The politics of Russian enterprise reform: Insiders, local governments, and the obstacles to restructuring

Russia and other countries in the Commonwealth of Independent States that h ave implemented voucher privatization programs have to account for the puzz ling behavior of insiders-manager-owners-who, in stripping assets from the firms they own, appear to be stealing from one pocket to fill the other. Th is article suggests that asset stripping and the absence of restructuring r esult from interactions between insiders and subnational governments in a p articular property rights regime, in which the ability to realize value is limited by uncertainty and illiquidity. As the central institutions that go vern the Russian economy have ceded their powers to the provinces, regional and local governments have imposed a variety of distortions on enterprises to protect local employment. To disentangle these vicious circles of control, this articles considers th ree sets of institutional changes: adjustments to the system of fiscal fede ralism by which subnational governments would be allowed to retain tax reve nues generated locally: legal improvements in the protection of property ri ghts; and the provision of mechanisms for restructuring and ownership trans formation in insider-dominated firms. The aim of these reforms would be to change the incentives that local governments, owners, and investors face; t o convince subnational governments that a more sustainable way of protectin g employment lies in protecting local investment, to raise the cost of thef t and corruption by insiders and local officials; and to allow investors to acquire controlling stakes in viable firms.