appears to suffer from horizontal dominance. To take but one example, the 100,000 workers at the automobile firm GAZ, which is one of the more innovative large-scale businesses, produced 220,417 vehicles in 1997, compared to the 125,000 workers at Chrysler that made 2 million cars. Goskomstat data of 800 enterprises reveals that firm size is negatively correlated with sales revenue per employee (see Appendix).

# **2. Vertical Integration**

Second, many of the dominant enterprises in Russia are also highly vertically integrated (or have exclusive buyer-seller relationships). Excessive levels of vertical integration superimposed on (horizontally) concentrated product markets can foreclose the entry of rival firms. The high degree of observed vertical integration largely reflects inertia of the uncertainties and chronic shortages of the old Soviet supply system. Engines for trucks are still made only by the Zavolzhye engine factory and bought only by the GAZ vehicle factory. Heavy locomotives are still produced only by the Novocherkassk electrical equipment factory, and the output is purchased completely by the Railways Ministry. Vertical integration is also increasing, occurring usually through mergers and acquisitions rather than through _de novo_ expansion. In the oil industry Tyumen Oil was created in 1995, bringing together oil production associations, refinery operations, and oil product marketing firms. Vertical integration also is increasing through the creation of industry-led (as opposed to bank-led) FIGs. A case in point is ALKOR, which encompasses aluminum smelting, production and distribution of finished products. Data from the WBRAS survey reveal that 46% of the firms indicated that their customers purchased supplies from only 1 or 2 suppliers, and that 23% of the suppliers control more than 65% of the relevant input market To be sure, there are economies of scale and a savings in transactions costs in combining successive stages of production under one corporate roof. The classic case of continuous steel-casting is well-known: it would be economically inefficient (if not technologically unfeasible) to have three separate firms heating iron ore, rolling it into ingots, and then finishing them into steel products. But in most industries such efficiencies exist only up to a point. Indeed, in the vast majority of markets throughout the world it is increasingly cheaper for a firm to buy inputs (or sell outputs) on the open market or through arms-length contracts rather than producing them internally. In Russia, it appears that due to the hazard of market transactions and because enforceable contracts are still nascent, there are strong incentives for vertical integration. As in the case of assessing the degree and implications of horizontal dominance, empirical investigation of vertical business linkages in Russian manufacturing should be a priority for policy makers.

# **3. Regional Market Segmentation**

Third, significant political economic power is wielded by regional authorities in Russia. This manifests itself in the tight control of important economic activities _within_ a region's boundaries. Such control, in combination with enterprise vertical integration, helps to freeze the high degree of structural autarky engendered under the Soviet system, where consumer goods production was a local responsibility and enterprises served only their respective local markets. Worse, it strengthens administrative--as opposed to economic--geographic market boundaries, and fosters the regional segmentation of the Russian economy, diminishing the establishment of a unified economic space, vigorous inter-regional competition and exploiting natural economies of scale.

There are a variety of practices local authorities exercise to limit the inter-regional movement of goods and services. _Tariffs_ are charged on the import or export of certain agricultural products in Ulianovsk, Belgorod, Sverdlovsk and Orlov oblasts, among others. There also is an increasing trend of regional _duties_ being collected on the importation of vodka and other alcoholic beverages. Many of the 3