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In this context the model of negative interaction (vs efficient market relations) establishes itself where some entrepreneurs (not a very representative segment) hold political power de facto or have a monopoly access to the center of political decision making. Afterwards these entrepreneurs using the judicial system as a tool against their competitors stop being motivated to establish and strengthen private property relationships 11.

See e.g.: E. M. Avraamova and others. Edited by T. Maleva. Middles classes in Russia: economic and social strategies. Moscow Carnegy Center. Moscow, 2003. (the share of the middle class is recorded at 20%). The data of All Russia Center of Life Level and KOMKON (2004) go beyond the domineering estimates 9%, and Rating Agency Expert which estimates of the middle class seg ment vary from 14% in 2000 up to 25% 30% in 2005.

Urban middle class in modern Russia. Analytical report. M., Four criteria were used to identify middle class representatives: education, profession, income and integrated self assessment of the social status. It should be noted however, that the income threshold for the middle class is only RUR10.5 thousand/month/household member. The report makes a distinction between the old middle class small businesses) and new middle class (primarily top managers in the fuel and en ergy complex and other sectors of economy)..

A reverse trend prevails in the world: annual surplus of the middle class makes about 1%, accord ing to some estimates.

Stagnation of the middle class. 24.01.2007, http://abarus.ru/news 11 Unequal distribution of wealth and relative inefficiency of production creates situations where most wealthy owners are not interested in solid protection of property rights: see Polishchuk L., Sav Section Institutional Problems According to the new institutional economic theory, the bureaucracy, its low productivity and absence of accountability which have been frequently criticized may be analyzed, on analogy with separation of property from control in a com pany, as a two tier system of the principal and the agent where the government of ficials play the role of agents (controllers and employees) and the electorate that of the principal. However, unlike the corporate owner, the electorate may not have a clear common goal, and this restricts their abilities to organize an effective monitoring of the politicians and government officials12. This brings us back to the issue of the formation in modern Russia of an adequate social base that would be objectively interested in public control and monitoring and would have sufficient economic resources and the level of political power.

5.1.3. Protection of property rights versus finance Primarily we should clarify why the idea of the protection of the property rights has been persistently placed at the core of any problem related to institutional de velopment13. Recently in analyzing private property historical and geographical fac tors have been more often selected as a focus. By the beginning of the 21st century new classic and new institutional researchers elected to determine the key fea tures of the markets under their review at least partially by the established property relations and the system of enforcement of the property rights and the contractual obligations. The expansion of the new classic models manifests in particular in the coverage of the in depth level (according to O. Williams) where the basic institu tional structures like ownership and law enforcement are installed.

The new comparative economics that have recently claimed to be an inde pendent trend of the new institutionalism made a thorough research of the genesis of the law systems and how they affect the property relations and their enforce ment14. The following conclusions are proposed based on the findings of the econometric analysis in various countries:

vateev A. Spontaneous (non)emergence of Property Rights. The Economy of Transition, 2004, Vol.

12, 1.S. Guriev and K. Sonin write: While the rich have the advantage in setting up a private guards company and establishing good relations with the government officials, they are not encour aged to lobby the establishment of good government institutions, and therefore there is no demand for such institutions that would protect the property rights and moreover support competition. The problem is that the middle class (in this particular event associated with the small business) can not create the political demand for the good institutions due to the insignificant share it holds in the na tional economy and because of high costs on coordination. (S. Guriev, K. Sonin. The wealth and the growth // Expert, 2003, 24, p. 4647. See also: K. Sonin. Institutional theory of unlimited re distribution. // Issues of Economy, 2005, 7, p. 418.

E. G. Furuboten, R, Richter, Institutions and the economic theory. St Petersburg, 2005, p. 547.

See also: works by V, Mau and K. Yanovsky in Institute of Economy in Transition: research pa pers dedicated to the regional and international comparison of the primary (basic) set of the politi cal rights that absolutely prevail over any other political and economic freedoms such as life safety, security of property and independence of the judicial system and mass media.

For details see, e.g.: R. Enton, A, Radygin and others. Corporate governance and self regulation in the system of institutional changes M, IET, 2006, section 1.

RUSSIAN ECONOMY IN trends and outlooks - the higher is the level of development of the private property institutions (the level of guarantees that would not be expropriated by the government and the ruling class), the larger is their positive impact on the long term economic growth, investments and the efficiency of the financial markets15;

- the improved implementation of the principles of the private property is an absolute requirement for more intensive development of the financial markets;

- protection of the property rights ensures preconditions for more intensive ex pansion of investments and higher rates of the economic growth16;

- in those countries where the courts enjoy more independence, the property rights are better protected and an improved environment is created for intensive economic growth ;

- the successful transplantation of the legislative norms and law institutions is connected not only with the choice of a legislation system but rather with the law enforcing practices in the given country (as in Russia);

- the more corrupted are the government officials the smaller is the chance to strengthen market related institutions and competition mechanisms (given that the administrative discipline remains at the same level).

The protection of the property rights (sometimes this notion is used as a synonym of the law enforcement) and the financial system are considered base economic institutions. Each of these is a subject for a separate study in terms of their relevancy and conformity of their current status in Russia to the economic ra tionale18. What is meaningful in the context of our analysis is that the mutual influ ence of those institutions in their current status seems to be negative.

A weak system for protecting property rights (due to the absence of a clear government strategy regarding state sector and privatization transactions, inertia meaning that the law is considerably behind economic activity; high degree of un certainties and contradictions in the business law; low quality of judicial and law en forcing practices; the expansion of rights of the departments and ministries to in terpret the law; poor government supervision; opposition to the establishment of self regulating institutions; ongoing banks and corporate risks associated with pro tection of deposits and securities; absence of regulation in the area of new finan cial tools; current and long term problems with land and real estate markets, etc.), curbs back the development of the financial system as a key long term tool of transformation of financial resources into capital.

In their turn, a high level of concentration, fragmentary and close nature of the Russian financial system in general, the absence of coordination and strategy of its 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.

La Porta R., Lopes de Silanes F., Shleifer A., Vishny R. Legal Determinants of External Finance // Journal of Finance, Vol. 52, 1997.

La Porta R., Lopes de Silanes F., Pop Eleches C., Shleifer A. Judicial Checks and Balances // Journal of Political Economy, Vol. 112, 2004.

See: Russian economy in 2005. Trends and prospects. M, IET, 2006, section 4.

Section Institutional Problems development19, regular disproportions and non transparency of the banking sys tem, still high dependency of the Russian stock market on the international liquid cash flows and short term portfolio investments tend to weaken long term demand for a stable protection of the property rights (investors). The modern economic lit erature generally recognizes that in the assessment of the level of law enforcement and protection of the property rights the financial market plays a key role (since unlike the commodity market, long term relations between the borrower and the lender are at stake).

According to the Frazer Property Index, Russia refers to the group of least de veloped countries. Its index value is between 45 (where 10 is the top value, and 0 is the lowest), which is similar to the indexes of Nicaragua, Philippines, Syria, Pakistan and Ukraine.

According to IET this is in line with the current level of investments. Elasticity of the investment growth for Property Index statistically estimated on the basis of in ternational comparison is 0.4 with a 5 year lag. In other words 1% Index growth re sults on average in 0.4% during the next five years. Thus for Russia with 4.4% In dex growth (2004 estimate) up to 6 (this is the level of Greece, Korea, Slovakia and India) or 7 8 points (Mexico, Hungary, Hong Kong, Italy, Spain and Israel), the in crease of investments by 2 3 points (of GDP) may be expected. Following the method of Index calculation we may assume that as a result of the development of the judicial reform (higher independence of courts via radical increase of costs of removal of judges appointed by the new procedure, and introduction of a new pro cedure of appointment of federal judges: qualification board with the participation of the entrepreneurs trade union, law defenders and Human Rights Commission ers) the Frazer Property Index may grow by 3 4 points on the average ( up to 7 points).

It is worth noting that uncertainty both macroeconomic and institutional has always affected investments negatively. A number of empirical studies proves the existence of a stable negative link between the level of investments into GDP and institutional variables characterizing the degree of protection of the property Modern economic literature traditionally divides financial systems into banking (bank based financial system, relationship based financial markets) and market (market based financial sys tem, arms length financial markets); but this classification has becomes obsolete primarily due to the development of securities markets within the traditional banking systems. The recent studies performed in 150 countries have not revealed any obvious advantages neither of the bank loan model nor of the securities model. According to the financial services view, it is the quality and accessibility of financial services that have prime importance, and secondly, the structure of the fi nancial system may have secondary importance since the banks and the securities markets deal with similar economic tasks; thirdly, banks and securities markets may effectively supplement each other and enhance competition in the area of corporate control by providing alternative options of funding investments; and finally, the division by the type of the financial system does not explain the differences in the rates of the long term growth and establishment of new companies. However, the relationship between the law system and the financial system is an axiom. The review and the data by Expert, 2005, 44, p. 7076.

RUSSIAN ECONOMY IN trends and outlooks rights20. The review results of a large number of countries show that in the countries with the favorable situation in the area of the property rights the investment proc esses get accelerated with a time lag of 5 years. This means that the absence of institutional changes or moreover the aggravation of the investment climate by certain directions may lead to negative consequences for investments in the near future or serve as a limitation of investment growth into major capital of the Russian economy.

This is an endless topic; and only two examples will be discussed here. In 2006 during IPO process the Russian companies engaged not less than $17 billion from Russia and another $17 billion by placing ruble denominated bonds. Accord ing to Rosstat, out of $17 billion received from the distribution of shares only $2.billion (or 14.7%) were invested into fixed capital. As for how the $17 billion gener ated from the placement of corporate bonds were used, statistics show that only $60 million (or 0.4%) were employed for the creation of the new fixed capital. Of course, one may account for inaccuracies of the official statistics, however the ba sic conclusion will hardly be changed: the funds received by issuing shares and bonds are not invested into fixed assets and therefore do not affect economic growth. One can assume that the core cash flow is used for refinancing and acqui sition of debts from their current owners. There are processes at the current Rus sian stock market that are similar to those at the U.S market in the late 1980es known as LBO (leverage buy out) transactions funded from the issuance of IPO and junk bonds. These transactions were actually mass scale borrowing of funds at the stock market by using a credit lever to buy companies and their assets. The key risk of such transactions is a low efficiency of the acquired companies which may not be enough to repay the debts. In the U.S. this junk bond market crashed in 1989 with borrowing companies becoming bankrupt.

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