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5. Toward a Politics of Social Order: Self-Governance on the Equities Market
- University of Michigan Press
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CHAPTER 5 Toward a Politics of Social Order Self-Governance on the Equities Market Previous cases in this study have not depicted state agents in a favorable light. On the equities market, however, we find that state agents played a critical role in helping brokers establish and maintain an SGO by dramatically reducing the costs of sharing information among group members. The SGO on this market allowed brokers to trade with confidence that their counter-party broker would abide by the contract and contributed to the market's spectacular growth. The main market index grew by 151 percent in 1996 and by 110 percent in 1997. During the financial collapse of 1998, when the market fell by almost 100 percent, the SGO on the equities market performed relatively well.1 The case of the Russian equities market provides two theoretical insights. First, state agents can enhance the prospects for self-governance, even under difficult conditions. The group features of participants on the Russian equities market suggest that it would be very difficult to engage in self-governance, but the intervention of state agents helped brokers govern themselves. Second, this case does not rely on social capital as a causal mechanism, but it does suggest the value a political interpretation for the production of social capital. Many accounts treat the formation of SGOs and social capital as arising from the «mists of history" or the demands of group members, but in this case agents from within the state fostered the creation of an SGO. Politicians and bureaucrats willingly bore the costs of establishing and promoting self-governance. By levying relatively moderate taxes and delegating vast governing authority and resources to an SGO, state agents reduced the cost of sharing information among group members and thereby promoted self-governance and the development of social capital. This chapter describes the development ofthe fragmented Russian equities market before justifying a focus on one sector of the market: the listed stocks ofprivatized enterprises traded by professional brokers on the Russian Trading System (RTS). Second, it depicts the prospects for self-governance by 107 108 Brokers and Bureaucrats analyzing features internal to the group of brokers (e.g., their numbers, homogeneity of interests, discount rates, and social ties). Third, it describes the origins and operation ofNAUFOR, the SGO on the Russian equities market . Fourth, it attributes the success of self-governance in large part to state policies that reduced the cost of sharing information. The Russian Corporate Equities Market With high levels of risk, little information about companies, and weak corporate governance, Russian equities bear all the earmarks of a classic emerging stock market. The largest players are foreign. Two surveys conducted in the summer of 1995 and the spring of 1996 suggest that foreign capital occupied about 60 percent of the market.2 Classic emerging market stocks such as natural resources, energy products, and utilities dominated trading. The three main segments of the Russian equities market, however, have had different players, paths ofdevelopment, and levels of risk. In the analysis I focus on the professional market of listed shares in privatized enterprises, but the case can be better understood by reviewing the stages of development of the three major sections of the Russian market. Private Sector Company Stocks Equities trading began in Russia in 1990 when brokers first sold stocks in private sector companies like banks, commodity exchanges, and insurance companies .3 Prospering from vast rents in the transition economy, private companies began to issue stock in 1989. The market gathered pace in 1990-91 due in part to the Law on Cooperatives, the Statute on Joint-Stock Companies (no. 601) and the Statute on Issuing Securities (no. 78) that provided a skeletal framework for trading equities. Bank stocks formed the core ofthis section of the market. Beginning in 1990, they made great profits by arbitraging between loans from the Central Bank and market-based loans, investing hard currency in foreign bank accounts, playing the currency markets, and transferring hard currency abroad for clients (Easterly and de Cunha 1993a, b). In 1992 and 1993 they also reaped great profits from the inflation tax levied primarily on households. Commercial banks, including Tveruniversal'bank, Inkombank, AvtoVAZbank, Mosbiznesbank, and Menatep, were especially active on the equities market. Banks issued shares in part to raise capital but also to dilute the large stakes typically held by a slnall number of founders that were usually based in state ministries or firms. By expanding their base of [3.236.139.73...