Transition in Russia: It's Happening

Working with 110 pairs of time series of state and market commodity prices in Russia, we search for signs of transition in Russia from a command to a market economy. Beginning with inter-city comparisons of state and market prices, we find that differences in the levels of these prices have gradually diminished following the 1992 Big Bang, that market/state price ratios have become increasingly uniform across cities, and that the volatility of innovations to these ratios has decreased dramatically. Further, we find widespread evidence within cities that state and market prices are co-integrated, and that market prices are causally prior to state prices, in the sense of Granger (1969). Finally, we find widespread evidence of co-integration and causality between state and market prices across cities. These findings suggest that, despite obstacles posed by resistant local governments, mafia activity and poor infrastructure, Russia's efforts to implement economic reforms have generated tangible results: the transition to a market economy appears to be well underway.