Perhaps even more importantly, corruption fueled by huge gains earned on NCS schemes and implicit subsidy redistribution gets public servants glued into the same web of collusion, further promoting insider deals and an anti-competitive environment. Thus, corruption and "crony capitalism" have become typical of the new industrial organization flourishing on NCS, obstructing efficient resource allocation and growth.

# Conclusions

Russia's 1995 - mid 1998 stabilization did not lead to widely-anticipated growth because low inflation was achieved by fixing the exchange rate, tightening credit, public borrowing and resorting to money surrogates, arrears and various types of tax offsets in financing public spending - not by cutting fiscal deficits and hardening enterprise budgets.<sup>4</sup> " As a result, the low inflation did not last because public debt was placed on an unstable trajectory. While there is a tendency to attribute the August 1998 meltdown to a terms of trade shock (falling oil prices) combined with a global repricing of risk flowing from the SE Asian financial crisis of 1997-98 (Slay (1999)), the analysis presented here shows that these might have exacerbated the situation, but were not a fundamental cause. The fundamental cause has been the persistence of soft budget constraints in the form of nonpayments, which stifled enterprise restructuring and growth, and eventually jeopardized stabilization. To make matters worse, social protection via subsidies embedded in nonpayments may also have been thwarted owing to the "new" industrial organization that siphons out the subsidies and enables the personal enrichment of managers and colluding officials.

The incentives embedded in nonpayments and the personal enrichment enabled have also had a deleterious impact on the development of vital institutions. Thus, the vested interests of "authorized banks", which made vast sums of money by serving as fiscal agents, probably delayed the creation of a strong federal treasury, thereby weakening expenditure control.<sup>43</sup> In addition, the powerful banking lobby did not have much incentive to push for banking and related legislative reform needed to underpin lending to the real sector, delaying the creation of a normal banking system. Likewise, the tendency to tailor taxes to individual companies has compromised the formal tax system and the credibility of tax enforcement.44 42 For example, the _Economist Intelligence Unit_ Country Report, 1 Q 1996, page 7, forecast GDP growth at 3 percent for 1996 and 4 percent for 1997. Eventual outcomes were -3.4 percent for 1996, +0.7 percent for 1997 and -4.9 percent for 1999.

**43** On how banks accumulated capital, which they then used to acquire prized assets during the loans-for-shares auction phase of privatization, see Black et al. (1999).

**4** Perhaps, the heart of the matter is Russia's vast endowment of oil, gas, and other natural resources and how to divide the spoils. Whethe **r** esource abundance is a boon or bane has long been debated in the economics literature, with resource-rich countries often lagging behind in growth and leading in corruption (see, for example, Sachs and Warner, 1995). Indeed, the energy sector has played a big role in Russia's nonpayments story, and Russia's rich natural resource endowment and how to divide the spoils might in future years be seen as the big difference between Russia and Central Europe, not 70 versus 40 years of socialism.