In Discussion Paper No. 1174, Christian de Boissieu, Programme Director Daniel Cohen and Gaël de Pontibrand examine the behaviour of Russian enterprises during the transition to a market economy, in order to reach some conclusions concerning economic policy at this stage of the transition. The widespread lifting of price controls, effective from January 1992, represented a critical stage of the transition. It was accompanied by a wave of privatization and more or less successful structural reforms intended to pave the way for the implementation of monetary and budget policies that would help stabilize the economy.

In order to analyse from `inside' the reality of this process of transformation, the authors conducted live interviews over two years on a sample of over 100 firms, half based in the Moscow region and half in four other regions – St Petersburg, Volgograd, Novosibirsk and Yekaterinburg. They reached a number of simple, yet fairly far-reaching conclusions. Following the inter-enterprise debt crisis of 1992, most firms have switched to a `pay-in-advance' system, which pushed firms into a `hard budget constraint' economy, far away from what they were used to. As a result the pressure to diversify suppliers, customers and products has been very strong. Wage earners have normally played the role of `residual claimants', unpaid in harsh times and benefiting from luck or good management of their firms when things go well. This is not related to the shareholder structure of the firms but to the poor functioning of the labour markets. The structure of bank portfolios is essentially junk, and it must be feared that a stabilization of the inflation rate will bring a collapse of many insolvent banks.

Russian Enterprises in Transition
Christian de Boissieu, Daniel Cohen and Gaël de Pontibrand

Discussion Paper No. 1174, April 1995 (IM)