require Russia to bincd itself to avoid many practices that impede investment as well as trade, and to take other positive steps that will attract high-quality FDI. The simultaneous or closely coordinated formulation of trade policy and FDI policy is an important step forward for Russia.

In this respect it is worth noting that in its 1996 _World Investment Report,_ the United Nations Program on Transnational Corporations analyzed the new paradigm and concluded: _Yhe decision to locate any part of [a company's operations] wherever it is best_ ... _means that FDI and trade flows are determined simultaneously. They are both the immediate consequences of the same locational decision... [This] presents new challenges for national policy makers. The need'for ,coordinatedpolicy approaches acquires greater importance... National trade and FDI policies have typically evolved separately, frequently influenced by different goals, and administered by dlistinct, often loosely connected agencies. This_ ... _separation is not suited to a world in which trade and FDI are closely interlinked. (pp. xxiv-xxvi)_ Beyond the _basic_ conditions enumerated above, a good investrnent climate for a country such as the Russian Federation is made up of many _specific elements._ There will be a payoff from improving conditions for every kind of business, and for business generally.

One of tihe most damaging elements is the tax system, in which instability, a heavy burden, and arbitrary enforcement are a major deterrent to foreign investors. T'he recently passed portion of the Tax Code will help in this regard, but more needs to be done. Repeated efforts to amend or change the June 1991 law on FDI are: another source of serious uncertainty for investors. That law, while it has its weaknesses, is not a major impedimen **t** o FDI; the recent amendrnents to that law, however, are a step backward.

There need to be stepped up efforts in dealing with crime, corruption, lack of security of property and persons, and enforcement of contracts. This multifaceted problem, for foreign investors and Russian citizens and companies alike, is getting worse rather than better. It is a major deterrent to FDI, and especially to cutting-edge, world-class FDI facilities. Even when appropriate legislation exists, the courts are unable to enforce procedures and outcomes. It is important to strengthen the legal/judicial framework to allow for credible propprty rights and adequate contract enforcement.

Many countries have paid increasing attention to the problem of corruption, and the debate on possible'policy options is on-going. There is no single solution.'<sup>4</sup> Recent insights suggest that corruption arises when institutions have monopoly positions, there is the ability to exercise discretion and incentives for accountabilit) are weak. Additional laws themselves are unlikely to bring about significant reduction in corruption. Effective reform must be directed to changing the system: (i) introduction of independent oversight of agencies; (ii) clarifying and making transparent how much official discretion can be exercised; and (iii) utilizing penalties and rewards for conduct. Russian authorities should give consideration to establishing independent anti-corruption oversight ("watchdog") bodies at the federal and regional levels; models can be found in other countries, such as Hong Kong, Singapore, Botswana and Chile. These two sets of problems are so severe that mcst actlions on other elements of the business climate that the Federation Government (including the Durma) might take will probably not succeed in attracting much more F]DI, with the exception of production sharing agreement legislation for the exploitation of minerals and hydrocarbons.

14 See, for example, R. Klitgaard (1998) and C. Gray and D. Kaufniann (1998).

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