"relaxation" in macro stringency as a result of the real devaluation, which has led to an improvement in enterprise liquidity.<sup>34</sup> Further, the government has not been able to borrow commercially, and has reaffirmed its desire to stay the course (see Slay (1999) for an account of the government's behavior post-meltdown - hyperinflation was avoided but although there has been no reversal, further implementation of reform has been on hold). No new net government borrowing and greater pressure on the energy monopolies to pay taxes means a reduction in the ability to finance implicit subsidies. This push factor, combined with the pull of a large and sustained real devaluation, has lowered NCS use, consistent with the analytical framework presented in this paper.<sup>35</sup> However, the nonpayments system is not about to disband itself spontaneously. Thus, while surveys by the Russian Economic Barometer indicate that NCS as a share of sales in medium-sized and small enterprises has come down from 50 percent, it has stabilized at 35 percent for the last three months of 1999.36 Similarly, arrears as a share of GDP have fallen at end-1999, but this is at least partly, if not substantially, due to inflation erosion. Likewise, while Gazprom and RAO UES have increased the share of cash in their sales, the level achieved as of the end of 1999 is still low by central European standards -- 33 percent for Gazprom, 39 percent for RAO UES. At the same time, there has been no perceptible change in other factors that perpetuate nonpayments. One important example is the politics of tax sharing between the subnational and federal governments, which is such that the former may well encourage noncash tax payments (part of NCS) to retain more taxes at the local level.<sup>37</sup> Another critical factor (discussed next) is the personal enrichment enabled by a new form of industrial organization spawned by nonpayments. Thus, the core of the problem involving the "government -energy monopolies - enterprises" nexus remains.

# _The "New" Industrial Organization38_

An opaque, untargeted system of subsidies such as the one embedded in Russia's nonpayments system is a natural recipe for the creation of alliances aimed at personal enrichment. Broadly speaking, these alliances involve the managers of subsidy receivers, subsidy providers and government officials. They collude to siphon out the implicit subsidies essentially by creating

**34** See Ahrend (1999) for the striking impact of the real devaluation. OECD (2000) discusses this and other factors that have improved enterprise finances.

35 Other explanations for high NCS use by enterprises have focused on tax evasion (Hendley, Ickes and Ryterman (1998) - HIR), a banking system geared to tax collection (HIR, see also Tompson (1997 **)** and the inability to lower prices because of tax rules combined with excessive depreciation charges stemming from inflation (Karpov (1997), Tompson (1999)i Woodruff (1998)). Commander and Mumssen (1998) highlight, as a primary factor, the liquidity squeeze and crowding out resulting from public borrowing and high treasury bill yields. Commander and Mumssen (1998, Table 4.2), and Aukutsionek (1998) present evidence casting doubt on tax evasion as a primary motive for NCS. For a detailed discussion, see Pinto, Drebentsov and Morozov (2000). See also Volgin (undated), and Buckberg and Pinto (1997). **36** In a seminar held on January 28, 2000, to discuss Pinto, Drebentsov and Morozov (2000), Petr Karpov, author of Karpov (1997), affirmed that the nonpayments problem has not diminished significantly in the largest enterprises. 37See World Bank (1999), Kourliandskaya (1999), Treisman (1999), Shleifer and Treisman (1999), Chapter VI., and OECD (2000).

**38** Numerous case studies illustrating the points made here are contained in Annex 3, Pinto, Drebentsov and Morozov (2000), based on a background paper by Pavel Kuznetsov.