5 - Demand-Side Barriers to the Use of Legal Strategies

Summary

The previous chapter illustrated the incompleteness of an exclusively supply-side approach to property security. Although a lack of state legal capacity in the early 1990s impeded Russian firms’ use of formal legal institutions, a rise in legal capacity can at best account only partially for the evolution in Russian firms’ strategies for securing property. This chapter begins the task of analyzing other factors that affect property security strategies. It focuses on demand-side barriers: the behaviors or beliefs at the level of firms and individuals that lead these actors to avoid formal legal institutions. Numerous factors can serve as demand-side barriers, but most fall under three categories – firms’ operations in the informal economy, collective action dilemmas among firms, and cultural norms.

As discussed in Chapter 2, there is no evidence that cultural norms played a role in the development of firms’ property security strategies in Russia. This chapter therefore focuses on firms’ activities in the informal economy and collective action dilemmas, analyzing first how these factors served as barriers and then how these barriers declined over time. For example, in the 1990s Russia's informal sector at times constituted more than 40 percent of the overall economy (Johnson et al., 1997, p. 183). But Russia's informal economy differed from that of many other regions, particularly Latin America, where the informal economy consists primarily of micro-enterprises operating outside of the state's purview. Instead, firms in post-Soviet Russia rarely have avoided registration and incorporation, but rather have concealed many aspects of their operations for the purpose of tax evasion. These low levels of tax compliance have had a significant effect on property security strategies. As a Moscow lawyer explained, intuitively capturing the logic of demand-side barriers, “In terms of which businesses face problems with bureaucrats and criminal groups, the most vulnerable are those using ‘black cash.’2 They can't turn to the courts or police for help, and everyone knows that” (Lawyer 8, interview, 2009).

As economic growth increased at the end of the 1990s, firms were encouraged to formalize their operations in order to take advantage of emerging opportunities. This, combined with long-delayed tax reforms, led to significantly improved tax compliance, which lowered one of the key hurdles to firms’ use of formal legal institutions. Through these reforms, the state indirectly contributed to the evolution of Russian firms’ property security strategies.