Coping with Uncertainty: The Role of Contracts in Russian Industry During the Transition to the Market

Abstract:     
Russia's transition to the market was tortuous. The literature presents the 1990s as a period when contracts were largely irrelevant due to the inadequacies of the substantive law and the inability of courts to protect property rights. This article explores how contracts were, in fact, used by Russian industrial firms through a series of in-depth case studies. At all of the case study firms, management had developed standard form contracts. Their willingness to rely on them when problems arose was dictated primarily by the nature of their relationships with their trading partners, not by a lack of faith in the legal system. Where the relationships were grounded in personal trust, managers were reluctant to invoke their rights under the contract. Where relationships were grounded in calculative trust (mutual need intertwined with mutual suspicion), managers did not shy away from legalistic remedies. Enterprises that relied on in-kind exchanges had little need to rely on written contracts due to the ephemeral character of these transactions. The lack of reliable information about the credit-worthiness of prospective customers combined with the lack of reputational sanctions for contractual violations made life difficult for all of the case study firms.

Keywords: Contracts, Trust, Russia, Transition

JEL Classifications: D21, D74, D82, K12, P31

Working Paper Series