reversal of flight capital. Once this process is launched, it will facilitate<sup>the more medium run tasks</sup> of institutional building, much the same as in Poland.<sup>2</sup>

# _Definitions_

We define nonpayments to include: (i) arrears, or overdue accounts payable,<sup>as well as (ii) all</sup> forms of noncash settlement (NCS), including barter, the use of<sup>"veksels" (promissory notes), and tax</sup> offsets whereby government spending arrears and overdue<sup>tax payments are mutually canceled.</sup> While arrears, or the failure to pay, constitute nonpayment in the<sup>strict sense, the use of NCS is not</sup> strictly nonpayment, only the use of a payment instrument other<sup>than cash rubles or bank transfers.</sup> However, as will be seen below, the use of NCS has subsidies<sup>built into it for energy and tax</sup> payments. Thus, while arrears mark a complete failure to pay, NCS is<sup>a partial failure to pay (or</sup> "underpay"). The two are lumped together to capture the notion of a subsidy<sup>under "nonpayments".</sup> The nonpayments system has two parts: (i) a large volume of rapidly<sup>growing arrears,</sup> estimated at close to 40 percent of GDP at end-1998 compared to 15<sup>percent at end-1994; and (ii)</sup> growing use of non-monetary exchange, with economic transactions<sup>increasingly settled by NCS.</sup> By the summer preceding the meltdown, cash collections by the infrastructure<sup>monopolies were as</sup> low as 12-13 percent on domestic sales for Gazprom (gas monopoly)<sup>and RAO UES (electricity</sup> monopoly), and about 30 percent for the railways. By 1998, the<sup>share of noncash settlements in</sup> enterprise sales had increased to 50-70 percent. Over the 1995 - mid<sup>1998 disinflation, as much as</sup> 50 percent of spending by subnational governments was in noncash<sup>form, while money surrogates</sup> and offsets averaged over 20 percent for federal government non-interest<sup>spending. 3</sup> Table 1 presents data on the time evolution of nonpayments over 1994-98.

||Table 1:<br>|Nonpay m|ents- 1994<br>|to 1998|||
|---|---|---|---|---|---|---|
|__________|I__||**1..**||||
|ARREARS'|billion rubles|90.4|238.9|514.4|756.1<br>|1056.4<br>|
||_percent of GDP_|_14.8_|_15.1_|_23.4_|_29.2_|_39.3_|
|Of which:|||||||
|_To suppliers_|billion rubles|56.4|122.3|245.9|344.7|475.1|
||_percent of GDP_|_9.2_|_7.7_|_11.2_|_13.3_|_17Z7_|
|_To the budget and_|_EBFs'_bln rubles|19.3|75.0|203.4|316.6|439.0|
||<br>_percent of GDP_|_3.2_|_4.7_|_9.2_|_12.2_|_16.4_|
|_Wagearrears_|billionrubles|4.7|13.6|34.7|39.7|77.0<br>|
||_percent of GDP_|_0.8_|_0.9_|_1.6_|_1.5_|_2.9_|
|NCS/SALES|percent|17|22|35|42|50|

**a/** end of period overdue payables for 4 sectors: industry, agriculture, transport<sup>and construction.</sup> b/ Russian Economic Barometer. See also Aukutsionek (1998).

_Cd_ excludes penalty interest and fines.

2 For an alternative, incremental approach, see Stiglitz and<sup>Ellerman (1999).</sup> 3The term "enlarged government" is used to denote collectively the<sup>federal government (or center), the regional (or oblast)</sup> governments, the local (or raion or municipal) governments and the four primary<sup>social EBFs: the Pension Fund, the Social</sup> Insurance Fund, the Employment Fund and the Medical Insurance<sup>Fund. Budgets are correspondingly defined.</sup>