Russian firms historically provided a significant range of non-monetary benefits to incumbent workers. This component of total compensation was not only quite large but was intended to be an important factor in governing individual agents' employment decisions. Further, in a significant number of settings, due to concentration in employment, firms were broadly equivalent to local governments in functions and tax assignments. To a greater extent than in East and Central Europe, Russian firms were effectively sites for providing a wide range of services that would commonly be provided by municipalities or other branches of government in market economies.
Expenditure on social benefits and services by Russian firms amounted to about 4.1 percent of GDP in 1992 and 3.3 percent in 1993 (2.1 percent for industrial firms) and firms are estimated to have contributed at least a quarter of total expenditure on housing, health, education and cultural services in 1993. Spending on social benefits and services was also equivalent to about 14 percent of the enterprises' total wage bill in 1993 for all firms and, for industrial firms, around 20 percent. By comparison, in Poland expenditure on social and housing funds as a percent of the wage bill (net wage cost) was no more than 10 percent in 1989 for industry.
A series of policy measures designed to cut the Gordian knot tying firms to benefits have already been implemented, including recent decrees that have forced firms to divest themselves of their social assets. The arguments for divestiture are several.