Chapter

Chapter IV.7 Legal Reform

Author(s):
International Monetary Fund
Published Date:
December 1991
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1. INTRODUCTION

The speed and depth of the legal changes in the USSR have increased drastically in the past year. The changes now occurring involve the fundamental principles on which Soviet legal regulation is based. In many areas of the law, change is at its earliest stages, having proceeded no further than the issuance of a new set of basic legal principles on which further legislation and regulations are to be based. Continuing debate over political issues and the proper overall direction of reform has sidetracked the process of elaboration of subordinate legislation and regulations, and there is often little or no enforcement history or authoritative interpretation of new laws. Thus, the current state of the law in many areas is extremely uncertain.

This chapter briefly discusses a number of the areas of Soviet law which are basic to the reform process. Section 2 covers issues of authority to legislate and regulate, including issues of federal structure, separation of powers, and local capacity. Section 3 discusses those elements of the legal structure which form the basic framework of a market economy: property rights, the ability to transfer those rights, and the enforcement of the law. Section 4 discusses basic regulation of the business sector: business forms, privatization issues, and antitrust legislation. Section 5 contains comments on a number of sectoral or specific matters including banking and finance problems encountered by new businesses, foreign investments, agricultural land use, regulation of the housing market, taxation, environmental regulation, and institutional capacities to implement reforms. A summary is presented in section 6.

2. STATE AUTHORITY AND THE LEGAL REGULATION OF THE ECONOMY

a. Introduction

The most serious legal problem currently facing the Soviet economic reform effort does not concern any particular piece or pieces of legislation but rather the lack of clarity and uniformity with respect to the substantive law governing economic matters and the standards and means for its implementation. At the time of this writing, the problem of lack of clarity and uniformity exists at all levels of government and involves uncertainty concerning the location of authority to legislate and to implement the laws, the nature and extent of the legislative and executive powers, and the appropriate means and methods for enforcement. The presidential guidelines identify lack of respect for the law as a primary cause of the current economic crisis, but under existing conditions, even those who strongly desire to follow faithfully the applicable law may be unable to ascertain what law is applicable and what must be done (or may be demanded by implementing authorities) in order to fulfill its requirements. Because the current uncertainty with respect to the structures of state power is comprehensive, extending not only to legislative, administrative, and executive structures, but to judicial powers as well, no stable resolution of such uncertainties is available from judicial bodies. Unless a significant amount of this uncertainty with respect to state authority is resolved and some clarity is achieved concerning which national, state and local bodies have the authority to define, administer, and enforce economic rights and obligations, no reform program, regardless of its content or emphasis, is likely to be successful.

The extreme levels of uncertainty with respect to the applicable law and its implementation which currently exist in the USSR result from a combination of problems. The primary and most publicized source of uncertainty is the current conflict between the union government and various subordinate territorial governments concerning the proper relationship between and among the constituent parts of the union. This is a fundamental conflict concerning the most basic questions of political and economic relations among nationality groups and territorial units and some resolution of the conflict, even if temporary or subject to gradual evolution, is clearly required before anything in the nature of economic reform programs can be devised and implemented.

The problem of uncertainty concerning state authority is not, however, simply a problem of uncertain political relationships. The traditional Soviet legal theory envisions a unified state power—organic in nature and indivisible—and the structures of Soviet state authority formed according to this theory are indeed very integrated and overlapping. While most legislators and legal scholars now accept the idea of a need for a “separation of powers,” only the first steps toward defining and implementing such separation have been made and the continuing lack of clear boundaries between the powers of various bodies may give rise to substantial uncertainties even in the absence of serious political turmoil.

In addition to problems of distribution of power and of legal competence, technical and organizational problems also contribute to legal uncertainty and particularly to lack of uniformity in implementation. The traditional modes of economic regulation in the USSR did not place large amounts of economic responsibility in the hands of local bodies of state power. As political power and responsibility for economic regulation are decentralized (whether this occurs as a result of political breakdown of the union or by way of a planned political and economic reform), increasing amounts of responsibility for economic regulation and enforcement will fall into the province of local bodies that do not have institutional structures designed to fulfill these functions and may not have the training, personnel, or experience to adequately interpret, refine and enforce economic law. Under these conditions, laws and regulations that must be interpreted, or simply implemented and enforced, at the local level are likely to be interpreted, implemented, and enforced in an inconsistent fashion.

b. Soviet federalism and issues of territorial power

(1) Soviet state structure

The structure of Soviet territorial-administrative divisions is quite complex and somewhat reminiscent of a matryoshka—a traditional Russian nesting doll which contains within itself many smaller dolls. The territory of the USSR is divided among fifteen Soviet Socialist Republics (sometimes referred to as SSRs or “union republics”). Union republics have long been referred to as “sovereign” and have had a constitutional right to secede since the first union constitution in 1924.1 Union republican bodies are immediately below the all-union level bodies in the Soviet state authority structure and there are a variety of legislative and regulatory tasks which are solely the province of the union republics.

A union republic may contain one or more autonomous republics. Autonomous republics (ASSRs) are territorial units based, like union republics, on a fairly populous nationality group. Autonomous republics were not created as union republics either because they are located in the center of the country (making secession a problem) or were based on a somewhat smaller population group existing within the territory of a larger one, or both. Although the autonomous republic is subordinate to the union republic, its structure of government may be nearly identical to the union republic level structure and it maintains its own constitution and a significant amount of independence. The autonomous republic is created at the all-union level and, once created, its territory may not be altered without its consent.

A union republic may determine its own division into lower level units of territorial administration, with the exception of the creation and alteration of autonomous republics. These generally include one or more oblasts (regions)—a purely geographical unit of territorial administration without basis in nationality characteristics of the population. They may also include a territorial division called a kray (territory)—usually a large territory which is not itself based on nationality, but which contains within its area a lesser unit of territorial administration based on a nationality group. Beneath the level of the kray, autonomous oblasts or autonomous okrugs (districts) (sometimes referred to as national okrugs) may be formed—both of which divisions are based upon particular nationality groups. Autonomous okrugs may also be formed within an oblast.2 Large cities are often separated out from the larger territorial unit in which they are located and form their own territorial administrative unit. At the lowest level of administration is the rayon (town), which is a small, geographically based division of a city (somewhat like a ward or borough) or of a suburban or rural area (somewhat like a county or township).

Territorial divisions which are based on nationality group have representation in the USSR Soviet of Nationalities, one of the houses of the bicameral national legislature, and are therefore accorded constitutional recognition at both the union and union republican levels, although the functions and powers of formations below the level of autonomous republic are not constitutionally defined.3 Territorial units which are not based on nationality group do not have specific representation in the national legislature or constitutional status but may nonetheless have substantial significance in administrative and state affairs.

Lower level territorial units are subordinated to the relevant state bodies at higher levels, but the precise nature of the division of competencies between levels is poorly defined. Local bodies of power have, according to traditional Soviet legal theory, the power to resolve all questions of local significance and to do so independently. However, they can do so only to the extent that the relevant power is not exclusively granted to another body and to the extent that the lower bodies follow the guidelines and decisions of those above them. Traditionally, most important decisions concerning economic policy, infrastructure investment, and even industrial plan operations have been made at fairly high levels of the state structure or through the centralized planning system, leaving the localities with a very limited sphere of independent action with respect to economic matters.

(2) Deterioration of the federal structure

In the past year, many of the union republics as well as some autonomous republics, regions, cities, and even urban districts have become increasingly insistent on being granted more effective control over local matters than they have had in the past. A significant number of the larger formations have issued declarations on political and/or economic sovereignty which proclaim that laws and regulations issued by higher bodies shall be effective on the territory of the declaring lower level formation only after the supreme state bodies of that formation confirm them. The validity of this formulation of local sovereignty has been rejected repeatedly by the union government. These rejections have, in general, not caused the republics and localities to rescind their declarations, although many have avoided taking actions that would cause an immediate confrontation. New legislation on the issue was recently passed by the Supreme Soviet of the USSR, once again declaring union law to be supreme in all areas of union jurisdiction and purporting to invalidate republican acts which contradict union law in those areas. The ability of the union to enforce this legislation over republican objection is in doubt, however, and a declaration on RSFSR sovereignty was passed almost concurrently, giving the RSFSR Council of Ministers and RSFSR Supreme Soviet the right to suspend union enactments which are believed to violate the sovereignty of the RSFSR, as well as other powers.

(3) The future shape and form of the union

There appears to be a broad general agreement that a new definition of the relationship between the union government and various constituent parts of the union, especially the republics, is needed. The need to reconsider the relationship is not only a result of the current strife, but also a natural outgrowth of the process of political and legal change that has occurred over the past several years and the resulting need to prepare a new Constitution of the USSR. While there is also broad general agreement that the new arrangement should include greater effective sovereignty at local levels, especially with respect to economic and environmental matters, there remains fundamental disagreement about the proper form of any agreement between and among the republics and the central government, and the proper division of powers between the union and its constituent parts.

One proposal for a means of redefinition of federal relationships involves the creation of a new “union treaty.” Such a treaty would be concluded among the various union republics and would redefine the relationships among them and the nature of the federal power within the union. The treaty would then be included as a fundamental part of the new Constitution of the USSR.4 A substantial amount of effort is being directed toward the resolution of the problem by this means, and a variety of committees at the union and republican levels have produced numerous draft texts of the treaty.5 However, while the discussion of the redefinition of Soviet federalism goes on in the context of widespread expectation that some form of a “union treaty” will, in fact, be concluded, there appear to be significant numbers of dissenters who feel that another form of resolution is preferable. Opinions on the matter vary across a broad spectrum, ranging from those who seek complete sovereignty and political independence for the republics and dissolution of the union government, to those who feel that the matter can be resolved by fairly simple constitutional amendment.

Prior to the issuance of the presidential guidelines, the Ministry of Justice of the USSR indicated its desire to see a union government with supremacy in a variety of specifically defined areas of law and regulation. The areas chosen were those in which the Ministry believes some substantial degree of consistency and uniformity are required for the creation and maintenance of an all-union market economy. In the Ministry’s view, these include laws on: currency and the monetary system, basic federal banking regulation, issuance of and trade in various kinds of securities, an antimonopolies system, general principles of civil law (i.e. contract, property rights, etc), definition of union rights and obligations with respect to infrastructure and emergency services, basic union-level rights for consumers, regulation of foreign economic relations, basic labor regulation, the means by which state requirements are to be met (i.e., a state contracting system), and the means by which prices are to be formed and price controls gradually eliminated. Although the Ministry itself saw this “wish list” as eminently restrained and reasonable, Ministry representatives made it clear that they were uncertain which, if any, of these powers would actually be retained by the central government.

Ministry representatives favored a union treaty as a means of resolving the issue of federal power and union relationships and providing the union with the powers it needs to maintain the all-union market, but expressed concern about the current willingness of some republics to enter into such a treaty. The type of union desired was described as similar to the European Community, but somewhat more tightly knit. This would suggest a union which could also conceivably be formed by means of an economic agreement that would not require a federal government, as such, or a union-level constitution. The Ministry proposal generally avoided discussion of the fate of existing union-level political bodies, concentrating instead on the need for legal uniformity on particular economic issues. Discussions with Ministry representatives on the subject of judicial bodies, however, suggested that the Ministry’s model assumed a federal apparatus with considerable power.

The presidential guidelines appear to advocate the maintenance of a relatively strong union, with a substantial amount of power remaining in the hands of central bodies. The precise nature and concept of the union, however, is somewhat difficult to determine. The guidelines themselves do not discuss the powers of the union and union republics in terms of division of legislative authority, but refer instead to a variety of specific areas in which an all-union administrative body should be created because the activity requires uniform management at the union-wide level. If it is assumed that a call for an all-union administration in a particular area indicates an intention to create union-level supremacy on the named issues, the guidelines appear to agree in large part with the list of desirable union powers discussed by the USSR Ministry of Justice. Basic monetary, banking and foreign exchange regulation, foreign economic relations, external customs, emergency response system, union-level infrastructure (i.e., transportation, communications, fuel and energy, etc.), antimonopoly policy, consumer protection, and certain kinds of price regulation are all to be placed in the hands of union-level bodies according to the guidelines.

There are also, however, some notable differences between the apparent dictates of the guidelines and the Ministry’s list. In one important example, the guidelines state that the republics shall regulate, through legislation, the possession, use, and disposition of all of the national wealth located on their territories. This may indicate an intent to create not only republican freedom to control the use of republican resources, but also republican freedom to define ownership and contract rights within the republic’s territory. Should this be the case, the definition of ownership and the standards for establishing and maintaining it might well differ across republican borders, creating confusion and difficulty in cross-republic transactions and hindering the functioning of a union-wide market. No other mention is made of the level at which basic civil law matters (e.g., contract) will be controlled, and the guidelines also omit mention of the locus of control for securities regulation and definition of business forms—matters the Ministry would have placed under all-union regulation.

In the guidelines, union involvement in price setting appears to involve more direct union regulation of the price of particular products, rather than the regulation of the process for price formation and the process of price de-control, as envisioned by the Ministry. However, the guidelines suggest that the products for which the union may set prices are to be determined by agreement among the republics, giving the republics a power to control union-level involvement that did not appear to be envisioned by the Ministry and perhaps effectively denying the union the ability to set any prices at all.6 The guidelines do envision a union-wide minimum wage scale which would be obligatory for the republics.

The guidelines also mention several additional areas for all-union administration not discussed by the Ministry. Defense programs and the conduct of major scientific and technological development programs are mentioned, as well as space systems and research, the development of single accounting standards, collection and organization of statistics, and the maintenance of patent, weights and measures and meteorological forecasting systems. The guidelines also mention the setting of union standards and the adoption of international standards as activities to be undertaken by the union-level bodies, although they fail to provide detail concerning the types and purposes of such standards.

With respect to the means by which the union is to be formed and maintained, the guidelines are not entirely clear. The guidelines state that the sovereign republics shall enter the union voluntarily and on the basis of their mutual interest, and further specify that powers delegated to the union may not be changed without the consent of the republics and that republics shall be economically liable for violations of their accepted obligations. The guidelines do not, however, specify the means by which the republics will enter into the arrangement or the legal form of the union, nor do they give any indication of the means by which the republics must agree to change the delegation of powers to the union, the ability of republics to withdraw from the union, or the means by which a republic is to be held economically accountable for failing to fulfill its obligations to the union. There is no specific mention of a union treaty, and while the union described could be formed by that means, the language could also be taken to simply refer to the terms which should be included in the new version of the constitution.

Both the Ministry’s presentation of its conclusions concerning union power and the treatment of the same issues in the guidelines are excellent illustrations of the current tenor of the debate. The Ministry’s list included no powers which were not directly related to the economy, and no discussion of the means by which the relevant union powers were to be enforced. The absence of such matters is even more stark in the guidelines. In discussing the union, the guidelines state that the republics will voluntarily enter the union for the purpose of forming a single economic territory, carrying out mutually beneficial economic relations and coordinated economic policies, and defending the market. There is a nearly complete absence in the document of discussion of the mechanisms by which union-level law and regulation should be generated or enforced and the political, administrative and other structures that would be required.

Discussions with the Ministry would indicate an assumption that union-level bodies of power would remain essentially the same, with some redefinition of powers and jurisdiction. Similarly, the guidelines mention that an Inter-Republic Economic Committee will be established under the USSR Council of the Federation, indicating that existing political/legislative structures are to continue to remain in place. The exclusive focus on economic needs and stark omission of related political and institutional issues which is occurring in union-level discussions of federal structure and legislative power is an indication of the climate in which these issues must be resolved. The center appears at present to be forced to conduct its argument for continued union largely in terms of economic necessity, as there appears to be little or no public support at this time for the argument that political or social unity is in and of itself a desirable goal. This complicates discussion of economic matters, as the center and republics argue in terms of the economic necessity of particular arrangements, but fail to address directly the assumptions that may be made concerning associated institutional and political structures, thus making economic efficiency arguments the proxy for other political issues.

Republican views on the preferable future shape of the union vary considerably, ranging from the Lithuanian declaration of complete political and economic independence to the views of conservative members of the Russian Republic parliament that the union must be, maintained in roughly its present form. Other views tend to recognize the need for substantial economic integration and the desirability of burden sharing via common defense arrangements and infrastructure. Many also accept as desirable or unavoidable the existence of a union-level administrative structure of some kind which would administer policy and programs which are coordinated at the union level. The terms on which such a union would be entered, the powers to be given to the union-level structure, and the means by which the union structure would be funded and maintain its powers, however, are matters of substantial disagreement among republics, and among groups within republics.

Recently, the idea has arisen within some groups that not even a union treaty is required: instead, some argue for the adoption of some form of cooperation agreement, to be concluded between republics that are considered to be sovereign states on the international level. One concept that is apparently being discussed is a union based on the voluntary and freely revocable gift of powers to the center by various union republics. Under this model the union republics would be free to transfer to the center whatever powers each thought appropriate, but there would be no necessary correspondence or relationship between the powers given to the union by one republic and those given to it by any other. The union would be given only enough funds by the various republics to perform those functions appointed to it and would serve as a variety of hired agent for the republics, performing military, diplomatic and other services on a fee-paid basis.

With respect to the intentions of other territorial units, a substantial number of the union and autonomous republics have made clear statements that they intend to achieve some form of sovereignty and delineation of their powers from those of the USSR.7 It is not at all clear that such republics would be unwilling to take part in an economic union arrangement similar to that described in the guidelines, so long as such participation was based on an initial recognition of the republics as sovereign states and the maintenance of options for free exit from the union. As an example, the Ukrainian Republic recently passed a comprehensive declaration of sovereignty and an additional declaration on economic sovereignty, declaring its intent to establish complete political and economic independence with the establishment of customs borders and, if necessary, the creation of a separate currency. Yet, Ukrainian officials also expressed an ardent desire for a strong economic union with at least some of the other republics.

(4) Conclusions and recommendations

The resolution of these issues of territorial and national sovereignty is fundamentally a political matter that must be resolved among the parties involved. Some resolution, however, even if subject to evolution, must be achieved before there can be a successful economic reform which preserves an all-union market. Even in those areas in which basic policy actually remains relatively stable, it is to be expected that political and legal uncertainty will severely retard risk taking and the development of new forms of business activities. Only those activities that will produce immediate profit, or those which would appear to be both acceptable and profitable under most likely future scenarios, will be undertaken in this climate. Further, because many such activities are those requiring limited investment and/or are designed to take advantage of current market deficits in consumer goods and services, continuing failure to establish clear lines of authority and a stable regulatory regime may produce results which give credence to charges that those engaging in new types of activity are privateers not interested in seriously investing in the economic growth of their communities and may thus contribute to pressure for reversal of economic liberalization.

If a permanent solution cannot be achieved immediately, a clear commitment to an acceptable temporary or partial arrangement might be preferable to no resolution at all. Such an agreement might specify which laws were to govern particular economic spheres or even specific economic activities during a period of years, with an assurance that, should the governing law change after that period, individuals would not find themselves severely penalized for having taken part in particular economic activities during the interim period. It is possible that such temporary measures might be of assistance in areas in which there is substantial agreement among most competing groups about the proper conditions for economic activity. In the alternative, more permanent measures might be taken to clarify control over particular parts of the economy where there is general agreement on the appropriate territorial or political level of control.8

Unfortunately, the complications inherent in any attempt to come to such an agreement, the time required to draft and agree upon the relevant legislation and the pressure of more basic political issues suggest that even temporary or partial arrangements are unlikely at this time and that they would be perceived as unstable even if passed. The maintenance of such solutions would require a level of political stability and basic policy agreement that is simply absent from the current environment. Temporary agreements, even if such agreements could be reached, would by definition be temporary and would thus fail to resolve the fundamental uncertainty problems. Similarly, partial agreements would by definition clarify the source of legal control for only a small segment of the economy, leaving the determination of the broader conditions in which that segment operates subject to the extreme uncertainty described above.

c. Competencies and capacities of state bodies

(1) Introduction

There are a number of bodies in the USSR that are empowered to issue laws, or decrees and regulations with the force of law. The relationships among the various bodies and the acts which issue from them, however, are not always clear. In some cases, this is the result of a legal tradition which defined state authority as a single unified system with undifferentiated powers, while in others it is a result of the as yet incomplete definition of the boundaries of the authority of newly created bodies. The lack of a clear separation of powers is a separate legal issue that is capable of causing difficulties even in the absence of federal strife.

(2) The Soviet theory of state structure

Until quite recently, the concept of separation of powers was strongly rejected by the greater part of the Soviet legal and political community as a characteristic of bourgeois states, where the various state bodies did not represent the interests of the whole people. According to this traditional Soviet theory, state power is an indivisible organic whole and all of the state organs represent all of the people. While some division of functions might be appropriate for the sake of efficiency, no separation of powers—in the sense of checks and balances—is required, as all bodies are expected to work together in pursuit of the same public interests. Rather than defining the power of government bodies narrowly as the power to act in only those ways and with respect to only those subjects which are specifically delegated to the body by the USSR Constitution or other relevant document, the Soviet tradition defined the powers of various state bodies by the assignment of broad responsibility and the grant of generalized tools (e.g., the issuance of laws, or of binding decrees). Accordingly, the competencies of various government bodies were defined primarily by the grant of certain exclusive powers and topics of regulation to particular higher organs, while those below retained all other powers necessary to their tasks (very broadly defined), but could nearly always be overruled by the organ above them.

(3) Changing theories and the problems of the transition period

As a part of the overall process of perestroika and democratizatsia (democratization), the generally accepted Soviet theory of state power has changed markedly. The reformation of the union and highest union-republican level organs of state power has included some elements reflecting this change in theory and the legislative (supreme soviets, congresses of people’s deputies) and executive (presidents and councils of ministers) bodies have been defined or redefined so that their functions and powers vis-à-vis one another are a bit more clearly delineated. Although the power to review legislation has not been vested in the court system, the courts and state arbitrazh have been empowered to hear cases concerning illegal or ultra vires actions of state officials that violate the rights of individual citizens or organizations, and a committee has been created under the Supreme Soviet of the USSR that is responsible for supervising and reviewing the constitutionality of legislation and regulation. The process of delineation of the powers of particular bodies, however, is only at its earliest stages and the over-broad definition of powers still contributes to confusion and inconsistency in elaboration and implementation of laws and normative acts.

Even the small steps toward delineation of competencies mentioned above have been made only at the highest levels of state power, while the lower levels have been much less affected by the process. District, regional and local soviets of people’s deputies remain largely in the same form that they have had for many years. The soviets themselves elect their executive committees and presidiums, which are considered to be the executive arms of local government and which may carry out many of the daily functions of government in some localities. The distinction at these levels between legislative and executive functions is limited at best and there is far less institutional check on the actions of either the soviets or the executive committees. The recent reforms have made one important change in the local structure—i.e., the elections of people’s deputies are now open and contested, thus producing a congress or supreme soviet that is more representative of and responsive to the population. While this reform may produce local government that is more responsive, however, it does not address the separation of powers problems.

In addition to the primary bodies of state power, there exist numerous ministries and committees. These bodies, although considered to be a part of the executive rather than the legislative apparatus, are generally authorized to issue binding resolutions and regulations within their areas of responsibility and within their territorial jurisdictions. Indeed, at the union level, the Council of Ministers has often been made responsible for issuing the detailed instructions and regulations that implement very general all-union laws, and similar tasks have traditionally fallen to other ministries or institutions with respect to dictating the means by which broad legislative pronouncements will be implemented. These ministries, committees and departments have in the past issued enormous masses of regulations and instructions which in theory implement the laws and decisions issued by higher bodies, but which in fact may limit or significantly alter those laws and decisions. The degree to which such limitations and alterations are permissible is very poorly defined.

The result of this failure to clearly define the competencies of state bodies is a substantial amount of uncertainty and a lack of uniformity with respect to the interpretation and implementation of legislative acts. Local bodies may impose differing requirements on new business entities for registration, place restrictions on the activities of such entities, or otherwise regulate activities under new laws. At the same time, ministries and other institutions empowered to insure binding regulations, rules, or orders may effectively restrict enterprises or others to whom such acts may be addressed in ways that are inconsistent with the intent of new economic legislation. Although direct contradiction of a new legislative act in a decision taken with respect to a particular person or matter may be appealed, restrictions can occur without direct contradiction of the broadly worded new legislation, and the appeal of restrictions issued as generally binding rules rather than with respect to a single individual or entity (for example, registration requirements, blanket prohibitions) is substantially more difficult. Thus, there may be significant differences in the implementation of legislation at lower levels and participants in the economy may face the possibility of arbitrary restrictions and unpredictable changes in the rules of behavior.

During the current period of transition, when there is substantial disagreement over economic law and policy, the problem caused by a lack of clear limitations on competencies is increased by several orders of magnitude. Various territorial units deliberately circumvent the requirements of new laws, and the lack of clear standards causes regulation of this kind of behavior to be extremely difficult. In addition, these same separation of power issues cause difficulties for legislators attempting to create new state bodies capable of enforcing new laws and regulations broadly—against state and quasi-state participants in the market as well as private parties.

(4) Conclusions and recommendations

Resolution of these problems will require a better definition of the boundaries of authority between legislative, executive, and administrative bodies at various levels. The best means for addressing this problem in the short term are not entirely clear. A significant amount of legislation redefining particular bodies and their powers may be required to achieve enforceable standards, and even this may be insufficient without constitutional amendments at the union and/or republican levels.

Some attempt has been made in recent legislation to address this problem by clear legislative statements concerning the powers of lower-level state bodies under the law. For example, the all-union law states that a local body may not refuse to register a cooperative except for the reason that its proposed activities, or its documents presented for registration, do not conform to legal requirements. This is one excellent means to circumvent the problem in the interim period and it would be useful for legislators to continue to use such provisions in legislative acts in order to define precisely the permissible exercise of discretion on the part of lower bodies.

In addition to limiting the exercise of discretion by lower bodies and clearly defining the considerations which may influence discretionary decisions, legislators could reduce confusion and increase uniformity of application by limiting possibilities for delay and for the exercise of arbitrary, inappropriate or corrupt influences. Managers, entrepreneurs, and legal counsel at the local levels complain repeatedly of the use of implementation procedures (e.g., registrations, applications for licenses and permits, etc.) as the occasion for the relevant authorities to use their powers to assist or hinder particular economic actors on the basis of prevailing ideologies, personal predilections, or outright corruption. The establishment of specific implementation procedures in the law—including clear statements concerning the grounds on which registrations, permissions, etc. are to be granted or refused, relatively strict time limitations on the consideration of applications, and the creation (in appropriate cases) of default presumptions in favor of the applicant9 —would all contribute to an increase in uniformity of application of the law and a reduction in corruption and inappropriate exercise of discretion. Although the use of such systems does impose costs, both in terms of higher-level legislative time and effort in devising them for each relevant law and in loss of flexibility, the gains in certainty and faith in the operative effect of the laws among the public and the business community may be worth the costs, particularly during the transition period.

The provision of effective recourse when illegal or ultra vires actions are taken is also required. The clear definition of the bounds of discretion and specification of procedures will go a great distance in making the existing right to appeal actions taken in individual cases meaningful—both by providing clearer standards by which individuals, officials, and courts or arbitrazh bodies may evaluate the actions of state bodies and by reducing the need for lower-level bodies to implement the laws through issuance of normative acts and general regulations. Nonetheless, given the emphasis on increasing effective control at local levels and the strong support for local sovereignty campaigns, it is likely that there will be a need for an expeditious means of resolving questions related to normative acts as well, particularly during the coming transition period. The creation of a general power of judicial review may be thought to be undesirable, either as a general matter or at least until the completion of reforms of the judiciary and the dispute resolution system as a whole. If this is so, consideration might be given to the creation of another means of review of legislation and regulations—perhaps through an arm of the relevant legislative body. In order to provide expeditious review of matters of inconsistent implementing legislation or procedures, it might be advisable to separate the body responsible for review of legislative inconsistency questions from that responsible for more difficult and cumbersome constitutional questions.

d. Localization of power and local capacities

(1) Introduction

The guidelines call for the role of autonomous republics and other national formations (i.e. autonomous oblasts and autonomous okrugs) to increase considerably, although they do not define the specific ways in which the role of such formations should be augmented. The role of local bodies in general (i.e., rayon and city Soviets as well as okrug and higher-level bodies) will increase substantially as the guidelines call for such bodies to take decisions on temporary price limitations, market controls, and other matters affecting local economic behavior and conditions. In fact, this process has already been occurring with respect to some areas and some functions, as new legislation places increasing amounts of responsibility on local bodies and the reduction of the powers of central bodies results in more localized distribution of control and implementation activities. While some reallocation of regulatory and implementation powers is clearly in order, a localization process that fails to take account of the pressures on local bodies to act irresponsibly with respect to the larger market, and their technical incapacity to meet many of the demands placed on them, is likely to produce undesirable results.

(2) Responsibility of local bodies to the larger community

As local bodies have begun to exercise new powers, many of them have shown tendencies to attempt to meet local interests without regard to the needs of the larger community. Orders have been issued restricting the movement of goods or attempting to interfere in interregional competition in order to protect the interests of local consumers or enterprises. As a new model of state structure begins to be elaborated, with respect both to questions of federalism and questions of separation of powers, local bodies may begin to have a clearer picture of their place in the social structure.

(3) Technical capacities of local bodies

Under the previous planning and budgetary system, local bodies of state power had only limited amounts of responsibility for economic planning, budgetary control, and the funding and provision of local services. Thus, local bodies have not had occasion to develop substantial skills or experience in performing such tasks as budget formation, evaluation of tax bases, management and control of local utilities, property registration, etc. Most bodies at the lowest levels lack the knowledge, staff, and technological means to fulfill many of the basic tasks of local government which have been or will be assigned to them. If these local bodies are not able to obtain substantial amounts of assistance in meeting their new responsibilities, even an otherwise well-planned reform effort may fail to show satisfactory results at the local levels.

(4) Conclusions and recommendations

Although there is substantial pressure for increasing democratization and control at local levels, localization of control should proceed with caution during the transition period and increased localization of control should not be permitted to substitute for the resolution of difficult privatization issues or questions of local sovereignty.

The ability of the reform program to show results at the local level will be heavily dependent on the ability of local bodies to meet their responsibilities and to use their new powers to promote market activities, provide better local services and infrastructure, and work creatively to assist in local development. Local bodies should seek, and capable organizations should provide, technical and financial assistance in developing techniques of planning, organization and control that are effective during the difficult transition period and that are capable of developing into viable local government structures and practices.

3. LEGAL FOUNDATIONS FOR MARKET EXCHANGES

a. Introduction

The effective functioning of a market-based system is dependent upon the existence of clearly defined and reasonably broad property rights, the ability of market participants to freely exchange property rights through a system of legally enforceable agreements, and the existence of a system which provides reasonably secure and predictable enforcement of such agreements. While there now seems to be greater recognition of the fundamental nature of these matters, the need to establish stable basic principles in these areas has until recently been somewhat obscured by a tendency to focus on particular pieces of legislation authorizing and defining specific forms of business activity. Although several new pieces of legislation have appeared in the last year that touch on these matters, they are generally “framework” laws which do not yet provide the clarity or detail required in these areas. The presidential guidelines focus heavily on defining specific institutions and instruments, while devoting little detailed attention to the need to alter basic civil law concepts.

In their present forms, neither the substantive civil law nor systems for dispute resolution and law enforcement are adequate to support and facilitate the growth of a market economy. Substantive law in the areas of property and contract still contains many aspects more suited to central planning than to decentralized market exchange. Although there are some underlying civil law principles which might serve as the basis for the growth of the law in new directions, these aspects of the law are simplistic and will need development before they are adequate to support complex commercial relationships.

The systems for civil dispute resolution and enforcement of economic obligations are currently being reorganized and are as yet in a state of some disorganization. It is clear that they are not yet prepared to handle the burdens that market transition will place upon them. With respect to the enforcement of criminal laws relating to economic activity and the general supervision of legality, the concern is not one of readiness to address new problems but rather one of excessive armament of supervisory agencies with intrusive powers and continuing existence of legal sanctions inappropriate to a market system.

b. Property rights

(1) Introduction

The guidelines call repeatedly for the expansion of property ownership and property rights in a variety of fashions, They explicitly call for the recognition of the right to private property, a substantial program of privatization of state property, and a program of land reform as major components of the stabilization of the economy. In addition, the guidelines implicitly call for the redefinition of rights to own and use property (especially productive property) in discussing the expansion of business activities of all kinds and the need for a law on freedom of entrepreneurial activity. These proposals are substantially more far reaching than any of the previous union level suggestions related to ownership and neither the current union nor most republican level legislation is consistent with the aims described. Implementation of the guidelines will require a significant legislative effort, including the immediate issuance of a number of pieces of new legislation and amendment or repeal of several other pieces, and, in the longer term, the redrafting of entire civil codes and a massive amount of conforming amendment of related legislation.

(2) Traditional Soviet doctrine

Until recently, ownership law in the USSR was strictly divided between socialist ownership and personal ownership. Socialist ownership included the general ownership of the state and state enterprises, ownership of rural cooperatives, ownership of collective farms, ownership of trade unions and also of social organizations. Personal ownership, a separate but related category, included the personal and household belongings of individuals and other objects needed by the individual for conducting subsidiary farming operations on a plot of land, or for engaging in a permitted handicraft or individual labor activity. Personal ownership was to be derived principally from the labor savings of individuals and was not to serve as the basis for the extraction of illegal or “unearned” incomes.10

The state was regarded as the sole owner of all state property, which could be held in “operative management” by enterprises and other bodies to which the state gave property for use. Operative management of property means, in effect, that the property can be possessed and used, but use is restricted. Property held in operative management by an enterprise must be used at all times consistently with the charter of the enterprise and the purpose of the property. Disposition can be made only in accordance with the law, often requiring an order or permission of the superior state body (ministry, department or committee) to which the enterprise or organization desiring to dispose of such property is subordinate. While personal property could be the subject of a pledge or lien and can be disposed of far more freely than state property, both the objects of personal ownership and the permitted forms of individual economic activity were, until recently, quite limited, rendering personal property essentially irrelevant as a source of market activity.11

Under the applicable civil code provisions, state property could not (in general) be alienated to individuals and could rarely be used as security or levied against.12 As an illustration of the relative importance of the two forms of property, the criminal codes generally provided penalties for stealing, converting or even negligently wasting state property which were very substantial and notably harsher than those corresponding to similar actions involving the personal property of individuals. These code provisions have not, in general, yet been repealed although newly issued legislation suggests that they may no longer be enforced, and there is a clear intention to equalize the position of both types of property in the future.

(3) Fundamentals of legislation on ownership

In March 1990, the new Fundamental Principles of Legislation13 on Ownership were passed and the USSR Constitution amended14 in an attempt to bring ownership law in general into a state consistent with the new developments in economic regulation. Although the new Fundamentals do authorize ownership by a variety of new economic entities, thus overcoming the limitation of property ownership forms to the “socialist” and “personal” forms enumerated in the 1977 USSR Constitution and corresponding laws, they are otherwise extremely general. The law also states that all forms of property will be equally protected—a substantial step in terms of the history of Soviet jurisprudence—and provides generally for the right of both owner and legitimate users to protection of their property or use rights. The law does not, however, mention any requirement of, or means for, registration of property ownership.

The new Fundamentals mention a number of different types of property ownership which are permissible, many of which—such as the property of a labor partnership, the property of an economic partnership, or the property of religious organizations—have not previously been specifically addressed by the Soviet law of ownership. The Fundamentals themselves, however, do not provide definitions of the particular rights and duties associated with the new types of ownership. Some of these “new” types of ownership are classified according to categories which already existed in the law; for example, the ownership of a labor partnership is identified as shared common ownership. This form of ownership is, in turn, defined in a general fashion in republican civil codes, e.g. chapter 12 of the Civil Code of the RSFSR. In this fashion, the general rights and duties of the owners vis-à-vis one another are already defined. The ownership of most business entities, however, is classified as “collective ownership”—a category of ownership defined neither in existing civil codes nor in the Fundamentals. A number of the types of ownership placed in this new category are the ownership rights of new kinds of business entities, which entities are, in turn, defined by relatively comprehensive all-union laws. In some of these cases, the laws themselves define the rights of both the business entity as owner and (where relevant) the individuals who may be part owners of the business entity. In other cases however, the law is still silent as to the entity’s definition or the rights of its owners and of the entity itself as an owner.

While the lack of a general civil law definition of collective property does not prevent the use of owned property by the relevant business entities, it does cause substantial uncertainty concerning the precise boundaries of their ownership rights and the rights of individuals and organizations who are, in turn, the owners of the business entities and the managers of their property. This uncertainty is particularly acute with respect to those types of business entity which have not been defined in other laws. If the definition of those types of ownership as “collective” stands, it is to be expected that this new term will be defined on the adoption of Fundamentals into the republics’ civil codes and their further elaboration therein. Under current conditions, however, the redrafting of republican civil codes is not likely to occur with any rapidity, and short-term development of the law in this area is likely to occur by means of laws defining additional business forms.

There are many remaining questions which are not answered by the new Fundamentals, concerning, for example, the extent of restrictions on the disposition of productive property. The Fundamentals themselves state that an owner may possess, use, and dispose of the property belonging to him in any way not prohibited by law. There is, however, little law as yet concerning permissible disposition of property. The exception to this is the Fundamental Principles of Legislation on Land, which provide for very substantial control of land use by the state and withdrawal of use rights as a penalty for inefficient use. This is an ominous precedent which suggests that the owner of production facilities may not be free to dispose of those facilities in ways which might appear wasteful or negative to society in general. The right simply not to use owned property, or to destroy it if one so desires, may be problematic—especially in industries where there are supply and/or monopoly problems. Attempts to control disposition in general, however, may lead to restrictions on alienation that hamper the free movement of property and reduce efficiency.

(4) Additional legislation affecting property rights

Several additional pieces of legislation have recently been passed which have had effects on the Soviet property regime. In November 1989, the Fundamental Principles of Legislation on Leasing were passed, which provide a means for all kinds of economic actors, including individuals, cooperatives and also state enterprises, to work on the basis of leased property. The leased property may be excess capacity rented out by an enterprise to a cooperative or individual or may be state property rented by an enterprise, cooperative or other organization directly from a ministry or other body. By using the lease-purchase option provided for in the new law, enterprises and other economic organizations can purchase and own productive assets that once belonged to the state.

Shortly after the Fundamentals on Leasing, another set of Fundamental Principles of Legislation was passed concerning land. Although the new law does appear to allow more flexibility in land use and codifies the possibility for land users to be given a life tenure in land, it does not envision unrestricted purchase and sale of land and appears to presume continued substantial control over land use. According to the new Fundamentals, land can now be given to agricultural and other users, for use in their private businesses or affairs. Such land may be inheritable by the descendants of the holder of a plot of land and there is no limit on the number of times it can be passed down, although rights to bequeath outside familial or business succession lines are not clear.15

(5) Use of property as security

The new Fundamentals do generally authorize the use of liens on property for securing obligations. This is an encouraging development that suggests that restrictions previously placed on productive assets owned by the state will not “follow” those assets into private hands. Productive property that has been privatized (through lease-purchase or other means) may thus begin to serve, along with personal property, as the basis for project finance. At the time of this writing, liens on property—or pledges—are regulated by basic republican civil code provisions.16 Such provisions generally allow pledge only of property that is owned outright or is in the operative management of the party making the pledge. They require that contracts of pledge be in written form and define the general conditions for maintenance, insurance, and recovery of pledged items. A draft Law on Pledge, however, is currently being considered, which redefines the conditions of an enforceable lien or pledge, the types of property rights that may be the subject of a pledge, and the procedures for effecting a foreclosure, and also introduces registration requirements for encumbered property. 17

In order for property to be used effectively as security, there will need to be attention to the technical means by which legal requirements can be met and rights substantiated. Particular difficulty will be caused by the absence of a coherent system for registration of property ownership and of liens and encumbrances on property. While it appears possible to obtain documents from the local authorities which attest to the ownership of property, and this may be helpful in proving ownership during the process of obtaining a loan and/or making a pledge, it will not provide the kind of systematic registration and tracking that will allow a normal market to function.

(6) Property rights of individuals

With respect to the property of individuals, the new Fundamental Principles of Legislation on Ownership have been criticized by some on the grounds that the sections relating to individuals preserve the system by which the permissible objects of individual ownership are enumerated by an exclusive list, continuing the previous tradition in which individual or personal ownership was discouraged and restricted relative to other forms. The language of the Fundamentals is, in fact, less than clear on this matter and would support both a broad and a narrow construction.

Article 7 discusses in some detail the objects of citizens’ rights of ownership, separating such ownership from the provisions of Article 3, concerning objects of the right of ownership in general. Both articles contain permissive language—“citizens may own,” “ownership may be exercised over”—suggesting that items not included in the list provided are not permissible objects of either rights of ownership in general, or citizens’ rights of ownership in particular. The list provided in Article 3 of objects of rights of ownership in general is very broad and contains the catchall category “other property.” In contrast, the list of objects of citizens’ rights of ownership contained in Article 7 is substantially more specific and limited and its catchall category is “other property for purposes of production and consumption.” Part 3 of Article 7 permits additional limitations to be placed on the ownership of citizens by union, union republic, or autonomous republic laws, while neither Article 3 nor any other article contains such a clause concerning other types of ownership.

All of these differences suggest that individual ownership continues to be a matter of some sensitivity and is subject to special restriction. A narrow interpretation of the Fundamentals could place restrictions on individual ownership of property for investment purposes (as opposed to consumption or production), and might tolerate very substantial restriction on individual ownership by the republics. Even if the provisions of Article 7 are interpreted more broadly, the separate treatment of individual ownership creates confusion and invites restriction of individual business and investment activities.

(7) Conclusions and recommendations

The presidential guidelines call for the creation of a varied economy based upon multiple forms of ownership. In order for the property law regime to support such an economy, a number of changes in the property laws will be required. It must be recalled, however, that the guidelines also call for the republics to have complete sovereignty over the national wealth located in their territories and to be able to define the conditions on its use and ownership. Thus, changes in the legal regulation of property rights may have to be made at the level of individual union and autonomous republics. While the guidelines themselves do not call for any particular means to ensure uniformity in this respect, it is clear that substantial differences between union republics with respect to the nature and means of protection of property rights will cause difficulties in the development of an all-union market. If property laws are to be issued by individual republics, some means of coordination needs to be found so that differences in republican laws do not inhibit interrepublican trade.

One important way in which the property regime could be improved would be the amendment of fundamental principles on ownership, at either the union or republican level, to establish a general right of natural and juridical persons (including state entities) to own all types of property, with the exception of those specifically forbidden by law and the elimination of the use of permissive lists of the objects of ownership rights. This formulation of ownership rights would require both a concurrent replacement or amendment of significant portions of the existing civil law and subordinate legislation and regulations—since the older provisions would in fact impose substantial restrictions—and a concurrent enactment of legislation limiting ownership rights with respect to various types of property, such as those that are inherently dangerous. While this would be a significant legislative task, establishment of this formulation of the objects of legal ownership would avoid problems caused by gaps in permissive lists and problems of interpretation with respect to new forms of property and would eliminate uncertainties caused by the differences in provisions applying to individuals and other types of entities. A similar formulation of disposition rights of property owners would be of assistance in ensuring the freest possible movement of property.

A general reformulation of ownership rights as described above might eliminate the need to create an identified special category of ownership—such as “collective ownership”—to differentiate such ownership from individual and state forms. A business entity, as a juridical person, would be considered the owner of its property in simple terms. Ownership relationships between and among the owners of the business entity would be regulated by the laws governing the creation of such entities, as well as by general provisions concerning such forms as common and joint ownership. If, however, the creation of a special category of ownership is desired for purposes of providing general principles, identifying common characteristics, and allowing ease of reference in other legislation, the characteristics of this category of ownership should be defined in the law before particular ownership relations are so characterized. If the current characterization of various types of business ownership as “collective ownership” is to be retained, content will need to be given to the category immediately so that the property rights of those entities are clear.

A more open formulation of general ownership rights need not entail the loss of ability to control undesirable uses of property or to moderate extreme differences in individual income or wealth accumulation. Problems of unproductive behavior with respect to productive property (e.g., failure to use the property, its neglect or destruction) will, in general, be regulated by market incentives and by pressure on business owners and managers to use and dispose of property efficiently. In situations in which there is an absence of competition or severe shortage conditions, antimonopoly legislation or laws governing emergency situations should be adequate to provide the necessary control without preventing the efficient movement of property to other uses (including the scrapping or destruction of obsolete capital) or unduly restricting the use of productive property for investment. If concern over destructive behavior is great, requirements concerning public offering of property for sale under appropriate circumstances might be considered. Similarly, taxation laws or specific restrictions on the accumulation by individuals of particular types of property could be used to control extreme wealth differentiation or restrict particular types of accumulation deemed to be inappropriate either during the transition period or for social reasons.

Principles discussed in the paragraphs above may also be applied to the legal regulation of the ownership and use of particular types of property, such as land. Land use rights must be relatively freely transferable in order for efficient land use patterns to develop, and the extremes of state control over land use dictated by the Fundamental Principles of Legislation on Land will need to be eliminated so that agricultural producers will not be enslaved to production minimums and prevented from developing efficient land use schemes.

c. Contract law

(1) Introduction

In contrast to the direct recognition of the need for reform in the legal regulation of property rights, contract law as such is not a direct focus of the guidelines and was not featured in previous reform plans. Attention has been paid to the need to eliminate particular restrictions on contractual freedom that stem from the planning system (e.g., price controls or the assignment of contractual partners), but little attention has been focused on the underlying system of contract law as such. The removal of limitations on freedom of contract is, indeed, a matter of first importance. In addition, however, attention will need to be paid to the development of the complex forms of contract required to support modern market transactions.

(2) Current state of the law

The basic principles of Soviet contract law can be found in the civil codes of the various union republics. The outlines of these principles were drawn from pre-Soviet European Civil Codes, and many of the principles are not inconsistent with a market economy. However, the broad general principles have never applied directly to contracts between enterprises involved in the planning process. Those enterprises are subject to special code provisions, as well as other regulations, which bind them to the dictates of the state economic plan, supplemented by general and procedural provisions of the Statute on the Supply of Consumer Goods, the Statute on Material and Technical Supply, and similar legislation that sets out the terms and conditions of contractual relations in the given sphere, and/or by the terms of a mandatory contract. These statutes, and also the form contracts and planning orders, have served as a means of specific prescription of contract forms and terms for most enterprises, essentially eliminating the need for the development of a more generalized contract law and practice that would guide the free formation of complex commercial relationships. In addition, the lack of a need to draft efficient, legally enforceable contracts has contributed to a problem of “contract illiteracy” on the part of many enterprises, business participants, and even jurists.

There has been a call by a number of well known jurists, including the Minister of Justice of the USSR, for work to begin on the conceptualization and drafting of new civil codes—with at least some principles to be determined at an all-union level—which would be up-to-date, would encourage participation of enterprises and other business entities in various forms of production, and would be uniform and binding all over the union. Included in such a code would be a new set of contract principles which might advance the state of contract law. However, given the pressure for greater republican economic independence, attempts to create a complete all-union code in a field in which previous codes were republican is not likely to be widely supported and even an attempt to draft a new set of all-union fundamental principles of legislation concerning such topics is likely to be seen by many as an attempt to undercut the republics’ abilities to devise their own systems. Further, even if successful, the creation of a new set of fundamental principles might not solve the problem of a lack of complexity and concrete provisions, as the fundamentals could prescribe only general principles to be incorporated into more specific republican codes.

(3) Conclusions and recommendations

Some fairly immediate development of contract law will be needed in order to regulate normal market relations among a wide variety of economic actors. As the wholesale recreation of the civil codes will clearly require a substantial amount of time, the immediate steps may need to be taken through other means. Some steps in this direction are being taken within the confines of new laws on specific topics, such as the draft Law on Pledge or the decree on joint stock societies, where specific requirements are set out for inclusion in particular types of contract. It seems likely that elaboration of general standards for types of commercial contract not currently included in the civil codes, or included only in very basic form, will have to proceed by this means for some time. Interim amendments to the civil codes pose substantial difficulties as uniformity would require changes in many separate codes among republics that may have significant differences concerning appropriate content.

With respect to contract law, as with ownership rights, the issue of uniformity among republics will need to be addressed. The guidelines do not mention contract provisions specifically, and there is no indication that these principles are intended to be more unified within the union than those regarding property use and ownership. Indeed, such differentiation would be difficult as many provisions of contract law are dependent upon underlying regulation of property ownership. Even if property ownership regulation is relatively uniform, however, substantial differences in contract law will retard efficient business practices within the union and lead to localization of contractual relationships, particularly if they result in failure to enforce interrepublican contracts.

In addition to improvements in the codified law of contract, some attention could fruitfully be paid to issues of education. “Contract illiteracy” could be com-batted by increasing the availability of information on the law and on the requirements of the enforcement systems, or by the provision of some efficient means for parties concluding contracts to check that the contract meets minimum requirements before concluding it. Unfortunately, the dearth of practicing attorneys in the USSR and the lack of contract experience on the part of those who exist suggests that such services would have to be provided by some other source. State arbitrazh is currently responsible for providing educational support to enterprises and the public concerning contract and economic discipline, but it is not clear that it will continue to have such responsibilities in the future nor that it would be capable of fulfilling them with respect to the general public under new conditions.

The provision of model contracts might also be of use in educating new business participants about the necessary form and content of an enforceable contract, as well as in informing existing enterprises about changes in the law and about options in drafting contracts under new conditions. Some of these models might be based on adaptations of the previously mandatory standard contract forms. Many of the standard contracts, however, were drafted by ministries or other bodies with a substantial interest in ensuring that contractual provisions and standards favored particular interests or groups. If these contracts are used as models, it will be important that they be revised by an independent group or body without interest in the content, except as it is consistent with law.

d. The dispute resolution and law enforcement systems

(1) Introduction

A great deal could be written in pursuit of an adequate description and critique of the Soviet systems for law enforcement and dispute resolution. There are a number of features of the systems, such as the division of civil cases between the courts and state arbitrazh or the supervision role of the procuracy, which are not common to Western systems. The following discussion provides only the most basic descriptions of the relevant institutions and concentrates discussion and critique on aspects of those systems which are of most concern in the regulation and support of a market-based economy.

(2) Civil dispute resolution

The civil dispute resolution system has, as yet, received limited attention as a key component of basic market functions. The guidelines decry the lack of respect for the law as one of the chief causes of the current economic crisis, but fail to address the institutions called upon to enforce the law and their adequacy to perform that task. While this may in part reflect a correct recognition that the questions of state authority to legislate and to enforce the law must be resolved before the nature of dispute resolution and enforcement bodies can be addressed, the resolution of those issues alone will be insufficient to ensure implementation of the law. If the available institutions for civil dispute resolution are not capable of adequately enforcing the property and contract rights of market participants, the redefinition of such rights will not have the desired effects and the expansion of market activities will be limited by the tendency of market participants to do business with only those partners whom they already know and trust. At present, neither the civil courts nor state arbitrazh are prepared to address adequately the number and types of civil cases that will arise as a corollary to market development, and attention must be given to redefining the functions of these bodies and preparing them for new case loads.

Although there are both union level and republic courts, the Soviet court system is not a federal system on the U.S. model. All lower-level courts are republican courts, with the only union-level courts being the Supreme Court of the USSR and the military tribunals. Although superior courts may in some circumstances hear cases in the first instance, the large majority of cases are heard in the first instance in the local “people’s court.” The republican level courts are arranged according to administrative unit, with a court level for each level of territorial administration. Thus, the number of intermediate instances which stand between the people’s court, or court of first instance, and the Supreme Court of the USSR depends heavily upon the territorial formation in which the court is located.

The district or city “people’s court” is a court of general jurisdiction, which hears both civil and criminal cases, although the case load within the court may be divided among divisions which specialize in cases of particular types. Each court also has a presidium, which consists of the court’s chairman and deputy chairmen, and a number of other members, and which exercises supervisory functions and considers protests brought against judgments of the relevant court. Such protests can, in law, be brought by a number of officials, but are in practice generally almost always brought by the procurator.

As the theory of separation of powers was not traditionally accepted in Soviet legal theory, there was no attempt to create in the courts a “third branch” of government with the accompanying power and independence. The Soviet courts have been traditionally subordinate to the higher organs of the state (i.e., to the Supreme Soviet and to Council of Ministers through the Ministry of Justice) and have had no ability to review or reverse legislative or regulatory acts of government bodies. Judges were, until recently, appointed by state functionaries (the local soviet or its executive committee) at the same territorial level as the relevant court and were dependent upon these local bodies for the provision of their material needs. Given this system, it is not surprising that reports of interference with judicial process have been common.

In comparison with many Western models, Soviet court rulings are relatively impermanent, in the sense that they are open to challenge and to consequent revision or reversal from quite a number of sources. Challenges can be brought not only by the parties to the case, but also from outside the case by the procurator at the local or higher level, by the presidium of the relevant court, by courts at a higher level, and also by other persons and officials. Such challenges or protests may be brought at any time after a judgment has been rendered. If the case is found, by the higher court, to have been wrongly decided, the decision and its effects may be overturned despite the lapse of time since the judgment was rendered and the degree of reliance placed on the judgment by the parties involved.

A program of court reform has recently begun and the first steps have been taken in order to remedy some of the problems here discussed. A new set of Fundamental Principles of Legislation on the judicial system was passed in November of 1989, and also a new Law on the Status of Judges and a Law on Liability for Disrespect of the Court. These new laws provide that judges shall be independent and subordinate only to the law. In an attempt to break the dependence of judges on local officials, the new laws provide that judges shall, in most instances, now be appointed by the state body at the next higher level of competence rather than that equivalent to the court and that the material needs of the court shall be provided for primarily by the Ministry of Justice. The independence of judges and judicial decision-making is protected by the imposition of fines, or in some cases prison terms, for attempts to influence particular decisions or for failure to carry out legitimate orders of the court. However, while these new initiatives are clearly steps in the right direction, they do not provide a basis for the courts to fulfill the kinds of demands that will be placed on them under new economic conditions.

The court’s jurisdiction with respect to commercial matters has traditionally been rather limited. The civil court has had jurisdiction over economic matters involving individuals, those involving kolkhozy (collective farms), and cases involving very small sums of money. The large bulk of commercial cases—disputes between enterprises, organizations and other juridical persons involving a planned or compulsory element—have been under the compulsory jurisdiction of state arbitrazh rather than the courts. Thus, the civil courts have a very limited experience of commercial disputes, and almost no experience with the resolution of complex business matters. However, as the number of business entities not bound by planning acts or state orders increases and the number of transactions containing mandatory elements decreases, a substantially greater number of commercial disputes will fall within this category. It is possible that many such disputes will, if formal resolution is necessary, be taken to civil courts rather than to state arbitrazh—as many attorneys and business managers associate state arbitrazh with the imposition of centrally dictated tasks rather than the neutral resolution of disputes.

In addition to serving as a forum for the resolution of commercial disputes, the courts are increasingly being called upon to provide a forum for complaint about inappropriate acts of authorities. For example, the 1988 Law on Cooperatives in the USSR provides that unjustified failure by local authorities to register a cooperative can be appealed to a court. Even in the absence of specific provisions, a general law allows the appeal of any action of Soviet officials which infringes the rights of an individual natural or juridical person to be appealed to the court and held void if illegal or beyond the competence of the body in question. Given these provisions, it seems inevitable that commercial and commercially related disputes in the civil courts will quickly increase in both number and complexity.

While the steps taken thus far with respect to the court system may be of some assistance to the courts in remaining independent and neutral when addressing new civil matters, there have been few steps taken that will provide the courts with the clear and final authority necessary to meaningfully resolve commercial cases or that will help to prepare courts to deal knowledgeably and efficiently with the new types of cases they will be encountering. Without such steps, court resolutions of commercial matters may lack the authority, uniformity, and finality required for them to serve as real resolutions. Parties may find it necessary to seek other means for resolution of legal disputes, and may in some cases be unable to enforce their contracts or vindicate other legal rights.

The Soviet system of state arbitrazh has, since the early 1930s, functioned as a separate dispute-resolution and general oversight system with exclusive jurisdiction over most economic disputes between most enterprises, organizations and institutions.18 The role of the arbiter in the state arbitrazh system is one that combines functions of mediator, judge, investigator-prosecutor, state administrator, and legislator. Arbiters are expected to assist the parties to a dispute to find an acceptable resolution of the problem by themselves, but failing that are responsible for determining a solution to the problem based on the applicable law (which usually includes the legal requirement of adherence to mandatory planned relationships). Disputes which must be resolved by arbitrazh have included those between enterprises which are unable to agree on the terms of a contract which they are legally required to enter into; thus the arbiter may be called upon to serve as the state administrator who elaborates planned or legally required economic relationships at the individual level.

Arbiters are required to be aware of and to remedy legal violations which may be occurring in enterprises with which they have contact, regardless of whether those violations are related to the subject of the dispute, and arbitrazh proceedings may be instituted by arbitrazh authorities sua sponte if an arbiter believes that violations of law are occurring. This investigative-prosecutorial side of the arbiter’s role involves substantial power to issue notifications to enterprises or to state enforcement authorities concerning violations of the law. These notifications must be returned within a stated period of time with a description of remedial measures taken. Arbiters also have the power to issue specific binding instructions to economic actors concerning the elimination of violations of law. Finally, arbitrazh organs are expected to draft normative acts which elaborate on the procedures that enterprises are required to follow in economic activities which have a mandatory nature,19 and to issue interpretations of economic law to ministries and departments.

The role to be played by state arbitrazh in the new market economy is not at all clear. Some pieces of economic legislation have referred disputes arising under the legislation to courts or state arbitrazh, without providing guidance as to the relevant jurisdiction of either, or the relationship of one to the other in resolving the disputes.20 As mentioned above, general civil code provisions give jurisdiction over disputes not involving mandatory elements to either/both arbitrazh and the courts. Yet, the traditions and procedures of these bodies are quite different and the treatment of a single dispute is likely to vary substantially between the two bodies. Arbitrazh bodies have traditionally examined disputes in which the actions of the parties are heavily determined by legal requirements, with a primary goal being the enforcement of those requirements. It is not clear that this body can be quickly or easily transformed into an “economic court” which will serve simply to examine and resolve disputes presented to it by essentially free economic actors. On the other hand, arbitrazh bodies are the only bodies that have any experience at all with large commercial disputes and any knowledge about the types of conditions and the traditional contractual and economic relationships that have existed in Soviet industry.

First versions of new draft legislation on arbitrazh are due to be presented to the union-level Supreme Soviet and also to some republican-level supreme Soviets late in this year. Early drafts of the union-level laws (produced by the union-level arbiters) appear to envision the new arbitrazh as more of a mediation and conciliation body than it has been previously, and (in some versions) perhaps also as the home of other nonjudicial dispute resolution options including both binding and nonbinding arbitration in the Western style. Jurisdiction provisions of the draft were very broad and exclusive—placing nearly all economic disputes except those involving individuals into mandatory arbitrazh jurisdiction—without reference to the planned or voluntary nature of their economic relationship. In addition, the drafts retained in relatively intact form the institution’s traditional roles as law enforcer, administrator, and elaborator of economic law and regulation.

Clearly, one of the matters of first importance relative to the definition and support of the civil dispute-resolution authorities under new conditions will be the resolution of the questions of definition of union, republican and local authority. Until the issue of legislative and regulatory authority is resolved, it will remain unclear which law is to be applied to any given case and which court or arbitrazh body has final jurisdiction. Thus, decisions of courts and arbitrazh will remain an unstable basis for action by parties. In addition, as the union is reshaped, it will be necessary for not only the law, but the direct relationships between and among the courts and arbitrazh bodies themselves to be clearly redefined in terms of rights of appeal, and proper jurisdiction for multirepublic issues. Officials of the Ministry of Justice of the USSR stated that they find the U.S. model of a federal judicial system attractive and hope to model the newly revamped Soviet judicial system along similar lines, perhaps including some of the more restrictive features of U.S. practice with respect to the appealability and permanence of judgments. No steps have yet been taken in this direction, however.

Fundamental redefinition of the court system will be extremely time-consuming and is dependent upon the resolution and redefinition of the complex political relationships that form the Soviet state. The process cannot be completed in the near term. There may, however, be some steps which would contribute to the ability of courts and arbitrazh bodies to resolve disputes in the near term while the more fundamental changes are being made.

One important step is the clarification, even if on an interim basis, of the relationship between state arbitrazh and the civil courts. The precise nature of the relationship, however, is less important than that the system provide certainty—with respect to jurisdiction to decide a particular dispute, the legal standards under which a body will decide, the point at which a resolution has reached finality, and enforceability of the resulting resolution. As long as these conditions are met, the provision of several different fora for resolving disputes need not necessarily be objectionable. Indeed, the legal systems of most developed market economies provide a number of means for the resolution of economic disputes and experience seems to suggest that this facilitates dispute resolution.

There may, however, need to be additional attention paid in the Soviet context to the effect that a multiplicity of resolution fora has on the development of commercial law and practice. Most developed market economies have built these alternative structures on the basis of a fairly well-developed body of commercial law, so that there is little concern about confusion in the development of basic legal principles. In the Soviet context, as basic principles of market-based commercial law are developing, it will be important that there also be certainty with respect to the meaning and effect of particular laws and a reasonable possibility for the experience of each type of dispute-resolution fora to be considered and incorporated in the development of commercial law principles. For these reasons, and particularly if the jurisdictions of the bodies are going to overlap, there may need to be some provision for elaboration of a single interpretation of law and a single standard of enforcement in relation to cases over which both bodies may preside.

The relationship of the dispute-resolution role of arbitrazh to its functions of general law enforcement needs to be reconsidered, and the law enforcement functions may need to be separated from dispute resolution or even placed entirely with other bodies. It is plain that there will be little resort to arbitrazh for dispute resolution or contract enforcement if it is expected that the institution will use the opportunity to conduct a general fishing expedition for legal violations and will institute enforcement proceedings. In addition, if arbitrazh is to fulfill dispute-resolution functions for economic actors who possess substantial freedom to dispose of property and to contract as they see fit, the portions of its activities which are concerned with the general functioning of the economic system and the system of contracting may have to be removed to a separate agency so that there is no concern with respect to the application of a new law to disputes other than current law. These functions could be confined in a separate department of arbitrazh which could be given the task of assisting with the elaboration of Soviet contract and economic law by means of the generation of models and suggestion of regulations to a competent legislative authority.

In addition to the need for clarification of systemic relationships, there will be a very serious need for additional personnel, facilities and training that has not yet been addressed. To date, no substantial steps have been undertaken that will provide training to judges on the handling of complex commercial cases and there have been no plans announced for the hiring and training of the large number of new judges and other personnel that will be needed as the burden on the civil dispute-resolution system expands. This may be a very fruitful area in which technical assistance and cooperation could be begun. Such technical assistance, however, will be most useful if it is available not only on the issues of complex commercial cases of particular types, but also on basic questions of court organization and docket control, basic civil process matters, and the organization and availability of nonjudicial as well as judicial means of dispute resolution.

(3) Procuracy supervision of business activity

The Soviet Procuracy is an institution charged with responsibility for “supervision” of all branches of Soviet society to ensure that legality is observed. Current legislation divides this supervisory responsibility into four specific types: supervision over agencies conducting investigations, supervision over the legality of court process and decisions, supervision of places of confinement, and general supervision over the execution of laws by ministries, lower level bodies of state power,21 institutions, organizations, and citizens.

The Procuracy may undertake a review of the actions of organizations, enterprises, or other bodies on its own initiative or may conduct a review or investigation on the basis of a complaint or a procurator’s observation that difficulties are being experienced. In addition, the Procuracy has in previous years conducted a variety of “campaigns” against certain categories of violation, often in response to Party resolutions urging that greater attention be paid to the elimination of the particular type of violation. In recent years, campaigns against environmental offenses and violations of economic legislation have been frequent, engendering substantial Procuracy involvement in reviewing the activities of economic actors.

In connection with the procurator’s review, documents from various bodies and individuals may be requested, including copies of subordinate legislation and regulations, information concerning measures taken to ensure compliance with the law, and other information—including business documents and records—needed to verify information concerning alleged violations and ascertain the state of legality. Expert investigations may be ordered and individuals may be required to give oral or written explanations concerning possible violations of the law. Procurator’s demands in these respects are mandatory and must be fulfilled by the relevant organizations and individuals. There is no requirement that the procurator show grounds for investigation or bring charges before making demands for information.

If violations of the law are found, the procurator may take several kinds of action. Illegal or ultra vires normative acts may be protested against, which in some cases entails the suspension of the act until the protest is considered.22 The procurator may also issue a recommendation regarding the elimination of a violation and has the right to take part in sessions of collegial organs where such recommendations are to be considered.23 If the violation of law is clear and threatens immediate harm, the procurator may issue a written instruction to the relevant individuals or bodies, or to their superiors, requiring the immediate elimination of the violation. Fulfillment of such instructions is mandatory and must be undertaken immediately.24 Finally, the procurator may issue a decree concerning the initiation of criminal or civil investigation or administrative or disciplinary enforcement proceedings. Procurators are not limited to consideration of serious violations and they can and do take enterprises and their managers to task for such matters as lack, of labor discipline, managerial incompetence or errors, and waste or lack of efficiency.25

The degree to which the Procuracy will exercise supervision over the activities of private business entities is not entirely clear. Although its previous supervision of enterprise activity was, by definition, supervision of the activities of state agents, the Procuracy’s powers are not limited by the governmental or quasi-governmental nature of the objects of supervision. By the terms of its statute, the Procuracy has the power to supervise the activities of private businesses and citizens as well as those of other entities. Thus, the Procuracy has nearly unlimited rights to review business records, employee and customer knowledge and other information concerning the operations of businesses and individuals, and to conduct fishing expeditions for legal violations.

It is not clear to what extent procurators have been exercising their powers to investigate the activities of newly formed private businesses. The most effective means for limitation of the Procuracy’s role in private business affairs would be to amend the statute governing its activity to eliminate any power of general supervision over private activities, whether individual or by business entities. Another option would be to require that some minimum grounds (evidentiary standard) for investigation be met before procurators may have access to information concerning such activities. A more comprehensive version of this option is favored by some members of the Procuracy itself, who feel that the responsibilities of general supervision unduly detract from the Procuracy’s functions as public prosecutor. These members of the Procuracy favor the complete elimination of the general supervision functions. While this would certainly solve the problem, it is unlikely to occur immediately, particularly given the current tendencies of lower bodies to ignore or even flout superior directives and the probable desire of superior officials to employ general supervision powers as one tool to control local insubordination. An amendment of the Procuracy’s general supervision powers to eliminate its power over private businesses and individuals, however, would address the possibility for interference in business affairs without preventing the Procuracy from addressing unacceptable official behavior.

If retained, the Procuracy’s power of general supervision over official bodies could be put to positive use in restricting the tendency of ministries and other bodies to interfere with new economic activities. Procurators could be instrumental in prevention of attempts by ministries to protect specific enterprises or industries from competition and might also be helpful in preventing individuals or groups in positions of power from using the economic transformation process to unfairly enrich themselves. In order for the Procuracy to fulfill this function, however, the necessary laws preventing inappropriate official conduct must be in place and the relevant rights of new economic actors well defined.

(4) Criminal and administrative sanctions

The Soviet state has traditionally controlled “undesirable” economic behavior by providing criminal or administrative sanctions for behavior which violates accepted norms and/or undermines the economic system. Although the severity of these sanctions has diminished somewhat over the years, there are still a number of articles of the criminal and administrative codes of most republics that give serious cause for concern. Some of these articles criminalize behavior that may be rational and economically beneficial, while others appear to define “legitimately” criminal behavior but could be of concern if interpreted too broadly.

It appears likely that many of these articles of the codes will be eliminated in the next major revision of the criminal codes. This process has already begun in the traditional way, with the issuance of draft Fundamental Principles of Criminal Law of the USSR and union republics. These new Fundamentals were issued in draft form for public discussion in January of 1989, and appear to envision substantial changes in the criminal law including the elimination of the differentiation between property crimes relating to state property and other property crimes, the elimination of many economic crimes, and the recognition of reasonable risk as necessary to business and personal activities. Since the issuance of the draft version, however, it does not appear that any substantial further action has been taken on the matter and the objectionable portions of the existing criminal codes continue to stand and to hamper the economic reform effort. Prosecution under most of these articles continues, with thousands of convictions per year.

Taking the RSFSR Criminal Code as an example (most republican criminal codes are very similar), there are two sections of the code which are a particular cause for concern. The first is Chapter II, which deals with crimes against socialist ownership. Although many of the crimes discussed in this section are legitimate—e.g. theft or intentional destruction of state property—the penalties provided for such actions with respect to state property are currently vastly disproportionate to those provided for similar actions with respect to any other type of property. This perpetuates the notion that state property is of more importance than other types of property and may tend to skew the deterrent effects of the criminal law. In addition, there are a number of “crimes” in this section of the code which would seem not to merit criminal punishment and which may be subject to inappropriate interpretations. Of particular concern here is Article 100, which proscribes an “unconscientious attitude toward state property” which results in damage, destruction or theft. Such provisions provide a tempting means for criminal liability to be inferred whenever there is some kind of damage to state property. It would be of some use to eliminate the most egregious differences by means of amending the sanctions in the state property crimes sections to conform more closely to those in the general property crimes sections of the code and by repealing one or two of the most draconian articles.

The second section of the RSFSR Criminal Code which gives cause for concern is Chapter VI—Economic Crimes. This chapter contains a number of articles criminalizing rational economic behavior which, because of irrationalities in the economic system, may have undesirable economic consequences. Article 153 provides for criminal punishment for commercial middleman activity, while Article 154 criminalizes “speculation”—the buying up and reselling of goods for the purpose of extracting a profit. Article 154-1 addresses the problem of irrational grain and bread pricing by criminalizing the purchase of bread and other grain products (meant for human consumption) for use as animal feed.

Clearly, these articles address behavior that is, in some cases, not only not criminal but even desirable in the context of market activity. Articles 153 (commercial middleman activity) and 154 define activities which are necessary to keep markets functioning smoothly and to adjust the distribution of goods. While Article 154-1 (feeding bread to animals) deals with a rather specific subsidy situation, the desirable means to deal with the problem is a pricing adjustment rather than the criminalization of rational behavior.

Other articles in the section on economic crimes deal with actions which might well remain crimes in some circumstances under market conditions, but whose scope and definition needs to be altered. For example, Article 156 criminalizes the deception of purchasers and customers by means of false weights and measures, false accounting, and also by the marking up of retail prices on goods or services. While the use of false weights and measures clearly constitutes criminal fraud, the matter of price markup needs to be removed from the code or redefined to limit application to the commission of fraud by retail employees.

As with many of the articles in the “socialist property” section of the codes, it is clear that the new code versions, if based on the draft Fundamentals, will remove or adjust many of the articles in the “economic crimes” sections. Some of these articles, however, are very serious impediments to normal economic activity and need to be dealt with immediately by means of amendment, particularly Articles 153 (middleman activity) and 154 (speculation). These particular articles are, however, least likely to be wholly repealed immediately, because of the fear that such an action would give license to wholesale redistribution, runaway inflation, and the arrogation of state subsidies on basic goods to private persons. There exists a common belief in the need to control speculation in order to prevent inflation and to provide for a fair distribution of scarce goods.

Even if it is not feasible to remove the offending articles from the code immediately, steps need to be taken to limit the chilling effect of these provisions on those who wish to engage in new forms of business using legitimate sources of supply and channels of distribution. Limitation of the articles to the organized resale of basic goods purchased at state controlled prices would be of some help in clearing the way for entrepreneurs and small businesses to engage in business activity using contract prices without fear of prosecution. In addition, the creation of a clear exception for those who provide distribution services (i.e., purchase goods and transport them to areas where they are needed) might allow better goods distribution and competition by firms located far from promising markets.

There are a number of other articles in the criminal codes which may be of some concern. Article 69 of the RSFSR Criminal Code defines “wrecking”—a crime against the state which involves an act or omission directed toward the subversion of any part of the Soviet economy or state, committed for the purpose of weakening the Soviet state, by the use of a state institution or organization or by obstruction of its work. This was a common charge during the years of the terror of the 1930s and it has not been seen much in the courts since that time. Nonetheless, it is clearly subject to dangerously broad interpretation, particularly in times of economic upheaval and distress, and there is no need for anything more in the code than the existing article on sabotage.

Article 88 is also of some concern. Article 88 criminalizes violations of the rules for transactions involving currency. Currency violations are classified as crimes against the state (the most serious classification) and the penalties for such violations are draconian, including death for speculation in currency on a large scale or as a form of business. Given the growing “dollarization” of the Soviet economy and the recent relaxation of the rules for use of convertible currency by Soviet citizens, this article would appear to be out of date and in need of immediate amendment or repeal.

The larger part of the discussion above applies not only to the various republican codes of criminal law, but also to codes of administrative violations. Administrative offenses are generally less serious versions of offenses which appear in the criminal codes, or are offenses not meriting criminalization. Most republican codes of administrative violations include articles describing conduct analogous to that which is discussed above under articles of the criminal code. For example, Article 151 of the RSFSR Code of Administrative Violations prohibits petty speculation, while Article 153 prohibits unauthorized operations with foreign currency and Articles 150 to 150-2 deal with unauthorized trade in goods. Each of the relevant articles of the administrative code will need amendment or repeal in the same fashion and for the same reasons that such is required for the criminal code.

4. REGULATION OF THE BUSINESS SECTOR

a. Introduction

The guidelines establish, as one of their primary goals, the creation of equal opportunities for all citizens and organizations to engage in business activities in a variety of forms, in an environment in which market forces are able to operate. According to the guidelines, this goal is to be achieved through the passage of legislation ensuring freedom of economic activity and prevention of state interference in the management of businesses and through a series of measures designed to create competition, including the rapid privatization of large portions of state property, the freeing of prices, and measures to demonopolize the economy. Achievement of these broad goals will require significant changes in legislation, for while some steps have been taken to create new legal forms of business activity, very little progress has been made in the legal area in respect of privatization, decontrol of prices, or antimonopoly measures.

b. Legal forms of business organization

(1) Introduction

One of the primary means for reform of legal regulation of the economy used to date has been the passage of relatively comprehensive laws intended to authorize and define a new form of business activity. There has been a steady stream of such legislation, beginning with the Law on Individual Labor Activity in 1986, and continuing with the Decree on Joint Enterprises and the Law on State Enterprises in 1987, the controversial Law on Cooperatives in the USSR in 1988, and in 1990 a new Law on Enterprises, a decree on joint stock companies and companies with limited liability, and a decree creating special conditions for small enterprises. This method of legislative reform has allowed the Soviet government to create substantial new business opportunities relatively quickly and to exercise some control over the pace and direction of the development of private activity. Inevitably, however, reform of this type has produced gaps and anomalies in legal regulation which will need to be addressed if the goal of equal business opportunity expressed in the presidential guidelines is to be met.

(2) Regulation of enterprises

Improvement in the functioning of enterprises has been a primary goal of Soviet economic reform efforts for nearly the entire history of the planned economy and is clearly one of the keys to the success of the reform effort as a whole. In 1987, the Law on State Enterprises was designed to begin a gradual liberalization of the rules and planning that had hindered enterprise initiative by gradually releasing planners’ claims on the products of enterprises and allowing them to sell the released products at freely contracted prices to whatever purchaser they chose. The concept was one of a learning process in which the state enterprises could gain experience with market-like situations without committing all of their resources or risking the possibility of serious losses.

Unfortunately, the implementation of the Jaw did not provide the kinds of results that had been hoped for. Complaints abounded concerning the failure to release a sufficient amount of production from central control, with some concern also being expressed over the substantial rights that the 1987 law had given to the enterprise labor collectives. Subsequent amendments to the 1987 law sought to further limit central and ministerial controls over enterprise decision-making and to limit the powers of the labor collective, but results in terms of increased production and market-based activity of enterprises continued to be unimpressive. A wide variety of factors were believed to have contributed to the poor performance, ranging from continuing interference by ministries and state organs, to supply problems, distribution difficulties, and the inhibitions of enterprise managers produced by uncertain political and economic conditions. In addition, although the law envisioned a reduction in the amount of production to be delivered to the state, fear of disruption of supply chains resulted in the passage of a requirement that enterprises maintain supply relationships that had been in existence for more than a minimum term.

In June of 1990, a new Law on Enterprises was enacted to supercede the amended 1987 law. By its terms, the current version applies to all enterprises, not only those that are state-owned; but in practice specific legislation concerning the formation and activities of particular types of enterprises (e.g., joint stock companies) will govern the activities of other types of enterprises. As most of the “privatized” forms of business enterprise will need to be organized under one or another of the specific laws, it would appear that the newer version of the enterprise law will, like its predecessors, apply primarily to state enterprises.

The new law is quite broad and general in many of its provisions and refers many of the most important questions of ownership and management to other legislation. It provides for complete freedom for the enterprise to plan its activities and production, but also states that enterprises shall provide work or services to the state according to a procedure determined by union and republic laws. At present, the law governing state orders makes such orders mandatory for enterprises, obviating the general provision in the enterprise law. Similarly, the enterprise law states that enterprises may sell their product at rates to be determined individually or by contract, but also requires that, in cases determined by union or republican law, output be sold at state prices. It further provides for confiscation of monies received above state prices and fines for failure to abide by price discipline. Thus, the enterprise law itself provides a framework for relatively unobstructed decisions on production and pricing, but this freedom may be curtailed by other legislation.

In attempting to pass a generalized enterprise law, the drafters of the newest version of the law may have actually hampered the movement of state-owned enterprises toward more independent and efficient behavior. The current version of the enterprise law appears to be something of a hybrid: taking great pains in some areas to protect the prerogatives of the enterprise owner, but also making reference in various articles to the independence of the enterprise itself; restricting the rights of the owner to interfere in the management of the enterprise; and defining in some detail the structure of the enterprise and its management rather than leaving such matters to the owner or board. A law directed specifically to the requirements for efficient operation of state enterprises might be preferable to the current version, as it would be able to deal more directly with the need to see that state enterprises are well organized and to prevent undue interference with enterprise operation by the central planning agencies and branch ministries. Without the need for concern that restrictive provisions might violate the rights of private enterprise owners, the law could be drafted to cover in detail the rights of public employees engaged in production work and the precise nature of appropriate—and inappropriate—relationships between the management of such enterprises, the owner (the state), and the owner’s agents (ministries, departments, etc.). Given the fact that under current conditions the basic enterprise law appears not to be intended to apply to the vast majority of private enterprises in any case, the apparent general applicability of the law serves only to confuse matters and provides little benefit to offset the costs of failure to draft the law in a more tailored fashion.

(3) Cooperatives

Without question the most active, and the most controversial, new form of business activity is the cooperative, authorized and defined by the 1988 Law on Cooperatives in the USSR. Under the law, cooperatives may be formed by groups of three or more persons and may hire labor, lease or purchase business premises and equipment, and operate on as large a scale as may be desired. Cooperatives are permitted under the law to charge freely negotiated prices for goods and services, although products or services under state contracts, using inputs provided by the state or for resale of goods purchased in the state supply network (whether wholesale or retail), are subject to centrally dictated price levels and/or permissible markups. Not long after the boom in cooperative formation, a public outcry began over the prices charged by cooperatives for goods and services and the practice of some higher quality cooperatives (especially restaurants and service cooperatives) of reserving part or all of their production or services to be sold to foreign citizens for hard currency. Pressure for control of cooperative activities and prices grew and in 1989 a set of amendments was made to the cooperative law, reemphasizing the restrictions on activities involving state-source supplies, allowing republican authorities to impose price ceilings on basic commodities regardless of the source of the supply, and placing price restrictions on imported goods sold by cooperatives. In addition, the list of activities in which cooperative businesses are not permitted to engage continued to expand, with cooperatives being banned from any business involving precious metals or stones, various kinds of trade in works of art, books and films, and a variety of others.

Responding in part to public pressure, local and higher authorities often refused registration to cooperatives, attempted to close them or interfered in their activities in other ways. Some pressure for control of arbitrary behavior by officials began to be felt, although public and much official opinion continued to be anti-cooperative. In June of 1990, another substantial set of amendments was passed which (among other things) both reemphasized price control measures and provided various new protections for cooperatives from interference with their activities or finances, including expedited means for cooperatives to seek review of official actions.

At present, cooperatives remain subject to a variety of restrictions concerning the types of activities they may engage in and the prices they may charge, many of which restrictions have not yet been placed on other new forms of enterprise. If this inequality in restriction continues, business activities may move away from cooperative forms and into the forms of joint stock companies, small enterprises and others. While this may not prevent new businesses from forming, it will limit experimentation with the flexible, worker-oriented cooperative form and prepetuate unequal conditions of competition between existing cooperatives and other forms of business in which both ownership and profit distribution are more controlled and more diffused.

(4) Joint stock companies and companies with limited liability

Joint stock companies and companies with limited liability may be formed according to the provisions of a decree of the USSR Council of Ministers issued in June, 1990. The decree is considered to be an interim measure, taken to permit activity related to the formation of such companies to begin, while more permanent legislation is elaborated. Joint stock companies and companies with limited liability may be formed by two or more individuals or entities, While the formation of such companies is thus theoretically open to most business participants, substantial minimum capital requirements ensure that these forms will not, for the present, be used by smaller business enterprises. Joint stock companies can be created as new business enterprises, or can be formed by the transformation of an existing enterprise into joint stock company form.

The companies are created through the conclusion of an agreement between the founders and the elaboration of a charter for the company and the registration of the agreement and the charter. Registration of companies must be completed within 30 days of submission of satisfactory documents and may not be refused except on the grounds of a violation of the law or failure of the submitted documents to conform to legal standards. Authorities may require the submission of additional information from persons or entities attempting to register companies in order to verify the information submitted and the 30 day time limit will be calculated from the time at which all required documents have been submitted. Failure to register the company within the required period may be appealed to a court or state arbitrazh.

The decree specifies in some detail the structure of the bodies which will have authority to govern the companies (including a general meeting of shareholders, auditing commission, executive body, and optional shareholders council) and the means by which decisions shall be taken by such bodies. Quorum rates, minimum frequency of meetings, and percentage votes required for passage of various types of decision are specified, with very limited provision for alteration by the company charter.

Of particular interest is the formation of joint stock companies on the basis of companies which are partly or entirely state-owned. Until the creation of the State Property Fund, this process required the permission of the relevant ministry to which the state enterprise was subordinated and the agreement of the enterprise’s labor collective. Since the creation of the State Property Fund, which has responsibility for the administration of state property, that body presumably has the authority to authorize the creation of joint stock companies from state-owned enterprises. There is no restriction on the ability of ministries themselves to form joint stock companies or to retain some share of stock, and it is permissible for state bodies other than the controlling ministry to take shares in the new company and for other enterprises and organizations to be stockholders.26 While experience with the creation of joint stock companies on the basis of existing state enterprises is as yet extremely limited, it may be expected that such conversions will result frequently in the creation of companies that remain state-controlled through majority shareholders which are state bodies.27

If there is no requirement that the ministries and state committees divest themselves of controlling interests in most such companies, control through stock ownership may be allowed to replace the more direct control that ministries previously exercised. Concerns have already been voiced concerning the possibilities for ministries to use the joint stock company form to avoid restrictions that may be placed on state enterprises that are directly owned and controlled. For example, creation of a joint stock company may allow ministries (as well as other potential owners) to avoid the requirements of the enterprise law concerning the powers of the labor collective and to dilute the power of the collective within the joint stock company by promoting worker investment on an individual basis. Of even greater interest to some ministries and state bodies will be the possibility to engage in profit-taking through dividends that would not otherwise be permissible to them.

The guidelines state an intention to use the joint stock company form as a step in the process of privatizing medium- to large-sized enterprises and organizations and creating competition in the market. Enterprises are to be turned into joint stock companies, whose stocks will in turn be sold off in order to privatize them. While the sale of stocks or shares of some kind may well be the only viable means of privatizing large enterprises, there could be a number of possible pitfalls under current legislation that could be reduced or avoided. It is extremely important that privatization programs depending upon the creation and sale of joint stock companies include carefully drafted restrictions on the retention and/or use of shares by ministries and state bodies. Such restrictions should prevent state bodies from retaining controlling interests in joint stock companies and using those interests to perpetuate their control over Soviet industry. The definition of controlling interest will need to be quite precise, as even fairly small percentages of stock ownership may provide a state body with effective control if the remaining stock ownership is very diffused.

An alternative means to prevent the maintenance of state control over joint stock companies would be to prevent the relevant state bodies from retaining any interest at all in such companies. This option would require that holding companies or agencies be created to take ownership of stocks that could not be sold on the market. In a similar vein, state bodies might be permitted to hold some stock in the companies, but forbidden to exercise voting powers or other shareholder rights related to the control and management of the company. Systems that do not take the ownership of the stocks, and the consequent receipt of benefits in the form of dividends, out of the hands of the state bodies entirely, however, may foster situations in which state bodies are tempted to use their authority to create advantageous conditions for companies in which they hold investments—creating anticompetitive conditions in particular markets.

Another step that would be of assistance in reducing the potential for abuse by state owners of interests in joint stock companies would be the passage of a strictly drafted state enterprise law that would define with specificity the permissible relationships between the state as owner, its agents, and any type of business or enterprise in which the state has an interest, and also the structures and procedures by which the commercial operation of such enterprises is to be ensured and state interference (whether to the advantage or disadvantage of the enterprise) prevented. Strict application of such a law to the relationships between joint stock companies and state bodies which own stocks could substantially reduce the problems of detrimental state controls and anticompetitive behavior by state owners during the privatization process in which the state is likely to retain substantial ownership.

(5) Small enterprises

Special conditions for the creation and regulation of small enterprises or small businesses were created by a decree of the USSR Council of Ministers of August 8, 1990. The decree emphasizes the importance of small businesses in the expansion of economic activity and creation of a market and, with the purpose of stimulating small business formation, offers a number of tax and other benefits to businesses that fall within its guidelines. The recognition of the importance of small business activity is encouraging and there are some provisions of the decree that will have a positive effect. The intended scope of the decree, however, appears to be more limited than would at first appear, and may allow more state involvement in small enterprise operation than would be desirable.

The provisions of the small enterprise decree permit the formation of small businesses in all sectors of the economy and on the basis of all forms of ownership, including state ownership and mixed ownership. In addition, any existing businesses that meet the size definitions contained in the decree are to be qualified as small businesses. The primary criterion for defining which businesses fall within the dictates of the decree is size of the work force. This criterion varies according to the sector of the economy: businesses in industry and construction qualify with a work force of up to 200 persons, in science and scientific services with up to 100 persons, in other production sectors of the economy with up to 50 persons, in nonproduction businesses with up to 25 persons, and in retail trade businesses with up to 15 persons. Union and autonomous republics are permitted to establish lesser maxima for the qualifying size of the work force and may also define equivalent criteria based on economic turnover. Although the decree is not specific on the point, it is to be assumed that lower maximum limits established by republican authorities would apply to qualification of small businesses for republican level programs and would not replace the union standard with respect to businesses in that republic.

Small businesses may be created by individuals, and by nearly any kind of group or entity, alone or in combination with others. State-owned enterprises and associations may create small businesses, and government bodies authorized to administer state property may create small enterprises directly. Small businesses may also be created by means of separation of a subdivision or structural unit from an enterprise or association on the initiative of the workers in that subdivision. When this occurs, provision must be made for the subdivision to meet its contractual commitments, steps must be taken to avoid reduction in budget revenues, and the enterprise or association, rather than the workers group, will be considered to be the founder of the business. In effect, a small business is created by creating any business entity that conforms to the size limitations, since cooperatives, joint enterprises, joint stock companies, and other business entities which are defined by separate legislation may also be considered to be small businesses for purposes of receipt of the benefits of the small business legislation.

The decree also authorizes the creation of small enterprises which do not fall within other categories of business. Such enterprises may be established by registration of a charter with the local authorities.28 The registration process itself is subject to a two week time limit from the date of submission of registration materials and the grounds for refusal to register a small business would appear to be limited to violation of the formation procedure or failure to comply with requirements for valid registration documents. A founder who has not received his documents back by the two week deadline, or who has received an unjustified refusal, may appeal to the courts or state arbitrazh.29

Small businesses which are created as joint stock companies, or in other separately defined forms of legal organization, must adhere to the legal requirements of those forms as defined in the relevant law. With respect to small businesses which are not regulated by other legislation, internal operations and relationships are not defined with the specificity found in the laws defining most of the other forms. The decree states no requirements with respect to the management structure or ownership distribution within the small business and stipulates that the relationship of the small business to its founder shall be determined by its charter. With respect to conduct of its economic activities, the decree states that a small business is independent with respect to disposal of its products and its profits, but later states that the products and work of small businesses must be realized at the prices and rates determined by legislation. It would thus appear that the small business form will allow freedom with respect to use of proceeds, but not allow businesses to operate outside state price controls for any product to which they apply and will not serve as a vehicle for developing market relations on a more realistic price basis until prices are generally decontrolled.

The decree creates a number of special privileges for small businesses designed to encourage their creation and growth. These include an exemption from payments into the budget from income (i.e., a tax exemption), with the exceptions of cooperatives which are required to pay the taxes normally levied on them, and those small businesses which already exist, which must continue to pay in the same fashion and at the same rate as previously. Accelerated depreciation is permitted for small businesses and the decree authorizes the creation of special funds for assistance to small businesses, on either a private or state basis. Such funds may offer advantageous loans and other forms of financial support. In addition to the funds, the decree requires or authorizes the creation of various state organizations which will assist small businesses with training, construction of facilities, foreign trade, and other matters.

The special privileges granted to small businesses and the lack of specific regulation of their internal structures and activities has reportedly encouraged entrepreneurs to favor the creation of new business endeavors as registered small businesses, rather than in cooperative or other form. The degree to which this decree has been or will be successful in stimulating new business activities, however, is not clear.

Several improvements and clarifications could be made in the decree, or incorporated into a law on small business if such were envisioned. First, the relationship of the decree to state bodies and state-owned or state-controlled enterprises and organizations should be better defined and may need to be altered. The unstructured nature of the relationship between the founder of a small business and the business itself invites abuse by state bodies wishing to avoid the noninterference restrictions that are contained in some other legal provisions. The provisions concerning the creation of funds to assist small businesses open the possibility that state-created and state-owned small enterprises will be assisted by means of these funds, allowing portions of enterprises (or whole small enterprises) to avoid a hard budget constraint and/or to compete on advantageous terms with other private enterprises. It is not clear that there is any substantial benefit to be gained by fostering the creation of new enterprises—of whatever size—that will be under the control of the old state administrators, and it may be appropriate to limit the creation of small enterprises to those involving private individuals and entities, or perhaps mixed entities. A less drastic means to address this problem would be the application of a strict law on state enterprieses—ensuring the independence of state-owned enterprises from state bodies—to any small business owned or controlled by the state or another state-owned entity.30

Although the version of the decree available at the time of writing permits the establishment of small businesses in any sector of the economy, it assigns priority to the fostering of businesses concerned with production of consumer goods and provision of consumer services, production of construction materials, accelerated development of new equipment and technologies, and the solution of ecological problems. While the development of small businesses in these areas would certainly be beneficial, small business should also be encouraged to form in the areas of business and industrial services,31 transportation, and wholesale trade, as well as in service sectors that could contract with government bodies to perform some of their functions. Privatization and demonopolization in these areas must occur quickly in order for the independent business community in general to be able to function and for markets to develop. The encouragement of small businesses which would serve these needs should be given at least equal priority with those mentioned in the decree.

There is no clear reason for cooperatives to be denied the tax benefits accruing to new small businesses and to be thus disadvantaged with respect to their competitors. If a tax holiday is desired only with respect to newly formed businesses, this could be provided for in the legislation, but the general provisions of the legislation should apply equally to all forms of businesses.

Finally, it is important to note that the general conditions under which small businesses created under the provisions of the decree will operate are quite similar in a number of respects to those under which cooperatives have operated for the past two years. There are no restrictions on the distribution of profits within the businesses, and they are being encouraged to operate in many of the same sectors in which cooperatives have operated. Like cooperatives, it is to be expected that many small businesses will form, at least in the short term, in sectors of the economy in which limited investment is required and in which supply conditions and pricing requirements allow business owners to take substantial rents and to quickly recoup their investments. It is thus quite possible that the same kind of regulatory frustration concerning lack of visible investments and infrastructure improvements and public frustration with high prices and high incomes for employees that has been directed at cooperatives will arise with respect to private small businesses as well. In order to allow these businesses to make contributions to the economy and to assist in the formation of a market, state bodies must resist pressures to restrict their activities or to regulate their profits and incomes through high taxation.

(6) Individual business activities

The Law on Individual Labor Activity, passed in November 1986, was intended particularly to expand the involvement of individuals in the production of handicrafts and consumer goods and the provision of services. It contains lists of specifically authorized and specifically prohibited production, service and cultural activities, as well as a general statement that all activities in the relevant spheres which are not specifically prohibited are to be considered legal. The scale on which such activities could be conducted, however, was clearly intended to be strictly limited. No activity, according to the terms of the law, could involve the use of hired labor or the extraction of “unearned income” or other detriment to social interests. The law required that citizens obtain permission from local authorities to engage in such activities and gives substantial leeway to local officials to set conditions and fees for licensing and registration, although a refusal to issue a registration could be appealed to administrative bodies superior to that which issued the refusal.

Until August 1990, the rights of individuals to engage in business activities continued to be rather restrictively defined by the 1986 law, although groups of three or more individuals were authorized by the Law on Cooperatives in 1988 to establish substantial business operations and to hire a labor force. This maintenance of stringent restrictions on individuals was echoed by the continuation of restrictions on individual property ownership, individual use of banking and finance facilities, and other similar restrictions. This anomaly with respect to business activities now appears to have been at least partially addressed by the August 1990 Council of Ministers decree on small enterprises, discussed above, which envisions the creation and chartering of small enterprises by “citizens, family members, and other persons jointly engaged in labor activity.”

Taking the provisions of the decree on small enterprises at face value, the inclusion of individuals in the decree would appear to render the restrictions on individual labor activity contained in the 1986 law essentially moot. The decree states that “individual…and other types of small business—the procedure of whose creation, activity, and liquidation is not regulated by special legislation—are guided by this ordinance and their own charter.” Such language would appear to indicate that the provisions and restrictions of the Law on Individual Labor Activity are not intended to apply to small businesses chartered and run by individuals. While this would bring restrictions on individual activity more into line with those applying to business activity pursued by groups, it would seem to produce a different type of anomaly, in that the restrictions on types of activity that previously applied to both cooperatives and those pursuing individual labor activities would effectively apply only to cooperatives.

(7) Dissolution, reorganization and insolvency of business entitities

Some of the laws discussed above contain provisions which permit both the founders or owners of a business entity, and also agencies of the state under certain conditions, to order the dissolution of a business. The provisions applying to most currently existing business entities are contained in Article 37 of the 1990 Law on Enterprises, which provides generally for the liquidation and reorganization of enterprises. The Article provides for an enterprise to be liquidated or reorganized on the basis of a decision made by the owner of the property of the enterprise, the state organ authorized to create the enterprise, or by decision of a court or state arbitrazh, but does not stipulate the grounds on which such a decision may by made, or any conditions under which it must be made. The Article goes on to state that if the reorganization or dissolution of the enterprise could cause consequences (ecological, social, demographic, or other) affecting the interests of the population of the territory on which it is located, the reorganization or dissolution must be coordinated with the corresponding local council of people’s deputies. Unfortunately, no guidance is provided concerning the “coordinating” role of the local soviet in reorganization or dissolution.

The Article goes on to specify other cases in which an enterprise may be liquidated, including when it is declared bankrupt, when it fails to meet conditions established by legislation or fails to make necessary changes to conform to the law within an allowed time period, when its charter documents are declared invalid by the court, or for other reasons provided for in legislation of the USSR and union or autonomous republics. Although these instances would appear to be grounds for a court- or arbitrazh-ordered liquidation of an enterprise, the provision is separate from that allowing dissolution or reorganization by order of the court or arbitrazh and the relationship of the two provisions is not clear. No definition of bankruptcy is provided by the law and no information on the procedures by which an enterprise may be declared bankrupt or the persons and institutions which may institute and/or participate in that process. No guidance is provided concerning the types of additional conditions for reorganization or dissolution that may be required by further legislation at the union or republican levels.

The Law on Cooperatives in the USSR, as amended to date, provides far more specific provisions on insolvency and reorganization. Article 23 now provides that a bank which has issued a loan to a cooperative may recall its loan as a whole if the cooperative violates its payment schedule, although the cooperative is provided with a right of appeal. A cooperative which has not met its commitments may be declared insolvent by the bank in which it holds its running account, and after six months of insolvency the bank is permitted to raise the question of liquidation of the cooperative to the local soviet which registered it. While these provisions would appear to give substantially greater certainty to questions of procedure with respect to insolvent cooperatives, they would also appear to be substantially harsher than the provisions related to other types of business entity, which do not grant banks similar leverage or provide for specific periods within which decisions to liquidate may be proposed to local authorities. Even these provisions, however, do not contain standards by which banks or local authorities are to exercise their discretion in such matters or make decisions concerning liquidation or reorganization.

The decree on joint stock companies and companies with limited liability provides for winding up of the company in cases in which its foundation documents specify a limited life for the company, its stated objectives have all been achieved, a decision is taken by the highest body of the company, or when a court or state arbitrazh decides that the company is insolvent. The decree provides that decisions of the court or state arbitrazh are to be made upon representation of the appropriate financial or banking authorities, but does not provide guidance as to the nature of insolvency which would justify winding up the company, the standards for permitting or requiring reorganization rather than closure of business activities, or other relevant matters. The decree does make specific provision for the creation of a liquidation commission and deal with the priority of some creditors.

Comparison of the relevant provisions in different laws and legislative acts suggests that there is a need for bankruptcy legislation defining the procedures under which businesses may or must declare bankruptcy, or may be declared bankrupt by others, and the procedures for examining the affairs of an insolvent or threatened business and determining what actions should be taken. In some cases, particularly during the transition period, it may be appropriate for the authorities to provide temporary protection of business entities from creditors in order to allow them to adjust to new conditions and/or to restructure their activities. In others, particularly where the business entity in question is a state enterprise, it may be necessary for bankruptcy legislation to enforce standards requiring either dissolution or reorganization of insolvent enterprises within designated time periods in order to prevent indefinite subsidization of enterprises through state budgets and the resulting inefficient use of resources and anticompetitive effects in the relevant market. In all cases, bankruptcy legislation should provide uniform standards requiring and/or allowing declarations of bankruptcy, presentation and approval of reorganization plans, and payment of creditors, as well as uniform procedures for conducting bankruptcy proceedings and a means for such proceedings to be publicly registered as notice to existing and potential creditors of the business.

(8) Conclusions and recommendations

There are a number of conditions commonly thought to be necessary for businesses, of whatever legal form, to operate in an efficient manner within a market. These conditions include the maintenance of relatively equal conditions for competition among businesses and relative freedom for businesses to choose the prices at which they are willing to buy and sell goods, and the existence of suitable institutional frameworks and supports for businesses to be created and defined. The guidelines recognize the importance of each of these factors and express strong intent to create the necessary conditions.

The elimination of price control can be accomplished through a combination of the removal of products from price control lists, the redefinition of the powers of price-setting agencies, and the movement of business activities into forms not subject to price controls.

The creation of relatively even conditions for competition between businesses is also a complicated matter, and one that receives top priority in the guidelines. The guidelines suggest that a presidential decree on the freedom to engage in business or entrepreneurial activities will be issued in the near future which will protect the right of all individuals and entities to engage in business activities. While this might be helpful in clarifying the situation of those groups whose rights to engage in business are not clear, and particularly in clarifying the rights of individuals with respect to business activity, the creation of equal conditions for such business activity is at least as important as the simple establishment of the right to engage in such activity in general.

Perhaps the most important step that could be taken in regard to the equalization of conditions for business activity would be the passage of a clear and detailed law concerning the relationship between the state and its employees and agencies and any business, enterprise, or commercial organization in which the state has an ownership interest. Such a law could clearly define the permissible and impermissible relationships between state-owned entities and state bodies, providing a defined management structure with specific safeguards against interference (whether helpful or harmful) in the financial or business affairs of the enterprise. Properly drafted and enforced provisions of this type could be of great assistance in eliminating some of the most troubling inequities in the current conditions for market activity, including subsidization and the absence of a hard budget constraint for many state enterprises and anticompetitive behavior by state bodies designed to advantage particular enterprises. While the application of such a law could not be instituted across all sectors immediately, and certain exceptions might have to be made,32 it would be a very substantial step forward in the creation and protection of market competition.

A number of inequalities are caused by differences between and among the laws applying to particular business forms. While some of these differences relate to legitimate differences in the ways in which such forms should function, a number are not necessary and should be eliminated. Examples of these types of differences include the substantial restrictions on activities of cooperatives and their exclusion from the tax benefits provided by the decree on small businesses, and the apparent restriction of individual entrepreneurs to the small business form and thus to the size limitations on small businesses.

The history of the cooperatives is an excellent illustration of another source of inequalities in business conditions. The problems experienced by the cooperatives in relation to interference by local authorities indicate the importance of providing protection to new businesses against inappropriate attempts at regulation or intimidation. In addition, the history of regulation of cooperatives shows a disturbing tendency on the part of legislators to respond to difficulties and to public dissatisfaction with broad restrictions removing problematic activities from the purview of independent businesses. Such a response has allowed legislators to avoid the necessity of specifically identifying the causes of the problem and designing means to address it. If conditions for business activity are to be equalized across all types of business form, however, and if independence of business activity is to be increased for all types of business organization, this response to regulatory problems will no longer be acceptable. Legislators will need to develop more tailored means of regulating undesirable business behavior, such as reporting requirements or licensing and inspection systems, which can be applied equally to all businesses.

Finally, the technical and institutional structures for effective regulation must be in place. One of the most important of these, particularly during the transition period, is a reliable mechanism for reviewing laws and regulation to identify inconsistencies and anomalies and to see that they are addressed. Reliable means for obtaining information concerning new laws and regulations must be available to participants in market activity so that they can regulate their conduct accordingly. This would require an effort to ensure that all the legislation, regulation, and normative acts relevant to the conduct of business are contained in publications with a suitably large circulation and availability. Systems for efficient registry of businesses and the property they possess are absolutely necessary and do not yet appear to exist. In each of these areas, technical assistance in the form of training in information control and analysis, computerization of data bases, means for maintaining a permanent and useful record of business registrations, and other matters will be required.

c. Legal framework for privatization

(1) Introduction

Although the need for a substantial privatization of state property has been acknowledged by both the union and some republican governments, no specific policy or program, and no legislation, has yet been announced with respect to the means, conditions, and pace of privatization. While some of the laws concerning business forms do provide a means for privatizing particular state assets or enterprises, these laws are not supported by any special conditions intended to assist in their use as privatization vehicles and there is no requirement that state property be made available for privatization through these means. The guidelines place considerable emphasis on a privatization program in creating a market, but they provide little in the way of a coherent program.

(2) Privatization through leasing

The primary means of privatization of state property under current law are the use of lease-purchase arrangements, the outright purchase of state property, and the creation of joint stock companies. While there does not appear to be any official record of the amount of property “privatized” through each means, the lease-purchase method may have accounted for a large portion of the movement of state property into private hands. According to figures provided by the newly established Union of Leaseholders, seventy percent of leasing agreements include a right to purchase the asset leased at the end of the term at a price which is fixed at the beginning of the leasing arrangement. Although many leasing arrangements are small businesses or involve the lease of facilities by restaurants or providers of services, such arrangements are said to include leases on some very large enterprises and firms.

(3) Privatization through joint stock companies

It is possible under the terms of the decree on the creation of joint stock companies for this vehicle as well to serve as a means of privatization of enterprises. As the decree itself was issued only a few months ago, little activity has yet taken place under its terms and it is somewhat early to evaluate its use as a privatization tool. Joint stock company creation under current conditions, however, appears likely to lead to the creation of mixed-ownership companies, often with continuing effective state control. Indeed, complaints have already appeared that the joint stock companies in particular, as well as other new forms of business organization, serve simply as a ministerial dodge in that they allow ministries to shift enterprises into a “quasi-private” legal form and thus entitle themselves to dividends and returns as owners without losing control over the enterprise.

Should the ministry be willing and able to sell its shares of the stock, the joint stock company could become a completely private entity, but the likelihood that this will occur frequently is small and the ministry’s ability to sell off its stock may now be subject to approval from the State Property Fund discussed below. Some larger enterprises have expressed an intention to avoid these issues by first moving their operations to a leasing basis—removing the state or ministry as a participant in their business activities except in the role of lessor—and thereafter creating a joint stock company without state or ministry participation. Whether or not these plans are ultimately successful, they in fact rely not on the creation of the joint stock company but on the leasing arrangement itself to remove state ownership and/or control of the property involved.

(4) The state property funds

Legislation at the union level has recently created the USSR State Property Fund—an organization with broad responsibility for the care and management of state property. The legislation simply creates the Fund itself, without providing any information on the procedures by which it will operate or the limits, if any on its discretion. The Fund has the capacity to value and to dispose of state property, but the terms and procedures by which such valuation and disposal are to proceed have not yet been defined. As it is likely that the union-level State Property Fund will have jurisdiction only over property owned or controlled by the union government, it would appear necessary for coordinate institutions to be formed at all other territorial levels at which independent property ownership exists before comprehensive privatization can take place. This would certainly include the union republics, and would likely include the autonomous republics as well.33 It might also be necessary to create such bodies within larger cities.

The issue of the level at which state property is owned must be resolved before the organs of the state can begin to transfer the relevant ownership rights. Under current Soviet conditions, this promises to be a difficult and divisive process that is likely to consume a substantial amount of time and energy. In order for any privatization to proceed in the short term, it may be necessary for lesser agreements to be reached among the relevant state bodies, allowing the various territorial authorities to dispose of particular properties where the territorial ownership can be agreed upon.

(5) Further plans for privatization

The guidelines recognize the importance of private (i.e., non-state) owners in the economic structure and their role in protecting not only the operating revenue of businesses, but also their net worth. They place heavy stress on a program of commercialization and privatization as a key component in establishing a real market economy. Although they do not provide any significant amount of detail about the process to be used for privatization, there are a few indications concerning the way in which it might proceed.

According to the guidelines, privatization would take place first in some priority industries in which it is most desirable to create non-state businesses. These industries include commerce, restaurants, consumer services, repair and construction, and small businesses. However, although privatization of these small enterprises is stated as a priority, no particular means for conducting such privatization is specified in the guidelines. No specific mention is made of any priority on the privatization of transportation or other services related to business activity. For medium- and larger-sized enterprises, the guidelines envision a privatization process that will begin with the transfer of those enterprises into joint stock company forms. The guidelines are silent, however, concerning any limitation on the amount of stock that may be held by the state or by a state-owned business entity and any need thereafter to sell off the stocks in such companies.

Special concern is expressed about the need to avoid “legalization of wealth obtained illegally” and the guidelines state that there must be strict monitoring of the process to prevent this from occurring. No further information is provided about the possible monitoring process, but the statement raises the ominous spectre of state use of the privatization process to identify and confiscate profits from illegal (or previously illegal) activities through some kind of a “source test” for funds used to buy property. Any attempt to use the process in this way is certain to have a substantial chilling effect on public willingness to invest. Further, it might well be argued that the illegally obtained wealth would be more productive and better controlled if allowed to enter the normal business sector, where its activities could be regulated and its profits taxed, instead of being forced to remain in illegal channels.

In connection with this issue, the guidelines state that priority for purchase of property and stocks is to be given to worker groups and their members. It is not clear whether this indicates an intention to create a preference for purchases by workers in a given enterprise of stock in that enterprise, or whether a broader preference is envisioned. While the point is not explained, the reference suggests that individual investment in state property, even if not subject to a source test regarding the money used for purchase, may be discouraged or disadvantaged. The guidelines state that workers groups and their members will be given assistance for property and stock purchases in the form of discounts, loans, installment sales, and the use of enterprise funds.

With respect to authority to conduct the privatization program, the guidelines state that the programs themselves—that is, the determination of the goals, principles and direction of the privatization—will be issued by decrees of the President at the union level, and by the supreme governmental authorities of the union republics. All concrete procedures connected with the process at the union level will be handled by the USSR State Property Fund, and the guidelines call for the creation of similar agencies in the republics. There is no mention of the need for decrees to be issued or agencies established at any levels lower than the union republic and no hint of the procedure by which the level at which particular pieces of property are owned is to be determined. As the guidelines call for complete republican sovereignty over property and the specific identification of union property as a part of the process of conclusion of a new union treaty, it may be assumed in their discussion of the privatization process that this division will already be complete.34

(6) Conclusions and recommendations

In order for the goal of substantial privatization contained in the guidelines to be met, a number of legal steps must be accomplished and several pitfalls avoided.

Of first importance in the privatization process is the determination of ownership for state property. Little property can be privatized on a stable basis if the threat of confiscation of the property by a competing state body exists. Whether this process takes place through the conclusion of a new union treaty or through some other means, it must occur before the privatization process can begin in earnest. In the interim, before the matter as a whole is resolved, some privatization could take place with respect to property for which the locus of ownership is clear. In order to facilitate these processes, it might be helpful for an interim process to be established by which a prospective purchaser could obtain the explicit agreement of union and republican offices that a piece of property could legitimately be transferred by a particular state property fund. It might be possible for the funds themselves to be given the power to come to agreement on these matters, at least with respect to a limited group of properties.

Once ownership of property is established, the relevant owners should immediately develop specific plans for privatization, together with the financial and other means to support them. While it may be considered desirable to ensure that workers within a particular enterprise have ample opportunity to invest, privatization plans which provide assistance and installment-purchase options only to workers’ groups may not produce the kind of response necessary to privatize large sections of the economy. Such plans may also cause inappropriate valuations of properties (by disfavoring or excluding some bidders) and may lead to their inefficient use. The guidelines’ stated commitment to equal conditions for all in conducting business operations will be much less meaningful if the conditions of privatization are strongly skewed toward particular forms of ownership and control. Individuals and other groups must have adequate opportunities to purchase state property. In connection with this, the privatization process should not be used as a means to identify and confiscate illegally earned income.

If privatization is conducted in the absence of antimonopoly measures, valuation of enterprises currently holding monopolies will be difficult and monopoly behavior by newly privatized enterprises may lead to irresistible pressure for state controls or limitations on privatization. The elaboration of privatization legislation must be closely coordinated with the creation of antimonopoly legislation, and the practices, procedures and powers of the State Property Fund connected in part with those of the antimonopoly enforcement agency.

Priority in privatization should be given not only to small shops and enterprises in the retail, restaurant and consumer services industries, but also to industrial and business services, wholesale trade, and trucking and other industrial transport. Even small endeavors in these sectors may make substantial inroads into state monopolies, and the availability of these business services is vital to the survival of other privatized companies. Priority should also be given to the establishment of competitive bidding systems for the supply of state orders and the use of competitively awarded service contracts to meet state needs.

d. Antimonopoly law and policy

(1) Introduction

Antimonopoly and/or fair competition law, although not an initial focus of reform efforts, has been receiving an increasing amount of attention by legislators and policy-makers in recent months. While drafts of antimonopoly laws have been produced at both the union and some republican levels, there is still substantial confusion over the proper direction of policy and the precise nature of the functions to be fulfilled by the antimonopoly enforcement body. In the interim, a decree of the Council of Ministers of the USSR provides for some general antimonopoly powers for union and local authorities.

(2) Barriers to entry

In order for deconcentration of Soviet industry to occur, a variety of existing barriers to new entry must be removed or reduced. These barriers include price controls, foreign trade and foreign exchange restrictions, lack of infrastructure, and cartel activities by existing enterprises.

In terms of services, the current poor state of Soviet transportation, telecommunications and postal communications stands out as an impressive barrier to the creation of new enterprises, as does the lack of development of financial and other supporting sectors. The ability for firms easily to communicate and transport goods is necessary for all business to function efficiently and is particularly necessary to new entrants who will initially work without established supply and transportation networks and firm business connections. State monopolies in these sectors will need to be dismantled quickly. Transportation is particularly important for its ability to permit entry by existing firms into new geographical markets and create competition almost immediately. In sectors such as road freight transportation, privatization and demonopolization should therefore move as quickly as possible. In order to support the emergence of private road haulage companies, needed infrastructure including terminal and warehouse facilities will have to be constructed.

New entry may also be stymied by the anticompetitive conduct of existing firms. Associations of enterprises, permitted under the 1990 Law on Enterprises, have reportedly already begun to coordinate their conduct to limit entry. For example, it has been alleged that an association of approximately 25 large state enterprises in Leningrad, involved in many industrial sectors, was able to block new entry by denying inputs to new firms.35 In addition to such broadly based exclusionary conduct, associations composed of horizontal competitors pose obvious dangers of cartel conduct, and appear to be permitted or even fostered by the existing law. Article 3(1) of the Law on Enterprises provides that enterprises may join together into associations “for purposes of coordinating their activities” and that “[by] a coordinated decision of the enterprises the association may be made responsible for centralized performance of certain production, economic and other functions.” While this article also requires that the associations abide by the terms of antimonopoly legislation, there seems to be the risk of at least confusion as to the extent of horizontal cooperation permitted. Because horizontal cooperation poses the gravest risks of anticompetitive effects, an effort needs to be made to clarify and limit the types of conduct permitted through associations.

Legally mandated product standards may also serve as an entry barrier. Mandatory quality standards already exist for many industrial and consumer goods and it has been suggested that higher standards would soon be set, at least for consumer goods. Although the level required by currently existing standards appears to be quite low, the effects of such standards should be examined and caution should be used in setting new standards in order to avoid unintended anticompetitive effects. Mandatory standards (apart from standards affecting health or safety) may well pose a barrier to entry by new firms capable of producing products acceptable to some consumers but not of meeting the standards. Voluntary standards, on the other hand, can be useful and can help competition and new entry in appropriate circumstances, especially in a market such as the USSR where the brand names of the numerous new entrants will convey little information to consumers about product quality.36

A number of provisions of existing criminal codes criminalizing private enterprise are extremely serious barriers to entry, as to any private business activity, and must be amended or repealed. In particular, articles which prohibit private entrepreneurial activity, activity as a commercial middleman, and speculation, need to be addressed in order for potential entrants to come forward.

(3) Draft antimonopoly legislation

A draft set of Fundamental Principles of Antimonopoly Legislation was due to be submitted to the USSR Supreme Soviet before the end of 1990. In the interim, the Decree of the Council of Ministers of the USSR Concerning Measures for the Demonopolization of the National Economy, promulgated on August 16, 1990, provides the basis for the creation of an antimonopoly agency and the beginnings of its activities.

Both the Decree and the draft Fundamentals draw on the main lines of competition legislation in Western countries. The abuse of dominant position, cartel agreements, unfair competition, discrimination, and anticompetitive mergers are all prohibited under their provisions. In addition, provisions not typically seen in the West are included in the Fundamentals, particularly the power of the Antimonopoly Committee (AMC) to break up dominant firms without regard to specific conduct.

Articles 7-11 of the draft Fundamentals and Article 4 of the Decree spell out the purposes, powers, and functions of the AMC. Neither the Decree nor the Fundamentals, however, include provisions specifying the details of the AMC’s form and staffing, and the status of the AMC thus remains vague.

Dominant position is defined in Article 2 of the draft Fundamentals as “an exclusive position of a market participant granting him an opportunity to exert a decisive influence on the level of competition in a certain market or to limit the freedom of economic activity by other participants in the market.” It is unclear whether the firm must have both an exclusive position and usable market power or whether the two are equated. The provisions of the Decree suggest that a threshold share of the market will be considered sufficient to constitute a dominant position, while firms below that share may be considered to have a dominant position only if they have both a minimum market share and usable market power. The Decree provides that firms with a market share exceeding 70 percent are dominant and those with a share of from 35 to 70 percent may be considered dominant “depending upon their opportunities to exercise decisive influence in each concrete case….”

Article 3 of the draft Fundamentals prohibits a firm from abusing its dominant position by suppressing competition through production limitations, refusals to deal, price increases, tie-ins and other means. It is not clear whether the suppression of competition itself must be proved or whether it is presumed once it is shown that the dominant firm has engaged in prohibited conduct. For at least some of the violations enumerated above, (e.g., tie-in sales) an anticompetitive effect need not arise in the market for the second good even though the firm has, by definition, a dominant position in the market for the first good. For other conduct, (e.g. withholding goods to create a shortage), an anticompetitive effect (the creation and capture of rents) should follow from the conduct, given the existence of a dominant position.

Cartel agreements (agreements between market participants) are prohibited by Article 4 of the draft Fundamentals and Article 2(b) of the Decree. Such agreements are prohibited and void if they are aimed at anticompetitive market division, creating barriers to entry, fixing uncontrolled prices to gain either high profits or the elimination of a competitor, or bid-rigging. The draft Fundamentals would permit such agreements to be approved by the AMC where they increase efficiency or output or promote exports. Unfair competition, including false labeling, false statements about a firm or its products, false or deceptive claims about a product, incorrect comparative advertisements, unauthorized use of a trademark, and unauthorized use or disclosure of confidential information, are also prohibited by both the Decree and the draft Fundamentals.

The draft Fundamentals prohibit state bodies from applying discriminatory or exclusive conditions to firms, if those conditions restrict competition, or from directing firms to give priority to particular customers. Such bodies are also prohibited from attempting to limit the independence of firms in selling their output or concluding among themselves agreements which limit competition. Antidiscrimination is treated more simply in the Decree, which states that competition-limiting discriminatory or prejudicial circumstances must not be established against “participants in a given market.” With respect to the conduct of state bodies, the Decree states that “central economic organs, ministries and departments” of the union are immediately relieved of the task of “direct guidance of the fulfillment of ongoing economic tasks” and of the administration of enterprises and organizations. This article is placed in abeyance, however, pending stabilization of the economy and a legislative sorting out of union-level administration.

Article 19 of the Fundamentals gives the AMC control over the creation, reorganization or liquidation of large-scale market participants (“large” being undefined), with the right to prohibit such moves if they may lead to a dominant position or other restraint on competition and to make exceptions where there are countervailing efficiency, output, or export gains. Where a dominant firm already exists, the AMC is empowered to break up the firms, apparently without regard to conduct. Under the terms of the Decree, a firm with a greater than 20 percent market share may not hold shares in a competitor, while legal persons holding a controlling interest in a firm with a greater than 20 percent market share may not hold a controlling interest in the shares of a competitor of that firm. The Decree permits ministries and departments of the USSR and of republican and autonomous region governments and even the executive councils of local governments to break up highly monopolized enterprises and organizations, if allowed by productive and technological circumstances and where “the economic expediency of the reorganization is apparent.”

In addition to powers of reorganization and merger control, the draft Fundamentals provide the AMC with the power to issue orders directed to the cessation of a violation, to the restoration of the status quo, to the restructuring or breakup of a firm, to the disgorgement of “illegally gained profits,” and to impose fines for slow compliance or noncompliance with orders. Forty percent of fines and disgorged profits are to go into a fund for the promotion of competition. Consumers or firms may also enforce the provisions of the Fundamentals by bringing private actions for damages against firms or bodies which act in violation of the antimonopoly legislation. These actions may be brought either in court or state arbitrazh.

(4) Conclusions and recommendations

Several issues are highly important in the development of competitive markets in the Soviet industrial sector. First, anti-cartel provisions must be clearly and vigorously applied. It is crucial that enterprises not fall into comfortable patterns of behavior guided by their association, rather than engage in vigorous competition. Horizontal associations, in particular, pose threats in both upstream and downstream markets as the firms can combine into either sellers’ or buyers’ cartels.37 Moreover, if such associations are in fact buyers’ or sellers’ cartels, that fact will surely push their counterparts to organize similarly, further decreasing efficiency by creating a chain of monopolies. The risk of cartelization through the association structure is sufficiently great that clearer provision regarding permissible association may need to be provided in both the antimonopoly and the enterprise laws, and the new antimonopoly authority should consider restructuring existing associations into competing groups.

An issue that is not well treated in the existing Decree or draft laws is the distinction between vertical and horizontal restraints. There is the strong possibility that competition-promoting vertical restraints, in particular by small firms or new entrants, will be prohibited under the Soviet law given that decisionmakers will not be well equipped to make the necessary distinctions between intra-and inter-brand competition. From this point of view, it would be useful for the fundamentals to be more explicit as to the types of agreements which are prohibited and the types permitted, and to distinguish explicitly between vertical and horizontal agreements. The use of some non-exclusive examples would not make for elegant drafting but might serve to educate courts and enterprises quickly and directly as to what standard of conduct is expected.

Another area for close attention is certain abuses of dominant position, particularly in the area of refusal to deal. Given the highly vertically integrated nature of Soviet industry, entry at any level of a monopoly sector may be difficult or impossible if the monopoly firm controls needed inputs or is the sole or major market for output. If the monopoly firm refuses to deal with the new entrant, that entrant will be forced to enter at all levels of the vertical structure, raising the costs and risks of entry substantially. Given the already great risks of doing business in the USSR and the undeveloped nature of the financial markets which would have to finance that entry, such a strategy of refusing to deal with new entrants could well be successful.

Related to the refusal to deal issue is the question of the terms imposed by a dominant firm in transactions with entrants at some level of the vertical structure. While the imposition of price controls on even monopoly firms may distort price signals, attention should be paid to prices aimed at impeding entry of new competitors.

The application of restructuring powers may need to be limited to certain well-defined situations. It is easy to see how restructuring should be applied where the issue is the breakup of an association, or where there are a number of independent producers or unrelated products grouped into one firm. It is not at all evident, however, how a monopoly based on a single assembly line could be constructively broken up. In such cases, the focus should be on encouraging new entry.

Merger control is not a focus of the Fundamentals, perhaps out of a belief that the immediate issue is breakup of firms rather than merger. As soon as breakup occurs, however, firms will seek to merge, arguing that they are not efficient or viable as divided. This claim will be correct in some cases. The AMC needs to anticipate this and develop procedures for reviewing the mergers that will arise. In particular, criteria need to be developed, to define the mergers which will need to be cleared by the AMC. Such criteria will have a double benefit: firms which do not meet the criteria will be able to register without question and the AMC will not be inundated with more merger proposals that it can handle, paralyzing both the AMC and the registration of the firms. A related merger issue concerns the relative powers of the union-level AMC and republican AMCs. The law must state clearly which body has the responbibility to review particular mergers and what the relationship of the bodies to one another will be with respect to supremacy and preemption.

The antimonopoly law will be applied, in part, through proceedings in court or the arbitrazh system. Many of the provisions of the law, however, require decision-makers to perform sophisticated economic analyses with which they are unfamiliar. Judges and arbiters will have had little or no experience with competition and free market economics and probably will not have access to the extensive antitrust literature which is available in the West. It may be appropriate to create a specialized tribunal for hearing these matters, whether brought by the AMC or by private parties. Creation of such a specialized tribunal would greatly simplify the task of training the decision-makers and supplying them with the background materials which they will need.

Penalties for violations of the Fundamentals appear to be weak in several ways. First, penalties for violation of the substantive prohibitions, especially the anti-cartel provisions, may need to include the possibility of imprisonment, given the grave effects of the offense on the economy, and the upper limit on fines raised substantially. Second, the investigative powers of the AMC appear to be lacking in both substance and enforcement powers. Individuals cannot be called to testify under the current draft, yet testimony is often required to understand both what appears in documents and practices which may not be memorialized on paper. Further, criminal penalties, as well as increased fines, may be needed to make investigations work. Without the threat of criminal penalties for impeding an investigation, documents may be destroyed rather than produced and false testimony provided with impunity.

Finally, while it is clear that antimonopoly legislation must be in place and enforced for a market economy to function efficiently, no antimonopoly provisions are themselves sufficient to deconcentrate the Soviet economy. Widespread deconcentration can occur only when conditions exist for businesses to be created and market forces to operate. Development and implementation of antimonopoly legislation must be closely coordinated with programs of privatization, price decontrol, and the opening of possibilities for foreign trade. These are elements which must be present to make deconcentration possible rather than items which can be deferred until later.

5. SELECTED SECTORAL AND SPECIFIC ISSUES

a. Banking and finance

The guidelines place emphasis on immediate attention to the banking and finance system,38 with the primary intention of gaining control over inflation and the issuance of currency. The guidelines also envision a transfer of the specialized state banks (which together account for 95 percent of bank deposits and credits) from state-owned and regulation institutions to joint stock company form. This step is intended to stimulate the provision of banking services on economic criteria and commercial terms to the economy. One of the specialized banks (Agroprom-bank) has already been converted to a joint stock company. There seems to be some value in stimulating the large state banks to provide better banking services and to take more account of commercial factors in their activities (particularly lending policies), by transfering these banks to joint stock company form.

While the guidelines focus on revamping the banking system to control the issuance of currency in order to restore public confidence in the ruble, they do not discuss the need to foster public and business confidence in the banks themselves and to develop banking legislation and practice that will facilitate the use of the banking system for business purposes. There are a number of very simple measures that could be taken to improve general public confidence in and willingness to use the banking system, and to make the use of banks by smaller businesses easier and more efficient. These measures would, in line with the guidelines’ focus on equal conditions for business activity, serve to help equalize conditions for all businesses with regard to banking.

Banking and financial regulations are not reliably available to the public and there is substantial evidence that basic regulations applying to the management of accounts and banking activity are not understood by many businesses. Banks may have vastly differing regulations concerning the ability of a customer to use funds deposited with the bank—for example, requirements that funds be drawn via bank documents rather than cash payment or upper limitations on the amount of funds that may be withdrawn during specified periods of time. These limitations are sometimes contained in the bank’s charter, but there is no requirement that such charters be published or available to clients or that clients be advised of such restrictions prior to depositing funds with the bank. Similarly unpublished restrictions may apply to use of convertible currency funds. Some new businesses, and also individuals, have been surprised by these restrictions and in some cases incurred penalties for late payment of obligations. Legislation or regulation needs to be passed requiring some uniformity in this respect, or at least mandating disclosures prior to deposit.

Problems in individual and small business use of the banking system have been caused by the lack of a system for bank payment that is available to individual account holders. Bank clearing systems were designed for use by juridical persons only, with individuals previously having the right to hold only savings deposits in the state banking system. The payments of individuals were generally made by means of cash, or occasionally (i.e., taxes, trade union dues, judicially imposed support or penalties) by means of deductions from salary. Although this restriction is in the process of disappearing, there still exists no meaningful checking or bank draft system by which individuals, or small businesses which run through individual accounts, may make business payments and have verifiable transaction records. Further, because of lack of familiarity with any financial instrument other than cash, or enterprise clearing procedures and uncertainty as to the means to verify validity of payment documents, most businesses will not accept any form of payment other than cash. Such facilities are very necessary for the development of business activities, and appropriate legislation and regulations need to be issued clearly authorizing these transactions, permitting the charging of reasonable fees for such services (to encourage banks to develop them), and defining the forms required for validity and the nature of obligations to honor drafts and payment documents.

In this area as well, there is a particular problem with convertible currency accounts. Since individuals were until recently prevented by law from conducting any operations whatsoever involving convertible currency, there was no provision for individuals to have accounts with Vneshekonombank, the only bank previously authorized to carry out convertible currency operations. While this restriction has also recently been lifted, no provision has been made by Vneshekonombank for opening convertible currency accounts for individuals and this service is only available from a few banks which have recently been authorized to conduct currency transactions under its supervision. Small businesses and social organizations have complained that those banks that accept foreign currency will only do so for businesses with substantial accounts and that they continue to have no means to maintain accounts or to make foreign currency payments. The absence of such facilities will seriously inhibit the participation of small businesses and enterprises in foreign trade, reducing the competitive benefits to be achieved thereby.

Finally, there is a need for legislation concerning access to financial and account information about individuals and businesses. There is a belief among some sections of the population that the building up of large bank deposits, the conduct of very substantial business operations, or the deposit of any amount of convertible currency is likely to give rise to disapproval, increased scrutiny, and possibly some kind of investigation or enforcement action, on the part of bank officials and state authorities. There is also a general failure to understand bank procedures and a fear that bank accounts could be sequestered by state agencies for purposes of enforcing legal requirements not related to financial regulation. There is good historical basis for these beliefs, as the banking system has at various times in the past served as a means for enforcing the law in a variety of respects, including notification of law enforcement authorities where “suspicious” activities were occurring and the requirement, through a complicated documentary payments process, of proof of compliance with everything from quality standards to social security laws. In addition, much of the public remembers earlier currency reforms. Fears of such difficulties, and the resulting unwillingness to use the banking system, might be somewhat assuaged through the passage of privacy legislation which would strictly limit the use of account information.

b. Foreign investment

The opening up of foreign investment and trade possibilities is a vital component of the Soviet economic reform effort, both because of the importance of imported goods and equipment to the growth of competition in the market and because of the need for substantial amounts of investment funds. The guidelines clearly recognize the importance of and need for foreign investment funds and the availability of foreign exchange for purchases (although the appreciation of the competition issue is not always obvious), and they give a prominent place to the strengthening of foreign economic relations.

The reduction of domestic spending and the provision of guarantees, or even special inducements, to foreign investors cannot substitute for the existence of a stable political and economic environment. While the most important and immediate aspect of stability to be resolved is the authority crisis discussed earlier, economic and regulatory stability are also important in attracting foreign investment. The clarification of property and contract rights, the legal rights of foreign parties, and the measures to be taken to privatize and demonopolize the economy will give foreign investors a greater security and an ability to evaluate the wisdom of various investment projects.

With respect to the rights of foreign investors, a presidential decree was issued on October 26, 1990, equalizing the rights of foreign participants in the economy with those of Soviet citizens in a variety of respects. The decree allows foreign investment in all kinds of business enterprises, either in combination with Soviet investment or alone. Foreign firms are to be permitted to establish subsidiaries in the USSR that are 100 percent owned by the foreign parent. Rights of foreign investors are to be protected to a degree not less than those of Soviet citizens. While this decree clearly expands the possibilities for foreign investment, it actually provides none of the requisite certainty with respect to the rights of the foreign investor. Equation of the foreign investors’ rights with those of Soviet citizens will only provide certainty when the rights of Soviet citizens are themselves relatively stable. Until this is the case, uncertainty will continue to be a major factor in retarding foreign investment.39

c. Agricultural issues

By far the largest legal issue confronting agricultural reform is the question of legal rights to own and use land. Some substantial liberalizing change with respect to land use rights occurred during the preceding year, but until the issuance of the guidelines it appeared clear that the state intended to continue to exercise substantial control over land use and land disposition. The guidelines, however, contain strong statements concerning the need for land reform as an early part of the economic stabilization and reform process, including calls for an end to the monopoly on land ownership and the institution of land mortgages. While the proposed legal regime with respect to land ownership and use is not specified, achievement of the goals stated in the guidelines clearly requires change in the existing law.

Until quite recently, the Constitution of the USSR stated clearly that the land (along with a variety of other natural resources) belonged to the state. While a variety of land-use plans could and did exist, ownership of the land itself was reserved entirely to the Soviet state. However, Article 10 of the USSR Constitution, which previously provided for state ownership of land, was substantially revised by a portion of the Law on the USSR Presidency, which was passed in April 1990. The relevant portion of Article 10 as it is now constituted reads: “The land, its mineral wealth, the waters and the vegetable and animal world in their natural state shall be the inalienable property of the peoples living on a given territory, they shall be managed by the Soviets of People’s Deputies, and they shall be made available for use to citizens, enterprises, institutions and organizations.” In addition, there is the following section of Article 11: “For conducting peasant and personal auxiliary farming operations and for other purposes stipulated by the law, citizens shall have the right to hold plots of land in lifelong possession, with the right of inheritance, as well as to hold such plots in use.”

While these sections of the current Constitution appear to make a substantial change in the rules of land ownership, the extent of the practical consequences is not as clear as might first appear. While the Constitution no longer dictates state ownership of the land, the new formulation appears to specify a form of collective ownership—by the “peoples living on a given territory.” A formulation giving ownership rights to “the peoples” would not normally be interpreted as authorizing individual ownership of the property involved. In practice, this formulation might well mean that the representatives of the “peoples”—the state bodies at the relevant level of government—would in fact exercise the ownership rights which in theory belonged to the collective population and would be the functional “owners” of the property. Control over land would be exercised by local soviets and their executive committees, or under the control and guidance of higher bodies of power if the words “a given territory” were interpreted to mean a larger portion of territory than that governed by a local soviet. Under this interpretation, decisive control of land use would be likely to move from the hands of all-union authorities into the hands of union republican or perhaps lower-level authorities, but would not move into the hands of individual or corporate private owners.

The provisions of the Fundamental Principles of Legislation on Land, passed after the constitutional amendment, would appear to confirm that this interpretation was intended. Although several portions of the law refer to the possibility for local soviets or other bodies of state power to grant plots of land, such plots are to be granted for use rather than individual ownership. According to Article 5 of the Fundamentals, “land may be granted for lifelong use with the right of bequeathal, to Soviet citizens for purposes stipulated by Article 20 of these Fundamentals of Legislation.” Thus, permissible use by individuals is defined as a heritable life tenure rather than as simple ownership with the power to dispose freely of the land. The conditions for land use by corporate bodies would appear to be quite similar with the Fundamentals, providing that “permanent ownership of land shall be granted to collective and state farms, other state-sector, cooperative and public enterprises, associations and organizations, and religious organizations for the purposes of agriculture and forestry.”

Discussion of the current state and probable future of land ownership tends to confirm the generally held view that completely free sale and purchase of land is not likely to be instituted soon. The issue of land ownership rights appears to be extremely divisive and the real bone of contention is free disposition and the concentration of land in private hands. It has been reported that draft land legislation for the Russian Republic essentially duplicates the “use for its purpose with bequeathal rights” formulation that appears in the union-level Fundamentals.

Unless some acceptable formula is adopted which will allow for flexible disposition of land, land-use patterns may be locked into the distribution which occurs initially as land is granted to those who want individual farming operations. Restrictions on the purchase and sale of land are likely to hamper the development of efficient land use; for example, by preventing concentration of less rich land into larger, potentially profitable farms.40 While concentration of land ownership in individual hands need not remain unrestricted, means need to be provided for reasonably direct transfer of land between users and facilitation of farming and other operations of different sizes depending upon local conditions.

As to use, the existing Fundamentals appear to envision very substantial state supervision and control over all kinds of land use, regardless of the ownership status of the land. Article 9 allows the termination of rights in land on a wide variety of bases, including irrational or improper use of the land (defined in some cases as failure to use the land for its purpose or failure to achieve appropriate harvest yields). Later portions of the Fundamentals which discuss the types of use to which land may be put also include substantial specifications regarding the purposes for which land may be granted to and used by different types of individuals and groups. The imposition of restrictive use and yield requirements on agricultural land would significantly hamper the ability of individual farmers to innovate and to make efficient choices based on land conditions and on market conditions and signals.

While the guidelines call for land reform, including the elimination of the monopoly on land ownership and the institution of land mortgages, it must be noted that they do not explicitly call for individual private ownership of land. It would be possible to interpret the guidelines as advocating the elimination of the union-level monopoly on land ownership, or of referring to the move to ownership by the “peoples” on the territory as the elimination of the land monopoly. Similarly, the draft law on pledge would permit the establishment of a pledge of land-use rights, and “land mortgages” could be established on this basis. Such an interpretation of the terms of the guidelines would indicate an interpretation of the recommended land reform as a substantial redistribution of use rights, for which the basis has already been created in legislation. Such a “land reform” would fail to solve any of the problems identified with respect to existing law.

It is also possible to interpret the guidelines as calling for the institution of individual and other private ownership rights to land. This would be consistent with the apparent principal purpose of such an innovation, which would appear to be the creation of vehicles for investment and for the securing of borrowing. The creation of individual and private ownership rights in land would require fundamental changes in the existing law, and perhaps another alteration in the relevant constitutional language as well. If the reform were to encompass the elimination of some of the burdensome use restrictions now existing, as would be consistent with provisions of the guidelines concerning increases in the independence of farmers and agricultural producers and in the efficiency of agricultural activities, it might be appropriate to replace the Fundamentals with a new law reflecting more restrained powers of zoning and use-monitoring.41

d. Regulation of the housing market

The transfer of housing stocks and the creation of a private housing market is emphasized by the guidelines as a means of soaking up excess household liquidity and creating a vehicle for investment and for the securing of loans. Several changes in existing legislation will need to made for this goal to be met.

Prior to the passage of the new Fundamental Principles of Legislation on Ownership, Soviet citizens were limited to the possession of one dwelling house or apartment and one dacha (country house). If a citizen acquired an additional house through inheritance or other means, he or she was required to dispose of one of the homes. Provisions of the civil codes of the republics dealing with ownership still contain these restrictions. According to the new Fundamentals, property that may be the object of ownership by individuals includes a dwelling house or apartment, and also a country house. The Fundamentals provide the citizen with the right of purchase of an apartment in the state housing fund which he or she is occupying. The Fundamentals do not specifically state a limit on the number of houses or dwellings that may be owned by an individual, although the language of the article is singular rather than plural. Thus, the status of restrictions on individuals rights to own dwellings is not entirely clear and should be clarified. The provision of rights to own more than one house might well spur the creation of new housing space by individuals hoping to take high rents under conditions of extreme housing shortage. However, given the fact that extremely large numbers of Soviet citizens have been on the waiting list for housing for many years and may now lose their rights to a freely granted apartment (when available), a liberalization which allowed some individuals to own more than one dwelling might simply be socially unacceptable at this time.

Many individuals will not want to own even a single dwelling if the incentives for ownership are not provided. At present, most people pay very little for their apartments in rent, and they are not responsible for the repair and maintenance of the apartment or building. Purchase of an apartment, particularly where there may be no guarantee that neighbors will also purchase and will contribute to improving conditions, will not be attractive unless rents are increased to reflect the real costs of building and maintaining housing stocks and the benefits of ownership—the ability to obtain credit on the basis of ownership and to freely rent or sell the owned property for a price approximating its value—are made available to purchasers along with the burdens.42

e. Environmental regulation

Soviet environmental law is still very much in its infancy. The first legal enactments in this area were made in the late 1980s and those tended to be quite general in tone and to have little in the way of meaningful sanctions. Until 1988, when the State Committee for Nature Preservation (Goskompriroda) was created, there was no state agency generally responsible for oversight of natural resource use and elaboration of environmental law and policy. Thus, although pressure for environmental regulation and clean-up has produced quite a lot of attention to this topic among legal scholars in recent years, the legal regulation of use of natural resources is still in its earliest stages.

Beginning in the late 1960s, a series of Fundamental Principles of Legislation of the USSR was drafted concerning the use of various types of natural resources. In 1968, the Fundamental Principles of Land Legislation were passed, in 1970 the Fundamental Principles of Water Legislation, in 1975 Fundamentals on Minerals, and in 1977 Fundamentals on Forestry. The union republics duly took these principles as the general parts of their codes on the subject and elaborated corresponding codes of law at the union republic level. Even the codes, however, proved to be rather general in tone concerning sanctions for failure to properly use natural resources, providing more detail on the types of use that could legitimately be made of particular resources and the procedures for obtaining use permissions. Although misuse or pollution of the relevant resource is prohibited in each of the codes, the sanctions available are often unclear, or where clear, ineffective. Fines for violations by individuals, administrative discipline for enterprise managers, confiscation of illegally taken resources and of implements used therefore, and other similar sanctions are provided. The sanctions tend to be rather mild by international standards and seem to be designed primarily to prevent theft or misuse of resources. Similar problems are encountered with the USSR Laws on Protection and Use of the Animal World and on Protection of the Atmosphere (both passed in 1980 as union-level laws rather than as Fundamental Principles).

Effective control of pollution by enterprises has been a difficult issue under conditions of central planning and state ownership. The imposition of fines on state enterprises by state enforcement agencies did not prove to be an effective method of controlling enterprise behavior, and the sanction of enterprise closure, which is available under most of the natural resource laws, has not been an attractive one in conditions of shortage. Attempts were made for a number of years to enforce environmental standards and to control pollution through the planning system, by requiring Gosplan and the ministries to take account of conservation needs and pollution problems, but this approach has not met with great success. Now, as the restructuring of the economy goes forward, new means are being sought to enforce environmental norms both against state enterprises and against new types of economic entities.

Under current legislation, the new Goskompriroda has broad powers to prohibit new construction or renovation, to suspend enterprise operation, and to bring suits to force enterprises to clean up pollution and/or pay damages to the state. Under the 1988 legislation, Goskompriroda must, in most cases, approve the building of new plants and facilities. According to Soviet scholars in the area, these powers have been used in the ensuing two years to prevent the construction of a number of plants and/or to require significant changes in design in order to meet environmental standards. The same sources reported that at least one of those plants whose construction was substantially held up by Goskompriroda was to belong to a Soviet-Western joint venture, but there was no indication that environmental restrictions were being differentially enforced with respect to newer types of economic entities.43

In addition to delays in prevention of new construction, there are numerous reports of forced plant closings connected with environmental concerns. The reported number of such closings varied, with reportedly nearly 400 plants having been closed in the RSFSR alone. These closings appear to be occurring mainly on the local administrative level and, in some cases, in response to public demonstrations without any official involvement, rather than at the behest of Goskompriroda.

Draft legislation on the protection of the environment has been pending now for more than a year. This legislation would allegedly tighten the environmental regulations and increase the strength of some sanctions, and would also unify some of the natural resources legislation that is now contained in separate laws dealing with particular resources. It is not clear what was preventing the legislation from moving forward, although possibly more pressing matters had taken precedence and that there was now some need to refashion the old draft law to correspond to economic reforms that were broader than expected at the time of drafting.

According to Soviet sources, the most serious problem facing the USSR in effectively enforcing environmental regulations and in dealing with problems that have already been created is not the lack of legislation but the lack of available resources and technology for evaluation and clean-up, a lack of disinterested participants in the evaluation and clean-up processes, and insufficient affordable clean technology both for retrofit and for new plants. In theory, enterprises and organizations are already required by law to prevent environmental damage and are liable under the law for the remedy of any pollution damage they cause. Unfortunately, scientists and specialists who are retained to perform evaluations for Goskompriroda and for particular enterprises are not independent and often have institutional interests to protect in issuing their findings. Where findings of damage and enterprise liability are made, enterprises cannot be forced to clean up damage when the enterprise itself does not have the ability to do so and there are no services available that will evaluate the sight and perform remedial work. While these circumstances continue, the details of liability imposed by legislation are essentially irrelevant, and both the enterprises and enforcement authorities will continue to be faced with stark choices between continuing production and environmental safety. Plainly, it is desirable that legal incentives created at this time not be counterproductive or allow evasion, but refinement of legal incentive structures designed to affect business behavior cannot proceed until both the general economic and regulatory structure and the conditions on which environmental services are available are better defined.

One legislative change that might be of some assistance in the short term would be the legally mandated devotion of some substantial portion of fines and penalties to the creation of the needed infrastructure. It has also been suggested that provision of favorable legal conditions for the creation of private companies in these areas, as well as favorable conditions for foreign firms to take part in such work, might be considered as ways to begin to remedy the problems faced. While there may be room for some additional assistance, there are already means for the union and republic governments to exempt firms which provide important services from taxes and fees and to expedite their establishment. A number of efforts are under way to establish such firms—primarily as joint enterprises with the participation of a western firm experienced in environmental work—and some subset of these have already been granted special advantages. The key issue for some time to come will be the continuing devotion of sufficient funds and attention to the problem.44

f. Institutional capacity to implement legislation

With regard to all areas of legal reform discussed in this and the previous sections, there are serious questions concerning the ability of existing institutions—economic, social and legal—to implement reform measures. Serious deficiencies in staffing, training, and technological capacity will hinder implementation of many of the reforms discussed, and may in some cases cause reform measures to be almost completely ineffective. While it is not possible nor is it desirable for the reform process to be delayed for the years that would be required for these problems to be addressed, reform measures and implementation provisions must be drafted with the actual capacities of the existing bodies in mind. Implementation procedures requiring sophisticated information technologies, for example, will not function well in most areas of the USSR at the present time. Problems may also be caused by attempts to implement legal provisions in the absence of their institutional corollaries. One of the best examples of this is the complete absence of land and property registration systems and the enormous problems that this is likely to generate concerning proof of ownership and registration of claims and encumbrances on property. Large amounts of technical assistance will be required for these deficiencies to even begin to be overcome and such technical assistance is vital to the success of the reform effort.

6. SUMMARY

a. State authority and the legal regulation of the economy

The most serious legal problem currently facing the Soviet economic reform effort does not concern any particular piece or pieces of legislation but rather the lack of clarity and uniformity with respect to the substantive law governing economic matters and the standards and means for its implementation. At the time of this writing, the problem exists at all levels of government and involves uncertainty concerning the location of authority to legislate and to implement the laws, the nature and extent of the legislative and executive powers, and the appropriate means and methods for enforcement. Unless a significant amount of this uncertainty with respect to state authority is resolved and some clarity is achieved concerning the boundaries of national, state and local authority to define, administer, and enforce economic rights and obligations, any reform program, regardless of its content or emphasis, is likely to be severely constrained. The primary and most publicized source of uncertainty is the current conflict between the central government of the USSR and various subordinate territorial governments concerning the proper relationship between and among the constituent parts of the union.

The problem of uncertainty concerning state authority is not simply a problem of uncertain political relationships. The traditional Soviet legal theory envisions a unified state power—organic in nature and indivisible—and the structures of Soviet state authority formed according to this theory are indeed very integrated and overlapping. While a complete constitutional and/or legislative redefinition of the power of Soviet state bodies will require a substantial amount of time, improvement could be made in the interim by increased use in legislation of clear statements concerning the limits of discretion of executive and lower bodies in implementing and enforcing the law. During the transition period, an expeditious review of normative acts of executive and lower level state agencies for consistency with governing legislation could also be undertaken.

The traditional modes of economic regulation in the USSR did not place large amounts of economic responsibility in the hands of local bodies of state power. As political power and responsibility for economic regulation are decentralized, increasing amounts of responsibility for economic regulation and enforcement will fall into the province of local bodies that do not have institutional structures designed to fulfill these functions and may not have the training, personnel, or experience to adequately interpret, refine and enforce economic law. In addition, democratization of local election procedures has produced greater pressure on local bodies to address local needs. Under these conditions, interpretation, implementation and enforcement of laws and regulations at the local level is likely to be inconsistent and local bodies may be tempted to solve local problems and satisfy local constituencies at the expense of national interests. Localization of control should proceed with caution during the transition period and should not be permitted to substitute for resolution of difficult political and economic issues. Large scale programs of technical assistance should be put into place to assist local bodies in developing the systems of planning, registration and control needed to make the reform successful.

b. Legal foundations for market exchange

The effective functioning of a market-based system is dependent upon the existence of clearly defined and reasonably broad property rights, the ability of market participants to freely exchange property rights through a system of legally enforceable agreements, and the existence of a system which provides reasonably secure and predictable enforcement of such agreements. While there now seems to be greater recognition of the fundamental nature of these matters, the need to establish stable basic principles in these areas has until recently been somewhat obscured by a tendency to focus on particular pieces of legislation authorizing and defining specific forms of business activity. Although several new pieces of legislation have appeared in the last year that touch on these matters, these are generally “framework” laws which do not yet provide the clarity or detail required.

The presidential guidelines call repeatedly for the expansion of property ownership and property rights. The guidelines explicitly call for the recognition of the right to private property, a substantial program of privatization of state property, and a program of land reform as major components of the stabilization of the economy. In addition, the guidelines implicitly call for the redefinition of rights to own and use property in discussing the expansion of business activities of all kinds and the need for a law on freedom of entrepreneurial activity. These proposals are substantially more far-reaching than any of the previous union-level suggestions related to ownership and neither the current union-level nor most republican-level legislation is consistent with the aims described. Implementation of the guidelines will require a significant legislative effort, including the immediate issuance of a number of pieces of new legislation and amendment or repeal of several other pieces, and, in the longer term, the redrafting of entire civil codes and a massive amount of conforming amendment of related legislation.

The Fundamental Principles of Legislation on ownership will need to be amended if the ownership rights of natural persons and those of juridical persons are to be equalized. This could be accomplished through a reformulation of basic ownership rights to include a general right of both natural and juridical persons to own all types of property except those forbidden by law. In order to avoid confusion and uncertainty, the use of permissive lists of the objects of ownership rights and the means by which the property of specific organizations may be formed should be discontinued and content must be given to categories of ownership which are referenced in legal acts. For any type of property in which full ownership rights are not made available, use-rights and the means for their transfer will need to be defined with specificity. An effort should be made to make use-rights as freely transferable as possible in order to promote efficient use of property.

In contrast to the direct recognition of the need for reform in the legal regulation of property rights, contract law as such is not a direct focus of the presidential guidelines and was not featured in previous reform plans. Attention has been paid to the need to eliminate particular restrictions on contractual freedom that stem from the planning system (e.g., price controls or the assignment of contractual partners), but little attention has been focused on the underlying system of contract law as such. The removal of limitations on freedom of contract is, indeed, a matter of first importance. In addition, however, attention will need to be paid to the development of the complex forms of contract required to support modern market transactions.

The presidential guidelines decry the lack of respect for the law as one of the chief causes of the current economic crisis, but completely fail to address the institutions called upon to enforce the law and their adequacy to perform that task. While this may in part reflect a correct recognition that the questions of state authority to legislate and to enforce the law must be resolved before the nature of dispute resolution and enforcement bodies can be addressed, the resolution of those issues alone will be insufficient to ensure implementation of the law.

In order for the civil courts and state arbitrazh to function effectively in resolving economic disputes, the relationship between the two bodies and their divisions must be clarified, particularly where jurisdictions overlap. If jurisdictional overlap is to be permitted, some appropriate means must be found to ensure a uniform standard of interpretation among bodies, by the provision of a single highest instance for review or by other means. With respect to arbitrazh, dispute-resolution functions will need to be separated from law enforcement responsibility. Finally, a program of technical assistance focused on the training of judges and arbiters in the handling of complex commercial cases, as well as in docket control and other matters, would be of assistance.

The Soviet Procuracy has nearly unlimited rights to review business records, employee and customer knowledge and other information concerning the operations of businesses and individuals and to conduct fishing expeditions for legal violations. The most effective means for limitation of the Procuracy’s role in private business affairs would be to amend the statute governing its activity to eliminate responsibility for general supervision over private activities. Another option would be to require that some minimum evidentiary standard be met concerning the grounds for investigation before procurators may have access to information concerning such activities, but this may be the functional equivalent of elimination of the general supervision powers without the clarity of doing so explicitly.

There are still a number of articles of the criminal and administrative codes of most republics that prohibit behavior that may be rational and economically beneficial. While it appears likely that many of these articles will be eliminated in the next major revision of the criminal codes, steps need to be taken to repeal or strictly limit the reach of the most destructive articles. In particular, laws punishing commercial middleman activities need to be eliminated immediately, and laws concerning speculation must either be eliminated or, at minimum, amended to restrict application to the most destructive cases of abuse of rationing and subsidy systems.

c. Regulation of the business sector

Inevitably, however, reform of this type has produced gaps and anomalies in legal regulation which will need to be addressed if the goal of equal business opportunity expressed in the guidelines is to be met.

Perhaps the most important step that could be taken in regard to the equalization of conditions for business activity would be the passage of a clear and detailed law concerning the relationship between the state and its employees and agencies and any business, enterprise, or commercial organization in which the state has an ownership interest. Such a law could clearly define the permissible and impermissible relationships between state-owned entities and state bodies, providing a defined management structure with specific safeguards against interference (whether helpful or harmful) in the financial or business affairs of the enterprise. Properly drafted and enforced provisions of this type could be of great assistance in eliminating some of the most troubling inequities in the current conditions for market activity, including subsidization and the absence of a hard budget constraint for many state enterprises and anticompetitive behavior by state bodies designed to advantage particular enterprises. In addition, inequalities caused by differences between and among the laws applying to particular types of business entity, including the substantial restrictions on activities of cooperatives and their exclusion from the tax benefits provided by the decree on small businesses, should be eliminated.

Finally, the efficient and effective conduct of business, and the efficient regulation of business by the state, requires the presence of the technical and institutional structures that make effective regulation possible. One of the most important of these, particularly during the transition period, is a reliable mechanism for reviewing laws and regulation to identify inconsistencies and anomalies and see that they are addressed. Reliable sources of information concerning new laws and regulations must be available to participants in market activities so that they can regulate their conduct accordingly. Systems for efficient registry of businesses and for registration of property and encumbrances on property are necessary, and also bankruptcy laws which will provide standards and procedures for the rehabilitation or closure of insolvent enterprises. In each of these areas, technical assistance in the form of training in information control and analysis, computerization of data bases, means for maintaining a permanent and useful record of business registrations, and other matters, will be required.

In order for the goal of substantial privatization contained in the guidelines to be met, a number of legal steps must be accomplished. Of first importance in the privatization process is the determination of ownership for state property. Whether this process takes place through the conclusion of a new union treaty or through some other means, it must occur before the privatization process can begin in earnest. In the interim, before the matter as a whole is resolved, some privatization could take place with respect to property for which the locus of ownership is clear. In order to facilitate these processes, it might be helpful for an interim procedure to be established by which a prospective purchaser could obtain the explicit agreement of union, republican, and other possible claimants that a piece of property could legitimately be transferred by a particular state property fund.

Once ownership of property is established, the relevant owners will need to develop specific plans for privatization taking account of the financial and other means which will be necessary to support them. Privatization plans which provide assistance and installment-purchase options only to workers groups may not produce the kind of response necessary to privatize large sections of the economy, may cause inappropriate valuations of properties (due to the elimination of some bidders) and may lead to inefficient use of properties. Individuals and other groups should also have equal opportunities to purchase state property. In connection with this, the privatization process should not be used as a means to identify and confiscate illegally earned income.

If privatization is conducted in the absence of antimonopoly measures, valuation of enterprises currently holding monopolies will be difficult and monopoly behavior by newly privatized enterprises may lead to strong pressure for state controls or limitations on privatization. The elaboration of privatization plans and legislation must be closely coordinated with the creation of antimonopoly legislation, and the practices, procedures and powers of the state property funds may need to be coordinated during the main period of privatization with those of the antimonopoly enforcement agency.

Antimonopoly and/or fair competition law, although not an initial focus of reform efforts, has been receiving an increasing amount of attention by legislators and policy-makers in recent months. While drafts of antimonopoly laws have been produced at both the union and republican levels, there is still substantial confusion over the proper direction of policy and the precise nature of the functions to be fulfilled by the antimonopoly enforcement body. In the interim, a decree of the Council of Ministers of the USSR provides for some general antimonopoly powers for union and local authorities.

Several issues are highly important in the development of competitive markets in the Soviet industrial sector. First, anti-cartel provisions must be clearly and vigorously applied. It is crucial that enterprises not fall into familiar patterns of cooperative behavior rather than engage in vigorous competition. Horizontal associations, in particular, pose threats in both upstream and downstream markets as the firms can combine into either sellers’ or buyers’ cartels. The risk of cartelization through the association structure is sufficiently great that clearer provision regarding permissible association may need to be provided in both the antimonopoly and the enterprise laws; and the new antimonopoly authority should consider restructuring existing associations into competing groups where necessary.

An issue that is not well treated in the existing decree or draft laws is the distinction between vertical and horizontal restraints. Vertical restraints may reduce competition within the vertical structure but promote competition between vertical structures. There is the strong possibility that competition-promoting vertical restraints, in particular by small firms or new entrants, will be prohibited under the Soviet law given that decision-makers, especially courts, will not be well equipped to make the necessary distinctions between intra- and inter-brand competition. It would be useful for the law to be explicit as to the types of agreements which are prohibited and the types permitted, and to distinguish explicitly between vertical and horizontal agreements.

d. Sectoral and specific issues

While the guidelines focus on revamping the banking system to control issuance of currency, they do not discuss the need to foster public and business confidence in the banks themselves and to develop banking legislation and practices that will facilitate the use of the banking system for business purposes. Banking regulations must be required to be publicly available so that customers may inform themselves about the conditions placed on their use of credit and their deposited funds. Legislation and regulations defining and authorizing increased use of bank payment documents (e.g., checks) should be passed to encourage development of these forms of payment. In addition, there is a need for legislation protecting financial information from disclosure, to increase confidence in the privacy of the banking system and reduce use of that information to enforce other laws.

The opening up of foreign investment and trade possibilities are a vital component of the Soviet economic reform effort, both because of the importance of imported goods and equipment to the growth of competition in the market and because of the need for substantial amounts of investment funds. With respect to the rights of foreign investors, a presidential decree was issued on October 26, 1990, equalizing the rights of foreign participants in the economy with those of Soviet citizens in a variety of respects. While this decree clearly expands the possibility for foreign investment, it actually provides none of the requisite certainty with respect to the rights of the foreign investor. Equation of the foreign investor’s rights with those of Soviet citizens will only provide certainty when the rights of Soviet citizens are themselves relatively stable. Until this is the case, uncertainty will continue to be a major factor in retarding foreign investment.

By far the largest legal issue confronting agricultural reform is the question of legal rights to own and use land. Some substantial liberalizing change with respect to land-use rights occurred during 1989, but until the issuance of the guidelines it appeared clear that the state intended to continue to exercise substantial control over land use and land disposition. It is possible, however, to interpret the guidelines as calling for the institution of individual and other private ownership rights in land. The creation of such ownership rights would require fundamental changes in the existing law, and perhaps another alteration in the relevant constitutional language as well. If the reform were to encompass the elimination of some of the burdensome use restrictions now existing, as would be consistent with provisions of the guidelines concerning increases in the independence of farmers and agricultural producers and in the efficiency of agricultural activities, it might be appropriate to completely replace the currently existing Fundamental Principles of Legislation on Land with a new law reflecting more restrained powers of zoning and use-monitoring.

The transfer of housing stocks and the creation of a private housing market is emphasized by the guidelines as a means of soaking up excess liquidity in the hands of Soviet citizens and creating a vehicle for investment and for the securing of loans. Several changes in existing legislation will need to be made for this goal to be met. The status of restrictions on individuals’ rights to own more than one dwelling is not entirely clear and should be clarified. In addition, purchase of an apartment will not be attractive unless rents are increased to reflect the real costs of building and maintaining housing stocks and the benefits of ownership—the ability to obtain credit on the basis of ownership and to freely rent or sell the owned property for its real value—are made available to purchasers along with the burdens.

The most serious issue with respect to enforcement of environmental regulation is the lack of facilities for environmental evaluation and clean-up. In the absence of such facilities, legal requirements based on assessments and payment of costs of damages are not realistically enforceable. Legislation might ease this situation by providing means for fines and damages paid in environmental matters to be used to create appropriate facilities or by providing incentives for their creation. A second issue of importance with respect to environmental legislation is the prevention of use of state budget funds or subsidies by state enterprises to pay fines and damages. This possibility eliminates any incentive effect of such penalties. Effective drafting of law on state enterprises could be of assistance here, as could a flat prohibition on such uses of state funds.

With regard to all areas of legal reform discussed in this and the previous sections, there are serious questions concerning the ability of existing institutions—economic, social and legal—to implement reform measures. Serious deficiencies in staffing, training and technological capacity will hinder implementation of many of the discussed reforms, and may in some cases cause reform measures to be almost completely ineffective. One of the best examples of this is the complete absence of land and property registration systems and the enormous problems that this is likely to generate concerning proof of ownership and registration of claims and encumbrances on property. Large amounts of technical assistance will probably be required for these deficiencies to be overcome.

NOTES

The first Soviet era constitution was the Constitution of the Russian Soviet Federated Socialist Republic in 1918. As this constitution concerned only a single republic, there was no need to deal with republican rights of secession. It is interesting to note, however, that this first Soviet constitution made no provision for separate or special representation of the many minority groups represented in the territory of the Russian Republic, instead providing for representation strictly according to population count. In 1924, the first constitution of the union was passed, uniting the Russian Republic, the Ukrainian SSR, the Belorussian SSR, and the Transcaucasian Socialist Federated Soviet Republic (a federation including the Georgian SSR, the Armenian SSR, and the Azerbaidzhan SSR), and providing for a right of free secession for any republic.

Confusion is sometimes caused by the use of the word oblast to denote a territorial formation that may be either simply geographical, or nationality based. A geographical oblast may contain a nationality-based okrug, but cannot contain a nationality-based oblast. A kray may contain both autonomous oblasts and autonomous okrugs.

Article 88 of the USSR Constitution simply states: “A district (okrug) is part of a territory (kray) or autonomous region (oblast). A Law on Autonomous Areas shall be adopted by the Supreme Soviet of the Union Republic.”

There would be clear historical precedent for this. Part 2 of the” 1924 USSR Constitution, which contains all of its substantive provisions, is in the form of a “Treaty on the Formation of the Union of Soviet Socialist Republics.”

There was even a public contest declared in which citizens were invited to submit drafts of a union treaty.

Given the choice, most republican legislatures are likely to choose to set prices themselves rather than to cede that power to union-level bodies.

All fifteen union republics have passed some form of declaration of sovereignty, as have a substantial number of the autonomous republics and some lower level territorial units.

For example, an agreement might be reached that the proper territorial level for control of freight trucking is the district level.

For example, the creation of a registration system in which failure to return documents with a valid reason for rejection within a limited period would be construed as their acceptance and registration.

The definition of “unearned” income has always been somewhat elusive. Illegal income-earning activities for individuals have generally included entrepreneurial activities involving hired labor (income derived from the labor of another is “unearned” by the receiver), illegal sale or lease of property or sale or lease above permitted price levels, any variety of middleman or trading activity, etc.

In those restricted areas in which personal property was permitted to serve as the basis for market activity, production and exchange were significant. The best case in point is the use of “personal plots” for the growing of foodstuffs and raising of animals. Although extremely small in total area, it has been estimated that the “personal plots” have provided up to a third of the national supply of some fruits and vegetables. From the legal point of view, however, this individualized market activity took place on a fairly simple basis and did not foster any significant development of market-oriented legal structures.

While the relevant code provisions still stand at the time of this writing, draft legislation is in preparation which will eliminate many of these restrictions.

Fundamental Principles of Legislation are sets of general principles in a given area of the law which are issued at the union level. These principles are then adopted by the republics and become the General Part of the relevant code of law. The republic elaborates the Special Part of the code, which contains more specific provisions on the application of the general principles to particular circumstances. The Fundamental Principles, along with particular all-union laws which may require the inclusion of certain provisions in the Special Part of the codes, serve to provide uniformity across republics on general legal concepts.

The amendment, which eliminated the constitutional language restricting property forms, was passed not as a separate amendment, but as a part of the series of constitutional amendments that created the office of the presidency.

The possibility of free sale and purchase of land is likely to be a fairly contentious issue, especially within some union republic level executive and legislative bodies that are drafting plans for economic transition and reform based on the assumption that they will become substantially independent in the near future.

See, e.g. Civil Code of the RSFSR, Articles 192 through 202.

The draft law is significant in that it would provide for means of pledging diverse types of property rights (e.g. lease rights, use rights, etc.) in addition to pledges of property held in simple ownership or operative management. The ability to use such rights as security will be very important in allowing immediate economic activity, as the amount of property that is owned outright is quite limited and appears likely to grow slowly through lease-purchase and other gradual means of privatization. The draft law, however, does not deal with questions of ability to transfer restricted use rights or those which require permission of authorities to be granted for a specific use and/or user. This may be particularly problematic with pledges of rights to use of land or natural resources.

State arbitrazh has traditionally had two branches: one generally referred to as “state arbitrazh” and the other as “departmental arbitrazh.” Departmental arbitrazh takes care of disputes that arise between entities which are both under subordination to the same administrative body, while state arbitrazh covers the remaining disputes under arbitrazh jurisdiction. Although there are two branches, the system is a unitary one, with state arbitrazh carrying responsibility for overseeing the activities of departmental arbitrazh.

The most comprehensive of these are the General Conditions applying to all deliveries of goods of particular types.

It was suggested by some members of the legal community that the remedies provided in such legislation were exclusive—i.e. that the complainant could proceed in arbitrazh or the court but could not then appeal the decision in the other forum—but this has not been clearly stated in any of the relevant legislation.

The Procuracy has no power over higher bodies of state power, i.e., the union and republic level councils of ministers, congresses of peoples’ deputies, supreme soviets, and presidiums.

Protests concerning such acts must be considered by the relevant officials within ten days and a notification sent to the procurator concerning the results of such consideration. If the protest is rejected by the relevant officials at the level of issuance of the protested act, the procurator may bring a protest to the body superior to the body or individual issuing the act.

There is no time limit on the consideration of recommendations.

Such instructions may be appealed to a superior procurator within ten days, but appeal of the instruction does not entail suspension of the instruction’s force.

Because the majority of enterprise activities were, until recently, subject to the legal requirements of the planning system, and legislation (either criminal, administrative, or civil) generally prohibits the negligent waste or damage of state property, many matters of wasteful business behavior or failure to meet contractual commitments fell under the general rubric “violations of legality.”

Some restrictions on the ability of enterprises and organizations to hold the stock of other enterprises or companies apply under the terms of the Council of Ministers decree concerning demonopolization.

As an example, representatives of the specialized state banks in the Ukraine, which are being converted into joint stock companies, stated that the Ministry of Finance of the Ukraine would hold large percentages of the stock in the company, with additional stock to be held by industrial ministries, and by state enterprises.

The provisions for direct registration of small businesses, combined with the expansive list of persons and entities permitted to form such businesses, would seem to allow individuals to register and operate a business on the same basis as groups and entities—an option that was not open to individual entrepreneurs before the passage of this decree.

As discussed above, registration provisions might be more effective if they provided that failure to return the document within the allotted period should be construed as registration.

The passage of such a law, generally controlling the relationship of the state to state enterprises, would seem in any case to be desirable.

It is interesting that the decree provides for creation by a number of state bodies of enterprises specializing in the lease of equipment to small business. This is precisely the type of activity that a small business itself could provide to the business community.

For example, some enterprises or entire industries may remain state-run monopolies for the long run. Different legislation might be required for efficient operation of such companies, although its provisions should also be clearly defined and strictly enforced.

If the declarations of local sovereignty promulgated by a variety of territorial formations below the autonomous republic level are accorded any validity, it may also be necessary to create state property funds for those areas.

This would also explain the failure to discuss the need for agencies below the level of union republic, as the union would have no authority over such matters once the new treaty is concluded.

What is unusual here is that the association would seem to comprise a sort of conglomerate cartel; the members are not horizontal competitors. Some have disputed the effectiveness of this particular association in limiting entry.

If a new entrant can certify that its product meets a given standard, that certification may substitute for the reputation of a brand name in informing consumers about the quality of the product.

The efficiency rationales of these associations may be weak and need to be examined closely on a case-by-case basis. For example, it is hard to see why all firms buying scrap metal need to be associated into one association in order to overcome problems of supply. It seems likely that the economies of joint buying would be exhausted somewhere below 100 percent participation.

For a more in-depth treatment of banking regulation, see Chapter IV.5.

For more details on this subject, see Chapter IV.4.

The Fundamentals of legislation on Land contain provisions which suggest that the problem of less productive farm land might be dealt with by means of provision of subsidies to those who hold the land. This approach would discourage or prevent both the formation of profitable farms on such land and the transfer of the land to other, more efficient uses.

On agricultural issues, see Chapter V.5.

Also see the section on housing (Chapter V.9).

It would be reasonable to expect that the burden of enforcement might at least appear to fall rather disproportionately on the newer entities, because those who are not on the state budget will be more likely to respond to financial sanctions, they form a larger proportion of new constructions or newer process installations, and they may be perceived to have greater resources and external connections to use in securing clean technology and/or cleaning up polluted sites. Unfortunately, statistics are not available on these matters.

Also see the chapter on the environment (Chapter V.1).

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