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Here is another example: in 2006 the share of GDP market capitalization increased up to 92.7% against 61.5% in 2005. The same year Russia became one of the world leaders in attracted direct foreign investments. The internal loan share in GDP for the year which dropped in 2005 from 25.9 down to 20.6% of GDP, re mained in 2006 almost at the previous year level. The gap between the indicators of capitalization and internal loan is an evidence of serious disproportions between the level of development of the banking system and the growth of the Russian companies (for more detailed analysis, see section 5.4).

The problem of mutual influence of the property rights protection and the fi nancial markets may be also viewed in the context of transplantation of the legal norms. Some analysts believe that the legal system in the ex USSR was least per ceptible to such transplantation. The difficulties in that case could be explained not by that in the course of the post communist law reforms ineffective legal norms were implemented at least from the viewpoint of economic efficiency. According to K. Pistor, M. Raiser and S. Gelfer, many former USSR states received technical as Clague C. Introduction, in Clague C. ed., Institutions and Economic Development: Growth and Governance in Less Developed and Post Socialist Countries. Baltimore: Johns Hopkins University Press, 1997.

Section Institutional Problems sistance from the USA, and now can boast of remarkable protection of the inves tors rights. On paper, if these documents are trustworthy, these rights are better protected than in some highly developed Western countries like Finland and Ger many. It is unlikely that the level of development of the financial markets will corre spond to such high level of legal norms support21.

5.1.4. Legislative system versus protection of the property rights Two directions of this topic may be identified quality and appropriateness of the law and constraints set by the systematic corruption that decrease efficiency of the law enforcement practices (in addition to the quality of the enforcement tools).

This topic is highly comprehensive and diversified and we will discuss just a few representative trends.

In terms of the problems solved by the legislation, the evolution of objectives set in the mid term programs of social and economic development during the 2000es is very specific. (Table. 4).

Table Basic objectives and tasks of the major institutional transformations in the 2000es Programs of the Russian Government Plan of Actions of the RF Program of a mid term so Government in the area of Program of a mid term social cial and economic develop social policy and economy and economic development ment Areas of the eco improvement for 20002001 (20062008), (20022004), nomic policy approved by RF Government approved by RF Government approved by RF Government Resolution of July 26, 2000, Resolution of January 19, Resolution No 1072 r 2006 . No 38 r of July 10, 2001 . No 910 r (with amendments) 1 2 3 Protection of the Implementation of actions for Establishment of the favorable Reliable protection of the prop property rights active protection of the property business climate based on erty rights, reforming of the law rights to assist in the creation of protected property rights and protective and judicial system;

the favorable business climate actual mechanisms ensuring development of independent the transfer of the property and public mass media and rights institutions of the civil society Privatization Privatization of the major num Privatization is founded on the Increase of the efficiency of ber of the federal government principle of buyers equality privatization and acceleration of companies and federal gov the reforming rates of the state ernment owned shares sector State property Increase of the efficiency of the Qualitative increase of the effi Law improvement to optimize management state property management ciency of the property man the state sector, and increase agement and performance of profitability of using property the state enterprises Corporate Development of a Business Creation of mechanisms for Improvement of the mecha Governance and Ethics Code protection of the shareholders nisms for protection of share protection of property rights. holders rights..

shareholders Improvement of the applicable The law sets the balance of rights laws and formation of judicial rights and interests of various tools for protection of share groups of shareholders holders interests Pistor K., Raiser M., Gelfer S. Law and Finance in Transition Economics. Economics of Transi tion, July 2000, Vol. 8, N 2, pp. 325 RUSSIAN ECONOMY IN trends and outlooks 1 2 3 Bankruptcy and Protection of the rights of credi Formation of the legal environ Balance of rights, interests and protection of credi tors, owners, shareholders ment ensuring effective protec responsibilities of the partici tors rights (participants) of the established tion of the interests of creditors pants of the bankruptcy cases and liquidated companies and owners and procedures Development of a Creation of the environment Enhancement of the role of the Expansion of the range of finan stock (financial) ensuring the development of stock market in attracting in cial tools. Creation of equal market investment institutions, increase vestments. Creation of the competitive and comfortable of the number of financial tools. environment for development conditions for the financial mar Development of infrastructure of institutional investors. ket players.

and tax treatment. Improvement Encouragement of investment Improvement of the system of of the tools for stock market activities.. market regulation, tax treatment regulation Development of infrastructure and infrastructure.

Development of a Creation of the environment for Essential expansion of the legal Land and real estate are in land and real es effective use and development framework for the real estate volved into business turnover tate market of real estate to meet the needs market development. Estab of the community and individu lishment of the system of legal als federal and municipal regula tion of the real estate market Indeed, the formal progress by specific directions of institutional transforma tions (that were also fixed in the mid term programs as objectives and dealt with gradually in some way) is obvious. Among most remarkable achievements of the 2000es is a modification of the Federal law On the Joint Stock Companies (2001), new laws On Bankruptcy and On the Federal and Municipal Unitary En terprises (2002), new wording of the law on competition (2005 2006); the Con cept of improvement of the corporate laws by 2008 adopted in summer of 2006, several clauses of which have been implemented already (modification of Article of the Law On the Joint Stock Companies); the development of a number of pro cedural innovations in the area of corporate conflicts in 2006 2007, etc.

Nevertheless, as seen from Table 4, for 20002008 the basic objectives change but insignificantly. The general conclusion on the stagnation of the institu tional transformations based on the formal grounds only would be ambitious, how ever, the comparison above gives grounds for the assumption of insufficient legal and regulatory support of the processes of the development of economic institu tions in the long term period.

A list of several meaningful legal acts which need has been discussed since late 1990es can serve as the evidence of this conclusion: On the restructuring and liquidation of commercial entities, On the affiliated persons, On the re sponsibility for execution of transactions using confidential corporate information (On the insiders transactions), On the self regulating entities, On nationaliza tion in the Russian Federation, On the central depositary etc. The reasons for a long delay in passing these legal acts are diversified, however the need in the es tablishment of transparent legal framework on these issues remains acute.

There are some examples below of how the law lags behind the economic re ality (protection of the property rights) (Table. 5).

Section Institutional Problems Table Inertia of the Law in 1990Most acute Basic (probable) grounds Issue Legislative decision Impact period for the decision Minorities stock dis 19952000 Amendments to the Consolidation in major The issue ceased solved law On the Joint companies mainly com being a problem due Stock Companies, pleted to economic reasons Transfer prices 1995 early Changes in the Tax Political reasons Selected pressure on against minorities 2000 es Code early 2000 es major companies State owned assets 1990es early Law On the federal Strategic decision of grad For those state en removed; no control 2000es and municipal unitary ual liquidation of unitary terprises that have over the state compa entities, 2002 enterprises the administrative nies management resource formal re strictions are intro duced Bankruptcy as a tool 19982002 Federal Law On Public campaign against The appropriation for company appro bankruptcy, 2002 appropriations via bank market use other priation ruptcy instruments like courts, registers, falsification of docu ments, etc.

Raiders (unfriendly 2002now Draft amendments in Public campaign against acquisitions) the procedures, 2007 raiders Unfriendly appropria 2006 mid Current projects en The issue of intensification tion of land (forecast)) term hance uncertainty and of conflicts in this area does corruptions not actually exist 10 year statute of 2000now The period is reduced Demonstration of efforts to In court practices the limitations for privati to 3 years, 2005 . strengthen property rights statute of limitations zation transactions protection changes are easily overcome. The court decision is consid ered to be enough Mergers and acquisitions called raids in the popular press is one of the most broadly discussed topics of today. Unfriendly acquisitions were not surprising back in the 1990es, and the 2000es were characterized by a stable growth of M&A transactions (with no state holdings). According to the available data, in 2006 the amount of mergers and acquisitions with the participation of Russian companies amounted to $55 $60 billion which roughly corresponds to the 2005 level (www.mergers.ru); Ernst & Young analysts speak of $65 billion (the growth is higher by 1/3 vs 2005). In 2007 the M&A market with the involvement of the Russian companies may increase by 25 30% or more if in 2007 there will be large scale transactions with the shares of energy companies and abroad.

The problem of alien acquisitions (only those that do not refer to the corpo rate law and classic raid which is a purchase of shares but based on falsification of documents, and therefore subject to the criminal law for corruption) is not sig nificant. According to the Ministry of Internal Affairs, in 2005 the value of disputable assets was about RUR200 billion or 12% of the total amount of 2005 M&A transac tions. However, it is these transactions that recently have been causing significant public (or pseudo public) protest. The RF Government introduced to the State Duma a whole set of amendments in the Arbitration and Procedural Code of Russia, RF Code of Administrative Offences, Tax Code and other laws in January 2007. (the notion of a corporate dispute was introduced; the possibility for minority share RUSSIAN ECONOMY IN trends and outlooks holders to join their claims into one collective claim; all the elements of a corpo rate dispute could be united into a sole process at the arbitration court at the place of registration of a claimant; settlement of security actions, etc). The problem, however, may not be solved in the framework of corporate and procedural amend ments given criminal nature of most notorious acquisitions.

As many believe, in 2006 2007 the raider problem became more serious in the area of land property. According to IET estimates (see section 5.3), the current legislation does not create proper conditions for taking land into private property but on the opposite has a trend to enhance ambiguity of interpretations and expand arbitrary actions of administrations. As an example let us see look at the most acute problems22 of appropriation of land under privatized enterprises:

- unjustified exclusion by the federal and regional authorities of the considerable number of land plots from the list of lands subject to buy outs;

- unacceptable costs of land buy out for the majority of the enterprises; absence of reduced prices for small and mid size businesses, or payments by install ments as well as crediting tools to provide access to land for a bigger number of enterprises;

- marginally high prices of land buy outs established in some of the regions and overestimated cadastre values of land;

- administrative subjectivity in setting boundaries of land plots as a result of defi ciencies in the urban development legislation;

- problems of interaction between the federal and regional authorities in the area of delineation of land ownership and distribution of revenues from land sales and rent.

The principle of distribution of authorities as a basis of a modern law abiding state seems to play a most important role in the political and legal infrastructure as it ensures proper environment for a sustainable economic growth. The deci sions of those authorities that in practice act as an arbitrator who supervises prop erty sales, implementation of contractual obligations and rules of the market game should be the evidence of the actual independence of the courts from the executive power.

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