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In 2006 out of four BRIC countries (Brazil, Russia, India and China), Russia and China received less that 2.0 scores (CalPERS method) meaning that these markets are shut down for investments. The 2007 forecast (1.9 scores) shows that Russia will remain at the previous year level while Chinas score increased from 1.to 1.7. The main problems of the Russian market in 2006 were: low political stabil ity, imperfect labor laws and insufficient openness of the market. In assessing civil liberty where 1 means the highest level and 7 no liberty at all, Russia was given scores. In terms of independence of courts and legal protection Russia received score out of 3 scores possible which is much worse than in China. Russia was as sessed at lowest scores in terms of courts independence, legal protection of prop erty rights, inefficient fight against organized crime and biased courts pro nouncements issued in favor of the government authorities.

CalPERS method could be equally indicative if we tried to assess the input of the key factors impeding further improvement of the investment climate in the country. With account of impact of certain factors in building up ratings, the nega tive impact of specific country (government) factors is increasing vs market fac tors quality.

Similar negative assessments of the civil society and political system in Russia may be found almost in all traditional ratings for 2006 regarding these problems (Freedom House ratings of civil liberty and mass media freedoms; World Economic Forum of global competitiveness; Oxford Analytica of creditors rights compliance;

the Heritage Foundation and Dow Jones Co; Indem Foundation; World Economic Forum, World Bank, Transparency International and others of economic indica tors). A number of ratings became much worse vs 2004 2005 (Table 1).

TableChanges in the ratings of political stability, economic and civil liberties in Russia in 2005 Lower rank/scores or Rating 2005 2006 close to Russia (BRIC countries) Civil liberties (by Freedom House) 5 no liberty 5 no liberty China (6) GCI, World Economic Forum (Global Com 53 rank 62 rank Brazil (66) petitiveness) GCI, World Economic Forum (protection of 108 rank 114 rank property rights) (in 2004 88) th 4 group no free China 54.02 scores th Economic freedom rating, the Heritage 4 group no free dom at large (54.01 119 rank Foundation and Dow Jones & Company, Inc. dom at large scores out of 100, India 55.60 scores, 120 rank) 104 rank 27.Political stability (by CalPERS, weight in coun 29.(in 2003 20.5) try rating, %) (30.6 for 2007) CalPERS rating (investment threshold is 2 at Total 1.8 Total 1.China 1.6 scores maximum 3) (in 2002 1.15) Country 1.Source: Rating Developers formal websites.

According to 2006 economic freedom rating made by the Heritage Founda tion and Dow Jones & Company, Inc., out of 157 states Russia ranked 120, getting Section Institutional Problems 54.01 scores (maximum was 100) which was lower than the 2005 rank. Out of other BRIC countries China was placed 119 (54.02 scores), Brazil and India 70th (60.89 scores) and 104th (55.60). Russia scored least in the following areas: no corruption (24.0%), free investments (30.0%), property rights protection (30.0%), freedom of finance (40.0%). Low score in freedom of finance, according to the rating agency, was given because of inefficient banking system, deficiencies in banking supervision and transparency, and restrictions of access to banking and insurance business for nonresidents. The low rating in the property rights protec tion means that Russia does not ensure such protection properly: the judicial sys tem is corrupted and biased, and ensuring the implementation of contacts is a real challenge.

As for short term trends, the situation is rather trivial. The developed asym metry of economic and political factors of the Russian economic development has been obscured so far by general indicators of economic rise, instable feedstock market situation and government finance parameters (budget surplus, Stabilization fund, and gold and currency reserves), and also by indicators of extreme profitabil ity of the Russian stock market.

The investors may describe this situation as Clod Frollo dilemma (section 5.4): a high profitability temptation up to a certain limit is stronger than the eco nomic freedom, investors rights and government interference concerns.

From the government point of view, economic wealth measured with formal current indicators and ratings proves the correctness of the selected political route (broadly, including the issues of protection of property rights, the judicial system, etc.).

It is worth noting that the Russian companies that as said above are most sen sitive to potential political and business cycle risks are those that have least illu sions.

The population is extremely perceptive of the abilities of the government au thorities to take effective actions in the area of economic policy (Tables 2 3).

Table Why there is no sizable economic growth in Russia now 2003 2006 population survey results, in % 2003 2004 2005 1. Red tape, corruption and bribery with the highest bodies of state authority 34 34 31 2. Plunderous policy of the major Russian businesses/oligarchs and their dis 38 34 29 interest in the national economic revival 3. Incorrect economic policy of the government 27 22 34 4. The government does not have an economic program 22 22 29 5. Capital outflow from Russia/flight to off shores 25 27 26 6. Theft of managers (profits withdrawal and appropriation) 28 20 21 7. Fixed assets worn out 13 11 11 8. High taxes on entrepreneurial activity 15 10 13 9. Russian goods are not competitive with Western goods 9 10 10 10. No investments into the Russian economy 11 11 12 11.Business is not legally protected 9 7 7 Other 7 7 6 Difficulties in responding 12 12 9 Source: Levada Center, www.levada.ru.

RUSSIAN ECONOMY IN trends and outlooks As Table 2 shows, for the entire period of 20032006 the weight of such factor as bureaucracy, corruption and bribery in the high echelons of power remained unchanged (and the largest among all other 12 factors). At the third and the forth places are the factors incorrect economic policy and the absence of the eco nomic program which were strengthening their significance in 2003 through 2006.

The second factor the plunderous policy of the major Russian busi nesses/oligarchs and their disinterest in the national economic revival was losing its value in the same period. The absence of legal protection for the business is not significant for the community; this may be explained by confusion of notions (the respondents seem to mix up legal protection and corruption). Table 3 appar ently demonstrates that during 2000 2006 not less than 2/3 of the population kept thinking that the Russian government was not able to develop a substantiated economic program for Russia4. In any case the data in Table 3 add up to the con clusion that the government and the market in Russia has been moving into op posite directions during 2000es.

Table Has the Government of Russia got a well defined economic program The 20002006 survey findings, in % 2000 2001 2002 2003 2004 2005 May April August August August August April The Government has got a well defined 22 21 16 18 21 19 and thoughtful economic program There is no well defined program but only very high level outline of what shall be 38 37 39 38 35 40 done There is no such program, and decisions 22 30 33 34 34 31 are taken given current circumstances Difficult to answer 19 13 12 10 11 11 Source: Levada Center www.levada.ru.

The problem of asymmetry of economic and political factors of the develop ment of the Russian economy becomes highly critical if viewed from a long term perspective, moreover if to assume that the sources of the current economic growth, budget revenues and funds to support social programs are closely related to the market situation.

5.1.2. Political versus economic institutions: public polls and their problems In the 1990es which one could call a period of initial establishment of a new institutional structure of economy in Russia the following components (criteria) were typically used: privatization, legislation (the scope and quality of the new legislation and the law institutions) banking sector status (independence of banks, Wed like to cite a statement made during the period of launching the 2004 administrative reform:

while the government authorities having decided to increase their impact on the economy, dem onstrate certain incompetence. There is a simple explanation to this. The government has not been dealing with economy at least for twelve years. It was involved in solving budget related issues.

There are no people in the current government who might know the real problems of the economy and how to deal with those problems Therefore any attempt of the government to remove private capital from the solution of strategic issues in the sectors where this capital operates would lead to stagnation (T. Gurova, Give me the wheel, Party // Expert, 2004, No 15, p. 34).

Section Institutional Problems islation and the law institutions) banking sector status (independence of banks, their business skills and practical distribution of credit resources, and also the level of supervision and the payment system), and the role of the government (whether it is market oriented or not and how efficiently it manages the state owned sector).

All subsequent additions were highly specialized, we believe. This standard was ex panded in the 2000es by including various assessments of the corporate govern ance quality, of economic and legal factors of the financial markets development and the boundaries of the institutional capacity. Apparently significant was also a growing interest to the problems of effective courts and enforcement in general5.

The most acute current issue is a systematic problem of adequate quality of the po litical institutions.

Since various groups and individuals typically derive benefits by exploiting economic institutions, a conflict tends to arise between various options of the pub lic choice which is eventually resolved in favor of the groups having more political power. The distribution of the political power in the society is defined by political institutions and depends on the distribution of resources. Economic institutions that promote economic growth emerge where political institutions, firstly, give the power to those groups that are interested in having a highly diversified ownership rights enforcement system, and, secondly,where political institutions set up effec tive restrictions for the actions of the power authorities and, thirdly, where the power authorities have no possibility to generate considerable rent for them selves.6.

The said restrictions are true for assessing institutional changes in Russia dur ing 19902000. In terms of application, the most important issue is how realistic is the todays discussion of the development of the above positive effects. Indeed we are not able to discuss the whole range of the functioning problems of the Russian political system in this paper. The above requirements to the quality of political in stitutions speak for themselves and apparently are the subject matter of the remote future for Russia.

Let us discuss only one issue as a possible argument are there in the current Russian society any groups that could ensure the existence of a diversified system of ownership rights enforcement, given the above assumptions. Whatever ap proaches may be used, it makes sense to discuss primarily the problem of the middle class.

There are various methodologies to identify the middle class (normative of relative, market based or property education based, etc.). Using then one can receive a wide range of estimates. Even in the ex USSR the quantitative estimates in the period of 80 90es of the last century varied from 11% to 30% of the popula tion. The estimates spread for Russia of the 1990es is also large from 6% to 25% See, e.g.: The establishment of the institutional framework of the market based economy, World Development Report, 2002. World Bank, 2002; From plan to market. World Development Report 1996. The World Bank. Oxford University Press, 1996; EBRD Transition Reports 19952006.

See.: Acemoglu D., Johnson S., Robinson J. Institutions as the Fundamental Cause of Long Run Growth. In: Aghion Ph., Durlauf St., eds., Handbook of Economic Growth, North Holland, 2004.

RUSSIAN ECONOMY IN trends and outlooks (prior to 1998 crisis). As for the period 2002 2004, the majority of estimates tend to coincide: 14% to 25% of the working population.According to Institute of Sociology of the Russian Academy of Sciences8, in 2003 2006 given the inflow of oil dollars into Russia, the size of the middle class keeps reducing from 25% down to 20% (economically active urban population). The marginal growth of the middle class up to 1/3 of the population size may take 10 15 years (provided the structure of the economy remains unchanged). The authors of the report believe that the chances of the middle class to grow at the expense of the old middle class are close to zero since the latter is decreasing which is a paradox. In other words it becomes clear that in the developing economic model (of state monopoly type) there is a trend to reduce this middle sub class. As a way out of this situation it is proposed to focus on the enhanced development of high technologies sectors rather than small and mid size businesses. This trend like wise a growing social and economic indifference of the middle class has been noted by T. Maleva, Head of Institute of Independent Social Studies10.

The specific mechanisms leading to this reduction are of secondary interest for us.

What is essential for us is that in 2000 no positive dynamics of the potential social base was observed (supported by empiric evidences) for indirect (via political rep resentation) formation of effective economic institutions.

Moreover, those institutions that in 1990 es opposed the expansion of de mand for effective economic institutions are functioning today though in modified form. If prior to the early 2000es (we recognize that the terms are conventional) the model of oligarchy capitalism was pursued, now we are typically speaking of the state capitalism in its Russian variation ( see below for details).

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