Even after more then ten years after the beginning of the transition process, Russian agriculture shows only limited sign of a recovery. Production has not reached the level of the pre-transition period and investment is still on a very low level. In this paper we use the "Theory of Induced Innovation" in order to access the development of production structures in Russia and to identify the major obstacles for restructuring. We argue that due to multiple market failure (capital, labour) and inappropriate institutional arrangements inherited from Soviet times hinder the development of Russian agriculture. Both reasons causes that agricultural enterprises have difficulties with regard to an adjustment of factor input and production corresponding to the real scarcities of production factors. Agricultural policies based on subsidizing factor use or minimum prices will be an inefficient approach to solve the problems. A promising approach instead would be encouraging market transactions and fostering the integration of agricultural enterprises in the regional and domestic factor and product markets.