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
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 taxation[1], 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 eligible for individual privileges[3]. 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 businesses[5]. 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 part[6] 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);
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 repression[7]; 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 process[8].
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.
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 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.