Can Regulatory Competition Improve Contracting Institutions? A Russian Tale of Two Reforms

Does competition from foreign jurisdictions undermine or accelerate the development of contracting institutions? Firms in less developed countries are increasingly resorting to foreign legal institutions to safeguard their transactions. Previous research on Russia finds that businesses switch to foreign law instead of trying to improve conditions at home, impeding institutional development in Russia. An alternative prediction is offered by regulatory competition theory: When Russian businesses choose foreign law over Russian law, this could incentivise lawmakers to improve institutions. This paper examines the impact of legal outsourcing in Russia to determine which of these two effects prevails. It differentiates between two pillars of contracting institutions: the quality of the law and the enforcement of the law, i.e., the commercial courts in Russia. Two contrasting case studies of recent reform projects in both pillars are presented. The first one is a success story: Russian contract law was significantly improved and important shortcomings in comparison to English law were removed. At the same time, the judiciary suffered a setback: Incremental improvement of the commercial court system implemented by the Supreme Arbitrazh Court (SAC) was abruptly ended when the Kremlin dismantled the SAC in 2014. The paper concludes that while regulatory competition facilitates the improvement of the letter of the law, it cannot tame the “leviathan.”