Market Forces and Structural Change in the Russian Economy

Abstract

Restructuring in Russia Sergei Vasiliev This paper reviews the debate about economic reform in Russia. It argues that the state is unable to play a strong role because its apparatus is weak and corrupt, and because it does not have superior information to the private sector. In fact, where it is allowed to do so, the private sector is flourishing in response to internal and external market demand. The paper documents the changing economic structure and draws lessons from the policy mistakes of the first two years of reform. It shows that firms that were either subsidized or protected from external competition, mainly through a vastly undervalued currency, have failed to restructure themselves. Finally, it is argued that the defence industry has nearly completed its reconversion, scaling down and shifting to other activities, even though a redirection through fresh investment has yet to happen. Policy recommendations include a clean-up of balance sheets in the banking sector, possibly with state guarantees.