RUSSIAN MAFIA: HOW SERIOUS A PROBLEM?

Publication: Monitor Volume: 5 Issue: 24

A newly released study, based on a survey of Russian firms, casts serious doubt on the widespread view that organized crime dominates Russian industry. The paper–“Law, Relationships and Private Enforcement: Transactional Strategies of Russian Enterprises”–was written by Kathryn Hendley of the University of Wisconsin, Peter Murrell of the University of Maryland and Randi Ryterman of the World Bank. In 1997 they sent researchers to interview directors and managers of sales and purchasing departments in 328 manufacturing firms in six cities.

They found that fewer than 3 percent of the managers reported using private firms for contract enforcement against delinquent suppliers, and only 2.5 percent used such firms to check the credit rating of a firm. Rather than turn to organized crime, Russian managers have simpler and more direct strategies to enforce contract compliance. For example, some 50 percent of customers are asked to pay up front before goods are released. Prepayment obviously makes the problem of nonpayment a nonissue. Another common but effective response is simply to stop doing business with unreliable partners. Barter, which accounted for 40 percent of transactions, can also be seen as rational in the face of uncertainty over payment abilities. Barter deliveries are more easy to monitor than cash, and are less likely to be seized by other claimants.

Direct representations to suppliers or customers are the most common solution to contract problems–and were rated by the managers as the most effective. Contrary to the image of steamy bathhouses, most of these meetings were formal rather than informal. If direct representations do not work, firms sometimes denounce unreliable companies to other companies, or to local government officials. Firms also frequently threaten to go to court. Hence the dominant pattern is mutual bargaining “within the shadow of the law.” In sharp contrast to the communist era, managers only infrequently turn to politicians for help with supplier problems.

The paper concludes: “These data suggest that for every 100 transactions, twenty-four experience potential disputes. Of these, sixteen are resolved through informal complaints, seven are resolved through threats of litigation and/or penalties, and one will be litigated.”

This study’s findings are one of the few pieces of good news to emerge from the Russian economy for some time. It suggests that horizontal, market mechanisms may be taking root; and that trust, reputation and interdependence may in practice loom much larger in Russian industry than mafia killings. Of course, survey data, particularly about sensitive topics such as organized crime, are not completely reliable. But in the face of such findings it behooves the mafia-pessimists to produce their own research to document the pervasiveness of organized crime in the Russian economy.

It may turn out that both sides are right. The mafia grip does indeed seem to be firm over certain sectors of the economy–such as retailing and construction–which were not part of the Hendley/Murrell/Ryterman study. Beyond that, crime-related disputes may be confined to a few prominent firms in the energy and metals sectors which capture the headlines, such as the Krasnoyarsk Aluminum Works.

(This story was written by a Monitor correspondent. For the full report, see http://www.bsos.umd.edu/econ/murrell/russlaw/russlaw.html.)

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