A Regional Analysis of Transactional
Strategies of Russian Enterprises
Kathryn Hendley, Peter Murrell and Randi Ryterman”
This article inquires into the attitude of Russian enter-
prises toward law and legal institutions within the context of
conflict resolution. The authors examine the regional varia-
tion in how Russian enterprises do business with one another,
focusing on specific strategies used to resolve conflict. Con-
trary to popular belief, the Russian business world is not ex-
actly a “Wild East” where the enforcement of commercial
obligations must be done through dubious means. Litigation
and the use of the law are seen as options, thus indicating a
certain level of legitimacy conferred on the legal sphere. At
the same time, however, enterprises seem to favour informal
avenues of conflict resolution.
The present analysis is grounded in a survey of indus-
trial enterprises in six Russian cities. The authors compare the
use and the effectiveness of various strategies across regions,
including relational contracting, self-enforcement, enterprise
networks, private enforcers, administrative agencies, and
courts. The differences are evaluated to determine whether
regions emerge as a significant causal factor. While the data
show variation, it is less than expected. With the exception of
Moscow and to a certain extent Bamaul, few patterns emerge
despite the variation among the regions in the use of strategies
by the surveyed enterprises.
The authors’ research shows little support for the use of
private force in contractual relations. The authors call for a re-
evaluation of the popular view that economic reform has been
thwarted by the absence of viable mechanisms for enforcing
contracts and other property rights.
Cet article s’intdresse a ‘attitude des entreprises russes
face au droit et aux institutions judiciaires dans le contexte de
r6solution de conflit. Les auteurs examinent ]a variation r6-
gionale dans la mani~re dont les entreprises russes font affaire
entre elles, en se concentrant sur les strat6gies particulires
employdes pour r.soudre tout conflit. Contrairement At ce que
l’on croit, le monde des affaires russe n’est pas un monde ott
l’exdcution d’obligations commerciales doit 8tre faite par des
moyens douteux. Le litige et le recours au droit sont pergus
comme 6tant des options, indiquant ainsi qu’un certain niveau
de 16gitimit6 a 6t6 conf&6 A la sphee juridique. Cependant,
en m.me temps, les entreprises semblent prdfdrer des voies
informelles de r~solution de conflit.
‘auto-exdcution,
L’analyse est fondde sur une 6tude d’entreprises indus-
trielles dans six villes russes. Les auteurs comparent ’emploi
et l’efficaciti de diverses stratgies ii travers les rdgions, in-
cluant les relations contractuelles,
les r6-
seaux d’entreprises, les agents privds d’exdcution, les agences
administratives et les tribunaux. Les diffdrences furent 6va-
lu.e.s pour ddterminer si les rdgions constituent un facteur de
causalit6 important. Les donndes montrent une variation, mais
celle-ci est moins marqude que prdvu. Ave l’exception de
Moscou etjusqu’h un certain point Bamaoul, peu de modules
6mergent, malgrd la variation rdgionale dans
’emploi de
stratdgies.
La recherche des auteurs ddmontre qu’il existe peu
d’appui pour ’emploi d’une force privde dans les relations
contractuelles et les auteurs pr8nent une r66valuation de Ia
perception populaire dictant que I’absence de rdforme &ee-
nomique est due A I’absene de mdcanismes viables pour
exdcuter les contrats et autres droits de propridt6.
. Kathryn Hendley is Associate Professor of Law and Political Science at the University of Wiscon-
sin-Madison; Peter Murrell is Professor of Economics at the University of Maryland; and Randy Ry-
terman is an Economist at the World Bank. Thanks are due to Alla V. Mozgovaya of the Institute of
Sociology of the Russian Academy of Sciences, who coordinated the survey throughout Russia, and
to James H. Anderson, Liba Brent, and Berta Heybey for research assistance. We gratefully acknowl-
edge the support of the National Science Foundation, the National Council for Eurasian and East
European Research, the World Bank, and the United States Agency for International Development
under Cooperative Agreement No. DHR-0015-A-00-0031-00 to the Center on Institutional Reform
and the Informal Sector (IRIS). The findings, interpretations, and conclusions expressed in this article
are entirely those of the authors. They do not necessarily represent the views of the World Bank, its
Executive Directors, or the countries they represent.
McGill Law Journal 1999
Revue de droit de McGill 1999
To be cited as: (1999) 44 McGill L.J. 433
Mode de rff6rence: (1999) 44 R.D. McGill 433
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
Introduction
I. The Spectrum of Strategies
I1. The Use of Strategies by Russian Enterprises: Regional Variations
A. Relational Contracting
B. Self-Enforcement
C. Third-Party Enforcement
D. Private Enforcement
E. Administrative Levers of the State
F Shadow of the Law
G. Litigation
Conclusion
Questionnaire Boxes
Tables of Figures
References
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
Introduction
Do Russian enterprises do business differently in different parts of the country?
More specifically, to what extent do the strategies adopted by Russian enterprises to
deal with their trading partners vary regionally? To take it one step further, can differ-
ent attitudes toward law and legal institutions among regions be discerned? Specialists
generally agree that Russia should not be viewed as a single polity or economy. Re-
gional variation has been documented in a variety of settings, such as prices,’ the be-
haviour of elites,’ the pace of economic reform,’ the effectiveness of policy imple-
mentation’ and of government more generally. Much of this research focuses on the
behaviour of government and takes either elite opinion or pre-existing economic
structure’ as key explanatory variables. In this article, we take a different approach by
concentrating on enterprise behaviour. We lay out the regional differences for a series
of transactional strategies, and suggest possible explanations.
The stability and predictability that enterprises desire in their business relations
can arise from a variety of sources. Law may or may not be germane. When the par-
ties have a long history of mutually beneficial trading, they may be satisfied to rely
simply on the integrity of their trading partners. In such cases, the fear of reputational
sanctions may be more potent than any legal remedy. Law plays a more meaningful
role when the parties are not acquainted with one another or when they have good
reason to distrust one another. Under these circumstances, law facilitates transactions
‘ D. Berkowitz & D.N. DeJong, “Russia’s Internal Border” (1998) [unpublished, archived at the
University of Wisconsin-Madison with Professor K. Hendley].
2 J.W. Hahn, “Reforming Post-Soviet Russia: The Attitudes of Local Politicians” in T.H. Friedgut &
J.W. Hahn, eds., Local Power and Post-Soviet Politics (Armonk, N.Y.: M.E. Sharpe, 1994) 208; and
J.F Young, “Institutions, Elites, and Local Politics in Russia: The Case of Omsk” in Friedgut & Hahn,
ibid., 138.
‘0. Grigor’ev, M. Malyutin & A. Neshchadin, “Regional Alternative Approaches to Economic Re-
form” in K. Segbers & S. De Spiegeleire, eds., Post-Soviet Puzzles: Mapping the Political Economy of
the Former Soviet Union, vol. 2 (Baden-Baden: Nomos, 1995) 85.
A. Kovalevskii, “Regional Peculiarities of Privatization in Russia” in Segbers & De Spiegeleire,
ibid., 221; D. Slider, “Regional Aspects of Privatization in Russia” in P.J. Stavrakis, J. DeBardeleben
& L. Black (with the assistance of J. Koehn), eds., Beyond the Monolith: The Emergence of Region-
alism in Post-Soviet Russia (Washington: The Woodrow Wilson Center Press, 1997) 105; and P. Han-
son, “Regions, Local Power and Economic Change in Russia” in A. Smith, ed., Challenges for Rus-
sian Economic Reform (Washington: The Brookings Institution, 1995) 21.
‘ K. Stoner-Weiss, Local Heroes: The Political Economy of Russian Regional Governance (Prince-
ton: Princeton University Press, 1997).
6Ibid.; and Hahn, supra note 2.
B. Van Selm, “Economic Performance in Russia’s Regions” (1998) 50 Europe-Asia Stud. 603; N.
Markova, “Russia’s Regions: The Results of Four Years of Economic Reforms” (1996) 39:6 Probs.
Econ. Transition 6; V. Bezrukov, “Basic Problems of Development of the Economic Reform in Re-
gions of the Russian Federation” (1996) 39:6 Probs. Econ. Transition 26; and Grigor’ev, Malyutin &
Neshchadin, supra note 3.
436
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by providing a set of rules that can serve as a starting point for bargaining and default
provisions if neither side is able to prevail in the negotiations. Of course, the capacity
of law to serve this function arguably depends on its own legitimacy within society. If
law is routinely flouted and judicial decisions languish unenforced, then law’s ability
to act as a common language in business transactions may be severely undermined.
When law’s authority is in question and business partners do not trust one another,
they may turn to third parties to enforce their agreements. These outsiders may take
on many forms, from people who hold sway due to others’ respect for them to people
who demand obedience at gunpoint. Law may also be marginalized in various types
of authoritarian regimes, including state socialism. Non-democratic societies rarely
allow any significant autonomy to law Instead, law is moulded to the desires of those
holding power. Business people, often by ingratiating themselves with the political
elite, recognize that legal niceties will not ensure contractual enforcement.
In most countries, enterprises employ a combination of these strategies, depend-
ing on the circumstances. Even in the United States, which has a well-deserved repu-
tation for being highly legalistic, enterprises eschew law whenever possible in favour
of more informal mechanisms. While most transactions are memorialized in the form
of written contracts, the parties’ behaviour is mediated not by the language of the
contract, but by the informal norms that emerge out of the underlying relationship.!
Law formally enters the fray in the guise of litigation only when all other options have
been exhausted. A clear recognition of the peripheral role of law even in a country
where law and legal institutions are generally well-respected is important at the outset
so that our expectations are appropriately modest when considering Russia.
Thanks to its past-during which trading relationships were enforced through the
planning system-and its present-day efforts to make the transition to a market-based
system, Russia represents a highly unusual case. The popular press-both in Russia
and the West-has created an image of the “Wild East”, where stable business rela-
tions are virtually impossible. The scholarly literature mostly follows this line, argu-
ing that Russia lacks the necessary legal structure to enforce contracts or uphold prop-
erty rights,'” and that enterprises routinely rely on private enforcers in order to ensure
stability in their business relations.” To date, however, very little empirical work has
a P. Nonet & P Selznick, Law and Society in Transition: Toward Responsive Law (New York:
Harper & Row, 1978) at 14-16,29-33,54-60.
9 S, Macaulay, “Non-Contractual Relations in Business: A Preliminary Study” (1963) 28 Am. So-
ciological Rev. 55.
0 E.P. Hoffmann, “The Dynamics of State-Society Relations in Post-Soviet Russia” in H. Eckstein
et al., Can Democracy Take Root in Post-Soviet Russia? Explorations in State-Society Relations
(Lanham, Md.: Rowman & Littlefield, 1998) 69 at 99, 146; A. Aslund, How Russia Became a Market
Economy (Washington: The Brookings Institution, 1995) at 5-7, 138, 211; and M. McFaul, “Why
Russia’s Politics Matter” (1995) 74 Foreign Affairs 87.
” See e.g. P.D. DiPaola, ‘The Criminal Time Bomb: An Examination of the Effect of the Russian
Mafiya on the Newly Independent States of the Former Soviet Union” (1996) 4 Indiana J. Global Leg.
Stud. 145; J. Leitzel, C. Gaddy & M. Alexeev, “Mafiosi and Matrioshki: Organized Crime and Rus-
1999]
K. HENDLEY ET AL. – TRANSACTIONAL STRATEGIES
437
been done on this issue. Most scholars have relied almost entirely on anecdotal evi-
dence or on what they thought were logical inferences.
Our research represents one of the first systematic efforts to study how Russian
enterprises interact with one another. We draw on the results of a survey of 328 Rus-
sian industrial enterprises conducted between May and August of 1997. In each en-
terprise, Russian surveyors administered different survey instruments to four top
managers: the general director and the heads of the sales, purchasing (supply), and le-
gal departments.’2 The sample included enterprises from six oblasts (regions)-Mos-
cow, Novosibirsk, Ekaterinburg, Saratov, Voronezh, and Barnaul-with each oblast
represented roughly equally. The enterprises were concentrated among ten industrial
sectors.” Their sizes range from 30 to 17,000 employees, with a median of 300 and a
mean of 980. Most of the enterprises were established during the Soviet era, and
about three-fourths (77%) are privatized. In virtually all of those that are privatized,
some stock was in the hands of insiders, and nearly a third were entirely owned by in-
siders. Outsiders (non-employees of the enterprise) held some stock in 60% of the
enterprises.
An analysis of these data for Russia as a whole indicates that Russian enterprises
also use a variety of strategies for maximizing stability in their business relations.”
Russian enterprises exhibit a strong preference for working with long-term partners,
suggesting that trust plays an important role in ensuring stability. This is hardly sur-
prising given the chaotic nature of the contemporary Russian marketplace, and the
difficulty of assessing the credibility of potential trading partners. The ever-deepening
debt crisis also contributes to this tendency, since credit is more likely to be extended
if there is a shared history. Equally interesting is that, contrary to the common wis-
dom, Russian enterprises do not reject the use of law and legal institutions out of
hand. This is not to say that legalistic strategies are preferred, but merely that they are
considered. Moreover, we found little evidence of enterprises resorting to private law
enforcement, and little evidence that they held out any hope of the State assisting
them with their financial problems.
In this article, we examine regional variations in the use of these strategies. As a
general rule, the basic findings track those for Russia. With the exception of private
sian Reform” (1995) 13 Brookings Rev. 26; and L. Shelley, “Post-Soviet Organized Crime and the
Rule of Law” (1995) 28 John Marshall L. Rev. 827.
z When the enterprise did not have one of these departments, the person who carried out the rele-
vant duties in the enterprise responded to that questionnaire.
‘” The industrial sectors are (number of enterprises in parentheses): food processing (67); textiles,
clothing, and leather (60); fabricated metal (34); electronics (34); chemicals and petroleum (33); ma-
chinery and transport equipment (23); construction (18); wood products (8); paper and printing (5);
and other (46).
“K. Hendley, P. Murrell & R. Ryterman, “Law, Relationships, and Private Enforcement: Transac-
tional Strategies of Russian Enterprises” (1998) [unpublished, archived at the University of Wiscon-
sin-Madison with Professor K. Hendley] [hereinafter “Law, Relationships, and Private Enforce-
ment”].
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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enforcement, which the regions uniformly shunned, we found considerable variation
among the regions in the use of strategies by the surveyed enterprises. Yet we find no
overarching patterns. For example, the behaviour of enterprises in the so-called “Red
Belt” does not emerge as consistently different from those outside this area.” Each
strategy seems to have its own logic, and different factors impact on the propensity for
its use.
In this article, we focus on seven general categories of strategies that enterprise
managers might use when their trading partners fail to live up to their obligations, se-
lecting the mechanisms that emerged as most typical in each category. We begin by
describing each in general terms, laying out the incentives for its use. We then engage
in a comparative analysis of the actual use of these strategies by enterprises in each of
the six oblasts surveyed. This analysis also addresses the perceived effectiveness of
each strategy.
I. The Spectrum of Strategies
Enterprises make a series of choices in every business transaction. Underlying
these choices are assumptions about the reliability of their trading partners and the le-
gitimacy of state-sponsored legal institutions. One or the other of these concerns may
dominate, depending on the specifics of the transaction. If, for example, two enter-
prises have been trading with one another for decades, then they may have developed
deep bonds of trust that override any nagging fears of non-payment or other types of
contractual non-performance. In such cases, as Macaulay argues,’6 the contract is
largely superfluous. If defaults occur, enterprises tend to find informal remedies that
bypass the formal legal system. Yet if defaults become routine, indicating that the in-
formal remedies have not had the desired disciplining effect, the bonds of trust will
begin to fray, and enterprises will increasingly look for external help. Such assistance
can take many forms, such as asking respected figures within the business or govern-
ment community to use their influence to convince the trading partner to rethink its
behaviour. Sometimes threats to file a lawsuit or to resort to less savoury methods of
enforcing contracts are used, and sometimes enterprises follow through on these
threats.
We see these options as existing along a continuum. The continuum does not rep-
resent any absolute natural order. It can be constructed along different axes, depend-
ing on which factors are considered most important. For this reason, we do not view
the continuum as reflecting stages that enterprises go through in any logical, prede-
termined progression. In fact, we recognize that an enterprise may employ several of
‘ Berkowitz & DeJong, supra note I at 2, define the “Red Belt” as including regions that voted in
favour of the Communist Party during the 1996 presidential elections. Four of the surveyed regions
fall within the Red Belt: Novosibirsk, Saratov, Voronezh, and Bamaul. The remaining two-Moscow
and Ekaterinburg-are outside the Red Belt.
16 Supra note 9.
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K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
these strategies in its effort to resolve a single problem (or may limit itself to only
one). The choice of strategies depends on a broad array of factors, only some of
which are within the control of the parties.
The continuum which we have constructed can be conceptualized as being driven
by trust in one’s trading partner versus reliance on law. At one end is the sort of rela-
tional contracting described above, in which outsiders play no significant role. At the
other end is litigation, in which the parties have been unable to reach a negotiated so-
lution themselves and have turned their dispute over to the courts. Their willingness to
resort to the formal legal system results not just from their frustration with their trad-
ing partner, but also from a basic belief in the legitimacy of this institution. The
placement of different options along the continuum is determined by the level of reli-
ance on outsiders for enforcement, and the identity of those outsiders, i.e., their source
of authority. The options range from complete reliance on one another, to reliance on
non-state actors, to reliance on state-sponsored institutions. We highlight seven basic
types of strategies, and present them in their natural order along this particular version
of the continuum. The description is generic. We particularize the strategies to Russia
in the next section of the article.
Relational Contracting. This outcome assumes that enterprises trust one another
to fulfil their contractual obligations. This trust may evolve gradually over long peri-
ods of time or may be forced on the parties through a kind of corporate shotgun mar-
riage. If problems arise, they tend to be resolved through informal negotiations be-
tween the trading partners, without involving outsiders or resorting to the courts. The
implicit threat that underlies such negotiations is that the relationship will be termi-
nated if some compromise cannot be reached. The non-performing enterprise is pre-
sumably sufficiently interested in maintaining the tie that it will modify its behaviour
accordingly.
Self-Enforcement. A small step away from relational contracting are arrangements
based on self-enforcing remedies. These are mechanisms that are built into the con-
tractual framework with the goal of providing both parties with an incentive to per-
form. Examples of these mechanisms include letters of credit, barter, and prepayment.
Thus, the relationship continues to be one of mutual dependence. In cases of non-
performance, the basic relationship between the enterprises may or may not survive,
depending on their desires. Like relational contracting, the frame of reference is gen-
erally limited to the two contracting parties, though the parties may assume the nor-
mal functioning of financial institutions. Neither state institutions nor private actors
are affirmatively called upon for assistance.
Third-Party Enforcement. As an enterprise becomes frustrated with the conduct of
its trading partner, it may turn to outsiders for help. The most benign form of this be-
haviour is an appeal to individuals or associations that are perceived to have some in-
fluence over the trading partner. This represents a step away from self-reliance, but
does not yet presume state involvement or the use of extra-legal remedies of self-help.
Examples of this include informing bankers or members of business associations
about the poor performance. The assumption is that the trading partner will be con-
cemed about its business reputation and, fearing ostracism, will alter its behaviour.
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Private Enforcement. When an enterprise experiences high levels of default
among its trading partners, and neither negotiations, self-enforcement, nor third-party
enforcement yield the desired results, more concrete action may be required, such as
resorting to private methods of contractual enforcement. Such behaviour assumes a
lack of trust in both the trading partner and in the capacity of the legal system to pro-
vide acceptable relief. This strategy is typically one that is multi-layered, often begin-
ning with implicit threats, and sometimes culminating in the use of violence. While
violence is not an essential element, intimidation is.
Administrative Levers of the State. Moving from private to state actors, the first
step may be to ask government officials to talk to the trading partner in an effort to
convince them to fulfil their contractual obligations. Even in market economies, gov-
emments have many levers of influence over enterprises and, depending on the cir-
cumstances, may be willing to use them. Presumably, the non-performing enterprise
will change its behaviour rather than risk the ire of the State, even if this displeasure is
expressed in a circuitous manner.
Shadow of the Law. When relations between trading partners are characterized by
a low level of trust, confiscatory remedies are often included in contracts to protect the
parties in case of default. Examples of these are collateral arrangements or penalty
clauses. These differ from the self-enforcement remedies described above in that they
usually require court action to be implemented. Thus, as relations unravel, correspon-
dence begins to include threats to initiate lawsuits and to enforce these confiscatory
contractual terms. Settlement occurs because it is cheaper than litigation, not because
of any sense of duty to long-term business partners.
Litigation. At the opposite end of the continuum from relational contracting is
litigation. Filing a lawsuit typically indicates a breakdown in the relationship between
the trading partners. They would not appeal to court, given that litigation inevitably
consumes time and money, if settlement could be reached through negotiation. Liti-
gation is also costly in relationship terms. Harsh words are exchanged, and the trading
relationship is sometimes irretrievably severed. Submitting a dispute to the courts im-
plies an acceptance of the legitimacy of the institution, and a willingness to abide by
its decision. Problems arise when such attitudes are not shared by the defendant, and
it refuses to obey the court’s decision.
II. The Use of Strategies by Russian Enterprises: Regional
Variations
How are these strategies used by Russian enterprises? How does the use vary
among different regions? In this section, we focus on specific strategies, comparing
their use as well as the perceptions of effectiveness across the six regions surveyed.
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K HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
The data are drawn primarily from responses to two composite questions that
were posed to the procurement director and the sales director.” These two questions
were intended to complement one another, with one addressing how the enterprise as
purchaser dealt with problem suppliers (Box 1), and the other addressing how the en-
terprise as seller dealt with recalcitrant customers (Box 2). The two questions are not
identical. In order to maximize the data gathered, keeping in mind our respondents’
limited patience, we altered the starting assumptions slightly, and we adapted the list
of responses. In the question for the procurement director (Box 1), we asked whether
each strategy had been used “in helping your enterprise to prevent and/or resolve
problems arising in relationships with suppliers” during the past two years. By con-
trast, we asked the sales director whether the enterprise had “used or threatened to
use” each listed strategy in dealing with “customers that did not honour their agree-
ment with your enterprise” (Box 2). Both sets of questions asked the respondent to
evaluate the effectiveness of the method in altering the behaviour of the trading part-
ner.
We have elsewhere reported the aggregate responses to these questions.” Space
limitations make it impossible for us to include the results for each permutation of
these strategies on a regional basis. Consequently, we have identified one or two ex-
amples that are most representative of how Russian enterprises use each strategy.
A. Relational Contracting
We were interested in knowing whether the surveyed enterprises found non-
legalistic tactics to be helpful when difficulties arose. We asked purchasing directors
whether their enterprise had used formally arranged business meetings between
lower-level officials to prevent or resolve problems with suppliers during the preced-
ing two years. We went on to ask them to evaluate the effectiveness of this method.
This method fits squarely within the relational contracting approach.” It focuses on
the precise level at which most contracts are actually negotiated in Russian enter-
prises. Few agreements to purchase inputs attract the attention of the general director.
Instead, their terms are dickered over by mid-level managers, and their relationship
plays a critical role in determining the overall success of the trading partnership.
Table 1 reports the results for this question. The second column sets forth the per-
centage of enterprises using this strategy in each region. The third column summa-
rizes the enterprises’ evaluation of the effectiveness of the strategy by presenting the
mean scores of the 0 to 10 scale, including only the responses of the enterprises that
actually used this strategy. The final column combines the information on the extent
17 See Boxes 1 and 2, below, for the English-language text of these questions. There is a small
change in format from the versions actually used in the field so that the reader is not confused with
the instructions given to the surveyors.
‘8 See “Law, Relationships, and Private Enforcement”, supra note 14.
‘9 See generally O.E. Williamson, The Economic Institutions of Capitalism: Finns, Markets, Rela-
tional Contracting (New York: Free Press, 1985); and Macaulay, supra note 9.
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of use and effectiveness. Assuming that the effectiveness of this strategy is 0 for those
enterprises that failed to use it, one can calculate a mean effectiveness score across all
enterprises. These mean scores appear in the fourth column.
The bottom row of Table 1 requires some additional explanation. In order to ex-
amine whether the differences between the regions are statistically significant, we
analyzed the underlying data with crude statistical tests. The first column of this table
serves as an example. Each enterprise has a “score” on the use of relational contract-
ing, which in this case is a dichotomous variable indicating use or non-use of the
method. This score was the dependent variable in a regression, where this variable
was related to the following independent variables: size of the enterprise, age of the
enterprise, state ownership, presence of a legal department in the enterprise, and
dummy variables for regions. A standard F-statistic was used to test whether the addi-
tion of the dummy variables for the regions added any explanatory power to the re-
gression, over and above that provided by the other variables. We examined whether
this F-test is significant at the 5% level and placed the results in the last row of Table 1’
If the word “significant” appears in this last row of Table 1, this means that re-
gional effects appear to be explaining patterns in the data. These regional effects can-
not be due to variations between regions in the standard characteristics of the enter-
prises in our sample-such as age, size, ownership, and the presence of a legal de-
partment-since measures of these characteristics have been included in the regres-
sions. Therefore, a natural interpretation of the significance is that it reflects some
property of the regions themselves that has an effect on how the enterprises conduct
their relationships.
Table 1 clearly shows the popularity of the strategy of relational contracting
among Russian enterprises. In all regions, well over half of the surveyed enterprises
had used these sorts of meetings between lower-level managers to deal with problems
with suppliers during the past two years. Just as interesting are the uniformly high
grades on effectiveness among enterprises who used this strategy. All regions have
mean scores above seven, on a 0 to 10 scale. The differences among regions are mi-
nor, and can be attributed to specific features of the enterprise.
Widespread use of this relational contracting strategy is not terribly surprising.
Almost anywhere, management can be expected to begin the problem-solving process
in a low-key fashion. A meeting between the concerned managers allows for an as-
sessment of the seriousness of the problem and whether it can be resolved quickly and
inexpensively. As we will see below, many of the other methods give rise to costs for
the enterprise that it may prefer to avoid, such as the cost and expense associated with
litigation or private enforcement, or even the potential damage to its own reputation
when it begins to speak ill of its trading partners.
‘0 Note that this calculation has been carried out for all of the strategies, and is presented in the bot-
tom row of all the tables.
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
The extreme popularity of this strategy tends to confirm certain characteristics of
the Russian economy. It suggests that Russian enterprises want to deal with people
they know-at least well enough to set up meetings. This, in turn, indicates the pres-
ence of some modicum of trust. In the current climate of uncertainty, this is to be ex-
pected. In the absence of any reliable credit-rating service, enterprises find it difficult
to assess the business integrity of new trading partners. This same lack of information
limits their ability to learn of alternative suppliers. The combination of these factors,
plus the widespread knowledge that failure to pay contractual debts has reached epi-
demic proportions throughout Russia, no doubt encourages enterprises to continue
dealing with the trading partners they have come to know. In principle, there is noth-
ing wrong with this sort of loyalty. However, it does limit an enterprise’s flexibility
and undercuts its right to pick its own suppliers and customers, a right finally won
with the end of the state-planning system.
Notwithstanding the overwhelming endorsement of this method, sharp differ-
ences exist in the level of use among the regions. With only 60% of surveyed enter-
prises reporting use, Saratov is the outlier. By contrast, more than 70% of enterprises
in the other regions used it and, in two regions (Bamaul and Voronezh), well over
80% used it. Our analysis indicates that these variations are attributable not to differ-
ences in the underlying characteristics of the enterprises, but to differences among the
regions. Our data do not allow for definitive conclusions as to why Saratov emerges as
unique. We can suggest a few possible reasons. It may be that Saratov managers have
weaker personal connections with their suppliers. Logically, this might result from a
preponderance of new suppliers. Yet our data indicate that, like all of the regions sur-
veyed, the Saratov enterprises have experienced about a 50% turnover in suppliers. It
may be that the Saratov procurement managers have been slower than their counter-
parts in other regions to find some common ground with their suppliers. On the other
hand, perhaps Saratov managers regard other strategies as more helpful. It is certainly
intriguing that Saratov enterprises emerge as among the most likely to initiate litiga-
tion against recalcitrant customers!’ This may indicate a higher level of trust in the ef-
ficacy of formal legal institutions than in personal connections.
B. Self-Enforcement
The unpredictability that has characterized the Russian economy over the past
decade has caused some enterprise managers to seek stability in the confines of spe-
cific contractual relationships. In this section of the article, we examine two ways in
which Russian enterprises seek to protect themselves: prepayment and barter. The im-
petus for both mechanisms is the same, namely the increasing difficulty of obtaining
payment for goods.
Prepayment is an innovation of the post-Soviet era. Under the planned economy,
payment was less important since all enterprises were state-owned and bankruptcy
21 See Table 8, below.
444
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was not possible. The end of state socialism, with its guarantee of perpetual life to in-
dustrial enterprises, was followed in short order by a crisis of non-payment of inter-
enterprise debt.” One practical solution was to require payment before goods would
be shipped. While this appears straightforward, it became a new source of delay in the
post-Soviet production cycle since the banks were ill-equipped to manage the proc-
ess.23
The composite questions did not cover prepayment. Consequently, our analysis of
prepayment is drawn from a series of questions posed to the procurement director and
the sales director relating to a particular purchasing and sales transaction, respectively,
of their choice. Among these questions was a detailed inquiry about the terms of
payment. We gave the managers a variety of choices, among which were full and par-
tial prepayment. ‘ We also asked them to compare the percentage of the price which
they had been contractually obligated to prepay, and the percentage they actually paid.
Table 2 sets forth the results for both transactions. Columns 2 through 4 summarize
the responses given by the procurement directors, while columns 5 through 7 detail
the responses given by the sales directors.
A cursory glance shows the importance of this coping mechanism in both sales
and purchase transactions. In this regard, the results from the questions to the pro-
curement director are most revealing since enterprises are disclosing their own be-
haviour (rather than the terms they imposed on their trading partners). We see that,
across the board, more than 35% of enterprises agreed to terms requiring full prepay-
ment. The use of partial prepayment is considerably higher, ranging from a low of
65% in Voronezh to a high of 85% in Ekaterinburg.’ Given that prepayment has be-
come an accepted feature of doing business in Russia, it is not surprising that partial
prepayment emerges as more common than full prepayment. The burden on the pur-
chaser (in this case, the respondent enterprise) is lower and therefore more desirable.
Moreover, interviews reveal that demands for prepayment tend to decrease in percent-
age terms as the parties become more comfortable with one another.
22 See B.W. Ickes & R. Ryterman, “The Inter-Enterprise Arrears Crisis in Russia” (1992) 8 Post-
Soviet Affairs 331; and B.W. Ickes & R. Ryterman, “Roadblock to Economic Reform: Inter-
Enterprise Debt and the Transition to Markets” (1993) 9 Post-Soviet Affairs 231.
Prepayment might also be seen as a Russian variant on letters of credit, which are commonly used
in international transactions to ensure payment. International transactions raise uncertainties that are
somewhat similar to those found in the Russian case, since the trading partners may not know one an-
other personally and may be unable to assess trustworthiness. The key difference between Russian
prepayment and letters of credit lies in the role of banks. When a letter of credit is accepted by a
seller, goods are shipped before payment is received. Payment is guaranteed by the bank that issues
the letter of credit upon the presentation of certain key documents. By contrast, the Russian practice is
that the seller is not required to ship goods until payment is received in its bank account. This obvi-
ously slows down the transaction, whereas letters of credit tend to speed up transactions.
24 Among the other choices for payment terms is penalties, which we analyze in Part II.F, below.
See columns 2 and 3 of Table 7, below.
” Note that the variations among regions for both full and partial prepayment are the result of dif-
ferences in the basic properties of the surveyed enterprises.
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K HENDLEY ET AL. – TRANSACTIONAL STRATEGIES
445
The results of the questions posed to the sales directors indicate an even higher
propensity to rely on prepayment. With the exception of Barnaul, all of the regions
report a higher percentage of sales transactions in which full prepayment was con-
tractually mandatory than was reported in procurement contracts. We might suspect a
tendency on the part of sales directors to inflate their ability to force these rather oner-
ous terms on their customers. Yet the differences do not bear out these suspicions.
While the difference is more than 15% in Saratov, it is less than 3% in Novosibirsk,
Ekaterinburg, and Voronezh, suggesting that puffery is not an issue. As with the pur-
chasing transaction, significantly more sales transactions involve partial prepayment
than full prepayment. This is to be expected for the same reasons set forth above.
The bottom row of Table 2 indicates that regional differences are at the root of the
variation among regions in full and partial prepayment in sales transactions. This
time, Barnaul emerges as the outlier, with low demands for full and partial prepay-
ment. Given that prepayments are processed through the banking system, we can rea-
sonably surmise that regions with lower numbers of enterprises relying on this strat-
egy have relatively weaker banks. For example, the number of days required to proc-
ess payments is much higher in Barnaul than in any of the other regions. More spe-
cifically, we can infer that bank transfers are processed more slowly in these regions
than elsewhere and, consequently, enterprise management has learned that prepay-
ment does not provide a solution, but merely adds to the woes of non-payment. By
contrast, it follows that regions where enterprises use prepayment more actively-i.e.,
Moscow, Novosibirsk, and Saratov-have banks that are able to process payments ef-
ficiently. The survey data provide some support for these inferences. Payments are
processed most quickly in Moscow, and most slowly in Barnaul 6
Another strategy used by Russian enterprises that fits within the self-enforcement
category is barter. Unlike prepayment, barter was also part of the planned economy,
though certainly hidden in the shadows. Somewhat ironically, Russia’s economic
transition has had the unexpected effect of increasing the incidence and importance of
barter. As the budget constraints have hardened, enterprises have struggled for their
very survival. Deprived of liquid assets and desperate to avoid bankruptcy, barter has
become their lifeline. Yet barter has become more than just a tactic employed by en-
terprises drowning in debt; it has grown to become a normal part of Russian business
life. Even thriving enterprises barter, motivated in large part by the perception that
they can avoid tax liability on in-kind transactions.
As with prepayment, our analysis of barter is based on several questions that are
not part of the composite questions set forth in Boxes 1 and 2. We asked the general
director to estimate the percentage of enterprise output “sold” via barter in 1992 and
26 We asked procurement directors how many days elapsed between the time they ordered their
bank to pay a typical supplier and that supplier’s receipt of the payment. The mean number of days
for each region is set forth parenthetically. The first number is for intra-oblast transactions, and the
second number is for inter-oblast transactions: Moscow (3.58 / 8.4); Novosibirsk (4.66 / 10.1);
Ekaterinburg (4.85 / 8.67); Saratov (4.87 / 11.1); Voronezh (5.73 / 10.87); and Barnaul (8.3 / 14.48).
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1997. The counterpoint is provided by a question posed to the procurement director,
in which we asked for an estimate of the percentage of production inputs obtained via
barter in 1992 and 1997. The results are set forth in Table 3. Not surprisingly, the table
convincingly demonstrates the explosion of barter over this five-year period. With the
exception of Moscow (which is discussed below), the incidence of barter in all the re-
gions multiplied many times over. Bamaul, which reported a six-fold increase with
regard to both sales and procurement transactions, is the most extreme. It follows that
this region, which has comparatively less prepayment, would compensate by bartering
more actively.
Table 3 also shows a striking similarity in the propensity to barter across the two
types of transactions. For example, in 1997 the difference between the percentage of
output “sold” through barter and the percentage of inputs obtained through barter is
consistently less than five. One logical explanation for this similarity is that output is
being bartered for inputs. Enterprise interviews indicate that such direct exchanges are
not the norm. Instead, “sellers” in barter transactions are more likely to obtain goods
that they have to resell (either directly or through intermediaries) or use to offset debts
to their suppliers or workers.” To acquire inputs through bartering, “sellers” have to
organize byzantine multi-sided transactions (tsepochki) that often require five or more
trades before obtaining something of value. Huge amounts of time and energy go into
arranging these deals. Even so, if enterprises are bartering to escape taxes, as is usu-
ally argued, then it still seems odd that the level of “sales” via barter is not much
greater than the acquisition of inputs. After all, enterprises need not pay tax on pur-
chases, yet the level of bartered “purchases” are virtually identical to the level of bar-
tered “sales.” The amenability of procurement directors to going along with their sup-
pliers’ desire to barter to escape taxes as a goodwill gesture is undercut by the 15% to
20% surcharge that is typically placed on bartered goods to account for the higher
transaction costs. Perhaps enterprises are bartering more out of desperation than out
of a desire to avoid taxes. These two factors may be so intertwined as to be indistin-
guishable. Enterprises across all the regions agreed that a substantial decrease in tax
rates is the factor most likely to cause a decline in the level of barter.’
The bottom row of Table 3 indicates that the regional variations in barter for 1997
cannot be explained by enterprise characteristics. The factors that are likely to have a
meaningful impact on barter are the strength of the regional economy and of the basic
27 For example, producers of automobile parts receive “liquid” goods, such as cars or trucks, in
“payment” for supplying the large automobile assembly plants. Sometimes these cars can be “resold”
to obtain the raw materials necessary to produce parts. This is becoming more difficult as creditors
grow less willing to absorb the costs of reselling these goods. As a result, enterprises in the position of
these parts producers have begun to work more closely with intermediaries, who sell the cars or trucks
on their behalf.
28 Enterprises were asked to evaluate the potential effect on levels of barter of: (i) decline in interest
rates; (ii) increase in enforceability of arbitrazh court decisions; (iii) increase in competition; and (iv)
decline in tax rates. All of the surveyed regions agreed that a decline in tax rates would be most likely
to decrease the propensity to barter.
1999]
K HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
447
financial institutions. Where the regional economy is relatively healthy, enterprises are
more likely to have some liquidity, thereby allowing them to produce and sell their
goods without resorting to barter. Among the regions included in our survey, Moscow
stands out. At 14% to 15%, the incidence of barter reported by the Moscow enter-
prises is less than half that of the next lowest oblast (Voronezh), and is one-third or
less of the remaining regions. This conclusion holds for both sales and purchases.
That Moscow has significantly lower levels of barter is hardly shocking. During
the years of the economic transition, Moscow has grown increasingly unique. Its
economy, as well as its financial institutions, are stronger than those of the other re-
gions. For example, debts owed to tax authorities, unpaid wages, and supplier arrears
are less of a problem for the Moscow enterprises surveyed than for enterprises in
other regions. This suggests a lower level of desperation in Moscow than elsewhere.
Enterprises need not barter in order to survive; the availability of short-term bank
credits provide them with options. As a result, Moscow enterprises seem to be bar-
tering only when it is advantageous to them, perhaps for tax gains or to placate trad-
ing partners that insist on this form of exchange.
C. Third-Party Enforcement
When problems arise between trading partners and they are unable or unwilling
to work them out between themselves, one option is to turn to a third party. Some-
times this results from one side growing fed up with the other side’s constant failure
to live up to its contractual obligations. In other cases, it may simply reflect a lack of
trust in, or knowledge of the other side. For the purposes of this analysis, the reasons
are moot. We are interested in whether Russian enterprises turn to enterprises that are
not involved in the transaction to help them sort out problems. This is, of course, a
relatively common phenomenon in many market economies. It may take on a variety
of forms, from an informal word-of-mouth sanction to formal sanctions imposed by
business associations. ‘ The common thread is the potential for reputational harm that
may be suffered by the enterprise that has allegedly misbehaved.
Our analysis is based on two questions drawn from the composite questions
posed to the procurement and sales directors that are set forth in Boxes 1 and 2. While
both questions addressed the appeal of third-party enforcement as a strategy, the tone
and substance of each question is sufficiently different to warrant separate discussion
of the results.
The question put to the sales director asked whether, when dealing with a recalci-
trant customer, the enterprise had ever told or threatened to tell other enterprises about
the customer’s behaviour. Column 5 of Table 4 sets forth the percentage of enterprises
Business associations do not appear to play this role in Russia. In the two composite questions set
forth in Boxes 1 and 2, we asked whether the enterprises had ever turned to business associations for
assistance in dealing with their suppliers or customers. Only thirteen of the 328 procurement manag-
ers surveyed reported having tried this strategy, while only nine sales managers used this method.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
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that have used this method during the past two years. It demonstrates the widespread
use of this strategy. The percentages range from a low of 40 in Moscow to a high of
54.55 in Ekaterinburg. We also asked the sales directors to evaluate the effectiveness
of this method in getting their problem customers to abide by their agreements. The
enthusiasm for this method is considerably more muted than for the meetings between
low-level managers presented in Table 1, or even for intervention by other enterprises,
which is discussed below. The variations among regions in terms of use and effective-
ness is attributable to enterprise characteristics such as age, ownership status, size, and
presence of a legal department.
Although the propensity to tell or threaten to tell other enterprises about poor per-
formance combined with indifference toward the usefulness of the strategy may seem
incongruous, it does make sense. This sort of action-whether limited to a mere threat
or taken further-imposes few costs on the wronged enterprise. Under the worst sce-
nario, the target of criticism may take offence and refuse to do business with the ini-
tiator of the story. In all likelihood, the initiator will have given up on the target any-
way, resulting in no real harm. Thus, the initiator may regard it as worth a try.
The more troubling question is why is this strategy, aimed at imposing reputa-
tional damage, not more effective in the Russian context? The answer lies in the diffi-
culty in obtaining information and the amorphous nature of Russian business culture.
As we have previously noted, reliable sources of information are few and far between.
Although faxes and the Internet have dramatically increased the quantity of informa-
tion, its quality remains highly suspect. More importantly, Russian business people
seem unconcerned about building or maintaining a reputation for fair dealing or fol-
lowing through on their contractual duties. Contractual defaults are so commonplace
that customers may have no fear of ostracism if news of their poor behav-
in Russia
iour is spread around.
The question posed to the procurement director was framed quite differently. We
asked whether the respondent enterprise had ever asked third-party enterprises to in-
tervene on their behalf to prevent and/or resolve problems with a supplier. This ques-
tion clearly presumed greater activism on the part of both the respondent and the
third-party enterprise. Not surprisingly, we find that a significantly lower number of
enterprises use this strategy. Column 2 of Table 4 reports the results. Four of our six
regions exhibit a striking similarity, with 14% to 15% resorting to this strategy. The
relatively few enterprises that pursue this tactic find it very productive. The mean
scores for effectiveness, set forth in column 3 of Table 4, are consistently higher than
those for the more popular strategy of simply telling other enterprises (column 6 of
Table 4). This suggests that a higher threshold of frustration or anger must be reached
before an enterprise that believes it has been wronged by a supplier will appeal for
help to an unrelated enterprise, but that when this step has been taken, it often yields
the desired result. Ironically, it seems that the original trading relationship is more
” See K. Hendley, “Temporal and Regional Patterns of Commercial Litigation in Post-Soviet Rus-
sia” (1998) 39:7 Post-Soviet Geography & Econ. 379 [hereinafter “Temporal and Regional Pattems”].
1999]
K HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
likely to be preserved through this method than through the seemingly less invasive
tactic of gossip.
D. Private Enforcement
The popular media would have us believe that the “mafia” is a central actor in the
resolution of Russian business disputes.” A number of Western specialists agree.?2
Typically, this is presented as the only reasonable option in the face of institutional
gaps or the incapacity of existing institutions to cope.’ Our data contradict this com-
mon wisdom. As a part of the composite question posed to the procurement directors
(see Box 1), we asked whether they had used private enforcement firms to resolve
problems with suppliers. The results, set forth in Table 5, speak for themselves. An
extraordinarily small number of enterprises reported using this strategy. Indeed, only
nine of our 328 surveyed enterprises employed this strategy. This includes three en-
terprises in Moscow and Barnaul, and one enterprise in Novosibirsk, Ekaterinburg,
and Voronezh. No use was reported in Saratov. Those enterprises in Barnaul and
Ekaterinburg that used the private enforcement strategy found it incredibly effective.
But the numbers are so small that these scores represent little more than anecdotal
evidence.
These findings are buttressed by the answers to two questions addressing how
often the enterprise depended on internal or external security services to facilitate the
collection of debts and the safe delivery of its output. The general directors were
asked to estimate their use of one of these services on a 0 to 10 scale, with higher
scores indicating greater frequency. The mean responses for the use of internal secu-
rity services ranged from 1.1 in Moscow to 2.8 in Saratov. Along similar lines, the
mean responses for the use of external security services ranged from 1 in Moscow to
2.4 in Barnaul. This strongly suggests that these security services, which may well
exist in many Russian enterprises, are not being used to resolve contractual disputes.
At the same time, the surveyed enterprises are not unaware that private enforce-
ment may have certain benefits for them. We asked the general directors to compare
the effectiveness of private enforcement with the courts in resolving disputes along
several parameters.’ As a general matter, the results indicate that the general directors
recognize that judgments of private enforcers are speedier and more likely to be en-
forced. These conclusions would seem to be obvious, yet the respondents were
guarded in their enthusiasm, perhaps indicating a wariness of the slippery slope of
private enforcement. Although none of the regions showed an absolute preference for
‘ See S. Handelman, Comrade Criminal: Russia’s New Mafiya (New Haven: Yale University Press,
1995) at 20-22 for a discussion of the difficulties of defining “mafia” in the Russian context.
32 See supra note 11.
We address this claim in our discussion of the strategy of litigation in Part 1l.G., below.
Our question clarified that we were interested in a comparison between private enforcers and the
arbitrazh courts. This follows since we were asking about methods for resolving contractual disputes
between enterprises. The arbitrazh courts have exclusive jurisdiction over such disputes.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
private enforcement, Ekaterinburg and Moscow were, respectively, at the high and
low ends of the scale.”
E. Administrative Levers of the State
Another option for an enterprise that has grown frustrated with its trading partner
is to look to the State for assistance. During the Soviet era, industrial enterprises
turned to the State as a matter of course. As Joseph S. Berliner documents, the first in-
stinct of Soviet managers was to turn to their industrial ministry for assistance. 6 Min-
isterial officials were often able to convince suppliers to provide needed inputs and
thereby resolve the problem. Their persuasiveness, of course, stemmed from their role
as gatekeepers for state investment (both in production and in the social sphere). As
such, they were able to offer compelling incentives to suppliers who were initially un-
cooperative. Alternatively, Soviet managers might go to the local Communist Party
organization and, if the supplier was nearby, the Partkom officials could also have a
powerful effect on its behaviour.”
These Soviet levers of influence either no longer exist or no longer operate in the
same way.” Enterprises are, for the most part, privatized. Even if state-owned, they are
no longer part of some vast state bureaucracy that can be manipulated at the center.
Instead, enterprises are now responsible for their own destiny, which has both positive
and negative consequences for management. On the negative side, managers now
have to resolve their own problems. They can no longer assume that the ministries (or
the State in some form) will bail them out. Yet this should not be taken to mean that
the State has become irrelevant to enterprises in post-Soviet Russia. Even in long-
standing market economies such as the United States or Germany, the State plays an
important role in the economy.9 The nature of this role varies across countries. The
“, The general directors were asked to use a 0 to 10 scale. A score of 0 indicated an absolute prefer-
ence for private enforcement, whereas a score of 10 indicated an absolute preference for the courts.
The regional means for enforcement ranged from a low of 3.2 in Moscow to a high of 6.2 in Ekater-
inburg. By contrast, the regional means for enforcement ranged from a low of 4 in Moscow to a high
of 5.7 in Ekaterinburg, but the mean scores are more closely clustered together. The differences
among regions may be more a reflection of the general directors’ attitude toward the courts than their
opinion of private enforcement.
” J.S. Berliner, Factory and Manager in the USSR (Cambridge: Harvard University Press, 1957) at
248-63.
” See e.g. J.F Hough, The Soviet Prefects: The Local Party Organs in Industrial Decision-Making
(Cambridge: Harvard University Press, 1969) at 214 where Hough cites a Pravda article on the prac-
tice of local Party organs of “beating out of the suppliers the equipment, materials, etc., which the en-
terprises have been allocated.”
“‘ For example, only one of the 328 surveyed enterprises reported that they had asked a political
party to intervene with a supplier to help them.
9J. Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial
Change (Ithaca: Cornell University Press, 1983).
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
State may limit itself to establishing the basic “rules of the game” or, alternatively, it
may intervene to protect certain essential industries.’ These are political choices.
The role of the State in the economy of post-Soviet Russia remains unclear,” as is
the relative power of federal, regional, and local state institutions.’2 Both our enterprise
interviews and the survey data suggest that enterprise managers are far more con-
cerned about their relationships with local and regional governmental officials than
with federal governmental officials. To that end, general directors report that their
senior managers meet more frequently with local or regional officials than with offi-
cials of the federal government.”3 Consequently, our analysis is focused on the re-
sponses by the procurement and sales directors to our questions about local and re-
gional government,” which are contained within the composite questions set forth in
Boxes 1 and 2.
We asked procurement directors whether they had asked local or regional officials
to intervene to sort out a problem with a supplier. This is a particularly revealing
question, since it asks about a method that was commonplace during the Soviet pe-
riod. The responses, reported in column 2 of Table 6, confirm the drastic decline in
the popularity of this method. Although 20% of surveyed enterprises in Barnaul and
Saratov had used this strategy over the past two years, in the other regions considera-
bly fewer enterprises had turned to the local or regional government for assistance.
Even more telling are the evaluations of the effectiveness of this method. These mean
scores reflect the procurement directors’ view of the ability of governmental officials
to force suppliers to live up to their agreements.”3 The scores are lower across the
board than those for relational contracting or third-party enforcement. However, the
variations suggest that procurement directors in Barnaul have much more confidence
in the ability and willingness of officialdom to intervene on their behalf than do man-
agers in other regions. Particularly intriguing is the dismal showing of Moscow, where
the local government under Mayor Luzhkov has a reputation as interventionist. Along
‘0 See P. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton: Princeton
University Press, 1995); and P. Evans, D. Rueschemeyer & T. Skocpol, eds., Bringing the State Back
In (Cambridge: Cambridge University Press, 1985).
41 What was clear was that none of the surveyed enterprises expected help from the government, in
any form, in the case of financial difficulties. We asked general directors to evaluate (on a 0 to 10
scale) the likelihood of receiving assistance from the government if they were forced to lay off work-
ers. The means for all regions were less than 1.
42 See G.M. Easter, “Redefining Centre-Regional Relations in the Russian Federation: Sverdlovsk
Oblast” (1997) 49 Europe-Asia Stud. 617; and J. Hughes, “Regionalism in Russia: The Rise and Fall
of Siberian Agreement” (1994) 46 Europe-Asia Stud. 1133.
43 Across the regions, general directors report that meetings between senior managers and federal
officials occur once or twice a year, whereas meetings with local or regional officials typically occur
on at least a monthly basis.
” The Russian-language version of the composite questions makes it clear that we are drawing a
distinction between the federal government on one hand, and the local and oblast governments on the
other.
41 See column 3 of Table 6, below.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
similar lines, the Saratov oblast government under Ayatskov is also well-known for its
close relations with industry.’ Yet the mean score of 0.8 on a 10 point scale indicates
that Saratov procurement directors regard appeals to the Ayatskov government as
useless.
Turning to the question posed to the sales directors, we find somewhat anomalous
results. We asked these managers whether they had reported or threatened to report
their trading partners to local or regional government officials when these partners did
not fulfil their contractual obligations. This question presumes less activism on the
part of the government. The assumption is that enterprises want to stay in the good
graces of the government, and so might alter their behaviour if the respondent enter-
prise threatened to disclose their poor performance. With the exception of Barnaul, we
find that few enterprises have embraced this strategy.” The contrast is striking. 30% of
the Bamaul enterprises reported using this method. This is consistent with the reputa-
tion of elites from this region for relying heavily on state subsidies.’ On the other
hand, less than 10% of the enterprises in any of the other regions have used it. Enter-
prises that resorted to this strategy generally found it helpful.’9 The evaluations of the
effectiveness tend to be higher than for the preceding question. The comparison of the
mean scores for effectiveness for the two questions is particularly intriguing. Some
regions, such as Bamaul and Ekaterinburg, exhibit consistency. Others are remarkably
different. For example, the Moscow and Saratov enterprises that used this tactic found
it much more effective in changing the behaviour of their trading partners than direct
intervention. These results fit more closely with the reputation of these regional and
local governments for working with industry.
F Shadow of the Law
As enterprises grow more wary of one another-whether as a result of repeated
defaults in payment or as a result of a deterioration in macro-economic indicators-
they may seek cover through various types of confiscatory remedies. We categorize
these as existing within the shadow of the law because they are contractual remedies
that assume non-performance and often require the specter of judicial action in order
to be operationalized.’ We see this strategy as being on the very brink of litigation.
Examples of this strategy, such as penalties or collateral arrangements, are more le-
galistic than the methods previously considered.
46 K. Hendley, “Struggling to Survive: A Case Study of Adjustment at a Russian Enterprise” (1998)
50 Europe-Asia Stud. 91.
47 See column 5 of Table 6, below.
41 p. Kirkow, Russia’s Provinces: Authoritarian Transformation Versus Local Autonomy? (New
York: St. Martin’s Press, 1998).
* See column 6 of Table 6, below.
oSee generally R.H. Mnookin & L. Komhauser, “Bargaining in the Shadow of the Law: The Case
of Divorce” (1979) 88 Yale L. 950.
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
453
Our analysis of this strategy focuses on the use of penalties. Like most countries
with a civil law legal tradition, Russian contract law allows for punitive remedies
when one party fails to live up to its obligations. This represents a continuity with So-
viet law. During the Soviet period, penalties were mostly assessed for late delivery or
poor quality. The amounts were minuscule. Their purpose was less to punish the
wrongdoer in terms of money than to send a signal to the ministry that something was
wrong. Penalties have taken on a very different function in post-Soviet Russia. As in-
ter-enterprise arrears mounted, penalties became a mechanism for encouraging con-
tractual discipline. Penalties against delinquent purchasers were authorized by both
presidential decree ‘ and statutory law.” However, these penalties are not imposed
automatically, but must be affirmatively asserted and claimed by the disgruntled
seller.” Technically, no court order is required to compel payment of penalties, but in
actual practice, penalties are one of the threats usually associated with litigation and
few purchasers pay them voluntarily.
In order to assess the use of penalties, we return to the questions relating to spe-
cific transactions that were posed to the procurement and sales directors. In the set of
questions about the payment terms associated with these transactions, we asked
whether penalty clauses had been included in the contracts.’ We also rely on several
questions to the general director in which we asked whether the enterprise had used
penalties to obtain payment from delinquent customers over the past two years and
whether he was aware of other enterprises using this method. The responses are set
forth in Table 7.
As a rule, sellers control the terms of the transactions,” and so the responses of
the sales directors presented in column 3 are highly revealing about the intentions of
” In mid-1992, President Yeltsin issued a decree authorizing sellers to assess penalties of 0.5% per
day of the amount owed against delinquent purchasers with regard to contracts for goods: Postanov-
lenie Prezidiuma Verkhovnogo Soveta Rossiiskoi Federatsii i Pravitel’stva R.F. “0 neotlozhnykh
merakh po uluchsheniiu raschetov v narodnom khozyaistve i povyshenii otvetstvennosti predpriyatii
za ikh finansovoe sostoyanie” (25 May 1992) Vedomosti S”ezda narodnykh deputatov i Verkhovnogo
Soveta R.S.FS.R., No. 23.
52 Art. 331 of the Civil Code of the Russian Federation (Part I was enacted in 1994; Sobranie zako-
nodatelstva R.E (1994) No. 32, item 3301; and Part 2 was enacted in 1995: Sobranie zakonodatelstva
R.E (1996) No. 5, item 410 [hereinafter C.C.R.E]; for the English-language translation, see RB.
Maggs & A.N. Zhiltsov, eds., The Civil Code of the Russian Federation, trans. P.B. Maggs & A.N.
Zhiltsov (Armonk, N.Y., M.E. Sharpe, 1997)) provides for the enforceability of penalty clauses in-
cluded in written contracts. Art. 395 C.C.R.F allows sellers to seek interest for the period during
which payment has been delayed. Arbitrazh courts differ on whether this interest should be construed
as punitive or compensatory damages: see e.g. Part 1 of the C.C.R.E
” See generally K. Hendley, “Growing Pains: Balancing Justice & Efficiency in the Russian Eco-
nomic Courts” (1998) 12 Temple Int’l and Comp. L.J. 302 [hereinafter “Growing Pains”].
” This is the same series of questions where we asked about prepayment: see Part ll.B., above.
5′ K. Hendley, R Murrell & R. Ryterman, “Do ‘Repeat Players’ Behave Differently in Russia? An
Evaluation of Contractual and Litigation Behavior of Russian Enterprises” L. & Soc. Rev. [forth-
coming in 1999] [hereinafter “Do ‘Repeat Players’ Behave Differently”].
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 44
the respondents. The proportion of surveyed enterprises that included penalty clauses
ranged from about one half to two-thirds. At the very least, these findings confirm the
widespread use of this strategy. This is reinforced by the responses of the general di-
rector as to whether the enterprise had used penalties as a method of collecting over-
due payments. In four of the regions, more than 70% of surveyed enterprises reported
use of this strategy. In the remaining two regions, Moscow and Voronezh, 53% of en-
terprises used penalties as a mechanism for collecting debts. How can this discrep-
ancy be explained? Perhaps it is a measure of the regional business culture and the
prevailing level of contractual discipline. Over the past two years, Voronezh has had
comparatively fewer non-payment cases in the arbitrazh court than the national aver-
age.’ Altematively, it may be a measure of the health of the regional economy. Mos-
cow enterprises may resort to penalties less often because they have less need to do
so. Overall economic indicators are more positive in Moscow and, consequently, these
general directors may be less desperate.
We do not assume that the inclusion of a penalty clause or the claim by the gen-
eral director that the enterprise used penalties to compel payment of contractual obli-
gations necessarily means that penalties were actually collected. Given that the seller
has full discretion over whether or not to ask for penalties, this operates as a potent
threat. The seller can later appear magnanimous when it foregoes penalties as nego-
tiations draw to a close. This supposition is confirmed by the results of two additional
sets of questions. We asked both the procurement and sales directors to estimate what
percentage of their contracts include a penalty clause. We then asked in what percent-
age of contracts in which payment was overdue were penalties actually paid. In the
case of the procurement director, this would mean that the respondent enterprise paid
the penalties, whereas in the case of the sales director, this would mean that the re-
spondent enterprise collected the penalties. The responses to these questions draw a
remarkable contrast. On the one hand, the responses to the questions about inclusion
of penalty clauses confirms the popularity of this strategy.” On the other hand, when
we asked about what actually happens when payment is late, we found that enter-
prises rarely collect or pay penalties. On the national level, more than half of all sales
contracts include penalty clauses, but in only 8% of sales contracts involving late
payment are penalties collected. Regional variation is present, with the percentage of
sales contracts in which penalties were collected ranging from three in Moscow to
eleven in Barnaul 8 The same stark difference is apparent with regard to purchase
16 Over the two years of 1996 and 1997, non-payment cases as a percentage of the total number of
civil cases decided was 38.25% in Voronezh, as compared to a national average of 50.8%. See “Tem-
poral and Regional Patterns”, supra note 30.
” The percentages of sales contracts reported to include penalty clauses are: 54% in Moscow; 54%
in Novosibirsk; 65% in Ekaterinburg; 44% in Saratov; 50% in Voronezh; and 50% in Barnaul. The
percentages of purchase contracts reported to include penalty clauses are: 31% in Moscow; 55% in
Novosibirsk; 44% in Ekaterinburg; 33% in Saratov; 50% in Voronezh; and 39% in Barnaul.
“s The results for the other regions are: 10% in Novosibirsk; 10% in Ekaterinburg; 4% in Saratov;
and 6% in Voronezh.
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
455
contracts. The national level data indicate that penalty clauses are included in 40% of
all purchase contracts, yet penalties are paid by customers in only 8% of contracts in-
volving overdue payments. Regional level responses vary, with the percentage of pur-
chase contracts in which penalties were paid ranging from five in Moscow to thirteen
in Barnaul.3
We asked the general directors why penalties are not used more. The responses
are remarkably consistent across the regions. They point to a fear of damaging the re-
lationship with the delinquent customer as well as to the inadequacy of laws and in-
stitutions (both legal and financial) needed to implement the strategy. They are uncon-
cerned that local or regional authorities might have a negative attitude toward using
penalties.
Without exception, fewer enterprises in all regions admit to the inclusion of a
penalty clause in purchasing agreements. The terms of these agreements are likely to
be controlled by the seller rather than by our respondents.’ As a result, the surveyed
procurement directors may have viewed this admission as an indicator of weakness.
Even assuming that these numbers are a bit soft, they still reflect widespread use of
penalties.
G. Litigation
When all else fails, a disgruntled enterprise can always file a lawsuit. We proceed
from the assumption that this is a last resort rather than a knee jerk reaction, though
we recognize that threats to file lawsuits may come earlier.” Indeed, these threats may
even be part of a negotiating strategy. Both parties’ desire to avoid the costs associated
with litigation acts as an inducement to compromise.
Going to court is a meaningful threat and a feasible strategy for ,,-aiing with
customers only if the courts are perceived as an institution capable of resolving dis-
putes and enforcing their judgments. Assessing the legitimacy of judicial institutions
is always a tricky matter.’ Under Russian law, disputes between industrial enterprises
are within the exclusive jurisdiction of the arbitrazh courts. 3 These courts are an in-
stitutional successor to the Soviet-era state arbitrazh.’ A number of Western observ-
‘9 The results for the other regions are: 8% in Novosibirsk; 10% in Ekaterinburg; 8% in Saratov; and
7% in Voronezh.
Press, 1981).
6 See “Do ‘Repeat Players’ Behave Differently”, supra note 55.
” See W.L.F Felstiner, R.L. Abel & A. Sarat, “The Emergence and Transformation of Disputes:
Naming, Blaming, Claiming ..” (1980-81) 15 L. & Soc. Rev. 631; and Macaulay, supra note 9.
62 See M. Shapiro, Courts: A Comparative and Political Analysis (Chicago: University of Chicago
63 See generally K. Hendley, “Remaking an Institution: The Transition in Russia from State Arbi-
trazh to Arbitrazh Courts” (1998) 46 Am. J. of Comp. L. 93 [hereinafter “Remaking an Institution”];
and K. Pistor, “Supply and Demand for Contract Enforcement in Russia: Courts, Arbitration, and Pri-
vate Enforcement” (1996) 22 Rev. of Central & East Eur. L. 55.
S. Pomorski, “State Arbitrazh in the U.S.S.R” (1977) 9 Rutgers-Camden LJ. 61.
456
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
ers have dismissed the arbitrazh courts as incapable of handling the sorts of disputes
that are likely to arise during the transition to a market economy.’ Yet their arguments,
which center on claims of prohibitive filing fees and long delays, do not stand up to a
detailed assessment of the evidence.” Over the past few years, more than 95% of con-
tractual disputes filed in the arbitrazh courts have been resolved within the two-month
deadline established by law.” Comparatively speaking, this is a record that most
countries (including the United States) cannot match. The difficulty with petitioners
being turned away from the arbitrazh courts because they could not pay the initial
filing fee has been ameliorated by a practice of allowing cash-poor enterprises to peti-
tion to have the filing fee paid by the loser at the conclusion of the case.” This is not
to say that arbitrazh courts are problem-free. They are justly criticized for a poor rec-
ord on implementation. When the lawyers for our surveyed enterprises were asked to
evaluate possible obstacles to using the arbitrazh courts, they consistently cited diffi-
culties in enforcing decisions as the most serious of these.’ Institutional reforms de-
signed to facilitate the enforcement of decisions were introduced in mid-1997.0
The best evidence of the viability of commercial litigation in post-Soviet Russia
as a transactional strategy is the high percentage of enterprises that report using, or
threatening to use, the arbitrazh courts over the past two years.” We base our analysis
on the composite question posed to the sales director’ because it presents the situation
of seeking payment from customers, which is the most common scenario according to
arbitrazh court statistics.” Table 8 presents the percentage of enterprises in each re-
63 See B. Black & R. Kraakman, “A Self-Enforcing Model of Corporate Law” (1996) 109 Harv. L.
Rev. 1911; J.R. Hay, A. Shleifer & R.W. Vishny, “Toward a Theory of Legal Reform” (1996) 40 Eur.
Econ. Rev. 559; and N.E O’Donnell & K.Y. Ratnikov, “Dispute Resolution in the Commercial Law
Tribunals of the Russian Federation: Law and Practice” (1977) 22 North Carolina J. of Int’l L. &
Com. Reg. 795.
6″Temporal and Regional Patterns”, supra note 30.
6Ibid
Ibid.; and “Growing Pains”, supra note 53.
Among the other obstacles listed were cost, time delays, procedural complexity, expense of out-
side counsel, bias among judges, incompetence of judges, and lack of confidentiality. Respondents
from all regions ranked cost and delay as the second and third most serious obstacle to using the ar-
bitrazh courts.
‘0 M. Vasil’eva, “Nel’zya zhit’ po zakonam dzhunglei” (1996) 7 Chelovek i zakon 54.
“We presume that. threats to initiate lawsuits are bonafide and that if the customer fails to respond,
the respondent would file the claim.
“See Box 2, below.
” See ‘Temporal and Regional Patterns”, supra note 30. By contrast, lawsuits filed against suppliers
are less common. Given the widespread use of prepayment, when lawsuits arise they often involve
situations where the customer has paid for goods which were not thereafter delivered. Also militating
in favor of fewer lawsuits is the reluctance of enterprises to take actions that might undermine their
relationship with long-term suppliers (see Macaulay, supra note 9). As this would suggest, the re-
ported use of litigation by procurement directors (see (H) in Box 1, below) is considerably lower. The
percentages of enterprises that admitted to filing lawsuits against suppliers are as follows: 24% in
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
gion that have filed or threatened to file lawsuits. More than half of all surveyed en-
terprises reported using this strategy. The percentages range from a low of 56 in No-
vosibirsk to a high of 69 in Ekaterinburg. The variations are attributable to enterprise
characteristics. In all likelihood, they stem from the size and/or the presence of a legal
department, both of which are legacies from the Soviet era.’
The evaluations of the effectiveness of this method are undoubtedly linked to the
respondents’ opinion of the arbitrazh court in their region.7′ Thus, the mean scores set
forth in the third column of Table 8 represent a crude measure of the trust placed in
each court, at least by these enterprises. Saratov and Ekaterinburg received the highest
scores. It is perhaps not accidental that the arbitrazh courts of these two regions have
a well-deserved reputation for handling cases efficiently and fairly. The chairpeople
(predsedately) of these courts are experienced managers, as their consistently low
rates of delayed cases confirm.’6 For example, the average annual percentage of cases
that were not decided within the two-month statutory deadline over the three-year pe-
riod from 1995 to 1997 was 0.8 in Saratov and 1.6 in Ekaterinburg, compared with
8.8 in Bamaul and 5 in Moscow.” These latter two regions received the lowest scores
for effectiveness.
The comparatively low scores awarded by the Moscow sales managers is a bit
puzzling. The Moscow City arbitrazh court is universally recognized as highly com-
petent. In fact, many non-Moscow enterprises include a clause in their form contracts
granting jurisdiction to the Moscow City arbitrazh court. By virtue of being located in
the financial center of Russia, its judges regularly confront more complicated com-
mercial matters than do other arbitrazh judges, and they have learned how to deal
with these cases. It is also the largest and most well-funded of all the trial-level arbi-
trazh courts. Given all of this, the consensus of the Moscow enterprises that litigation
is not a terribly effective strategy is surprising. Perhaps it reflects a dissatisfaction
with the outcomes of the cases in which they participated.
Moscow; 33% in Novosibirsk; 20% in Ekaterinburg; 16% in Saratov; 25% in Voronezh; and 34% in
Barnaul.
74See “Do ‘Repeat Players’ Behave Differently”, supra note 55.
” Russian arbitrazh courts are organized on a regional basis. The strong preference of enterprises to
litigate in their local court is indicated by their tendency to include clauses in their form contracts
ceding jurisdiction to this court. Absent such a clause, the arbitrazh court closest to the defendant ex-
ercises jurisdiction.
76 The Saratov chairman is male. His Ekaterinburg counterpart is female. Both are carryovers from
the days of state arbitrazh. Multiple interviews with them between 1993 and 1997 indicate that they
are well-versed in the new procedures and committed to making their courts run smoothly. These
chairpersons carry the title of “judge” but, in contrast to chief judges of common law courts, they
rarely hear cases. They are primarily occupied with managerial tasks, such as assigning cases. See
generally “Remaking an Institution”, supra note 63.
” “Temporal and Regional Patterns”, supra note 30.
MCGILL LAW JOURNAL/REVUE DE DROITDE MCGILL
[Vol. 44
Conclusion
The evidence presented above contributes to filling a gap in our knowledge of
how Russian enterprises interact with one another. It builds on previous work that
looked at survey results for Russia as a whole,” but adds a critical nuance by focusing
on regional variation in transactional strategies. Differences among regions in enter-
prise behaviour is present for all of the tactics examined, both in terms of basic use
and perceived effectiveness. Even more importantly, many of these differences are the
result of regional effects (as opposed to characteristics of the surveyed enterprises,
such as size, age, ownership, and access to legal expertise). At this point, however, we
have only begun the process of developing the causal explanations for the behaviour
described. Based on our knowledge of the politics and the institutional landscape of
the surveyed regions, we have suggested possible reasons for the observed variations.
We recognize these as mere starting points for more detailed analyses in order to de-
termine precisely why enterprises in particular regions embrace or eschew each strat-
egy.
The existing literature on Russia’s regions tends to evaluate and group them on
broader criteria, such as support for economic reform or democracy, or effectiveness
of government.” It might seem that, on the basis of relative levels of use of various
strategies, we could also surmise that enterprises in certain regions are more positively
disposed toward markets and/or law. But this approach only confuses matters in our
case. The transactional strategies we have identified cannot be neatly divided into pro-
and anti-market. Nor is it always obvious whether their use is indicative of a receptiv-
ity or antipathy toward law. Much depends on context. For example, when an enter-
prise relies on relational contracting tactics rather than filing a lawsuit, it may be seen
as an effort to resolve a potential dispute with a minimum of fuss, thereby minimizing
transaction costs.” Alternatively, the same situation may be seen as reflecting an un-
willingness to deal with unknown trading partners, which may have the effect of lim-
iting market development.”
The absence of clear and consistent regional patterns in the results is yet another
reason why efforts to categorize the surveyed regions are futile. In other words, even
if it could be established that certain sorts of behaviour are indicative of pro- or anti-
market attitudes, the results are too scattered. Indeed, if we were to rank the regions as
to their propensity to use each strategy, we would find that each list looked different.
There is not even any consistency as to which regions have similar results. Thus, in
contrast to what Berkowitz and DeJong found for price policy,’ our findings do not
“”Law, Relationships, and Private Enforcement”, supra note 14.
“Berkowitz & DeJong, supra note 1; Stoner-Weiss, supra note 5; Grigor’ev, Malyutin &
Neshchadin, supra note 3; Hahn, supra note 2.
“See Williamson, supra note 19; and Macaulay, supra note 9.
” D.C. North, Institutions, Institutional Change, and Economic Perfonance (Cambridge: Cam-
bridge University Press, 1990) at 119-22.
” Supra note I.
1999]
K HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
459
reflect any behavioural bright line between regions in the Red Belt and others.’ In-
deed, enterprises in the Red Belt regions do not act similarly with respect to any of the
strategies studied.
Although we cannot discern the existence of overarching patterns, two regions do
emerge as distinct. These are Moscow and Barnaul. The importance of financial in-
stitutions provides at least part of the explanation. For example, in Barnaul where
banks have proven incapable of processing payments in a tirnely fashion and bank
credits for enterprises are illusory, enterprises barter extensively and look to the gov-
ernment and others to help them out of difficulties. By contrast, in Moscow where
banks function fairly effectively, enterprises can rely on arm’s length tactics, such as
prepayment.
Finally, the evidence tends to undermine a few long-held assumptions. It demon-
strates that Russian enterprises generally reject the use of private force to enforce
contractual obligations, and that enterprises regularly use legal institutions and pursue
legalistic remedies. The argument that economic reform has been thwarted by the ab-
sence of viable mechanisms for enforcing contracts and other property rights deserves
to be re-evaluated.
Supra note 15.
460
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Questionnaire Boxes
Box 1: QUESTION POSED TO THE PURCHASING DEPARTMENT
During the past two years, how important were the following methods in helping your enterprise to
prevent and/or resolve problems arising in relationships with suppliers? First, please tell us whether
you used the method. If the method was used, then please evaluate its effectiveness on a scale from 0
to 10. A “0” means either that the method was not used at all or that it was not effective and a “10”
means that the method was very effective.
Method
I = Yes, this method was On a scale from 0 to 10, how
used during the past two
years.
effective was the method
during the past two years?
2 = No, this method was
not used during the past
two years.
Formal business meetings between
lower-level officials of the trading part-
ners. (A)
Formal business meetings between the
general directors of the trading partners.
Informal meetings between counterparts
in the two enterprises, for example, in a
restaurant, banya, recreational facility, or
civic organization.
Intervention by other enterprises. (B)
Intervention by officials of a business
association or a financial-industrial
group.
Use of private enforcement firms (secu-
rity firms, collection agencies, mafia,
etc.). (D)
Intervention by banks.
Intervention by representatives of politi-
cal parties or movements.
Intervention by officials of the local
government. (E)
Intervention by officials of the federal
government
Use of arbitrazh courts. (H)
Use of treteiskie courts.
(Note: Treteiskie courts are private tribu-
nals that arbitrate business disputes at the
request of the parties.)
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
BOX 2: QUESTION POSED TO THE SALES DEPARTMENT
Listed below are some possible methods of dealing with customers that did not honour their agree-
ments with your enterprise. First, please tell us whether your enterprise has used or threatened to use
this method during the past two years. Then, please tell us how effective either the threat of using
these methods or their actual use has been in getting them to honour their agreements. Convey your
views by choosing a point on a scale from 0 to 10- A “0” means either that the method was not used
at all or that it was not effective and a “10” means that the method was very effective.
Method
I = Yes, our enterprise used or
threatened to use this method
during the past two years.
2 = No, our enterprise did not
use or threaten to use this
method during the past two
years.
On a scale from 0 to 10, how
effective is this method for
getting other firms to honor
their agreements with you?
Telling other enterprises about
the behaviour of an enterprise
that did not honour its agree-
ment. (C)
Forcing the enterprise to pay a
financial penalty.
Stopping trade with the enter-
prise.
Filing a complaint against the
enterprise with an anti-
monopoly committee.
Sending pretenzia or other no-
tices suggesting a possible
court action.
Filing a claim in arbitrazh
court. (G)
Reporting the enterprise to a
local government organ. (F)
Reporting the enterprise to a
federal government organ.
Reporting the enterprise to a
business association or a finan-
cial-industrial group.
Reporting the enterprise to so-
cial, religious, or civic organi-
zations.
462
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol.44
Tables of Figures
TABLE 1: RELATIONAL CONTRACTING
The use and effectiveness of formal business meetings between lower-level officials
of the trading partners in helping the enterprise to prevent and/or resolve problems
arising in relationships with suppliers (see (A) in Box 1).
Regions
Percentage of enter-
prises using method
Average scale score
for those using
method
Average scale score
across all enterprises
(assuming score =0
if not used)
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an F-test
showing whether
regional effects are
significant or not
70.91
75.93
79.63
60
83.64
88.68
7.1
7.39
7.72
7.12
7.87
7.66
5.04
5.51
6.04
4.27
6.58
6.79
Significant
Insignificant
Significant
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
TABLE 2: SELF-ENFORCEMENT-PREPAYMENT
Regions
Re: specific purchasing transaction
Re: specific sales transaction
Full
prepay-
ment
(%)
(2)
40
45.45
38.18
49.09
36.36
38
Insig-
nificant
Partial
prepay-
ment
(%)
(3)
70.91
80
85.45
80
65.45
68
Difference:
contractual &
actual pre-
payment (%)
Full
prepay-
ment
(%)
Partial
prepay-
ment
(%)
Difference:
contractual
& actual pre-
payment (%)
(4)
(5)
(6)
(7)
6.41
13.48
10.36
5
5.7
6.25
52.73
48.15
40.74
67.27
38.89
18.37
83.64
90.74
75.93
85.45
55.56
48.98
7.8
6.53
16.73
7.33
7.36
7.94
Insignifi-
Insignificant
Signifi-
Signifi-
Insignificant
cant
cant
cant
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an
F-test show-
ing whether
regional
effects are
significant or
not
TABLE 3: SELF-ENFORCEMENT-BARTER
Regions
Percentage of output sold through
Percentage of inputs obtained
barter
through barter
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
1992
11.06
7.89
10.06
6.35
8.13
9.48
1997
15.49
47.91
46.47
49.09
35.13
63.92
1992
6.02
13.54
9.14
14.1
10.71
9.69
1997
14.05
50.72
41.A6
44.47
38.75
63.39
Results of an F-
Insignificant
Significant
Insignificant
Significant
test showing
whether re-
gional effects
are significant
or not
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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TABLE 4: THIRD-PARTY ENFORCEMENT
Question to Procurement Director: The use and effectiveness of intervention by
other enterprises in helping the enterprise to prevent and/or resolve problems arising
in relationships with suppliers (see (B) in Box 1).
Question to Sales Director: Telling or threatening to tell other enterprises about the
behaviour of an enterprise that did not honour its agreement, and the effectiveness of
this method in changing that enterprise’s behaviour (see (C) in Box 2).
Regions
Question to Procurement Director
Question to Sales Director
I
Per-
centage
of enter-
prises
using
method
Average
scale
score for
those
using
method
Average
scale score
across all
enterprises
(assuming
score = 0 if
not used)
r
+
Percentage
of enter-
prises us-
ing method
I
Aver-
age
scale
score
for
those
using
method
Average scale
score across
all enter-
prises (as-
suming score
0 if not
used)
(2)
14.56
14.81
14.81
7.27
14.55
26.42
(3)
5.13
5.88
7.72
7.12
7.87
7.66
(4)
5.04
5.51
6.04
4.27
6.58
6.79
(5)
40
45.45
54.55
45.45
47.27
52.83
(6)
3.57
4.13
4.93
5.12
4.58
3.93
(7)
1.36
1.8
2.69
2.33
2.16
2
Insig-
nificant
Insignifi-
Significant
Insignifi-
cant
cant
Insig-
nificant
Insignificant
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an
F-test show-
ing whether
regional
effects are
significant or
not
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
465
TABLE 5: PRiVATE ENFORCEMENT
The use and effectiveness of private enforcement firms (security firms, collection
agencies, mafia, etc.) in helping the enterprise to prevent and/or resolve problems
arising in relationships with suppliers (see (D) in Box 1).
Regions
Enterprises using
method
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an F-test
showing whether
regional effects are
significant or not
Average scale score
for those using
method
Average scale score
across all enterprises
(assuming score =0
if not used)
5
2
10
–
0
9.67
0.27
0.04
0.18
–
0
0.55
Actual
number
3
1
1
0
1
3
5.45
1.85
1.85
0
1.82
5.66
Insignificant
No test performed be-
cause of small num-
bers of enterprises
using method
Insignificant
466
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TABLE 6: ADMINISTRATIVE LEVERS OF THE STATE
Question to Procurement Director: The use and effectiveness of intervention by lo-
cal government officials in helping the enterprise to prevent and/or resolve problems
arising in relationships with suppliers (see (E) in Box 1).
Question to Sales Director: Reporting or threatening to report the failure of a trading
partner to live up to its contractual obligation to a local government organ, and the ef-
fectiveness of this method in changing that trading partner’s behaviour (see (F) in Box
2).
Regions
Question to Procurement Director
Question to Sales Director
Aver-
age
scale
score
for
those
using
method
(6)
5.25
5.2
4.33
4.5
2.5
4.19
Average scale
score across
all enter-
prises (as-
suming score
= 0 if not
used)
(7)
0.38
0.47
0.24
0.33
0.09
1.26
Significant
Significant
Significant
Insig-
nificant
Significant
Per-
centage
of enter-
prises
using
method
Average
scale
score for
those
using
method
Percent-
age of en-
terprises
using
method
Average
scale score
across all
enterprises
(assuming
score = 0 if
not used)
(3)
1
2.88
3.33
0.8
1.83
4.27
(4)
0.11
0.42
0.18
0.15
0.2
0.89
(5)
7.27
9.26
5.56
7.27
3.64
30.19
(2)
12.73
14.55
5.45
20
10.91
20.75
Insig-
nificant
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an
F-test show-
ing whether
regional
effects are
significant or
not
1999]
K. HENDLEY, ET AL. – TRANSACTIONAL STRATEGIES
TABLE 7: SHADOW OF THE LAW-PENALTIES
Column (2): Percentage of enterprises that included a clause subjecting them to pen-
alties in case of late payment in their specific purchasing agreement. (Question posed
to procurement director.)
Column (3): Percentage of enterprises that included a clause allowing them to impose
penalties on customers who did not pay in a timely fashion in their specific sales
agreement. (Question posed to sales director.)
Column (4): Percentage of enterprises that endeavoured to collect penalties from
customers with overdue payments. (Question posed to general director.)
Column (5): The percentage of general directors who believe that other enterprises
have used penalties to collect overdue payment from customer.
Regions
Penalty clause
in purchase
agreement (%)
Penalty clause
in sales agree-
ment (%)
Use of penalties
to collect over-
due payments
(%)
Use of penalties
by other enter-
prises to collect
overdue pay-
ments (%)
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
(2)
44
56
24
38
43
43
(3)
51
67
47
49
56
62
(4)
53
71
71
71
53
75
(5)
56
58
65
67
65
70
Results of an F-
Significant
Insignificant
Significant
Insignificant
test showing
whether
regional effects
are significant
or not
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
TABLE 8: LITIGATION
Filing a lawsuit in arbitrazh court or threatening to do so as a mechanism for encour-
aging non-paying customers to honour their agreements, and the effectiveness of this
method (see (G) in Box 2).
Regions
Percentage of enter-
prises using method
Average scale score
for those using
Moscow
Novosibirsk
Ekaterinburg
Saratov
Voronezh
Barnaul
Results of an F-test
showing whether
regional effects are
significant or not
58.18
56.36
69.09
61.82
60
60.38
method
3.57
4.13
4.93
5.12
4.58
3.93
Average scale score
across all enterprises
(assuming score 0
if not used)
1.36
1.8
2.69
2.33
2.16
2
Insignificant
Significant
Significant
1999]
K. HENDLEY, E-T AL. – TRANSACTIONAL STRATEGIES
469
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