Modelling the Process of Market Emergence
One such fact of particular importance is the sharp increase in inter enterprise arrears which was not being repaid during the first half of 1992 -- an episode known as "the arrears crisis". As shown in Figure 1, the volume of arrears peaked in the summer of 1992 at some 23 per cent of Russian GNP. The volume of arrears soon subsided to an average of about 5% for the period after 1992. Some experts find this figure to be not out of line with what is a normal amount of overdue trade credit by international standards [2]. A straightforward statistical comparison, however, can be misleading because enterprise arrears in Russia represent a different type of economic relations. In many cases the credit is forced, bears negative real interest and has no fixed repayment period or agreed repayment schedule. To a degree, these peculiar features were conditioned by the shortage of working capital, a drastic fall in demand and other economic consequences of a government's attempt to put an end to the regime of soft budget constraints by lifting price control and removing state subsidies to producers.
The evolution of the arrears crisis provides important evidence of how enterprises with no former experience of dealing with situations characterised by a high degree of uncertainty advanced along a new learning curve. Enterprises were forced to adopt a survival strategy giving priority to conforming to existing constraints and not to maximise anything in the framework of those constraints [5]. All objective factors considered, the dimension of the accumulated debt and its persistence suggest that enterprises actually were not particularly anxious to get out of it. Paradoxically, liquid assets of enterprises and their debts have been growing simultaneously [6]. The debt became an element of their survival strategy being instrumental in prolonging the existence of a business environment they were accustomed to, i.e., the one governed by soft budget constraints. Because the accumulated bad debt grew out of proportion on the national scale and became commonplace in all industrial sectors, this important business indicator ceased to be seen as a symptom of poor management efficiency. By the autumn of 1992, 95% of enterprises had bad debts enough to be proclaimed bankrupt on legal grounds [15]. In a sense, debt performance became separated from the business performance of a firm.
The enterprise arrears comprise four elements. By far the largest is overdue payments to other enterprises. Overdue bank loans, overdue budget payments and deterred wages are less significant in absolute figures but this does not mean that enterprises prefer to avoid making these types of debt. The relatively small share of overdue wages could be attributed to a small weight of labour cost in overall production costs typical of former socialist countries [4]. Similarly, the small volume of bank debt is a sign of underdevelopment of banking services in the country. To some extent, the debt structure of industrial firms has been shifting away from inter-enterprise arrears towards budget and overdue salary payments. Some evidence suggests that the settlements of taxes is the lowest priority of enterprises in distress because they "have little choice: if they don't pay their suppliers, they will cease to be able to operate because the suppliers will refuse to supply; if they don't pay their taxes, they may get into trouble, but the tax authorities may be unwilling to take drastic measures to collect the tax arrears, and in meantime the firm will continue to operate" [10]. Besides, firms strive for budget subsidies using all available means. It is not uncommon for struggling enterprises to request federal funds for a large-scale investment programme and then use them for non-investment purposes.
While Russian enterprises are less concerned with their debt position than are Western firms, they are still concerned with enterprise survival based on continuing production. For this reason, firms have attempted to gain more control over receipts from their trading partners. Since the 1992 arrears "crisis", it has become usual to demand at least some element of prepayment on orders for goods. The prepayment condition is increasingly being extended even to long-term customers. Although "informal" methods of settling debts are still very widely used, requesting a prepayment together with taking legal action against debtors possibly represent the first steps by enterprises towards introducing some sort of market discipline in their trading relations.
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