Business Culture in Putin's Russia

John Kennedy

• Publisher: Routledge
• Year: 2021
• Print ISBN: 9781032100784
• eBook ISBN: 9780429889967
• Topic: Social Sciences
• Subtopic: Regional Studies
• Index: Social Sciences

This book examines how Russia's entrepreneurs operate in a business environment beset with risk and uncertainty. The challenges they may encounter include an unreliable judicial system, insecure property rights, arbitrary interference from officials, as well as corruption, harassment, suspicion and violence. Based on extensive original research, including fieldwork within three businesses, this book explores how entrepreneurs survive and some thrive. It focuses on the kind of obstacles they face from day to day, details their motivations, rationale and methods, and describes the actual relationship between ordinary entrepreneurs and the state, providing new insights into business-state relations.

1 Introduction Business Conditions in Putin’s Russia

DOI: 10.4324/9780429469176-1

The development of Russia’s private sector has remained an important feature in Putin’s economic policy over his 20 years in power, but as I show in this introductory chapter, successive market-oriented policies and government-led incentives have not really transformed conditions for ordinary businesses operating under hard budget constraints. This is especially the case for individual entrepreneurs and small and medium-sized enterprises (SMEs), who still face many of the challenges of the 1990s, although state officials rather than criminals are often the main threat to independent businesses today (for example, Connolly 2020: 67). At the same time, even the most begrudging of my informants would acknowledge that Putin’s governments have delivered greater economic stability to the benefit of the country as a whole, and some have developed ways of working that enable them to work profitably despite the risks.

What explains the difference between declared policy intent and actual outcomes with respect to private-sector development? First, a dynamic growth model based on the development of the private sector and diversification of the economy has been less important than macroeconomic stability and financial security (Connolly 2020: 88). The beneficiaries of this approach have been the country’s leading and still-dominant state-controlled and state-affiliated enterprises, principally in the energy and metals industries. This can be seen clearly in Russia’s GDP performance over the Putin period: while GDP grew at an annual average rate of over 5 per cent between 1999 and 2013, this was attributable to high prices for the most important exports – oil, gas and metals – rather than market reforms (Connolly 2015: 13). Russia’s reliance on its strategic industries was revealed in 2015 when the ‘dual shock’ of Western sanctions and a collapse in oil prices triggered a recession, and GDP fell by 3 per cent. Growth returned in 2017 but at a slower rate than before and below the global rate (Connolly 2020: 82). According to Alexei Kudrin, finance minister under Putin until 2011, GDP averaged less than 1 per cent overall between 2013 and 2019. He predicted that, given the oil price crisis of early 2020 and ongoing global COVID-19 pandemic, it would decline between 4 and 5 per cent by the end of the year (TASS 2020: online). Thus, Russia’s independent businesses have continued to play a marginal role in the country’s economic performance overall, even while the case for the development of conditions for business and growth-oriented reforms looks as clear today as it did at the start of Putin’s presidency.

Second, while the government talked about economic stability and largely delivered, it also promoted private-sector development but did not achieve a great deal. In this book, I argue that institutional theory can help explain why. According to North, institutions provide ‘the framework within which human activity takes place’ (1990: 4), and in Russia informal institutions, comprised of cultural norms, values and codes of conduct, undermine the formal institutional rules and laws introduced to support business development. This has been called ‘institutional asymmetry’ (Williams and Vorley 2014: 843). This means that the government’s policies and laws in support of business are undermined by behaviour determined by informal codes of conduct. To put it another way, institutional theory enables us to understand how formal policies have been insufficient to deliver domestic business reform and diversification. This leaves entrepreneurs vulnerable to predation, not least from state officials.

Considering both factors, it is clear that a specific type of capitalism has emerged in which the state has a steering role in the macro economy, but it is largely absent from the development of the real economy. Thus, for the purposes of this book, the dominant role of the state per se is not as important as the weakness of the private sector over 20 years of Putin rule despite the importance of economic modernisation and development to his economic messaging and policy. Conditions for entrepreneurs have remained, by some internationally recognised measures, the most challenging of any large world economy. This leaves them to deal with a high degree of everyday uncertainty and risk, but they are not without agency, even if they are relatively weak compared to state officials.

While officials may act according to their personal will, it frequently goes against the interests of entrepreneurs or the law. In turn, entrepreneurs tend not to rely on the government, law or policy but help themselves or turn to trusted acquaintances for support and have developed their own philosophical and practical responses. This is also explained by institutional theory: when individuals meet institutional constraints, they change their behaviour, which means, logically, that entrepreneurs will not accept their vulnerability to the state but seek to avoid it. As North puts it, ‘if institutions are the rules of the game, organisations and their entrepreneurs are the players’ (1993: 345).

In this chapter, I discuss these conditions further, detailing how a form of business–state relations has developed in the Putin era in which the weakness (rather than development) of business is inherent, but entrepreneurs retain a degree of control over their circumstances even so. I also show that, although much research has been undertaken showing that business is difficult, there has been little on specifically how entrepreneurs are reacting to these difficulties, which would require observation of business in practice. This allows me to move, in the following chapters, to discuss what these conditions are and why entrepreneurs bother with commerce if the odds of survival and profit are stacked against them.

Support for Business in Policy and Reality since 2000

At the outset of Putin’s presidency, the prospects for the improvement of conditions for private business were uncertain at best. They were not highlighted in the economic aspects of his ‘millennium manifesto’, in which he first set out his key ideas (Putin 1999, online). He sought to strengthen the rule of law and the state’s control over the economy (particularly its leading industries, exemplified by the so-called shashlik agreement, which set the terms and balance of relations between the state and Russia’s post-Soviet business elite) and create the conditions for a stable economy. As Connolly has shown at length, the goals of the millennium manifesto were in large part met, and the state had regained both power and control over the economy. At the same time, the prospects for the development of new economic sectors decreased, and property rights remained weak (2020: 54–70). As Connolly wittily concludes, ‘Putin had largely succeeded in stopping people from killing each other [but] failed to stop them from stealing from each other’ (2020: 70). This is not to say that business development was absent from the Kremlin’s agenda altogether. Rather, of the numerous decrees, resolutions and programmes for small business in the years before the 2008–9 economic crisis, the ‘vast majority’ were simply not implemented (Aidis et al. 2008a: 3). According to Puffer et al., the SME sector did develop during the first Putin presidency, but did so without significant government support (Puffer et al. 2009: 446).

In 2008, the prospects for the development of the private sector had improved. Macroeconomic conditions were better than in 2000, and the new president, Dmitry Medvedev, arrived with a modernising vision, which he set out in his 2009 article, ‘Go Russia!’. In this, he stated that ‘twenty years of tumultuous change has not spared our country from its humiliating dependence on raw materials’ and called for an ‘intelligent economy’ based on knowledge, new technologies and innovative products (2009: online). Nevertheless, the global financial crisis, which caused a recession in Russia when oil prices fell, and Putin’s relative (informal) hold on power held back progress. Putin’s preference was for ‘state-led solutions to economic policy [which] continued to prevail regardless of Medvedev’s liberal rhetoric’ (Connolly 2020: 73). Following that crisis, which indeed underlined Russia’s acute dependency on oil and gas prices, the government sought to reinvigorate its support for business again. The 2007 law, ‘On Developing Small and Medium Scale Entrepreneurship’ (Ministry of Economic Development of the Russian Federation 2016a: online), which set out the ‘basic goals and principles’ of state policy towards entrepreneurs, gained new relevance.¹ Further initiatives to support entrepreneurs followed. A presidential decree in May 2008, ‘On Urgent Measures for the Liquidation of Administrative Limitations Upon the Execution of Business Activity’, tasked the government with taking steps to practically improve conditions for business activity in the country (Rossiyskaya Gazeta 2008: online). Under Medvedev, a new regulatory impact assessment was unveiled in 2010, and the Agency for Strategic Initiatives was created in 2011 with the purpose of providing support and removing barriers in the way of viable entrepreneurial projects.

The policy momentum of the Medvedev period continued on Putin’s return to the presidency. His so-called May Decrees demanded ‘a radical improvement in the investment climate and a major scaling back of the state’s presence in the economy’ (Guriev 2019: online). He also introduced the 100 Steps Programme in 2012, with the aim of improving the country’s position on the World Bank’s Doing Business rating from 120 to 20, and installed a presidential commissioner to protect the rights of entrepreneurs (Yakovlev 2015: 59). Federal budget support for SME and entrepreneurship programmes was increased significantly from 3.9 billion roubles in 2008 to 23 billion in 2014 (Organisation for Economic Co-operation and Development [OECD] 2015: 15–16). In 2015, Putin introduced a law freeing small businesses from regular inspections until the end of 2018 as a way to stimulate growth in the sector, which, he said, contributed to only 21 per cent of GDP in Russia compared to over 50 per cent in developed economies (The Moscow Times 2015). This figure was indeed lower than in comparable developing countries as well (European Investment Bank 2013: 8; also OECD 2015: 20).

Despite the intensification of government attention on modernisation of the economy and improvement of business conditions following the crisis (Buckley and Weaver 2013), including after geopolitical and economic crises struck in 2014, in the end they did not make a significant difference to the everyday conditions encountered by entrepreneurs. Economic growth recommenced at a lower rate than before the crisis (OECD 2015: 26): in 2013, growth was 1.3 per cent, compared to an average of 7 per cent in the decade to 2008 (Connolly 2020: 79), and the persistent weakness of the private sector became more obvious. In 2014, Russia’s Public Chamber found that only 3.4 per cent of SMEs lasted more than three years (reported in The Moscow Times 2014: 5), and the development of small business overall showed a ‘declining tendency’ (Kreidenko and Mironova 2012: 352) rather than growth. A 2013 OECD report described Russia’s business climate as a ‘persistent handicap’ and stated that ‘a range of indicators suggest that doing business in Russia is perceived as difficult and risky’ (2013: 10). In 2014 a further OECD report remarked on the fact that while the authorities seemed to have become ‘more energetic on fighting corruption and strengthening the legal protection of businesses … capital outflows and the low market valuation of Russian companies suggest that business is not yet fully convinced’ (2014: 2). The key ‘long term challenge’, that report found, was still to ‘reduce dependence on the volatile revenues from exhaustible natural resources, and strengthen sustainable, productivity-driven, regionally balanced and broad-based growth’, which above all required structural improvement to the business climate, strengthening the rule of law and fighting corruption (OECD 2014: 4). Evidently, formal policies did not translate into substantive improvements in the business climate.

It is true that Russia improved its rating on the international Doing Business scale over this period, reaching No 51 by 2015 (World Bank 2016: 229).² However, this measure has limitations: it reflects the way regulation applies to business on paper rather than compliance with it; it is based only on the experiences of businesspeople in Moscow, and it does not acknowledge the informal economy (World Bank 2016: 19–22). In any case, any tangible effort to implement the May Decrees was ‘sidelined by the need to respond to sanctions and the fall in oil prices’ (Connolly 2020: 82). I will not detail Russia’s responses here because these are covered elsewhere in detail (Connolly: 2018, 2020), but true to form, the Kremlin’s economic focus remained on macroeconomic stability (with some success considering the low rates of growth and reduced foreign investment) rather than the development and diversification of the independent business sector.

Furthermore, in a second iteration of his May Decrees in 2018, Putin turned the government’s attention away from private-sector development and towards public spending to stimulate growth through a series of ‘national projects’. Accordingly, the weight of expert opinion has tended towards greater scepticism about the Kremlin’s intentions for the development of independent business since the 2014–15 crisis. Whereas in 2015 the OECD still considered that ‘positive momentum is being built up by public policy on the road to a more entrepreneurial Russian Federation’ (2015: 15), today that might be seen less as momentum and more as rhetoric with few tangible results after two decades. Moreover, according to experts, the national projects are unlikely to stimulate growth more than any previous initiatives. Sergey Guriev, Chief Economist at the European Bank for Reconstruction and Development (EBRD) and former advisor to Medvedev, has noted that the ambitions in the first May Decrees never materialised (2019: online) and is sceptical about the Kremlin’s turn towards growth through public spending and the national projects:

It is not surprising that experts and investors have little faith in the effectiveness of large-scale public investment in a country notorious for corruption. The solution to Russia’s problems lies in precisely the opposite direction – in implementing the long-promised reforms: protecting property rights, respecting the rule of law and competition, reducing the state’s role in the economy, fighting corruption, reintegrating Russia into the world economy, and investing in human capital.

(2019: online)

To this point I have argued that despite successive initiatives to support the development of the private sector over 20 years, substantial difficulties continue to fac...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgements
• Note on transliteration
• 1 Introduction
• 2 Methodology
• 3 Case Study
• 4 Case Study
• 5 Case Study
• 6 Theoretical Implications
• 7 Conclusion
• Bibliography
• Index