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Questions answered in this forum: Will corruption and crime dismantle reform? Will Chubais' reform programs be maintained by the next administrator ? How did Russia move from state owned business to independent business? Should we invest in Russia? What can the West expect from this cabinet shuffle ? Viewer comments NewsHour Coverage September 29, 1997: A new Russian law limits all religions outside the Orthodox Church. July 22, 1997: Elizabeth Farnsworth speaks with David Hoffman, The Washington Post's Moscow Correspondent. May 27, 1997: Russia agrees to the expansion of NATO. Browse the NewsHour's coverage of Europe and the Conference of Independent States.

Douglas Hurd of Portland, OR, asks: I have been curious how Russia transitioned from state own business to independent business. (If the state owned the factory, who ended up owning it? David McGuffin, Moscow correspondent for Feature Story, Inc., responds: Douglas, After 1991 the government handed over most businesses, factories and shops to its workers and managers. As things turned out, it was most often the managers and directors, who were in the position to find investors and knew how to run the business in the bigger sense, that wound up with the controlling interest in the businesses themselves. You're position in Soviet Russia had a lot to do with how a person would succeed or fail in the new capitalist Russia. Clifford Gaddy of the Brookings Institution responds: In most cases, the formerly state-owned factories have undergone nominal privatization and majority ownership is now in the hands of the managers of the plant (most of whom are carry-overs from the communist era) and the workers. In fact, the plants are controlled by the managers, while workers remain passive. There are some exceptions to this scheme. A few plants have been taken over by outside financial interests (mainly Moscow-based banks). Others are still owned by the state. But the biggest and most important manufacturing plants fall into the first category. More important than juridical status, though, is their behavior, the way they operate. It is very much in the style of the old days. In many ways, these plants are farther from the market than they were before. They have not undertaken programs to become competitive. They have not found (and frequently not sought) new products and new markets. All this goes to say that the figures one often hears about 70% [or 55% or 65%] of the Russian economy being in private hands are quite misleading. It is wrong to think of the Russian economy as consisting of two sectors, a state-owned sector and a private sector, and that "transition" is movement from state to private ownership. Rather, think of Russia as three economies, and define them as follows. First, there is an OLD ECONOMY, enterprises that may or may not still be state-owned but act like they are. Second, there is the truly NEW ECONOMY, made up of companies that operate like firms in a Western market economy. Finally, there is what I call, for lack of a better term, the PERSONAL---or HOUSEHOLD---ECONOMY, where people engage either in pure household production such as tending garden plots or other forms of very temporary activity of a "wheeling-and-dealing" nature. Some of what people do in this economy---street vending, etc.---may on the surface look like small businesses. But they are not. These people are merely coping; they do not intend to, and will not, develop this activity into permanent businesses. The actual New Economy in Russia is very small. It may not account for more than 10-15% of all economic activity today. In contrast, the Personal Economy may represent as much as half of the entire economy. Moreover, this Personal Economy sector continues to grow year by year, supplanting the Old Economy but at the same time preventing movement into the New Economy. Next: Should we invest in Russia?

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