Rule-of-law reform will succeed only if it gets at the
fundamental problem of leaders who refuse
to be ruled by the law.
-Thomas Carothers¹

Over the last several years, various observers have vigorously debated the performance of courts in Russia. Some scholars, such as Kathryn Hendley, Peter Murrell, and Randi Ryterman, argue that the courts in Russia operate reasonably well, particularly in comparison to courts in other countries.² They find that Russian business managers are about as likely to go to court as they are elsewhere and argue that once one adopts a more realistic standard for performance, courts in Russia do not fare badly. In short, law matters in Russia.

Others, particularly those in the popular press and policy world, have a dim view of courts in Russia. They argue that the system is plagued with unqualified judges, corruption, and political interference at all levels. Moreover, they note the court system is a significant drag on the economy. As President Vladimir Putin told parliament in April 2001: "We badly need judicial reform today. The country's judicial system is lagging behind real life and is not very helpful in carrying out economic transactions. Not only for entrepreneurs but also for many people who are seeking to restore their rights in law, the courts have not been quick, fair, and impartial."

This essay presents a slightly different perspective on the debate. Based on the results from a survey of 500 firms conducted in Russia in November 2000, it shows that the perceived performance of the arbitration (arbitrazh) courts depends significantly on whether the cases involve private or state agents. Company managers expressed a fairly positive view of the work of arbitration courts in adjudicating conflicts with other private entities but had far less confidence that the courts would protect their rights in conflicts with state officials. They expressed considerable skepticism that decisions against local or regional governments could be enforced, and many believed that state officials put pressure on the arbitration courts. Thus, Russia faces the critical problem of creating judicial institutions that allow, indeed, encourage, government officials to make a credible commitment to abide by the rule of law.

The survey

Assessing the performance of court systems is tricky. Doing so, when cases involve state agents, is doubly so. For example, reviewing the rate at which private citizens win cases against the state can be misleading if citizens only bring to court cases of the most egregious violations of their rights. The significance of win rates can also be difficult to interpret if citizens are especially reluctant to challenge the state in court.

Reviewing the total number of cases against the state raises similar problems. Citizens may bring more cases to trial because of arbitrariness by the state rather than because of the strong performance of the courts. Moreover, if the courts work well and constrain the state from violating rights in the first place, then fewer citizens may litigate against the state. Win rates and filing rates can be very informative but should be used with care to assess the performance of courts.

To mitigate some of these difficulties, I commissioned VTsIOM, the All-Russian Center for the Study of Public Opinion, to conduct a survey of 500 firms and their managerial staff in eight cities in Russia: Moscow, Nizhni Novgorod, Novgorod, Smolensk, Tula, Voronezh, Ufa, and Yekaterinburg. In each city, VTsIOM conducted interviews with managers, chief executive officers, or chief financial officers from at least 60 firms between October 10 and November 15, 2000. We chose a representative sample of various firms, ranging from heavy-industry giants in the energy and machine-tool sectors, to light-industry firms that produced textiles and food, to retail trading firms and banks. The average firm in our sample employed 840 workers; the smallest had four workers, and the largest had over 53,000. Half of the firms had more than 150 employees, and more than 60 percent of the companies owned the building in which they operated. The response rate was 56 percent.

We took great pains to minimize the problems commonly associated with survey research. However, like all research instruments, surveys are imperfect. Case studies, statistical data, and further surveys should complement the results found here. Nonetheless, the results at hand paint a picture consistent with past research.³

The relative performance of courts

To gain some sense of the performance of state arbitration courts relative to other state institutions in Russia, we asked firms to rate the performance of the following political institutions on a scale of 1 to 5, with 1 being very poor and 5 being very good. Despite widespread criticism of Russia's court system, the state arbitration courts, which handle most economic disputes, received fairly high ratings from firm managers. Only the state tax inspectorate came off better than the state arbitration courts. The arbitration court received higher marks than the courts of general jurisdiction, indicating that businesspeople differentiated between the two institutions.

As is often argued, the weakness of the Russian court system seems to lie more with the enforcement of decisions than with the operation of the arbitration courts per se. Firm managers scored the performance of court bailiffs significantly lower than that of the state arbitration courts (2.7 versus 3.2 on a scale of 1 to 5).
These results were generally consistent both for managers who had used the courts in the last two years and for those who had not. Neither were there significant differences in the various responses of managers of privatized, state-owned, and new but private firms-that is, firms created after 1990 that have never had any state ownership. The next section offers a somewhat more complex view of the matter by examining the perceived performance of the courts in the case of conflicts involving state officials and private parties.

Using courts in disputes with state officials and private parties

We first examined how often business managers turned to state arbitration courts to resolve conflicts. We found that 70 percent of the firms had experienced violations of their property rights, over the last two years, that they considered sufficiently severe to merit the attention of a court. Many of these conflicts involved state agents, but businesses were less likely to take such cases to court than conflicts with other private firms. Of the 192 firms that had a conflict with the local or regional government over the last two years, 84, or 44 percent, had used the courts to resolve at least one of these conflicts. In contrast, 284 firms had conflicts with business partners or other members of the private sector, and 187 (66 percent) of the managers took at least one of these cases to court, indicating a greater willingness to use the judiciary in cases involving private rather than state entities.

Managers of the new, private firms saw themselves as especially vulnerable in confrontations with state officials. Only 30 percent of these managers, having had a conflict with the local or regional government, brought any of these issues to the point of litigating. In contrast, firms with some degree of state ownership took 66 percent of such conflicts before a judge. Just over half of the privatized firms, which had a dispute with the local or regional government, took one of their cases to court.

The results suggest that managers were especially reluctant to bring cases against state agents, although these results may be confounded by a variety of factors. Conflicts involving state agents may involve smaller stakes or more complicated issues than those involving private businesses and, therefore, may be less likely to end up in a trial. Moreover, the responses cited above reflect only the views of those managers who had had a conflict in the last two years. To get around the latter problem, we asked all managers a series of hypothetical questions in order to elicit their expectations as to whether or not the courts could protect their rights in cases involving state and private entities.

When speaking from experience, managers said that state arbitration courts would be less effective in protecting their rights when the state was party to the case than when it was not. We asked firms: "In the case of an economic dispute with the local or regional government, do you believe that the courts could protect your legal interests?" We then asked: "In the case of an economic dispute with a business partner, do you believe that the courts could protect your legal interests?" We also asked a similar question concerning the enforcement of decisions that go against the local or regional government and against private business.

Table 2 shows the managers' belief that local and regional governments were less likely to abide by judicial decisions than were private businesses. Most managers expected the courts to protect their interests (68 percent) and to enforce decisions (84 percent) in cases involving other private businesses. However, far fewer businesses said that the courts could protect their interests (49 percent) and enforce decisions (38 percent) in cases involving local or regional governments. Again, these results imply that firm managers do not believe that state arbitration courts work badly in their own right. Instead, they suggest that firm managers recognize the weakness of the arbitration courts vis-à-vis the state, if not in cases involving other private firms.

This problem hits hardest for the managers of new, private firms; 28 percent of the managers of these companies expected that arbitration courts could protect their rights in a conflict with a local or regional government. This figure increases to 50 percent for managers of firms with some state ownership. On the question of implementation, only 21 percent of the managers of private, new firms believed that a decision against the local or regional government would be enforced, while 40 percent of the managers of state firms believed that courts could impose their will.

These differences have important consequences for investment. Predictably, firms that believe arbitration courts can protect their rights in disputes with governments planned to invest at higher rates than those that did not; 44 percent of the former planned to make a significant capital investment next year, while only 36 percent of the latter so intended. These differences are statistically significant at the .10 level. Thus, the expectation that businesses can use the courts to protect their rights in conflicts involving the local or regional governments has a tangible payoff for the economy.

Influence on arbitration-court decisions

Concern about the relationship between local or regional government and state-arbitration courts also appeared in the responses to a question about the frequency of political interference in the workings of the court. Many observers have pointed to individual instances in which courts have faced pressure from either state or private entities, although it is difficult to know how widespread is the practice. Since those who influence court decisions are rarely willing to discuss it, the best we can do is ask how frequently others perceive such attempts. We asked: "Based on your experience and the experience of your colleagues, do you think that pressure is put on the decisions of the arbitration court in your region?" Of those questioned, 38 percent either did not answer the question or responded "Don't know." This may indicate a genuine lack of knowledge or simply discomfort with the topic.

Of those who did respond, 66 percent believed that pressure regularly was placed on the decisions of arbitration-court judges in their region. Responses to this question varied little among the managers of the new, state-owned, or privatized firms. We then asked those who believed that the arbitration courts were subject to attempted influence, "Who do you think places pressure on the decisions of the arbitration court in your region?" and then listed a host of prominent political and economic entities. Responses varied, but many believed that local and regional officials were the sources of pressure on the arbitration-court judges. In particular, managers believed that governors (42 percent) and members of the regional and federal bureaucracies (40 percent and 33 percent, respectively) were especially likely to pressure the arbitration-court judges. Other firm managers identified influential businesspeople (54 percent) as those most likely to exert pressure on these judges, while, somewhat surprisingly, only a little over one quarter of the managers responded that criminal structures would seek to coerce the judges. These results indicate the managers' belief that arbitration-court judges are especially vulnerable to state officials and influential businesspeople.

Implications and conclusions

Constraints on the exercise of state power are important, not least because state policies often promise benefits in the future for changes in behavior today. If a manager believes that courts cannot compel government officials to abide by the rule of law, he will be reluctant to make long-term investments. And we can expect the converse to be true. Hence the importance of creating courts that compel governments to make their commitment to the rule of law credible. Success in this is central to economic performance. As Douglass North notes: "Credible commitment is not the whole solution to the problems we confront today. But throughout history it is overwhelmingly the most pressing issue."⁴

Businesspeople in Russia recognize the problem. In general, they exhibit a fairly positive view of the performance of state arbitration courts, particularly in cases involving other private firms. However, they are far less sanguine that these courts could protect their rights vis-à-vis the state. Improving the performance of courts in Russia, is, in significant respects, a political, rather than merely a technical, problem. Creating courts-and related institutions-that increase the likelihood of compliance by state agents remains an all-important task for Russia.