc.). Today, of all ministries subordinate to the Prime Minister, the more influential, apart from the Finance Ministry, is the Ministry of Economic Development and Trade.

4.2 Possible problems in public administration In accordance with the Federal Law “On the Bases of State Service in the Russian Federation,” adopted on July 31, 1995, state officials are prohibited to receive profit from commercial activity. In accordance with the Presidential Decree of April 4, 1992, #361, a person appointed to a “leading state position” had to present a declaration of incomes and property. The Decree of May 15, 1997, #484 obliged all state officials to present additional annual declarations of incomes and property (on top of the ones filed by all citizens). These declarations are public (non-secret) documents. The then President himself (Boris Yeltsin) and the head of his administration (Anatoly Chubais) have handed their declarations over to the press for publication. The acting legislation on elections sets additional requirements to candidates to elective positions. As far as the latter are concerned, law practice has shown that control over the fulfilment of these norms is selective and creates the opportunities for manipulating the election process. The State Duma is currently considering amendments that propose to retain the formal requirements of declaring incomes and property, but at the same time strip the election commissions of the right to dismiss candidates for the violation of these requirements, and to seriously restrict the rights of the courts to dismiss candidates. The practice of declaration of incomes and property can be characterised as effective to a certain measure. The effect is directly proportionate to the efficiency of the media market (i.e. its openness, competitiveness, on condition of respect of the freedom of speech). For the same reasons, the efficiency of this norm in 1997-1999 was not high (the media market was oligopolic) and continued sliding during the past two years (as the state continued monopolising this market). Many entrepreneurs point to the increasing acuteness of the problems of appointments to the leading positions of persons who, due to lengthy service in a certain agency, maintain contacts with the corresponding groups representing special interests and act on support of these groups by commercial enterprises. Besides, there is not even a formal requirement (for example, the way it is with respect to the

44 Paper “Hidden path to prosperous economy” 26 heads of joint-stock companies) to declare their commercial interests (as well as the interests of their close relatives). Allegations have been voiced that the Ministry of Communications has issued a license to the cell communications company Megafon via a considerably more beneficial procedure than to any other company. The grounds for suspicion consist in the “technical” nature of the present government.45 In a certain measure, it consists of former employees of the Soviet ministries and agencies (like the present Minister of Communications, Defence, etc.), rather than politicians. It gives the state authorities undergoing such profound transformations the possibilities to resist reforms or offer the opportunities to individual persons for the redistribution of resources (markets) in their favour (thanks to the possibility for the ministry head to co-operate with groups representing special interests at a minimal cost due to long-standing personal contacts with their participants). At present, draft laws have been prepared (in particular, by the Union of Rightwing Forces), demanding that state officials should declare their commercial interests along with the incomes and property, starting at a certain level, but the date of their consideration by the State Duma has not been set yet. However, these draft laws do not solve a more fundamental problem – an almost inevitable conflict of interests (corporate-departmental and national) during the appointment of professional functionaries to top positions. The practice of developed nations, where the head of agency is, as a rule, a member of the team of the head of state (the Russian example – the Interior Minister Gryzlov and the new Defence Minister – Ivanov). Another aspect of raising the efficiency of management of the public sector is the reduction of its size. This process has slowed down in mid-90s. In the first half of 1990’s the space for gaps in state management rapidly curtailed along with the ongoing privatisation (which, albeit inefficient, due to the dispersal of control and lack of a responsible proprietor, lifted formal responsibility off the state for controlling tens of thousands of enterprises and facilities). As a result, the share of the state sector in incomes, expenses, and employment in Russia, according to the data of the International Bank for Reconstruction and Development,46 is comparatively smaller than in most countries with an economy in transition. Nevertheless, at the beginning of 2000 (according to the Centre for Strategic Research), there were still 14 thousand so-called “unitary enterprises” engaged in commercial activity listed in the federal register, and 23 thousand institutions. No explicit criteria of maintaining state control over certain entities have been elaborated. The acting legislation on privatisation does not contain any requirements restricting the rights of officials to randomly select the procedure and method of privatisation either, which creates the hazard of corruption. The traditionally low salaries of government officers (going back as far as the feudal tradition of “nursing grounds” – profitable offices, which ensured the officer income from the easily obtainable bribes) are believed by many to be the root cause of inefficient administration. There are, however, reasons to doubt that simply with a pay rise (even a substantial one), the officer would be discouraged to revise his behaviour strategies. Any time when the officer is given a broad and poorly formalised authority, the “nursing grounds” system will be reproduced no matter what the level of salaries is47. On the other hand, administration can be made more efficient with such incentives that relate to the presence of a traditional and deeply rooted institution of free election since it threatens low-efficient and

45 Many accusations have been addressed to the company MTS (in competitors’ opinion, affiliated with the Moscow Government and the St.Petersburg Administration). These accusations were indirectly confirmed with the aggressive expansion of this company in St.Petersburg with the establishment in the course of one year of a dumping (for the Russian market) price (within the range of 1-2 cents per one minute of conversation). So far, the complaints of the competition have had no effect. 46 See http://lnweb18.worldbank.org/eca/eca.nsf/General/D902E8CAF401B76E85256B410081DF03? OpenDocument 47 The debates on the pension reform illustrate the ongoing struggle for the redistribution of poorly formalized jurisdiction over major financial resources. Ideas to have pension funds invested through transparent private vehicles fail to gain unanimous support among either Pension Fund officers or government officials. 27 corrupted bureaucrats even if their corruption cannot be proved in court. No less important is the institution of free mass media that ensures transparency of the government machinery.

4.3 Conflicts of interests Standard-setting and compliance monitoring by the same body The administrative environment in the economy, shaped by the years of reform, appears to have a whole set of incentives encouraging bad-faith behaviour. It includes the widespread practice whereby adoption of regulations and their compliance supervision fall within the purview of one and the same authority (e.g., Gosstandard (State Standard-Setting Authority), Sanitary and Epidemiological Control in the Health Ministry, Construction Committee, and, finally, Ministry of Interior). Excessive and poorly formulated commissions (authority) Another problem here is poorly formulated and excessive authority. This could make an issue for any country, but, with more sophisticated public controls and mature democracy, incentives to abuse such excessive authority are substantially constrained by a threat to become exposed by a good reporter or a political rival. In young democracies, those checks are not that strong. Box : Supervisory authorities in the production and sales of goods or services Sanitary and Epidemiological Service of the Russian Federation; State Veterinary Service; Russian State Committee of Standardisation and Metrology (Gosstandard); State Bread Inspectorate under the RF Government; Russian State Inspectorate on trade, quality of goods and consumer rights; State Fire-fighting Service of the Russian Ministry of Interior; State Service for the protection of plants of the Russian Ministry of Agriculture; Federal Labour Inspectorate; Russian State Committee for construction, housing and communal utilities sector; Federal State Office “State Environmental Expert Evaluation.” Additionally, pursuant to the Law “On Militia,” police officers have the right to monitor compliance by enterprises and organisations of statutory rules and regulations, in any sphere of activities and virtually without any restrictions. Trade unions have the right to monitor operations of the enterprises where they have at least one member of the trade union in question. «Overlapping loyalty» to federal and regional authorities; This is still an important risk to businessmen because of the uncertainty of the relations between federal, regional and local authorities. It raises the issue of “joint jurisdiction and undefined loyalty of civil servants working in the regional offices of federal government - regional authorities still impact substantially the locally based employees of the federal bodies. Conflicts inside the powers-that-be: - between legislative and executive authorities - Until recently, an urgent and painful problem was a bitter conflict between the legislative and executive powers, which resulted, among other things, in the August crisis of 1998. - between regional and federal authorities; between regional and local authorities. There are outstanding conflicts between the federal centre and regional leaders who have formally moderated their ambitions48. - finally, an additional line of conflict lies in the relations inside the executive branch where the interests of “sectoral” ministries (traditional post-soviet control structures) and new (functional)

48 See also reference about new “Federal districts” 28 agencies clash with those of the Ministry of Finance or Ministry of Economic Development and Trade. (some sectoral/line ministries were abolished in 199249)

5 Co-ordination between levels of government

5.1 History and current situation The existing distribution of powers may be attributed to the history of political struggle in 1990 - 1996. Before August 1991 the USSR leadership was trying to manipulate constituents of the Russian Federation against Yeltsin’s government. Yeltsin, in turn, made a very generous offer to them: “Take as much of sovereignty as you can…” At the time of the stand-off between the President and the Congress of Deputies, regional leaders again found themselves at an advantage, and bargained with both sides. However, after the October 1993 events they started to show their true political weakness by publicly demonstrating their allegiance to the winner. However with the continued stand-off between the president and legislature, both the presidential administration and the government had to buy political loyalty from the more influential regional leaders. Quite naturally, immediately after the executive power gained control over the Duma it started to re- establish the control of the Centre over the regions. Moreover, it is surprising that this process goes on rather unhurriedly, and many regions continue to preserve their regulatory leverage in gross violation with the federal legislation (restrictions to the freedom of travel in Moscow and Krasnodar Krai; restrictions to the export of goods from the Krasnodar Krai and the Republic of Mordova, etc.).

5.2 Federal and regional bodies responsibilities in the bills preparation Under the Constitution (article 104), the legislative (representative) authorities of the Federation members enjoy the right of legislative initiative. According to the Duma by-laws and the existing practice, draft laws submitted for the next reading are forwarded to the Russian Federation subjects - to the regional legislatures (obligatorily only those that have submitted the bill). Practice shows that the chances for adoption of a Government bills are maximal (due to the institute of veto, such situation has shaped out since the times of the first Duma), whereas the chances of bills introduced by groups of deputies (individual deputies) are considerably lower, and the initiatives of the Federation subjects’ legislatures have the lowest prospects. It should be admitted, however, that the probability of adoption positively correlates with the average quality of preparation of each group of draft laws. The existing order of the Government legislative activity envisions taking into consideration the “proposals of the state authorities of the Russian Federation members” along with the proposals of the “state and other organisations,” during the preparation of plans of legislative activity. Therefore, the role of the regions in drafting the federal legislation is quite modest. However, until the recent campaign to inspect the compliance of the regional legislation to the Russian Constitution and the federal laws and a number of precedent-setting court decisions, the reverse influence (of the Federation on the regional legislative activity) was minimal. The President resorted to his right 50 to suspend the acts of the regional executive authorities quite seldom.

5.2.1 Current problems of excessive regulation in the regions Prospects for the regulations’ quality do not depend entirely on the federal government. By virtue of the existing distribution of powers and jurisdiction between the federation and its constituents, in certain areas the federal Centre cannot exercise direct regulation. The measures proposed by the federal Centre are intended to refine regulatory mechanisms at the regional level and must therefore take into account all possible limits to federal intervention. The most acute of all is the historically driven problem of conflicting regional and federal laws in areas of joint jurisdiction and even in areas that belong to the sphere of exclusive federal competence.

49 More than 100 sectoral ministries was abolished, for instance – Ministry for machine-tool and tool industry, Ministry for heavy machine-building, Ministry for gas industry, ministry for Medium-machine-building, Ministry for building material industry, Ministry for light industry, Ministry for electrical engineering industry, Ministry for electronic industry, Ministry for food industry, State committee for professional education, etc 50 In accordance Article 85, Section 2 of the Constitution of RF 29 Throughout 2000 - 2001 certain progress was made in the elimination of such phenomena (amendments were introduced to the Constitution of the Republic of Tuva, and the Charter of the City of Moscow). But despite certain improvement, the problem, after so many years, has not been fully resolved yet51. Avoiding, unless pressed very hard, any clashes between federal and regional powers, it would be reasonable to use a differential approach to different types of violations of the federal legislation. First group – any actions that clearly obstruct steady growth of the national economy. Those might include: - introduction of interregional barriers to import and export of goods; - introduction of interregional barriers to the movement of labour; - introduction of any regional or local taxes unless specifically allowed by the federal laws (Tax Code); - unlawful regulation of prices and trade mark-ups. Such decisions are made mostly by executive authorities from various tiers. Illegal internal customs barriers are established, as a rule, by Russian governors; unlawful taxes, by heads of municipal or district authorities. Occasionally such measures could be introduced by regional legislatures (which in most of the regions are controlled by the heads of the executive branch in the region 52). In any such case, in accordance with the legislation and interpretation by the Russian Constitutional Court, courts of the general jurisdiction may not rule to review such legislative acts, this being the privilege of the RF Constitutional Court itself. True, pursuant to a recent ruling by the Constitutional court, those courts of law may suspend such conflicting legislative acts. The President of Russia may neither abolish nor suspend legislative acts of the regional constituents. At the same time, the time needed to have such cases reviewed by the Constitutional Court is definitely beyond any reasonable limits and could run in years. Box : Most widespread examples of obstructive regional regulation The more widespread instances of such violations relate to the import of agricultural products or consumer goods from a region (Krasnodar Krai or Mordova), and bans on exports of liquor or beer from other regions. Regional charges are levied on the local firms and accumulated in a certain fund controlled by the regional administration; in other cases, regional businesses are required to purchase certain good, documents, etc. Such funds are known to have been established even by private individuals (Moscow, Kaliningrad Oblast, Tuva). In some regions they charge a fee for entering of a motor vehicle coming from another city (Novosibirsk, Altai). In over 40 Russian regions there are bans or individual restrictions to the movement of goods. More than 25 regions have introduced illegal taxes. Decrees by regional authorities may occasionally provide for regulation of more than 20 items of “vital goods.” Those lists would comprise such goods as liquor, mineral water or smoked salami. They issue decrees with non-definitive requirements to economic agents (e.g., requiring them to maintain “justified” prices), inviting arbitrary treatment and various sanctions. This is particularly common in the Krasnodar Krai, where one of the decrees by the governor prescribed businessmen to keep “copies of protocols of approval of their prices by consumers.” In separate cases certain decisions issued by the federal government allow local executive authorities to arbitrarily interpret their purpose, and assume inappropriate functions. For instance, invoking the need for public social security, the government issued the Resolution No 347, dated 29.03.1999, and with it initiated price regulation for medical goods. The level of wholesale price was restricted to the selling price that could not exceed the price identified in the state registry of prices for medical goods, and a wholesale mark-up whose value is the competence of regional authority. As a result, under the law, it was possible to limit the mark-up cap to 0%. Even a 5 - 10% mark-up is usually too small to cover the minimum costs, although such caps are quite commonplace. As shown by the

51 For more details on such barriers, see CEPRA paper by K. Yanovsky, S. Zhavoronkov, A. Majugi and D. Cherny “Political and economical problems in Russian regions,” IET, Moscow, 2001 52 Compare any Russian political media file for 1992-93 with actual situation – one can see very few contradictions or conflicts between executive and legislative powers in the Russian regions; see also Federal Electoral committee publications about regional legislature elections – “Regional legislature elections 1995-1997. Electoral statistics” Moscow, Ves Mir, 1998 – huge majority of elected deputies – executive power officials, managers of big plants, state (budget) employees – teachers, doctors etc – i.e. persons, dependent from the executive power leader. 30 comparison between the wholesale prices quoted by distributors and the selling prices for medical goods, those regions where the authorities decided against artificial restrictions, average wholesale prices for many medical drugs turn out to be even below the ones in the registrar, i.e. they are market- generated prices. Second group – such provisions of the regional legislation that contravene to the federal laws but are never applied in practice. Those are largely those provisions in the regional constitutions or charters that provide for the priority of the regional legislation over federal laws. Third group – actions which, to a varying degree, may be regarded as justified. Two scenarios are plausible here: - legislative or regulatory acts in the region were approved before any relevant federal law; and - federal legislation is inefficient, and regions have better laws.

5.2.2 Federal Districts The idea of federal districts was proposed by V.A.Mau, head of the Governmental Working Centre for Economic Reforms, in the period of elaboration of the so-called “Greff Programme.” The main objective of the proposal was, above all, to ease the dependence of the courts on the regional authorities, as well as to take the territorial branches of the federal ministries and agencies from under the same regional influence. In practice, the institution of representatives has become an additional element of management, hardly enhancing the efficiency of legal mechanisms and leading to the attainment of a single legal environment. In the Volga Federal District, for instance, certain steps have actually been taken towards the insurance of investors’ rights and removal of the regional barriers (albeit far from all of them 53), whereas in the Southern and Far Eastern Districts practically no measures have been taken. Moreover, the employees of the apparatus of the Representative in the Southern Federal District grossly violated the federal legislation in Ingushetia54. Barriers remained to the export of produce from Krasnodar Territory. The Presidential Representative in the Central District, who had initially demanded from the Moscow authorities to cancel the illegitimate norms restricting the freedom of movement, has publicly denied his demands afterwards and recognised his “error” (although the Constitutional Court had recognised this practice as illegal and banned it way back in 199655). The lower echelon of this mechanism – the “federal inspectors,” operating under the auspices of representatives on the territories of concrete regions, have simply replaced the Presidential Representatives – a body of regional management of the Presidential Administration, active in the period from 1991 to 1993 and gradually slackening their activity (with the exception of a short period in 1997) until 2000. The main achievement of the federal reform – the revision of the regional constitutions and laws, leading to the cancellation of many norms contradicting the Federal Constitution and laws, was conducted mainly by the forces of the Prosecutor General’s Office, rather than the Presidential Representatives. The functions of Representatives are defined only on the level of the Presidential Decree of May 13, 2000, #849 and the Statute on Plenipotentiary Representative of the President in the Federal District, approved by the aforementioned Decree. At the same time, the functions of ministries, agencies, and regions are established by the federal laws and the Constitution. Representatives and their apparatuses can exercise on strictly legal grounds only the functions of monitoring of the situation in the regions and influence the appointment of officials of the federal agencies. Depending on a number of factors (first and foremost, the availability of their own information sources on the situation, loyalty of various groups of officials), these functions can be either purely symbolic or quite weighty. Hence, the difference in the actual power and influence of representatives ought to be considered as a negative factor from the point of view of ensuring the unity of the legal environment and common legal order on the national territory56.

53 See Yanovsky, Zhavoronkov, and Others, 2001; Mau, Yanovsky, Zhavoronkov, 2002 54 See the archive of Radio Liberty programmes – “Elections-2002” for March-April 2001 55 See the Decree of the Constitutional Court of April 4, 1996, #9-P. 31 6 Selected regulatory issues

6.1 Reforming regulatory framework for key natural monopolies Pursuant to the Law “On natural monopolies” (Article 4), special monitoring is due in the following areas: the transportation of oil and petroleum products over trunk pipelines, transportation of gas over pipelines, services under transmission of electric and thermal energy, railroad transportation; services of transport terminals, ports, airports; services of the public tele- and mail communications. All inexplicitly named business agents (energy and electricity) (JSC “UES of Russia”), Telecom; Transport (Telecommunications Ministry and railway regulation under reform); financial sector (Securities Authority), other (gas and oil transportation), apart (so far) from railroad transport are public joint-stock companies with more (100% in oil pipelines (Transneft) or less (under 50% in Gasprom) weighty block of shares held by the state. Box : Primorie and California Efficiency of deregulation steps depends substantially on a comprehensive approach as partial measures may produce negative results. Recent energy crises in the Fareast Primorie and in California matched not in the scope of deregulation or liberalisation of the industry but rather in the crippled and controversial deregulation. In both instances all measures of liberalisation touched, to a bigger or lesser degree, the power generation but not its sales. Fixed tariffs for the end user generated shortages similar to chronic shortages of most commodities under socialism caused by fixed prices and prohibitively high costs to new entrants. The difference between the Russian Fareast and California lies in the fact that in the former case investments are precluded by the policies that are unfriendly to independent outside investors, as pursued by the administration of Governor Nazdratenko, and in the latter, by the position of the “green” administration of the State of California refusing to approve virtually any project for the construction of new power utilities. According to the Law “On Natural Monopolies,” article 4 of which spreads on the transportation of oil and oil products by pipe mainlines; the transportation of gas by pipelines; transmission of electric and thermal power; railway transportation; services of transport terminals, ports, and airports; services of the public electric and postal communications, the regulation is exercised by the “federal executive authorities in charge of regulation of natural monopolies.” Precisely this formulation enabled to fully hand control over the tariffs of the natural monopolies to the “United agency for Tariffs” - entity created on the basis of the Federal Energy Commission (i.e. to a specialised body) from the Ministry for Antimonopoly Policy, until recently retaining a formal right to influence tariffs on the federal level. Due to a special role of the aforementioned sectors of the Russian economy, particularly in export 57 (opening up an actual possibility to leave part of the incomes on accounts abroad, not controlled by the state), the activeness of groups of special interests in the sphere of control over the listed forms of activity is maximal. Special role on the market of electric power is played by the already mentioned power commissions – the federal and regional executive authorities, authorised to set tariffs in accordance with the Federal Law “On State Regulation of Tariffs on Electric and Thermal Power in the Russian Federation” of March 10, 1995. The Law not only pursued the goal of creating a system of bodies dictating prices, but also of providing all manufacturers of electric power, regardless of their form of property, with access to power transmission networks. It is important to note that the regional commissions until recently were practically fully independent from the Federal Energy Commission (which, according to certain estimates, has contributed to the power crises in Primorye). The appointment of chairmen of the regional commissions should be co-ordinated 56 For example, representatives Cherkesov (Northwestern District) and Latyshev (the Ural District), who have traditional connections with the special services, have never encountered overt opposition from the governors. The same cannot be said about S.V.Kirienko, who lives in a state of open conflict with the presidents of Tatarstan and Bashkiria. 57 The Russian export is prevailed by oil, oil products, gas, produce of ferrous and non-ferrous metallurgy, and some types of products of the chemical industry. Metallurgy, which is not a sphere of natural monopoly, is one of the main consumers of electric power. 32 with the federal commission, but until 2000 it was almost always a mere formality. Under the Law, commission members are state employees of a Federation member and are fully accountable to the regional authorities. Expenses on the maintenance of commissions are compensated from the assignments envisioned in the structure of prices (tariffs) of produce (services) of power supplying organisations in the order established, accordingly, by the Governments of the Russian Federation and the Russian Federation member. The role of RAO EES, RAO Gazprom, RAO Transneft, and the Ministry of Railways in regulation differs quite significantly. The former three economic entities are fully or partially under state control. They can exert a considerable influence on the customs (if not the rules) of business circulation. The latter organisation is empowered to create the norms within the sphere of its competence, control their implementation both by its own subordinates and by independent transporters and owners of the rolling stock. Moreover, the Ministry of Railroads is also a key participant of the market, which triggers conflict of interests. Key regulatory problems in this area are financial transparency of natural monopolies and reasonable restriction to government interference in pricing. At the present moment, in the current power struggle for decision-making influence, the success temporarily lies with the ministerial (sectoral) special interest groups. It is largely suggested by the actual withdrawal of the tariff regulation function from the jurisdiction of the Anti-Monopoly Ministry. Only some entrepreneurial unions can, with a certain reservation, be qualified as independent regulating organisations (in mid-1990: the Round-Table of the Russian Business; the Russian Union of Industrialists and Entrepreneurs; the Association of Private and Privatised Enterprises). The only real “regulation” they impose on their members is the informal ban on the use of overt violence against each other 58. Much less frequently and in cases involving more compact and less formal associations, there is an informal ban on employment of the authorities in the competition struggle. Specialised associations united by common lobbyist group interests and fearing to damage the corporate reputation (unions of insurers, participants in the stock market, realtors, valuators, publishers, etc.) are remote analogues of self-regulating organisations of developed countries.

6.2 Price regulation by the state As a legacy from the Soviet times there are numerous provisions in Russian laws that give various offices an opportunity to meddle in price setting. The Soviet legislation is well known to have had the notion of “state discipline of prices,” i.e. the state as the owner of the overwhelming mass of property was setting the price for the manufactured goods and services. Reselling goods produced by the government sector was treated as “speculation” punishable under criminal or administrative procedures. Free price-setting applied only to a limited range of goods the right to produce which the Soviet laws did not deny (e.g., agricultural goods produced at the backyard gardening plot). In late 1991 – early 1992 one of the first steps by the reformist government was to liberalise prices and trade rules: The RSFSR President’s decree of 15 November 1991, No 210, “On the elimination of restrictions to salaries and growth of assets used in consumption,” and the RSFSR President’s decree of 3 December 1991, No 297, “On measures to liberalise prices” effectively lifted any restrictions to wage increases or price setting at enterprises. However, state regulation was retained virtually for all types of energy and fuel, telecommunications and transportation services, communal services and many consumer goods such as bread, dairy products, sugar, salt, oil, vodka and spirits, matches, medicinal drugs, etc. Later, in 1992 – 1994 this list was shrinking, to be finalised in the President’s decree of 28 February 1995, No 221, “On measures to streamline state regulation of prices (tariffs),” implemented in the following resolutions by the RF Government: “On measures to streamline state regulation of prices (tariffs)”, dated 7 March 1995, No 239 (as amended by government resolutions of 08.02.96, No 131; of 15.04.96, No 473; of 31.07.96, No 915; of 30.06.97, No 773; of 30.07.98, No 865; and of 28.12.98, No 1559). Having acknowledged formally the need for further price liberalisation and maintenance of price regulation only for natural monopolies,

58 see Kiselev’s remark on “the history of adoption of the first commandment” in footnote 5 to section 1.2 33 Decree No 221 nevertheless instructed the RF Government to define the procedures for price regulation and the lists of goods and services whose prices were subject to state regulation. Pursuant to the above mentioned Government Resolution No 239 (as amended), federal executive authorities regulate prices for: - Natural gas, casing-head gas and residual stripped gas (except for such gas sold by gas producers that are not affiliated with Gasprom, Yakutgasprom, Norilskgasprom or Rosneft-Sakhalinmorneftgas, or sold to the public and housing construction co-operatives); casing-head gas sold to gas refineries for reprocessing; a broad fraction of light hydrocarbons, liquefied gas for household needs (except such gas sold to the general public) (as amended by the RF Government Resolution No 865, dated 30.07.98); - Products of the nuclear fuel cycle; - Electric energy and thermal power whose tariffs are regulated by the Federal Energy Commission; - Transportation of oil and petroleum products by trunk pipelines (as amended by the RF Government Resolution No 865, dated 30.07.98) - Defence products; - Unpolished diamonds and precious gems (as amended by the RF Government Resolution No 773 of 30.06.97); - Prosthesis and orthopaedic goods; - Freight of goods and cargo handling operations by railroad transport; - Conveyance of passengers, luggage, cargo and mail by railroad (with exception of commuter trains traffic); - Cargo handling operations at ports, port fees, passage fees collected from vessels flying foreign flags and going by domestic waterways; - Services of the ice-breaker fleet; - Air navigation services to aircraft in transit and over airfields; - Services to aircraft, passengers and cargo in airports; - Separate mail and electronic telecommunications services, broadcasting services by Russian state television and radio companies as defined in the list approved by the Russian Government; - Vodka, distillery and other alcohol goods over 28 percent proof produced within the Russian Federation or imported into the customs territory of the Russian Federation (pursuant to the RF Government Resolution No 131 of 08.02.96, as amended by RF Government resolution No 915 of 31.07.96). Executive authorities in the regional constituents of the federation regulate prices for: - Natural and liquefied gas sold to the general public and housing construction co-operatives (with exception of gas for motor vehicles); - Electric energy and thermal power whose tariffs are regulated by regional energy commissions; - Solid fuel, household heating oil and kerosene sold to the general public; - Passenger and cargo transportation by all types of public transport in the municipal traffic, including metro, and commuter traffic (except railroad); - Fees for housing and communal utilities services paid by the public; - Mortuary and undertaker services; - Water supply and sewage services; - Trade mark-up to prices for medicinal drugs and medical goods; - Social services rendered to the public of the Russian Federation by state and municipal social welfare agencies (pursuant to the RF Government Resolution No 473 of 15.04.96).

34 Executive authorities in the regions are not allowed to regulate prices through introduction of fixed prices, price caps, mark-ups, price variations caps, margin ceilings, or declaration of price increases for all types of production and technical goods, consumer goods and services (para 7 of the resolution). It would seem that price regulation in Russia is close to optimum: regulation applies to prices either for natural monopolies goods or to an extremely limited range of essential goods. However, practice points to the contrary. The reason lies largely in the arbitrariness of regional powers (more than 65 regions of Russia are exposed to illegal price regulation and in the overwhelming majority of them relevant acts are still in effect) as well as in the extremely confusing legislative and regulatory framework. As of today the Administrative Procedures Code is still operational in its Soviet version proclaiming as its mission “protection of the Soviet social order,” some 10 years after it disappeared. The Code (Articles 146.6, 150.2, 151) prescribes fines and confiscation of goods sold “at prices exceeding statutory retail prices” or in cases of “speculation.” Article 224.8 of the very same Administrative Procedures Code rules that cases of disruption of state discipline could be brought before “heads of the price controlling authorities” (no such positions to be found today) in the constituents of the federation. Despite everything, those provisions are quite effective and comply with Article 424, paragraph 1, of the Civil Code whereby price regulation may be introduced only subject to law. Regional authorities and police have been eagerly invoking such provisions to expose businesses to extortion. Box : Regulation of prices for alcohol Far from perfect are the measures stipulated by the above mentioned presidential decrees and the RF Government resolutions. It is particularly true for the regulation of prices for alcohol and medical products. Regulation of prices for alcoholic drinks over 28% proof is subject to the RF Government Resolution, No 131, of 8 February 1996, “On measures to ensure stable operations of the distillery industry.” For fiscal purposes, this document provides for the introduction of minimum prices for vodka and liquor. The right to set such minimum prices is given to the Ministry of Economy in co-ordination with the Russian Agricultural Products Ministry. It opens up room for arbitrary rule. It could be argued that if one is to stick to the idea of minimum prices, it would be reasonable to set such minimum prices for vodka and liquor with a separate law and denominate the price in the minimum statutory wage and salary.

35 … and medicines. Even more deplorable is the state of things on the medical products market. Under the RF Government resolution, No 347, of 29 March 1999, “On measures of statutory control of prices for medical goods,” it is required to agree the price not only with the Ministry of Economy and Healthcare Ministry, but additionally regional powers are given the discretion to introduce mark-up caps for medical goods. The level of this mark-up cap is not regulated. The mark-up cap could be quite legally set up at 0.001%. The resolution touches upon medical drugs from the list of “vital drugs,” which is composed of hundreds of medical drugs, let alone their pharmaceutical analogues, and as such is practically all-embracing. This resolution was legalised by the federal law “On medical products,” dated 22 June 1998, No 86-FZ. Article 5, para 5, of the law mentions “state regulation of prices,” but stops short of indicating where it is applicable. Article 424, paragraph 1, of the Russian Civil Code prescribes that state price regulation applies only in cases stipulated by law. Therefore any other instructions to economic agents, unless compliant with the legislation, may not be fulfilled. However, as it follows from the above, this legislation fails to regulate price issues directly, and leaves that instead to the regulatory acts.

6.3 Lowering administrative barriers A first package of regulatory reform laws had mostly a positive impression on the business community, although many had expected more from it. Only one law – “On registration,” could pass through the Government and the Duma without serious changes for the worse. The Federal law “On Registration” which came into effect in August was predetermined already by the Civil Code, Part One, that made a reference to such act. The basic concept of the law is the implementation of the principle of the “single window” registration of legal entities by notification, given higher liability of the founders for the disclosed information. Despite the opposition of a number of agencies, it did not prove hard to toughen (by reducing) the registration time period eliminating fully any checks of the compliance by the constituent documents to the effective legislation (the more so as such documents have long been produced to model samples, and their compliance is in the vested interests of the founders or, at the very least, their long-term partners, if any). Approval of the Land Code opens up the way (albeit a long one) to gradual clarification of relations in real property in cities (agricultural lands have just been “set free” but not to foreigners). The Code limits opportunities for any arbitrary investment decision-making, particularly, if the investor has the title to the land plot (and thus his rights and duties are specified not in his contract with the authorities, which offers only formal equality to the parties, but in the law). What is still an open issue is the multiplicity of required approvals for investment projects 59. Amendments have been drafted to the investment law introducing the “single window” principle for project approval. A concept of another bill has been prepared (coupled with the amendments to the investment law), describing in detail the approval procedure and providing for the “privatisation” of this activity. The activity itself is strictly defined in the time given to checks and in the liability of the inspector for any damage. Project compliance with various constructions, sanitary and other standards could be checked better by commercial examination entities for a standard fee. The state then would have only to monitor the standards applicable to such commercial entities, and maintain the system of regulations. The Federal law “On licensing of separate types of activities,” No 158, before it was amended in August 2001, listed as subject to licensing 215 types of activities, “and also other types of activities whose licensing is prescribed by other federal laws made effective prior to the effective date of this Federal Law.” In parallel, there were about a hundred effective legislative acts introducing licensing for specific types of activities. In addition, the provision of this law bearing on the non-applicability of the licensing procedures provided therein, to the licensing procedures of specific types of activities whose licensing is prescribed by other federal laws made effective prior to the effective date of this Federal Law, contradicts the principle of universality of licensing procedures throughout the Russian Federation and hence the principle of uniformity of government licensing policies. There are currently over 30 federal laws which, with a

59 See Annexes for more details on investment project approvals 36 varying degree of detail, prescribe either licensing procedures, or give the right thereto to relevant ministries and agencies. As a result, licensing affected minimum 500 types of activities. In reality, the number of types subject to licensing (including instances lacking legislative grounds) was close to 2000.Occasionally one and the same type of activity would require several licensing drawn from different departments of one and the same agency at different levels (federal, regional or municipal). Still another trick that helps swell the range of licensing is “interpretation,” “qualification and specification” of the notion of this or other activity subject to licensing under law. Each type of activity should be specified in a list of definitive services whose attributes could be sought and found even in such industries that have nothing to do with the licensed activity. As a result, instead of one type of licensed activity they issue licenses to dozens60. The specification of types of activities is introduced, as a rule, by departmental regulatory acts. Given the resulting expansion of the number of licensed types of activities it is virtually impossible to effectively monitor businesses’ compliance with the requirements of the legislation and good-faith business rules while executive authorities tend to focus primarily on business restrictions instead of its promotion. Effective control over the huge list of licensed activities require considerable investment in the ever growing personnel of the licensors, in qualified expert examination at the time of licensing and during the subsequent post-licensing monitoring. Only random checks would then be realistic, which is a strong encouragement for an opportunistic behaviour, since the bureaucrat gets the discretion to decide who should be exposed to purely formal checks and who would get the full treatment. The licensing fee, as well as the tendency to support licensing agencies with the fee payments helps turn licensing into a source of additional income gains and revenues for regional and institutional budgets. They set up various sectoral or regional licensing, examination and other centres that accumulate most of the fees paid up by applicant licensees who are obliged to apply for licenses through such centres. Decisions establishing such centres are passed by sectoral regulatory acts or by resolutions of regional and local administrations. The fee applicable to a license may grow substantially as a result of arbitrary expansion of the list of documents required to produce to apply for a license, which includes a variety of opinions from inspectorates, supervisory and regulatory agencies. This is supported by the analysis of numerous resolutions by the Russian Government bearing on licensing. As a result, each opinion from the relevant supervisory authority that is funded from the relevant budget and obligated to perform work for free is offered to an applicant firm as a paid-for service. Pursuant to the Federal Law “On licensing of specific types of activities,” any “decree by the President of the Russian Federation, and resolution by the Government of the Russian Federation which regulate licensing procedures applicable to specific types of activities performed in the Russian Federation shall be implemented to the extent in which they do not contract the given Federal Law.” In practice, in a number of cases regulatory legal acts rely on the old rules whereas their compliance with the Federal Law has never been tested. Any drawback found at the federal level filters through to the regional level. It is the regional level that is responsible for regulatory acts introducing licensing for the ever growing number of businesses without any legal grounds. Not infrequently some of the terminated licensing gives way to other forms of permissive practices. Local charges levies on retail firms, issuance of certificates of attestation to companies offering their services to households, retailing or catering businesses in actual fact substitute for their licensing. Licensing continues to go unregulated at the municipal level. In some cases regional authorities try to preclude illegitimate licenses or arbitrary licensing procedures while encourage them in other. Interest groups have demonstrated their power lobbying against amendments to the licensing law even before it was introduced by the government to the Duma. Thus, for instance, they failed to implement the principle of “a single law” and a single licensing procedure covering all. The licensees’ list has retained a 60 E.g., pursuant to the order of the RF President “On approval of the Rules and Regulation of the State Committee for Supervision over nuclear and radiation safety under the President of the Russian Federation,” the list of activities that can be performed only if licensed by the State Nuclear Safety Committee shows 11 items. But the actual number of licenses issued by this agency can be as many as 400. 37 significant number of types of activities for which additional supervision cannot be attributed to consumer interests (e.g. publishing business). A new version of the law “On licensing of certain types of activities” failed to resolve the key outstanding issues: radical reduction of the licensed activities to a few dozen that would meet clear-cut criteria (presence of obvious and immediate threat to the consumer posed by possible bad-faith action by a manufacturer or seller of the good or service, in the absence of effective alternative system of checks or possibilities to ensure the required quality and safety standards). As a result, the list has retained over a hundred of different activities. It was also expected that the new version of the law would eliminate any references to other laws, and would make the licensing control procedure universal. This did not happen: quite a few number (over 15) licensed activities remained unformulated (including control over electronic mass media). Some of the licensed activities are poorly specified (operation of explosive production facilities; operation of fire-risk production facilities; operation of chemically hazardous production facilities), and allow for implementing acts to expand licensing procedures to dozens and hundreds of new types of activities. Some of the listed activities are very hard to monitor, making them a breeding ground for abuse by the police (“commercial services of passenger conveyance by passenger motor cars”). Similar issues concern the law “On the protection of rights of legal entities and individual entrepreneurs exposed to the state control procedures.” Fourteen types of inspections were left out from the effective law. Thus, certain monitoring activities by the licensing authorities, police and tax agency have remained poorly formulated or not formulated at all.

6.4 SME policy Although undertaken regularly by federal or regional authorities, or even local government, no attempts have so far succeeded to make small and medium business more attractive. As an interim measure, they have been discussing recognising SMEs as an exclusively social function (better competition and lower unemployment) and eliminating them as a source of tax revenues. More frequently, however, government policies are limited to the distribution of individual benefits (cheap loans, cheaper rents, etc.) subject to individual or group arrangements (e.g., within the framework of the Law “On artisanship in the City of Moscow”, which was drafted expressly for the purpose of a campaign in support of a small group of business activists, which was not formally closed but succeeded in obtaining one-time privileges before this law, providing for no specific obligations either for the businesses or for the authorities, became a mere declaration). SMEs support funds of all sorts stayed in the midst of corruption scandals until most of them ceased to exist. Any attempts to support small business (or “domestic producer,” for that matter), or to “attract big foreign investors,” instead of trying to set up a framework of stable, transparent and attractive business rules, would hardly produce any positive results (unless one focuses on representatives of special interest groups).

7 Conclusions

7.1 General assessment of current strengths and weaknesses Basic achievements or failures of reforms in regulation relate not so much to technical results (improved legislation, refined jurisdiction, reduced regulatory burden) as to success or failures in the establishment of key open society institutions and to the reliability of basic rights (personal immunities, property rights, transparency of decision-making by the authorities, mechanisms of democratic oversight by the taxpayer over tax collection and budgetary expenditures). The main reason for the limited effectiveness of all recent attempts to achieve a breakthrough in the improvement of the investment climate lies exactly in the fact that useful but secondary, ancillary institutions (improved procedures for the harmonisation of interests between business community and authorities) were being constructed in isolation from the establishment and strengthening of basic institutions, which instead of getting stronger since 1999 show many signs of exposure to erosion. Power is becoming increasingly less transparent. There is an obvious tendency towards an increase of primitive

38 centralisation to the detriment of this transparency (for instance, the ability of the central authorities to almost demonstratively interfere with the regional procedures and political election campaigns beyond the legislative frameworks leads, above all, to the weakening of subordination of the authorities to the electors, lowering of the role of independent mass media in their daily control over the quality of state regulation). Confidence of businesses in the reliable and efficient laws and enforcement, and in the adequate response of the law enforcement authorities, sets the stage for the efficiency of all those measures that are termed “deregulation” and “de-bureaucratisation.” Investors tend to be attracted more to those countries that have retained barriers set up by the overly strict legislation (tax, environment, social, etc.) than to countries with formally liberal taxation and minimal formal obstacles to new entrants but with weak guarantees to personal safety and hence to the entire set of private property rights. This means that businessmen’s demand for these institutions is much higher, as are their implications for a more favourable investment climate, than for such institutions as business registration, licensing, investment approvals, inspections and checks, etc., related to the current system of regulation by the state in Russia. Essentially, the deregulation process is inseparable from the establishment of a regular law and order, secured guarantees of individual rights and property titles. Individual rights are inseparable from guarantees of property title. Unless individual safety is guaranteed, property title looses much of its value. Freedoms of speech and information, in turn, are important safeguards to the entire set of individual rights. Besides, a free and independent (or, at the very least, facing bitter competition) press ensures the necessary degree of transparency of government agencies and enterprises as well as major businesses, such as banks and public companies, which is required to safeguard the rights of shareholders and investors. In the absence of these general conditions, no measures to deregulate could produce a desired effect.

7.2 The dynamic view: the pace and direction of change There is currently no need for super-quick reforms. It would do to implement the judiciary reform, having reinstated fully the guarantees to the independence of judges, and to put in place the legal and economic framework for the independence of mass media and competitiveness of media market, and the emergence of basic institutions would become gradual but autonomous. Reforming regulation per se is desirable and possible. Some of the areas of such reforms are delineated below. However, even with a considerable slowdown in the pace of these reforms, there is no stopping to the emergence of efficient and duplicating non-governmental institutions. The efficiency of regulation would thus be growing. The potential for such regulatory reform in Russia independent of the government is far from being exhausted. The main achievement of the previous period of reform (including regulatory reform) is the remaining multiple future scenarios. It appears, in a more general overview, two options are possible: One option is the policy of “a guided reform of the guided economy under the conditions of the guided democracy.” The other one is establishment of institutions of a competitive market and competitive political system. If the first scenario wins, there will be more political stability in the mid-term perspective, and a possibility to implement some major projects with state involvement (e.g., in the mineral resources area). The choice of the second scenario is likely to comprise substantial winnings from the first scenario. Additionally, it would guarantee a long-term economic growth and further improvements in the mechanism of state (or alternative?) regulation, with minimum costs involved. Local self-government has a lot of room for the improvements in regulation. It mostly lies in the more effective administration of real property where the applicable taxes constitute a basis for own revenues. Another area is in the achievement of an arrangement with the federal level for the redistribution of either responsibility (delegation from the local government to the regions or to the federal centre) or additional financial resources, if not on a continuous, then at least on a long-term basis.

7.3 Future challenges

39 In the mid-term perspective (2002 - 2004) it would seem appropriate to stimulate regulation of market processes by non-governmental institutions (reinforcing the role of self-regulating agents of the market; amending procedural laws to allow for class actions, or actions on behalf of a non-definitive group). For the regulation by state, it would seem feasible to phase out excessive forms of direct control, particularly where they may incur substantial costs and/or its positive effects are not obvious. A case in question is sanitary standards that run in tens of thousands; construction rules, fire safety, environmental or labour safety rules, etc61. Similar issues are outstanding in the area of efficient administration of standards for goods quality and safety. Such control systems based exclusively on governmental institutions fail to ensure customer an acceptable level of quality and safety, and instead put up barriers to businesses. A better way would be to have a reasonable combination of an indirect supervision by the state and the involvement of non-profit and commercial laboratories doing quality assurance or non-governmental product certification or check compliance of project documentation with the effective rules and standards. With time, some non- governmental inspections could be set up to inspect compliance of various operations with sanitary and environmental standards or other safety standards. Similar control systems are widespread on the financial markets acting in the interests of shareholders and investors (a network of independent auditors), and prove to be at least as reliable and functional as the government officers or controllers. In all developed countries as in Russia consumer societies are quite competitive to the state consumer authorities for the consumer protection. This is something that well-established businesses are interested in. They objectively need stricter systems of public control to emphasise their own competitive advantages. The solution in question would rely on a legal framework for the mechanisms of market oversight based on civil institutions, which would comprise a draft law “On standardisation and compliance attestation,” “On self-regulating organisations,” “On amendments to the Federal Law “On consumer rights protection,” and “On amendments to the Criminal Code of the Russian Federation.” To discourage bad-faith behaviour by civil servants, and provide a level ground for business, it would seem appropriate to improve laws relating to state appropriations making this procedure algorithmic and based on one sole numerical criterion for the choice of a winner. And finally a set of legislative measures is needed to cut individual costs to consumers or owners of housing striving to exercise their rights to favourable environment, and to timely and accurate information about the quality of good and services. The efficiency of measures as resulting from a lower administrative burden on the economy (de- bureaucratisation of economy) would to a large measure depend on the degree of toughness and consistency, with which new legal rules would be introduced at the federal, regional or local levels and which, in turn, depend on the successes of administrative and judiciary reforms. In the absence of tangible progress in those areas, all measures to de-bureaucratise the economy, dependent on the activity of non-governmental entities and individuals to protect their own rights and legitimate interests, would yield but a rather limited effect.

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