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Who has residual rights of control over
enterprise or firm after all contractual obligations have been met? |
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In past government ministries,
planners, administrators, & ultimately KPSU exercised control over
residuals |
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Who decides what to do with enterprise
assets? |
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Previously enterprise directors highly
constrained by their ministries and central planners over asset management |
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Question of factory or enterprise ÒmanagerÓ
or Òfactory directorÓ or Òenterprise directorÓ? |
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Taking orders vs. managing |
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Òrisk avoidanceÓ vs. Òentrepreneurial
riskÓ behaviors |
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Who decides what to do with generated
income? |
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In past ministry officials had major
influence & control |
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In past not much of an issue due to Òsoft-budgetÓ
constraints |
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Decision making skills & behavior
must generate such income first! |
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Foreign Investment |
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May 1991 Union parliament adopts
– Principles of Legislation on Foreign Investments in the USSR |
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Reaffirms right of 100% foreign capital |
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Expanded range of foreign investors
allowed: |
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Juristic persons, stateless persons,
foreign states, international organizations |
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Types of allowable enterprises |
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Joint Ventures |
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Joint-Stock companies |
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Limited-liability companies |
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Partnerships |
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Individual proprietorship firms |
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Granted concessionary rights for
development of natural resources to foreign investors |
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Addressed questions of the
establishment of and procedures governing activities of enterprises within
so-called Òfree-economic zonesÓ (FEZ) |
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FEZ |
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1989 cities of Vyborg and Novgorod
first established FEZs |
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By end of 1989 more than 60 petitons
for FEZs filed |
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MoscowÕs main international airport -
Sheremetyevo is a FEZ |
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FEZ –> tax breaks, lenient
customs regulations |
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1990 in Far East all of Sakhalin Island
became a FEZ |
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Nakhodka-Vostochnyy FEZ |
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Greater Vladivostok FEZ proposed
including Nakhodka-Vostochnyy |
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Other FEZs proposed – Khabarovsk
FEZ, Amur FEZ, Yakutian FEZ, international Tyuman River |
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Often FEZs were backdrop for center VS
periphery/local conflicts over control over natural resources and FDI
(foreign direct investments) |
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Reform of State Enterprises and
Cooperatives |
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Jan. 1988 - Law on State Enterprises
enacted |
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Decentralized management |
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Increased autonomy |
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Increased flexibility of state
enterprises |
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Autonomy increased for firms to set
production targets |
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Conflicted with persistence of
compulsory state orders (goszakazy) |
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state orders still accounted for
90% of production in 1988 |
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Allowed workersÕ voice in selection of
management (ex. RAF - IGRA) |
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1988 Law on Cooperatives |
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Created powerful incentives for state
enterprises to create cooperatives |
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Exempted Coops from compulsory plan
assignments |
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State firms created profitable sideline
business without direct central governmental control and influence |
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Coops granted significant freedom to
set wages and prices (e.g., directors set own wages and that of allied nomenclatura
workers |
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Allowed creation of Coop banks |
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Coop banks increased financial
flexibility of founding state enterprise ÒkoopÓ partners |
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By beginning of 1991 80% of all Soviet
Coops where kooperativy pri or attached to state enterprises & produced
80% of total goods and services sold by coops |
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Reform of State Enterprises and
Cooperatives |
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1988 Law on Cooperatives continued: |
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By August 1991 - 255,000 registered
coops with 6.5 million employees, 42 billion rubleÕs worth of output in first
half of 1991 |
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November 1989 Leasing Law |
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Entire enterprise could be leased with
2/3 of workers vote in favor of such reorganization |
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Coop thus paid rent and depreciation
costs to its ÒstateÓ parents on equipment and buildings - high potential for
profit and theft of state assets |
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Coops could purchase equipment outright
with their earnings, result –> purchase on the cheap from parent ÒstateÓ
firms |
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Loophole for nomenklatura, directors
and ÒmafiaÓ black marketers, to end up owning such coop firms |
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Bribing workers with promises of pay
raises and job security to secure votes favoring conversion |
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1990 Law on Enterprises |
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Owner of enterprise had exclusive right
to choose management personnel |
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OK in Western firms, but in Russian
transitional context weakened the political and economic positions of workers
and strengthened those of administrators and ÒmanagersÓ or the likely new
owners. |
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Small Enterprises (malyye predpriyatiya) |
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1989 Temporary Statutes on Small
Enterprises |
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August 1990 - Decree on Creation &
Adoption of Small Enterprises |
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Defined by # of employees: 15 in retail
trade, 200 in construction |
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Both laws allowed for separating off
portions of existing state enterprises |
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Greater operational and financial
freedom than state enterprise parents |
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1990 decree granted total tax exemption
until beginning of 1991 |
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1990 decree allowed small enterprises
to have access to centrally allocated inputs of parents state enterprises |
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January 1991 federal law on taxation
granted small enterprises preferential tax treatment. |
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Small enterprise profits invested in
labor training, new technology and capital improvements were exempted from
taxes |
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Initial 2-year tax holiday on profits
from building materials manufacture, construction, consumer goods, and food
processing |
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75% of profit tax liability for first
year and 50% for second year forgiven on profits from all other activities. |
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Non-exempt Co-ops precluded from tax
concessions on production of consumer goods |
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One result – many Co-ops
registered a ÒSmall enterprisesÓ in response to differential taxation and
other legal provisions of small enterprises vs Co-ops. |
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Joint-Stock Companies |
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June 19, 1990, USSR Council of
Ministers Statute on Joint-Stock Companies and Companies with Limited
Liability |
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Allowed existing state enterprises to
reorganize into open or closed joint-stock companies under certain conditions |
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Open joint-stock companies - stock could be held by workers,
managers, various levels of government, other state enterprises, &
private individuals |
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Closed joint-stock - only workers,
managers, and state could hold stock |
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Both workers and state organ authorized
for reorganization purpose would have to reach joint decision on
reorganization |
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Example, Menatep Interbank Association,
poorly understood by stockholders |
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Law on Inventions in the USSR (May
1991) |
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Strengthened economic, legal, and
organizational principles for protection of inventions under various forms of
ownership with a market economy |
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Incentives for innovations in medicine
and ecology were increased |
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Rights and benefits for firms adopting
innovations were expanded |
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No Patent Court or state patents
department |
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Securities and Stock Exchanges |
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Draft law on securities and stock
exchanges first considered by USSR Supreme Soviet on July 10, 1991 |
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Adopted December 1991 after Russian
securities market was in operation |
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Goal was to protect stockholders, from
incompetence and dishonesty |
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Stock issuers prior to sale or issuing
of stocks or securities required to publish in at least 2 newspapers
preliminary comprehensive and absolutely trustworthy information about the
securities and the financial position of the entity or persons issuing them |
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Introduces legal concept of property
qualification |
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Question of stockholder protection or
new arena for bureaucratic graft and corruption |
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Within months of passage, Russian stock
market with registered securities totaling more than 100 billion rubles was
facing liquidity crisis |
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Causes of liquidity crisis: |
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Few joint-stock companies had tangible
or real assets to back up their securities |
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Joint-stock companies ÒinvestmentÕ
companies |
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Nearly all stock being sold on
secondary market were overvalued |
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Weak to nearly non-existent financial
infrastructure and lengthy delays in payments under high inflationary
conditions made any business deal risky |
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Liquidity crisis was rapidly developing
in current accounts for current supplies |
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Virtually no system for collection and
public disclosure of financial information |
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What would financial disclosure
statement of Òsoft-budgetÓ state enterprise look like? |
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Little time elapsed for development of
reliable business reputation |
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Russian statutes on securities,
criminal and administrative codes still lacking |
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No unified policy for purchasing and
selling of securities among former Òruble zoneÓ republics |
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Commodities Exchanges: Background
events |
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Systematic reduction of 3 long-term
Soviet institutions: |
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Gosplan (State Planning Committee) |
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Goskomtsen (State Price Committee) |
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Gossnab ( State Committee for Material
Supply) |
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May 1990 first Commodity Exchange -
Moscow Commodities Exchange |
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By Oct. 1991 more than 400 commodity
exchanges operating |
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By Oct. 1992 ~1,000 commodity exchanges |
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Wholesale auction houses / markets even
Òflea marketÕ like |
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Function of Commodity exchanges |
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1) connecting commodity buyers and
sellers |
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2) price discovery |
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Sources of commodity exchange revenue
streams |
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1) capitalize exchanges by selling
shares for hard currency |
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2) sell brokerage seats or rights to
transect business deals |
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3) sales commissions from 0.5 to 5.0%
on transactions, brokers get ~40% of commissions |
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