A Model of Russia’s “Virtual Economy”

The Russian Economy has evolved into a hybrid form, a partially monetized quasi-market system that has been called the virtual economy. In the virtual economy, barter and non-monetary transactions play a key role in transferring value from productive activities to the loss-making sectors of the economy. We show how this transfer takes place, and how it can be consistent with the incentives of economic agents. We analyze a simple partial-equilibrium model of the virtual economy, and show how it might prove an obstacle to industrial restructuring and hence marketizing transition.

Introduction: The Russian transition from a “demonetized command economy” to a “monetized market economy” has taken an unexpected detour. The Russian economy appears to be evolving a new hybrid system, a partially monetized quasi-market economy.This hybrid has been called the “virtual economy.”The “virtual economy hypothesis” has been used to explain the lack of restructuring in Russian enterprises and the growth of barter and other non-monetary transactions. In particular, the virtual economy hypothesis implies that barter and non-monetary transactions play a key role in distributing value from productive sectors and activities to the loss-making sectors and enterprises in the economy. Without such transfers the virtual economy could not exist.

Author: R. E. Ericson,B. W. Ickes

Source: Institute for Economies in Transition, Bank of Finland

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