Implications  for  trade  relations

The inability to ensure domestic supply of fish products resulted in imported fish products occupying a large share of the Russian seafood market. Norway became Russia’s biggest supplier of fish, with an export growth from NOK 490 million in 1990 to almost NOK 800 million in 1991. During the following 10-year period the export of farmed fish from Norway grew from 6 percent to about 60 percent of the total value of Norwegian seafood exports to the Russian market (Elvestad and Nilssen 2010:273-274). In other words, in a country that had traditionally been self-sufficient in fish supply, Norway now became an indispensable supplier of fish products to the Russian market. However, it proved to be challenging for actors connected to this trade relation to familiarize with the Russian market.

Poor formal institutions also dominated the sector for imports of seafood products, resulting in chaos and corruption.

Several of the respondents, both exporters and importers, describe the situation in Russia in the 1990s and early 2000s as extremely chaotic, characterized by illegal transfers through tax paradises, laundering of money and corruption. Respondent 8, an importer of fish products on the Russian side, provides a description of the chaotic situation:

“It was cowboy style. There were extremely high degrees of tax fraud, customs fraud etc. Salmon was imported as herring, since herring had a lower price and a different custom code. It was extremely hard to compete, because you didn’t know how much your competitors were paying in fees. The market was entirely non-transparent… All fish was traded through tax paradises. Before 2006 there was no actual export of fish from Norway to Russia, because all the fish was billed through tax paradises, such as the Virgin Islands, Saint Bart’s and all those places. This meant a huge loss of money for the Russian state. There was practically no collection of taxes, since everybody did this. It was standard procedure.”

This indicates that Russia’s formal institutions were in such a poor state that they were actually unable to collect taxes and create an even playing field for economic actors. Trade

relations were characterized by tax fraud, corruption, and unclear and unstable terms of exchange. As a result of this, informal institutions and network relations became increasingly important in trade relations. Some of the respondents highlight the importance of relationship building in trade relations with Russia. Respondent 1, a Norwegian exporter explains:

“On my first trip over there [to Russia] in 1998, this whole thing with relational building was huge in Russia. When we came back we had discussed very little business, and everything was very much based on building relations. There was an unbelievable drinking and partying culture, and an expectation that we should become friends. And the issues concerning the actual trade… Let’s just say that that was not what was most important.”

This quote underscores the issue of trust in Russia, which I have elaborated on in previous sections (see Figure 4.2). Because of the poor state of Russia’s formal institutions and the unpredictable nature of formal rules and laws, economic actors in the Russian transition economy were largely dependent on creating stability and predictability in economic exchanges through informal institutions such as personal networks. This coincides with Peng’s model (Figure 2.3) explaining the transition from a relationship-based, personalized exchange system to a rule-based, impersonal exchange system. As Peng (2003) and North (1990) emphasize, the transition from a relationship-based to a rule-based exchange system is an incremental process, and even though the formal rules and institutions may change rapidly, the ability of economic actors and informal institutions to adapt to this new institutional framework happens gradually and with time. The behavior of actors within the fisheries in the Russian transition period of the 1990s can be explained by the logic utilized in the theory chapter: Since formal institutions were so poorly developed they were unable to fulfill their function of creating stability, predictability and securing the rules of the game in economic transaction. As a result of this, economic actors resorted to informal channels in order to reduce uncertainty in economic interactions.

Furthermore, the inability of the state to act as a third party enforcer of formal rules and laws resulted in a decrease in the possibility of sanctions for opportunism and rent-seeking behavior. In the fisheries sector a myriad of often short-lived companies popped up, staffed by people who were seeking their luck – aiming to earn big money, quickly. These were often people with little relevant experience or education. Several of the respondents

characterize Russia in this period as a “land of opportunity”, and many Norwegian seafood producers saw an opportunity to establish themselves in a new and promising market.

Respondent 1 remarks the large number of companies operating in the 1990s and early 2000s:

“Earlier there were a lot of the same people involved in the fisheries business, but there were constantly new companies popping up. Companies disappeared, and new ones popped up with the same people involved.”

With the formal rules of the game being so unclear and poorly enforced, and with countless companies popping up and trying to get their share of the cake, Russia developed into a “dumping market”. The openness and lawlessness of the Russian market attracted exporters who saw the opportunity of selling low-quality fish for high profits. In other words, because of the lack of stable and solid formal institutions able to secure market rules, opportunism and rent-seeking behavior was thriving. Respondent 2, a Norwegian exporter, explains:

“We didn’t start exporting to Russia until 2005, but I remember that earlier the attitudes of some exporters were “let’s just send the shitty products to Russia”… I remember this very well. In the beginning of the 2000s there was a lot of weird stuff being sent to Russia. You know, Russia was a new market, it was exciting and

everyone had access to it. So then one person buys fish from a second guy, who sell’s it to a third guy, who sell’s it to him, and then to her, and then they sell it to Russia. So the products that finally came to Russia were old products that didn’t fulfill the

requirements that they should have.”

The quotes above give an insider’s perspective and concrete examples of the state of institutions in the transition period of the 1990s. They illustrate how a poorly developed formal institutional framework can contribute to extreme opportunism and rent-seeking behavior. In Russia, the legacy from a largely relationship-based exchange system made the transition to a rule-based exchange system very problematic. In line with the theoretical assumptions, the respondents exemplify the implications of underdeveloped formal institutions, namely that informal institutions become increasingly important. As the first quote by Respondent 7 illustrates, when there is no formal system to create security and predictability in economic transactions, you need to spend huge resources on establishing trust with your business partners to reduce the costs of exchange. In this way, stability and

predictability is created through informal institutions and relational capital, rather than through generalized rules and formal institutions. These are symptomatic features of Russian institutions during the transition period of the 1990s. However, with a change in presidents, and the emergence of Vladimir Putin as a powerful political character, changes in the institutional framework were looming.

Chapter 5: From state capture to business capture: Establishing the power