Sie sind auf Seite 1von 15
Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change Author(s): Pauline Jones Luong andy : American Political Science Association Stable URL: http://www.jstor.org/stable/4145302 Accessed: 04/04/2010 16:26 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=apsa . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. American Political Science Association is collaborating with JSTOR to digitize, preserve and extend access to The American Political Science Review. http://www.jstor.org " id="pdf-obj-0-2" src="pdf-obj-0-2.jpg">

Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change Author(s): Pauline Jones Luong and Erika Weinthal Source: The American Political Science Review, Vol. 98, No. 1 (Feb., 2004), pp. 139-152 Published by: American Political Science Association Stable URL: http://www.jstor.org/stable/4145302

Accessed: 04/04/2010 16:26

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=apsa.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change Author(s): Pauline Jones Luong andy : American Political Science Association Stable URL: http://www.jstor.org/stable/4145302 Accessed: 04/04/2010 16:26 Your use of the JSTOR archive indicates y our acce p tance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the p ublisher re g ardin g an y further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=apsa . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. American Political Science Association is collaborating with JSTOR to digitize, preserve and extend access to The American Political Science Review. http://www.jstor.org " id="pdf-obj-0-44" src="pdf-obj-0-44.jpg">

American Political Science Association is collaborating with JSTOR to digitize, preserve and extend access to The American Political Science Review.

http://www.jstor.org

American Political Science Review

Vol. 98, No. 1

February 2004

Contra

Coercion:

Russian

Tax

Reform,

and

Negotiated

Institutional

Change

PAULINE JONES LUONG

ERIKA WEINTHAL

Yale

University

TelAviv University

Exogenous

Shocks,

e view of institutions as coercion rather than as contracts dominates the comparative politics

iterature on both institutional creation and the

between the Russian

politics of economic reform. The emergence of a

collectively optimal tax code in Russia demonstrates the limitations of this emphasis on coercion.

was not imposed by a strong

central leader, mandated by international

groups. Rather,

it

institutions, or

economic interest

government

is the product of a mutually

ability

to

and the Russian oil companies. Russia's

the conditions under which and the microcausal mechanism

change

and economic reform. Owing to their mutual

financial crisis generated widely shared perceptions

This new tax code

the result of state capture by powerful

beneficial exchange

negotiate

an

effective tax regime also suggests

whereby exogenous shocks promote and

vulnerability

interdependence,

the

among

institutional

August

1998

these actors that the payoffs of cooperation had changed. Yet the economic reform institution that

resulted required a series of incremental strategic moves that established common knowledge.

At

the core of political science is the question

of how institutions

emerge-that

is,

whether

they are the product

of social contracts and

strategic bargains, power asymmetries and coercion, or

path dependence

deed, although

perspective on

the central

and

evolutionary development.

that unifies them.

In-

each subfield

institutional

has favored a different

emergence, this is one of

questions The view of institutions as contracts (or the contrac-

tarian approach), which was born with Thomas Hobbes

but reached its

maturity

in the

public

choice and ratio- American politics

Shepsle

1986,

orga-

nal choice literature,

(see,

e.g.,

has dominated

Kiewiet and McCubbins 1991,

and Weingast 1993) and the new economics of

nization

(see,

e.g.,

Moe 1984 and Williamson 1985) for

almost two decades. According to this view, institutions

are the

product

of individual

exchange

and

competi-

tive selection

aimed at deriving

a mutually beneficial

outcome, such as efficiency

Shepsle 1986). As

or cooperation (see, e.g.,

the

comparative politics embraced

Pauline Jones Luong is Assistant Professor, Yale University, Depart- ment of Political Science, PO. Box 208301, New Haven, CT 06520-

8301 (pauline.luong@yale.edu).

Erika

Weinthal

is

Assistant

Professor,

Tel Aviv

University,

Department of Political Science, PO. Box 39040, Tel Aviv 69978 Israel

(erikaw@post.tau.ac.il). The authors share equal

responsibility

for the content and analysis

herein. This article is part of a long-term joint project and we have chosen to rotate authorship on the articles we generate.

The authors would like to thank Timothy Colton, Anna Grzymala- Busse, Stephen Hanson, Stephen Holmes, Gregory Huber, Ira Katznelson, Lawrence King, Ellen Lust-Okar, M. Victoria Murillo,

Thomas Remington, Andrew

Schrank, Regina Smyth, Ivan Szelenyi,

both the 2001-2002

Daniel Treisman, Zeev Maoz, the participants in

Post-Communist Workshop at Harvard University, and

and the Comparative Politics Workshop three anonymous reviewers for their in-

sightful comments and useful suggestions

Mariya

tance.

Kravkova and Maria Zaitseva

on

early drafts, as well as

for providing research assis-

We also acknowledge the Carnegie Corporation in New York

and the Leitner Program in Political Economy at Yale University for

financing

Policy

in

our fieldwork in Russia, the Institute of Law and Public Moscow for offering logistical support, and the Carnegie

Globalization and Self Determination Project at the Yale Center for

International and Area Studies for facilitating our collaboration at Yale University.

new institutionalism, however, the contractarian

proach

was

largely rejected

(see,

tutions as coercion

1995, and

Knight

ap-

in favor of the view of insti-

e.g., Bates 1988, Firmin-Sellers

their

many

differ-

1992).1 Despite

ences, this is true of both historical institutionalist

accounts, which

clearly

eschew

contracting (see,

e.g.,

Thelen and Steinmo

1992), and rational choice institu-

tionalist accounts, which have come to embrace the as-

sumption that institutional outcomes are distributional

(see,

e.g., Knight 1998).

The view of institutions as coercion rather than as

contracts has also come to dominate the literature on

the

politics

of economic reform. This is

argument

apparent in

policy

the prevalence of the

change requires state.2 Based on the

and Latin America,

necessary

that economic

an authoritarian leader and/or a

divergent experiences

the view became

strong of East Asia

widespread that

imposed

but difficult market reforms must be

from above-either to make effective investment de-

cisions, to

thwart organized

popular

opposition,

or to over-

come an inherent

(see,

Kaufman

1990). Alongside

emerged regarding

to mandate or

Kahler 1989 and

bias toward the status quo

Haggard

and

e.g., Fernandez and Rodrik 1994,

1992, Stallings

and Kaufman 1989, and Wade

from com-

e.g., Sachs

Monetary

1994 and

foreign capital (see, of contractarianism

this literature an analogous argument the need for international

pressures

(see, e.g.,

encourage market reforms

Stallings 1992), ranging

and International

pensatory aid packages Fund

(IMF)

conditionality (see,

Stone 2002) to the need to attract

e.g., Simmons 1999).3 The rejection

  • 1 The opposite

trend occurred in international relations, which

moved from the domination of the institutions as coercion approach

(Neorealism) to the institutions as contracts approach

ism). For an overview of this debate, see Baldwin

2

In this literature, state strength is often

equated

1993.

or insulation from popular

(Neoliberal-

with autonomy

demands and narrow economic inter-

ests. For example, this is why Williamson (1994) advocates the use

of autonomous technocrats (or reform in developing countries.

technopols) to implement economic

  • 3 These two arguments come together most explicitly in Sachs 1994,

which argues

of strong

that successful economic reform

requires

a combination

(i.e., autonomous) leaders and international assistance.

139

Contra Coercion

February 2004

is also manifested in the predominant treatment of eco-

nomic reform as

benefiting

a

particular group

expanding

at the ex-

the

pie

to

pense of the majority

make

everyone

1991; Olson

rather than

e.g.,

better off (see,

Alesina and Drazen

1982, and Schamis

1999).

We demonstrate that this emphasis on coercion hin-

understanding tutional creation and economic

a detailed

optimal

on

analysis

tax code

extensive

of the

ders our

of the

process

reform

by which insti-

occurs through of a collectively

emergence

in Russia from

1998 to 20024 based

the Soviet

elite interviews. 5 Following

Union's retreat from Eastern

and ultimate demise in 1991,

Europe scholars also endorsed

in the late 1980s

the view of institutions

as coercion in their attempts

and

evaluate

postcommu-

2002,

and

emergence the prospects for market transition in the

nist

world

(see,

Treisman 1998).

e.g.,

Hellman 1998, Stone

to understand institutional

We find, however, that this new tax

imposed mandated by international

by

of state

capture by powerful

general

as both the

code was neither

a

strong central leader,

institutions, nor the result economic interest

groups,

literature predicts and specialists

Rather,

it

represents a

govern-

eco-

the Russian

set of domestic

companies

(ROCs)--

from the

on Russia commonly argue.

negotiated

ment and

settlement

the most

between

powerful

Russian

oil

nomic actors-the

in which each side incurred gains and losses

exchange. At the same time, the

regime in Russia

at the

emergence

end

of

of an effective tax decade marred

a

by

corrective

important

it

suggests an al-

stagnant to the contractarian

ternative mechanism

reform efforts offers an

approach because

two

whereby tors can achieve mutual gains from

to their mutual

August 1998 financial crisis

perceptions

among the Russian

payoffs

of

ROCs that the

economic

cooperation

reform

institution that

equally powerful ac-

cooperation.

Owing

the

shared

and the

changed. The

resulted, however,

vulnerability and interdependence,

generated widely

government

had

was contingent upon gic moves that established common

a series of incremental strate-

knowledge. Thus,

we also build on the literature that invokes

shocks to

explain

economic reform

exogenous by clearly specifying

the conditions under which and the microcausal mecha-

nism

whereby exogenous shocks promote institutional

policy change.

creation and economic

4 The new Russian tax code consists of two parts. Part I was adopted in July 1998 and enacted in January 1999; it covers administrative and

procedural matters, including

protection

the introduction of new taxes and the

in August 2000,

of taxpayers' rights. Part II was adopted

amended in November and December 2001, and enacted in 2001 and

2002; it includes specifications

corporate profits tax,

on various taxes,

including the VAT,

personal incomes tax, and the social tax. This

Part I laid

of Part II. For

article focuses primarily on explaining Part II, although

the groundwork

for

the approval

and

implementation

an overview see, OECD 2001, 115-144.

5 These interviews were carried out systematically in Moscow from

September 2001 to July 2002 with representatives

from both Russian

and foreign oil and gas

companies, Russian government officials,

energy experts.

interviewee.

In

most cases,

and Russian and foreign financial and

names are withheld at

the request of the

THE PUZZLEOF RUSSIA'S NEGOTIATED TAXREFORM

Russia's

ability

to negotiate a new tax code after almost

attempts presents

us with a

striking

the dominance of the coercion

widespread

a decade of abortive

puzzle in light

approach

in

pessimism

First,

coercion

be

of both

comparative politics and the

about Russia's

prospects

for market reform.

it directly contradicts the view of institutions as

difficult economic reforms can

by

only a strong leader within or

country. Second,

reform in

post-

wis-

whereby imposed from above

pressures both the recent literature on economic

communist

external

from outside the

states and the long-held conventional

predict institutions to a stable and

dom on resource-rich states

fail to

develop the necessary

growth,

particularly

Finally,

economic

hensive tax regime.

been posited

to facilitate

that Russia will

promote

compre-

the mechanisms that have

cooperation elsewhere-such and social norms-were

as a precommitment strategy clearly absent in this case.

From Informal Exchange to Formal

Guarantees

Tax

policy be described as a classic collective

in which the two most powerful

the Russian

in Russia for most of

the

1990s can best action

problem7

actors concerned-

compa-

government nies (hereafter ROCs)-followed

and the Russian oil

individually rational

to

the Russian

strategies that were collectively suboptimal.8 Owing

mutual

suspicion

and weak

enforcement,

government

term

opted to maximize its revenue in the short

tax rates

by

de-

through setting arbitrarily high

opted

cree and the ROCs

in the short term

to minimize their tax burden

increasingly

elaborate

As a result,

by developing

schemes to evade these exorbitant tax rates.

the government

of its

projected

was able to collect

costs over the

approximately half

keep a

tax revenues and the ROCs could

of their

substantial portion

incurred

unreliable

heavy

and

profits. Both sides, however,

long

term in the form of

property rights,

negative

ef-

revenue streams, insecure

asymmetrical

information that had a

fect on the Russian economy as a whole and could have

been reduced or eliminated From the Russian

ularly

the

Ministry of

rates was the best

through cooperation.

government's perspective, partic-

Finance, maintaining high tax

the

budget despite

way to replenish

low compliance rates (see, e.g., RPI, March 1996 and

6

Russia not only possesses the world's largest natural gas reserves

and the eighth largest

porter of natural

oil reserves, but is the world's largest ex-

gas and the second largest exporter of oil. See

http://www.eia.doe.gov/emeu/cabs/russia.html.

7

For a comprehensive

discussion of collective action problems, see

Hardin 1982 and Olson 1965.

8

Although other actors (such as

regional

government

leaders) were also influen-

1990s, we focus our analysis

because

they

were the

tial in shaping taxation policy in the early on the ROCs and the Russian

most important

new tax

code-particularly

actors involved in the subsequent formulation of the

Part II (authors' personal communication

with Alexander Ustinov, Economic Expert Group, June 2002).

140

American Political Science Review

Vol. 98, No. 1

Samoylenko

and revenue

were

rarely, if

1998).9 The official tax rates for

sharing for regions

ever, observed

in

abysmally

industry

that existed on

practice,

paper and tax col-

lection rates were

1999, chap.

cording to

2000,

low as a

result (Gustafson

chap. 6). Ac-

9; Shleifer and Treisman 2000,

the IMF (2000, 69, 71), even as of January 1,

taxes at the consolidated level

the value of

unpaid local governments) was 8.3% of the GDP.

elites

presiding

over the

country's in-

regional leaders engaged

government

to de-

(see, e.g., Easter,

purposefully

indus-

(federal and

Instead, economic

dustrial enterprises as well as

in

ongoing

the

budget

negotiations

respective

surprisingly,

highly

termine their

2002). Not

targeted

tries

in

its

the energy

was

sult. In

with the

tax burdens

the

government

lucrative and concentrated

sector for revenue extraction and on this sector as a re-

highly dependent

1998, for example,

the oil sector accounted for

approximately

Economic

one-fourth of all tax revenues (Russian

government

it

Trends 1998, 6). The Russian

portion sought from this particular sector by raising tax rates

arbitrarily and means, such as

threatening to employ

blocking

access to

different coercive

pipelines and export

markets, if companies did not comply. Moreover, re-

sponsibility

for

determining tax

by

the

rates in the

energy sec- of Fuel and Energy

tor was often shared

and the

Ministry

Ministry of Finance,

which resulted in constant

to ex-

fluctuations in the tax

cise taxes.

Despite

in revenue extraction,

ertheless,

managed

rates, especially pertaining the high transaction costs involved

the

Russian

government,

nev-

33 and 35% of

tax rate of

to collect between

the ROCs' revenues based on a

53%.10 At the same time,

statutory the government could guar-

by arbitrarily granting tax

for

providing energy

antee itself a source of fuel

arrears to companies in exchange

to

delinquent customers, tic industries as well as households (Jones

Yet this strategy only exacerbated the

noncompliance,

which often included domes-

Luong 2000).

problem of

cre-

particularly among the ROCs, by

ating a strong their

profits.

the ROCs'

incentive for It also failed

economic actors to hide

to take

into

account that

tax burden was much higher than even the

and local

to levy informal taxes on the oil

regions by forcing

them to

in their

social services and infrastructure investments

1999, 207). The ROCs

responded

to this

situation by developing a series of legal and

government projected because of the regional

governments' tendency

companies operating

provide

(Gustafson

untenable

was able to collect at least a

of the revenue

semilegal schemes to hide their profits through which

they effectively evaded heavy taxation.11 Transfer pric- ing was the most common form. Because the corporate

9 This was also confirmed in authors' personal

Arkady Dvorkovich, Deputy Minister,

communication with

Ministry of Economic Devel-

opment

and Trade, July 5, 2002.

  • 10 Authors' personal communication with Vitaly Yermakov, Re-

search Associate, Cambridge

Energy Research Associates (CERA),

June 2002, and with Dvorkovich, op. cit.

  • 11 Although the Russian government's

Finance could ascertain a close

auditors and the Ministry of

estimate of what the ROCs' actual

profits were through export quotas and yearly audits, the prevalence

of these legal and semilegal

catch or to sanction the

schemes made

it extremely costly to

ROCs for tax evasion (authors' personal

income tax (or profits tax) was based on trade rather

than production, parent companies official income by creating trading

located in a low tax zone within

could reduce their subsidiaries (often

Russia) from which they and then resold

prices

to offshore Russian inter-

zone). By

some

purchased oil at below-market

this oil at mediaries

equally

(often

low

prices

estimates, the

located in a free-trade

ROCs have been able to hide at least 25 %

of their export proceeds through

a result,

the

government

only

proximately

transfer

pricing.12 As

ap-

received 22% of the

$30 billion in windfall rent from natural re-

sources sales in 2000, while 78% remained in the hands

of oil and

gas exporters.13

only

Actual

(versus statutory)

tax

rates on oil not

were lower than they should

to

be, but

also differed markedly from company

e.g.,

Novaiia

gazeta, August 7, 2000).

tax evasion that detracted from

company (see,

Another form of activities

profit-making included the development of intricate schemes to avoid

payroll

taxes. Here,

parent

companies would create

employees, arrange

employees

under

offshore subsidiaries for insurance

to pay their

to

pay

companies

their

the guise of large

monthly payouts from life insurance

fees so that

rates than the

accounts.14

govern-

cycle

policies, or pay higher corporate banking

employees

would

earn higher

market rate on their

interest

Thus, by

ment and

checking the end of the 1990s the Russian

the ROCs were locked

in a vicious

in which exorbitant tax rates encouraged

evasion

encouraged even

leading

of expropriation,

schemes to

higher

evasion and

tax rates and threats

to more elaborate and time-

hide profits.

The results were

economy on the whole, which investment rates or economic

(IMF, 2000). Although

new tax

consuming disastrous for the Russian

did not record

since 1995,

due

to the

positive growth for most of the decade

the

government

legislation

the

Duma

had attempted to introduce

it was continuously opposition of the

stalled in

"Left" (i.e.,

the Communists and Yabloko)

lobby,

circumvent

1998, the Duma

an

agreement

and of the oil and gas

attempted to

April could not reach

reform. Rather, the for-

by adopting numerous

compromise

taxpayers'

which the Yeltsin administration

by issuing

and

new decrees. Even as late as

the government

tax

concerning

impede

mer continued to

reform

amendments, while the latter refused to

by addressing procedural the tax

rights or lowering

1998). Similarly,

the Duma,

issues related to

burden (see, e.g., Samoylenko

tax reform in

blocking to hide their income,

in addition to

the ROCs continued

to exaggerate their losses in order to obtain tax breaks (RPI, April 1998, 10) and to pressure the government to reduce the energy sector's tax burden (RFE/RL, July 23, 1998). This situation, however, changed dramatically by the end of 1998. Despite nearly a decade of failed tax re- form, from 1998 to 2002 the Russian government and

communication with representatives of ROCs, September 2001 and

June-July 12 2002, and with tax auditors, July 2002).

Authors' personal communication with Yermakov, op. cit.
13

Authors' personal communication with Yermakov, op. cit.

  • 14 Authors' personal communication

with Peter I. Reinhardt,

Principle, Ernst & Young, September 2001.

141

Contra Coercion

February 2004

the ROCs were able to achieve mutual in the form of a new tax code.

operation

new tax

code is designed

to

a

gains In
gains
In

from co-

sum, this

of

incentives

significant

increase the reliability

creating

without

revenue streams for both sides by

for broad-based tax

compliance

improvement in the government's administrative ca-

pacity

and

pegging

global

payments price of oil. It also reduces informa-

by

eliminating

transfer

pricing and

profits.

the ROCs' tax

to fluctua-

tions in the

tion asymmetries

encouraging fixed tax rates and

By

the

setting

government

its revenue

the ROCs to disclose their actual

reducing to resort to coercive tactics to meet

incentives for

needs, moreover, the new tax code has the

potential

to secure

abroad.

property rights

for the ROCs and

thereby at home and

operations

enable them to both increase their investments

attract foreign partners to expand their

on the

path

Russia's new

because

Furthermore, it puts Russia decisively

By most accounts,

toward market reform.

only it sets lower tax rates than the OECD recommends but

tax code exceeds Western standards not

also because it is much

vious one. For example,

on

simpler

and clearer than the

pre-

it has introduced a 13% flat tax

corporate contributions to

profits tax (a.k.a.

personal income, capped

the social insurance fund, reduced the

corporate

turnover

to the

price

cedures that are on

income tax) rate from 35 to 24%, abolished

taxes (as of 2003), tied export tariffs directly

of oil, and established new

par

accounting pro-

accounting

with international

standards. In addition, a new mineral extraction tax was

introduced in January 2002

rate pegged

of

to the

price

(Chap.

26, Part II) as a flat

of oil. It has also won the praise

political analysts

and, thus,

its

po-

economy as a

2002).15

foreign for the inclusive nature of tax benefits

tentially positive

whole

impact

and domestic financial and

on the Russian

(see, e.g., These assessments were confirmed

Andersen 2002 and Rabushka

by sults, which indicate that tax collection rates have in-

the initial re-

creased since the new code was

put

into effect (see,

Kommersant, October 19, 2001; Pravda, October

e.g.,

18,

2001; and Russia Journal,

July 18, 2002). For example,

70% fol-

in-

the fact that income tax revenues

lowing come has been

of costly tax-evasion

jumped by the introduction of the flat tax on

directly

personal attributed to the abandonment

schemes (Aslund 2001, 22).

The Failureof

Existing

Accounts:

Coercion,

State Capture, and the "Resource Curse"

How did the Russian government and the ROCs man- age to overcome their collective action problem and cooperate with one another to their mutual advantage? This outcome is especially puzzling because none of the existing accounts provide a satisfactory explana- tion. Neither the general predictions nor the particu- lar assessments of Russia that stem from the predom- inant view of institutions as coercion can explain the emergence of this new tax code as a product of intense

15 This is the consensus among domestic and foreign financial an-

alysts according to authors' personal communications, September
2001

and June-July 2002.

negotiation

and

compromise.

Indeed, both the litera-

ture on institutional economic reform in

predict

code-either

emergence generally and that on states

postcommunist

specifically

that Russia should fail to establish a viable tax

through contracting

or at all. Nor were

explana-

in contractarian

the mechanisms often cited

tions of

institutional emergence through cooperation

present in this case. That the view of institutions as coercion has dom-

inated scholarly

clearly

concerning

assessments of Russia's transition is

overwhelming

pessimism

demonstrated in the

its

prospects

for economic reform in the ab-

leader within or external

pres-

country. Many have attributed most of the 1990s

sence of either a strong sures from outside the

market failure in Russia

throughout to the weakness of either President Boris Yeltsin or cen-

tral state institutions vis-a-vis powerful economic inter-

ests (see, e.g., and Glinski

Hellman 1998, McFaul

1995, Reddaway

1999).

2001, and Robert and Sherlock

Thus, not surprisingly, Russia's

the

has

political

often

order

necessary

in its

been placed

and seemingly

Putin, who

hope

for

establishing

to achieve market reform

newly

elected

president,

Vladimir

e.g.,

he

more authoritarian leader,

succeeded Yeltsin in March 2000 (see,

Nicholson 2001 and Shevtsova 2003).16 Because

not only

a Duma

enjoyed

a popular mandate but also faced

and therefore more

poised

climate and

agenda

polarized, after the 1999 elections Putin seemed

political

that was less

pliable, to unilaterally redefine Russia's

single-handedly push through

(see,

e.g., Remington

his economic

2001). Putin's position

security

as former

service (i.e.,

head of the Soviet Union's internal

the KGB) bolstered the presumption

be a

strong leader, capable

his will.

of

using

that he would

force to impose

According

to this perspective, the new tax code is

yet

another

example

of Putin's unri-

immediately

Putin

presidency, for example,

administrative

changes to influence national

aimed at re-

signifi-

best understood as

valed authority since his election. Almost

after

ascending to the

sweeping

launched

ducing the power of the regions

policy-making, including

tax reform. The most

cant of these was the reorganization

Council,

viously

through

which the

obstructed the

of the Federation

regional leaders had pre- at tax

demand-

government's attempts

budget by

reform and weakened the federal

ing complex revenue-sharing arrangements

Treisman 1999).

(see, e.g.,

Putin also demonstrated to the ROCs

that he was willing to use force through his decisive

treatment of the notorious oligarchs Boris Berezovsky and Vladimir Gusinsky in the first few months of his

presidency (see Lloyd 2000 for details). Yet, if this is what brought the ROCs to the bargaining table, it fails

to explain why negotiations over a new tax regime be- gan in late 1998 under Yeltsin.

16 Putin was appointed as prime minister in

elected to the

August

1999 and then

presidency (RFE/RL Russian Election Report, 2000, 13). The Duma elected in

in March 2000 with 52.94% of the vote

December 1999 contained a majority of his

to form the first stable policy coalition in

supporters, who appeared

the

Russian parliament

Unity bloc). For details, see Colton and McFaul 2000 and Smyth
2002.

(the

142

American Political Science Review

Vol. 98, No. 1

It also fails to

explain why

that

Putin did not

simply

impose a new tax regime

government's preferences.

two biggest

polarized

perhaps

out even the tacit

approval have continued Yeltsin's

mises so that a

solely With the elimination of the

reflected the

obstacles to tax reform in the 1990s-the

regional Putin could have passed the new tax code with-

of the ROCs. He also could of

changing

partic-

Duma and recalcitrant

leaders-

arbitrary practice

tax rates by decree. Yet Putin chose to forfeit this

ular

advantage

tinue the

vis-a-vis the ROCs and, instead, to con-

negotiations and make the necessary compro-

tax code could be

passed

by the

important taxpayers-the ROCs.'7 As

comprehensive through the Duma as a law that was endorsed

country's

most

will be described in more detail below, to reassure the

ROCs that their assets would not be

expropriated after

property

his commitment

the 1998 crisis, he also publicly recognized the

rights

of the oil

industry

and

pledged

not to renationalize. Thus, he seemed to be interested in

making a truce with the

remaining oligarchs

despite signs

rather than

alienating them. Moreover,

growth

of economic

1999, agreeing

and increased tax revenues in

to formalize a tax code with lower fixed rates was not

costless for Putin. If the ROCs chose to

commitment to comply

Russian

could no

government

renege with the lower tax rates, the

deficit because it

community

pres-

other post-

1994,

on their

risked a

budget raise tax rates.

longer arbitrarily

Others have looked

to the international

to provide either the financial incentive or direct

sure to

propel

market reform in Russia and

(see, e.g.,

communist states

and Stone 2002). Indeed,

of international

Aslund 2002, Sachs

the undeniable importance and the

increasingly

competitiveness

direct role of transnational actors in domestic affairs in

the context of

globalization (Rodrik 1997) and a post-

(Weinthal 2002) lend

support

to this

obvious alternative explanation for

government pushed through

foreign

invest-

Cold War world

argument. Thus, an

the new tax code is that the

independence

direct foreign

2001).

In

this new tax regime in order to attract

ment or

appease

clear since

ergy sector,

its foreign creditors. Yet it has been

that, particularly in the en-

bringing

in

Russia has very little interest in

investment

(Jones Luong both
(Jones Luong
both

and Weinthal

the executive

of

fact, until very recently,

branch and the Duma

PSAs, which are

investment

have stalled

the adoption

universally viewed as the key

in the

to further

foreign come clear in the following

energy sector.18 As will be- section, the Russian govern-

ment also did not adopt a new tax regime to attract for-

eign direct investment but, rather, because the ROCs sought an additional guarantee for their property rights at home by attracting Western partners for joint ven- tures abroad. Nor is the new tax code simply a product of direct pressure from foreign financial consultants or the IMF compelling the Russian government to design a more suitable (i.e., Western-style) tax regime. In fact,

17 According to the 1993 Russian Constitution, taxation is under the

purview of the legislature; thus, a comprehensive tax code could only be adopted as a law. 18 Authors' personal communications with Vladimir Konovalov,

Director, Petroleum Advisory Forum, September 14, 2001.

since 1997 the IMF has been of Finance to raise, not lower, The contractarian

approach in the form of two prominent

proaches to understanding

form in

take all"

postcommunist

view,

captured the gains of their

position

encouraging

the

Ministry

rejected

ap-

re-

Russia's tax rates.19

has also been

and

closely

related

the failure of economic

states. The first is the "winner

according to which a narrow set of actors

from

early

market reforms

by

virtue

effectively prevented sub-

early gains

and then

sequent reforms that might threaten these

(Hellman 1998). For Russia, in particular,

this

perspective

is

directly

related to what many have deemed the evils of "insider

privatization"

(or

privatization policies

regime),

that deliber-

ately enriches a few agents

property rights

so that

favor those closest to the

because it either

who prefer

they

can

to maintain insecure

exploit

their

privileged

"early

reforms that would

access to social assets (Sonin 1999) or creates

winners" who block

subsequent threaten their ability to continue to reap the benefits of

their

ill-gotten gains (Alexeev 1999; Black, Kraakman,

"early

win-

and Tarasova 2000). The most notorious

ners" are the ROCs because of the

way

in which these

well-positioned private actors acquired ownership of

the

energy sector-first,

a

through

a

pure

"asset

grab"

and, then, through

(see Johnson

agreeing

suspicious

"loans for shares" deal

details). By

1997 and McFaul 1995 for

to the new Russian tax code, however, the

ROCs do not "take all" but, rather, incur substantial

economic losses. Despite

tax code actually it eliminates the

capital expenditure

began

tinue

to recover,

bring

to tax evasion.

reduced tax rates, the new

increases their tax burden because

tax benefits of transfer

pricing and

deductions.20 Even when oil

prices moreover, the ROCs chose to con-

and to

reverting back

negotiations with the Russian government

their profits onshore rather then

More

Russia's

specifically,

inability to

according

develop

to

this

perspective

regime

thus

a viable tax

far has also

been attributed directly to this elite "re-

resources"

following

the Soviet

tax code, how- of eco-

ability

process is

suggest

distribution of power

collapse

ever,

(Easter

demonstrates not

2002). The new Russian

only

that the

nomic elites to derail the economic reform

more limited than these

pessimistic

accounts

but also that, under certain conditions, these "insiders"

or

"early

winners" can in fact serve as the engine of

further reform. The second is the view of the Russian state as fully "captured" by key economic interests. The tax code, then, is merely the result of "state capture"-that is, the ROCs have used their excessive political influence to impose lower tax rates for their own benefit. Yet

this is an unsatisfactory portrayal of the emergence of the new tax code for several reasons. First, if the

ROCs were capable of simply dictating their preferred policies to government officials, it is not clear why they would prefer to establish a formal tax regime rather

  • 19 Authors' personal communication with Dvorkovich, op. cit.
    20 Authors'

personal communication with Yermakov, op. cit.; see also

Mazalov 2001, 2.

143

Contra Coercion

February 2004

than

continuing

to benefit from the status

quo

in which

they relied on informal networks and influence both to

negotiate taxes. It also does not

favorable tax rates and to evade unfavorable

explain why

the ROCs endorsed long-term costs on

their profits, an overall in-

a tax code that inflicted short- and

them by forcing them to fully

disclose

adopt accounting procedures, and accept

crease

in

their

tax burden.

Second,

the literature on

"state capture" predicts

a "capture economy"

perse

that those who benefit from

institutions that dis-

will reject

rents (Hellman, Jones,

and Kaufman 2000) or

improve the protection of property rights (Sonin 1999).

Yet

by protecting

tax

payers rights vis-a-vis state agen-

taxpayers, and endeavoring

cies, lowering

to increase

rates for all

compliance

across sectors and broaden the

tax base, the new

Russian tax code does both. It thus

provides tax benefits that are inclusive in nature and is

already having as a whole.

a positive impact on the Russian econ-

omy Beyond the literature on institutional emergence and

the

politics

of economic reform, the

long

held

con-

ventional

wisdom on resource-rich states

also predicts

institu-

a stable

that Russia will fail to

develop the necessary

growth, particularly

tions to promote economic

and

on the

comprehensive tax regime.

"resource

In the vast literature

curse," a weak (or nonexistent) tax

regime

tive

is viewed as

perhaps

the most

prevalent nega-

outcome of resource

wealth due to state leaders'

myopic

thinking

and

heavy

reliance on external (i.e.,

rather than

internal) sources of revenue (see, e.g., Karl

emergence

of

is a

gains from

puzzling

1997, Mitra 1994, and Shafer 1994). The

a viable tax code in energy-rich Russia, therefore, striking anomaly.

Finally,

trade in

Russia's

ability

to achieve mutual

the form of

a new tax code

is also

because the causal mechanisms that are commonly in-

voked in the literature to explain cooperation-such

a precommitment strategy21

points)22-were

clearly

Neither the Russian

or social norms (e.g.,

absent in this case.

unilaterally willing

to signal

each

party

their

as

focal

government nor the ROCs were

strategic move

Rather,

to make an extreme

commitment to cooperation.

pursue

continued to

independently ratio-

prices

were

nal strategies. For example,

declining

den on

in

early 1998,

the ROCs, the

even when oil

rather than easing the tax bur-

government sought

to

squeeze

in the

the gaps

the ROCs for additional taxes