The Escape from Institution-Building in a Globalized World: Lessons from Russia

Abstract

Strong institutions and accountable governments are imperative for any country’s long-term prosperity. Yet the development of such institutions has presented a continuous challenge for many countries around the world. Using Russia as a case, this study brings attention to the unexpected negative impact of global interdependence and shows that institutional arbitrage opportunities have enabled economic actors to solve for institutional weaknesses and constraints in the domestic realm by using foreign institutions, thereby limiting the emergence of a domestic rule of law regime. We argue that such opportunities lower the propensity of asset-holders, normally interested in strong institutions at home, to organize collective action to lobby for better institutions. We demonstrate the main ways through which Russia’s capital-owners make use of foreign legal and financial infrastructures such as capital flight, the use of foreign corporate structures, offshore financial centers, real estate markets, the round-tripping of foreign direct investment, and reliance on foreign law in contract-writing and foreign courts in dispute-resolution.

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