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Abstract:
Foreign Direct Investment into Russia has been low in comparison to other transition economies. We surveyed almost 50 European enterprises that conduct business in Russia and asked about the reasons behind their presence here and about the main problems they have encountered.

Our survey shows that the most pressing problem foreign direct investors in Russia face is connected neither with criminality, nor corruption, but simply an inadequate and ever changing tax law. Next in line come problems with property and creditor rights, customs, the risk of political change, macroeconomic instability, a weak banking sector, the Russian accounting system, and only then corruption. The risk of expropriation, harassment from federal and local government, and payment arrears from clients are considered to be of only medium-level importance. Finally, problems with the Russian workforce or management, Russian suppliers, crime, racket and barter are seen as being of moderate significance.

Russia, transition, FDI, foreign direct investment

Abstract:
The paper provides an overview of the course of economic reform and the performance of the Russian economy since the early 1990s and an analysis of the structural reform challenges ahead. It assesses the contribution of institutional and structural reforms to economic performance over the period, before turning to the question of where further structural reforms could make the biggest contribution to improved performance. Three major conclusions emerge. First, there is still a great deal to be done to strengthen the basic institutions of the market economy. While the Russian authorities have embarked on some impressive - and often technically complex - "second-generation" reforms, many "first-generation" reforms have yet to be completed. Secondly, the central challenges of Russia's second decade of reform are primarily concerned with reforming state institutions. Thirdly, the pursuit of reforms across a broad front could enable Russia to profit from complementarities that exist among various strands of reform.

Russia, economy, reform, growth, stabilisation, transparency, corruption, state ownership, competition, transition

Abstract:
This article investigates issues related to industrial restructuring in Russia. Based on extensive sectoral data it examines, more particularly, levels and changes in labour productivity, unit labour costs and revealed comparative advantages for a large number of Russian industrial sectors. The main findings are the following. First, impressive increases in labour productivity have been achieved since 1997, especially during the post-crisis period. Secondly, this has been true for all major sectors, with the exception of those which are still predominantly state controlled or which suffer from strong state interference. Thirdly, there have been significant relative adjustments within the industrial sector, as labour productivity increased more in less productive sectors. Since the crisis, relative unit labour costs have also adjusted considerably, as less competitive sectors experienced relatively slower wage growth and larger labour force reductions. Fourthly, international competitiveness - as measured by revealed comparative advantage - remains limited to a small number of sectors that mainly produce primary commodities (particularly hydrocarbons) and energy intensive basic goods. And, finally, there has been a tendency for further specialisation in resource based exports in recent years.

Russia, transition, industry, sector, productivity, competitiveness, revealed comparative advantage, RCA, restructuring, unit labour costs, wages, private sector, state control

Abstract:
The gas industry is perhaps Russia's least reformed major sector. Prices are regulated, exports are monopolised and the domestic market is dominated by a state-controlled, vertically integrated monopolist, OAO Gazprom. Gazprom combines commercial and regulatory functions, and maintains tight control over the sector's infrastructure and over information flows within it. The sector as it is currently constituted is highly unlikely to be able to sustain sufficient output growth to satisfy both rising export commitments and domestic demand. There is significant potential for accelerating the growth of non-Gazprom production and making gas supply in Russia more competitive, but this will require fundamental reform. The proposals for reform advanced in the paper address two sets of issues. First, there is an urgent need to increase transparency in the sector and transfer many of the regulatory functions now performed by Gazprom to state bodies. Secondly, there is a longer-term need for a considerable degree of unbundling of Gazprom. In particular, it would be desirable to remove control of the sector's transport infrastructure from the company and to revise the arrangements governing gas exports to non-CIS states, which are currently monopolised by Gazprom. At the same time, recent increases in domestic gas tariffs must continue until internal gas prices rise above full, long-term cost-recovery levels.

Russia, economy, natural gas, infrastructure, pipelines, monopoly, competition, state ownership, Gazprom, subsidies, regulation, energy, exports, ring fence

Abstract:
In this paper we investigate the relationship between corruption, human capital, and the monitoring capacities of civil society, as proxied for example by press freedom and an independent judicial system. In a theoretical model we find the impact of education on corruption to depend on the capacities of civil society to oversee government officials. If those capacities are well developed, education decreases corruption, whereas it may lead to higher corruption if civil monitoring is low. We find empirical evidence to support this result for secondary and higher education. Furthermore we investigate the direct relation between corruption and press freedom. We find no evidence that corruption negatively affects press freedom. We find, however, strong empirical evidence that a lack of press freedom leads to higher levels of corruption. This implies that strengthening press freedom should be among the priorities in the fight against corruption.

Corruption, Political Economy, Press Freedom, Human Capital

Abstract:
This paper provides an in depth analysis of Russia's recent growth, with a view to understanding the prospects for its continuation. It examines in detail the main drivers of growth, as well as the main developments and policies that have been underlying it. A key finding is that the role of the oil sector, and particularly privately owned oil companies, has been vastly more important in driving economic growth since 2001 than most analyses have recognised. The oil sector's contribution to growth has hitherto been severely underestimated as official data do not account for transfer pricing and thus fail to reflect fully the importance of the hydrocarbon sector in the Russian economy. The paper further argues that prudent post-crisis fiscal policy, by balancing the federal budget over the oil-price cycle, has also been essential for creating a macroeconomic environment conducive to strong growth. Looking forward, it is argued that given its economic structure Russia is bound to remain a heavily resource dependent economy for some time to come. This reality largely defines the most important challenges facing Russian policy-makers as they seek to create a framework for sustained growth, with respect to both managing a resource-based economy successfully and facilitating economic diversification over time.

Russia, transition, economic growth, fiscal policy, monetary policy, real exchange rate, capital flight, natural resources, dutch disease, resource curse, oil, gas, property rights, diversification

Abstract:
This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances - the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether "macro-prudential" regulation could be useful.

interest rates, monetary policy, housing, sub-prime crisis, financial markets, macro-prudential regulation, Taylor rule, house prices, asset prices, financial imbalances, market turmoil, financial innovation

Abstract:
In recent years economists have come to see rich natural resource endowments as a "curse" or "precious bane" that inevitably undermines development and slows economic growth. Resource-based development undeniably involves important risks. Nonetheless, the resource curse - if it exists - is at least no fatalité, as the examples of Australia, Canada and the Scandinavian countries demonstrate. This paper argues that the serious challenges posed by resource-dependence, which include an increased vulnerability to external shocks, the risk of 'Dutch disease', and the risk of developing specific institutional pathologies, can be overcome, or at least very substantially mitigated, if accompanied by the right economic policies. It then analyses in detail what these "right" economic policies are, and how to set up economic and political framework conditions to facilitate their successful implementation. The paper thereafter looks specifically at Russia as a prominent example of a resource-based economy. It investigates briefly the main drivers of Russian growth in recent years, and makes specific recommendations that would help the Russian economy to sustain high growth.

Russia, transition, economic growth, natural resources, Dutch disease, resource curse, oil, diversification, fiscal policy, monetary policy, capital flight

Abstract:
Coverage of Russia in western newspapers leaves an overriding impression that the place is corrupt and doomed. Economists and pundits have focused on corruption, and the lack of the rule of law as the main causes of last year's crash. These structural problems definitely exist and they are indeed serious. But they also existed and were serious when the stock market was booming in 1996-1997 on the perceived success of Russian reforms. In fact, focus on these two problems neither explains the crash nor the real news of recent months - that production in Russia is steadily growing for the first time in a decade.

The reason for this turnaround is the collapse of the rouble, which freed industry from the uncompetitiveness of the former exchange rate. The August 17 debacle is turning out to be salvation of Russian industry.

The depression of Russia's heartland in 1995-1998 was largely caused by the very success of stabilisation. To bring down rampant inflation the exchange rate was pegged. As a result inflation was swiftly reduced in 1996 and consumption and financial booms in 1997 triggered a small growth blip, but industry sank further into its depressive mire.

While stock markets went from high to high the real economy was suffering from Russia's version of the Dutch Disease. The commodity-based export sector prospered, largely freed from the subsidisation role of Soviet times, but Russian manufacturing went from bad to worse. Companies made more losses and in order to survive they failed to pay tax, wage and supplier bills, and turned to barter. While corruption, tax avoidance and plain stealing by management were - and are - pervasive, they alone do not suffice to explain the growth of these virtual phenomena during the stabilisation period.

Post-crash, things are different. Federal tax revenues are up which has allowed the government to start paying off some of its outstanding arrears. In the private sector profits, cash-flow, and order book levels are up, while barter and wage arrears are down. With a competitive exchange rate the Russian economy is reviving for the first time in decades. Russia's transformation into a market economy, however flawed, is bearing some fruit.

Provided there is no fast real appreciation and no major political upheaval, there is nothing to suggest that the Russian economy will not keep on growing. But although denouncing corruption might help to foster positive change, blaming it for the crash (and for the West's loss of Russia) provides precious little insight. Straight exchange rate economics goes much further in explaining why Russia continued to decline after stabilising in 1995, and why it is growing now.

Russia, Transition, crisis, 1998, devaluation, growth, barter, arrears, non-payments, industry, competitiveness

Abstract:
Long-term bond yields have been low in recent years both in nominal and real terms, and - especially in the United States - they have reacted differently to shifts in monetary and fiscal stances relative to previous cycles. This article examines various possible explanations for this behaviour, such as the effects of changes in monetary policy frameworks on inflation and interest rate expectations; developments in ex ante saving-investment balances, and shifts in investors' portfolio preferences (including official reserve accumulation, "petro-dollar" recycling and pension fund demand for longer maturities). The paper finds that it is unlikely that any individual explanation can account for the level and profile of bond yields in recent years, but that an important element has been a compression in term premia, together with shifts in expected short rates. Even though bond yields have started to rise in the early part of 2006, they are unlikely to go back to the levels that prevailed in the 1980s or the early 1990s, as several of the factors that drove them lower are set to persist.

Interest rates, bond yields, term premia, risk premia, neutral rate, inflation expectations, monetary policy, credibility, saving-investment balance, capital flows, current account, pension funds, portfolio preferences, financial markets, bond spreads, reserve accumulation, petro-dollars

Abstract:
This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation "episodes", it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators - inflation, the exchange rate and unemployment - suggest a "crisis" situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued.

Fiscal adjustment, fiscal consolidation, fiscal policy, fiscal stance, monetary policy, monetary conditions, central bank, financial markets, interest rate, quality of fiscal adjustment, policy co-ordination

Abstract:
This paper provides an overview of the political economy of oil in the CIS. It briefly situates the region's oil sector potential in the global context, before analysing the structural features of the oil sectors by country. It examines the ways in which CIS oil industries have been organised and governed since 1991, as well as questions of transport infrastructure and export routes, which are especially critical for Central Asia's landlocked producers. The paper finally considers the causes and likely consequences of the recent shift towards greater state ownership and control in Russia and Kazakhstan, the region's most important oil producers. The paper's central argument is that these changes have increased the risk that the full hydrocarbon potential of the CIS may not be developed in a timely and economically efficient way.

CIS, Russia, Kazakhstan, Azerbaijan, Uzbekistan, Turkmenistan, Caspian, energy, oil, pipelines, political economy, growth, corruption, state ownership, pipelines, privatisation, property rights

Abstract:
This paper examines the development of Russian industry in comparison with that of Ukrainian industry during 1995-2004 in an effort to ascertain to what extent, if any, Russian manufacturing showed signs of succumbing to 'Dutch Disease'. Ukraine and Russia began the market transition with broadly similar institutions, industrial structures and levels of technology, and the economic reforms implemented in the two countries were also similar, although Ukraine was reckoned to lag behind Russia in many areas. The main difference between them is Russia's far greater resource wealth. It follows that differences in industrial development since 1991 may to some degree be attributable to differences in initial natural resource endowments. In short, Ukraine could provide a rough approximation of how a resource-poor Russia might have developed over the transition.

Russia, Ukraine, Dutch disease, natural resources, oil, gas, transition, industry

Abstract:
Over the last two decades, governments have most of the time granted -sometimes substantial - discounts when privatisating state assets. In average this discount has been higher under more right wing governments, and in more unequal countries. We present a simple political economy model of privatisation that can explain these main stylised facts of the recent privatisation experiences without having to rely on widespread "machiavellian" behaviour of governments. Moreover we investigate under which circumstances privatisation can proceed, and who will be the main beneficiaries. Finally we discuss the connection between privatisation and the efficiency of a country's tax system.

Privatisation, political economy, voting models, divided government, corruption, underpricing

Abstract:
Using a panel of 77 Russian regions from 1990-1998, we investigate the reasons behind largely differing regional growth performance. We consider politico-institutional characteristics, indicators of regional economic reform, and initial conditions (including economic, geographic and structural features).

Surprisingly, differences in institutional characteristics or economic reform explain relatively little of the observed difference in regional growth performance. For example, we find no evidence that a region's economic performance has been influenced by the political orientation of its leaders, or the political preferences of the population. In contrast, a region's initial industrial structure, and both its natural and human resource endowments had a large impact on its economic growth performance during the nineties.

Russia, growth, transition, political economy, regional economics

Abstract:
This article investigates the connection between the apparently uncorrelated issues of tax evasion and privatisation. We first determine how the political process - given a country's level of development and income distribution - will determine the efficiency of its tax system. We then regard how the efficiency of taxation impacts on the outcome of privatisation attempts. We consider under which condition privatisation will proceed, and who will be the political supporters as well as the main winners of the privatisation process. Moreover we investigate the impact of different forms of corruption both on the initial public support for privatisation, as well as its long term political sustainability.

Privatisation, Taxation, Political Economy, Corruption, Underpricing

Abstract:
This article uses extreme-bound-type analysis to revisit the determinants behind widely differing economic growth in Russian regions. Using data of 77 regions for 1993-2004, it separately examines the growth drivers for the phase of economic decline up to 1998, and for the period of strong growth afterwards. Looking at forty variables considered to be potentially related to growth, it determines, for each of the two periods, the ones robustly associated with Russian economic performance. Among the variables considered are proxies of politico-institutional features, indicators of economic reform, and measurements of both economic and non-economic initial conditions. The main findings, based on close to one million regressions, are as follows: during the period of economic decline up to 1998, differences in Russian regional growth were almost entirely driven by initial conditions, with resource and human capital endowments, industrial structure, and geographical location playing the dominant roles. However, since the 1998 crisis, the importance of initial conditions has declined significantly, and is now basically reduced to hydrocarbon wealth and advantageous geographical location. More reform-oriented policies, as well as better regional leadership are found to have come to make a significant difference. These results point to determinants of economic performance in periods of actual economic decline being quite different from those in normal times of economic growth.

Russia, transition, regional economics, extreme-bound analysis, economic growth, natural resources, initial conditions, economic reform, political economy

Abstract:
This paper examines the development of Russian industry in comparison with that of Ukrainian industry during 1995-2004 in an effort to ascertain to what extent, if any, Russian manufacturing showed signs of succumbing to 'Dutch disease'. Ukraine and Russia began the market transition with broadly similar institutions, industrial structures and levels of technology, and the economic reforms implemented in the two countries were also similar, although Ukraine was reckoned to lag behind Russia in many areas. The main difference between them is Russia's far greater resource wealth. It follows that differences in industrial development since 1991 may to some degree be attributable to differences in initial natural resource endowments. In short, Ukraine could provide a rough approximation of how a resource-poor Russia might have developed over the transition.

Russia, Ukraine, Dutch disease, natural resources, oil, gas, transition, industry, productivity, competitiveness, revealed comparative advantage, restructuring, unit labour costs, wages

Abstract:
This paper provides a brief overview of the political economy of Caspian oil. It begins by situating the Caspian region's oil sectors in the larger global market, before proceeding to examine the ways in which the Azerbaijani, Turkmen, and Kazakh oil sectors have been organised and governed since 1991. The paper then considers the likely consequences of recent policy shifts in Kazakhstan, the region's most important oil producer. A further section considers the questions of transport infrastructure and export routes, which remain particularly complex problems for Central Asia's landlocked producers. This is followed by a brief conclusion. The paper's central argument is that it is by no means certain that the Caspian region's hydrocarbon potential will be developed in a timely, economically efficient way. While the impact of geology, geography, and international price movements can hardly be ignored, policymakers can do much to raise or lower the long-term elasticity of the supply by the Commonwealth of Independent States. Unfortunately, policy in the region seems, on present trends, likely to lower it.

Commonwealth of IndeCommonwealth of Independent States, Kazakhstan, Azerbaijan, Uzbekistan, pendent States, Kazakhstan, Azerbaijan, Uzbekistan

Abstract:
This article investigates the connection between the apparently uncorrelated issues of tax evasion and privatisation in a political economy framework. We first consider how the political process - given a country's level of development and income distribution - will affect the efficiency of the tax system. We then discuss the impact of the efficiency of the taxation system on the outcomes of privatisation. We consider under which condition privatisation will proceed, and who will be the political supporters as well as the main winners of the privatisation process. Moreover, we investigate the impact of different forms of corruption both on the initial public support for privatisation, as well as on its long term political sustainability.

Privatisation, Taxation, Political Economy

Abstract:
This article provides an in-depth analysis of Russia's post-crisis growth, with a view to understanding the prospects for its continuation. It examines in detail the chief drivers of growth, as well as the main developments and policies that have been underlying it. A key finding is that the role of the oil sector, and particularly privately owned oil companies, has been vastly more important in driving economic growth from 2001 to 2004 than thus far recognised. The oil sector's contribution to growth has hitherto been severely underestimated because official data do not account for transfer pricing and thus fail to fully reflect the importance of the hydrocarbon sector in the Russian economy. In the light of this finding, this article also assesses the economic impact of the "Yukos affair." Looking forward, it is reasoned that - given its economic structure - Russia is bound to remain a heavily resource-dependent economy for some time to come. The article further argues that, given good macroeconomic management and the avoidance of gross policy errors, Russia could realistically hope to sustain high growth rates over the medium term. However, given current tendencies for greater state involvement in key sectors of the economy, such an outcome is not by any means guaranteed.

Russia, Transition, Economic Growth, Capital Flight, Natural Resources, Yukos, Oil, Gas, Transfer Pricing, Property Rights

Abstract:
A noted European economist argues that the Russian economy and its post-2000 growth have been heavily dependent on natural resources, especially hydrocarbons, and are bound to remain so for some time to come. Given that many economists have come to view rich natural resource endowments as a curse that undermines development, the question arises as to whether Russian economic development is doomed. The author argues that while the challenges posed by resource dependence are serious, they can be overcome, or at least substantially mitigated, if accompanied by the right economic policies as the examples of Australia, Canada, and the Scandinavian countries demonstrate. He analyzes what these economic policies are for Russia, and how to set up Russian economic and political conditions to facilitate their implementation.

Russia, transition, economic growth, natural resources , Dutch disease, resource curse, oil, diversification, fiscal policy, monetary policy, capital flight

Abstract:
In this article we investigate the role both the old large enterprises sector and the new SME sector have played during transition in Romania. In the first part, based on micro data for the large SOE sector, we document how heavily loss-making enterprises have been able to survive for a decade, through initially direct and later increasingly indirect subsidies from the state. We show concretely how the 'survival of the unfittest' has led to the emergence of pervasive chains of arrears in the economy, with large negative consequences not only for the budget and state-owned energy suppliers but also for general economic efficiency. We thus show that the lagging privatisation of large SOEs has had negative systemic effects on the Romanian economy, well beyond the question of increased enterprise efficiency. In the second part we show that - in spite of the drain of resources from the large SOEs and a difficult business climate - a sector of SMEs has emerged that has been the main contributor to employment and export growth in recent years. However, the development of the SME sector has been severely constrained by the aforementioned negative forces, as documented by its underdevelopment in comparison with those of other Eastern European transition countries.

Romania, Transition, Enterprise Restructuring, State-owned Enterprises, SMEs, Subsidies, Arrears, Privatisation