Global Steel Trade; Structural Problems and Future Solutions

When prices began to escalate after price
deregulation in January 1992 and company
debts were mounting, regional governments
worked to protect local companies and maintain
critical services by resorting to barter. 85
According to one expert, the federal and
regional governments entered into a struggle for
sovereignty over money and the former was
unable to assert the authority over the latter
necessary to establish the ruble as the only
means of payment. 86 Regional governments
became creative in their attempts to keep
companies afloat and avoid social unrest; barter
provided the best means to employ these
measures. The actions by the regional
governments undermined the power of the
federal government by allowing barter to
displace the cash economy. 87 Addressing this
problem will be important to the federal
government’s plans to rein in the implicit
subsidies granted by the regional governments
or to collect taxes in cash.
The regional governments approached barter
with a permissive attitude due to the legacy of
the Soviet regime in which companies did not
go out of business. Many local politicians
have been willing to do whatever is necessary
to keep enterprises operating and workers
employed. This is especially relevant in the
metallurgical industry in
which more than 70 percent
of the companies are “cityforming”
(i.e., the company
60
was started by the central
50
planners and a city was
formed around it). 88
40
Effect on Restructuring.
Complex barter arrangements
were the primary mechanisms
for local and regional
governments and the natural
monopolies to provide implicit
subsidies to companies
struggling to survive (in 1997,
almost 80 percent of all
domestic steel sales were
performed through barter 89 ).
Implicit subsidies disbursed
through barter were also
Percent of Sales
30
20
10
0
1992 1993 1994 1995 1996 1997 1998
Source: Russian Economic Barometer.
How Barter Works
Two examples help illustrate how the barter
system works. The first, given by Ledeneva and
Seabright (1998), starts with a gas equipment
company that owed taxes to the local
government. Instead of paying the taxes, it
supplied equipment to a gas drilling operation
which provided gas to the steel company Mechel.
Mechel, in turn, supplied steel to the Nizhny
Novgorod automobile plant, which supplied
chasses for buses to the Kurgan bus plant. The
Kurgan plant then supplied buses to the Kurgan
city government. Ultimately, the city received
buses instead of taxes (regardless of whether the
buses were needed), and all the enterprises in
the barter chain maintained production
(regardless of market demand).
A second example of barter involves one of the
big three steel producers, Magnitogorsk.
Magnitogorsk had accumulated energy debts with
the local power company. To settle a portion of
the debts, the power company worked out an
arrangement with the Chelyabinsk Tractor Plant
which agreed to take 8 million rubles’ worth of
steel from Magnitogorsk. The tractor factory
would then pay the power company in utility
vehicles, which the power company would use to
pay its creditors.
3-7. Russia: Share of Barter in Industrial Sales
For steel, the percentage of barter sales was even higher. In 1997, barter
transactions accounted for almost 80 percent of all domestic steel sales.
Chapter 3: Behind the Crisis—Russia 51