Tag Archives: state capitalism

Putting in a good word for the Russian bourgeoisie

small shop in Russia

A typical small independent shop in a provincial town now under a lot of pressure from cartel-like supermarket chains.

A shorter version of this post appeared on Ridl.io

As anthropologist James Scott once said, ‘it’s time someone put in a good word for the petite bourgeoisie’. Shopkeeper-owners, small independent professionals and traders fulfil essential social and economic functions in any society but are especially important in modernizing ones. Sooner or later they turn into a middle-class with property rights and economic interests to defend. They are seen, even by Marxists, as a motor of political change.

However, in Russia the growth of a real middle-class and a healthy private sector is hindered at every step, largely in favour of a state-big business nexus. Whole industries – particularly in strategic sectors, are managed by state-owned monopolies, and have preferential access to banking finance, as Ilya Matveev points out.

The idea that the Russian political economy is a hybrid form of ‘state capitalism’ is widely accepted. However, less attention is paid to how these processes affect entrepreneurship generally and the wider implications for society. Coercion to gain access to wealth and the violent form of corporate raiding are also widely studied. However, elite insiders’ appetites for unearned wealth and sources of economic rent mean that even small businesses are subject to ‘taking’, rather than ‘trading’, to use Gerald Easter’s terms. This reflects a ‘maturing’ stage of insider elites and the way natural resources have already been ‘gathered back in’ by the state.

In most societies, the diversity of small and medium sized businesses – made visible in town and city centres – is seen as a key indicator of the health of the economy, and society more generally. If ‘mom and pop’ businesses are driven out of business, goes the logic, it’s because bigger capitalists have preferential access to power or the state, and because taxation and regulations are too burdensome for smaller operators. Russia suffers from both these structural obstacles and things are getting worse rather than better. To explore this we can start from the big picture and progressively narrow our focus to show how entrepreneurs are increasingly squeezed out and how informal ‘micro businesses’ are now one of the only viable alternatives for those without patronage from system insiders.

One way of understanding this is by looking at the share of ‘entrepreneurial incomes’ versus employment wages.  In 2000, it was 15%, but in 2018 it had dropped to 7.5%. Incomes from property are microscopic – 5%. So much for a broad property-owning class. The number of small and medium-sized enterprises (SMEs) is falling by 6-7% a year. We can also look at the average size of firms as an indicator. Labour researcher Stephen Crowley argues in a forthcoming book that Russia is an extreme case of the privileging of large enterprises. 80% of employment in manufacturing firms is in large companies, only 10% of the country’s workforce is employed in SMEs, versus 70% in the EU. Moreover since the Russia-Ukraine conflict and its economic side effects, consolidation has intensified, with the vast majority of closures in small and medium firms. There is plenty of evidence that monopolies and cartels are growing and competition falling. David Szakony reports that 14% of firms in 2016 reported they had ‘no competition’, a rise from 1% in 2013. Yet the number of ‘unfair competition’ court cases heard has fallen over the same period, while the Federal Monopolies Commission is notorious for pursuing SMEs in bureaucratic actions. Szakony summarises: Since 2014, SMEs have been squeezed by ‘skyrocketing interest rates, unsustainable tax burdens, and uncertain protection for their property rights’.

That the conditions and prognosis for SMEs are so bad is very visible in the Sisyphean efforts of the Minister for Economic Development, Maksim Oreshkin. Today Oreshkin is quoted as saying that preventing the stagnation of small business requires ‘work to increase the confidence of the business community in the state (both in regulation and in the system of enforcement) and reduce administrative costs.’ The report carrying the quote adds, ‘According to him, all these areas are enshrined in the list of key structural reforms.’ The problem is that all the signs are that for good reasons smaller businesses don’t trust the state.

Schemes like low interest loans for restaurants and small shops are a drop in the ocean ($30m), and almost exclusively go to ‘connected’ insiders at regional level. Indeed, this scheme is in fact a policy reversal – a similar scheme was discontinued because it mainly benefited the banks and was abused by businesses with political connections. In Kaluga region in 2017 (where my fieldwork sites are), for example, all the subsidized loans went to four companies owned by a single individual.  But even if the scheme provided fair access, an individual entrepreneur in a low-margin business (which is most shops) would find this a risky proposition.

 

In addition, for retail businesses there will be a broadening of the ‘compulsory barcoding’ of products to allow the state a real-time assessment of turnover.   While the idea behind these changes is to simultaneously prevent tax fraud and help small businesses by taxing their actual turnover, it is expensive for small shops to install and service. An online ‘cash register’ requires much more work in marking stock and inventory control . Finally, proposals like ‘inspection holidays’ to protect ‘conscientious’ business from excessive regulatory attention, only underline how much predatory and corrupt power bureaucrats have over small businesses. While the rate of some inspections is falling, there has been a sharp rise in ‘unplanned’ visits by regulators – up 74%). Regulatory inspection in Russia remains  a key area where bribe-taking can occur.

These dynamics are most observable in the changing patterns of shops and SME employment in small and medium sized towns. In the town of 20,000 people where I conduct field research, only two independent grocers remains, down from more than a dozen in the early 2000s. Three chains of mini-markets have taken their place – very convenient, but a classic example of cartel-like behaviour. One is owned by a state bank, the other two by oligarchic interests. This pattern is mirrored more widely – around 40% of trade is controlled by large retailers and the trend is increasing. The poorest areas do without the chains completely but even here a genuine local entrepreneur will struggle.  A vocal observer in this has been the controversial business commentator Dmitrii Potapenko, who in 2017 offered a stark analysis – ‘a seven rouble difference in the price of a loaf of bread is a critically significant sum’ (then around 10 US cents) illustrating the extreme price sensitivity of consumers. Potapenko has been in the limelight again just recently, commenting on cryptocurrencies. This was against the backdrop of discussions about the self employed ‘going into the shadows of cash only’, [ушли в кэш], the merits of employees demanding the option of payroll in cash, and the use and abuse of the Federal Law 115-F3 on money laundering that allows banks to freeze business accounts. While there’s more heat than light in the discussion, it highlights how trust of the banking system is still highly relative, and, as we’ve seen with even high-ranking politicians, cash is king!

But back to the suffering of small business under insurmountable pressures…

A similar trend to that seen among small shops is observable in employment, whether in services or manufacturing. In my town, small producers of steel, building materials, and plastic manufactures have either gone to the wall or sold up in the last ten years. Some of this is a natural process as many of these businesses were left-overs of large and outdated Soviet-era enterprises. A few with very special niches will hang on, but most are dying out. The local owner of a steel fabricators employing around 100 people, recently sold out to a conglomerate, tired of bureaucratic sword of Damocles, fed up with competing with Chinese imports, but mostly exhausted by the experience of being an entrepreneur in Russia: ‘in business you need to know when it’s time to leave,’ he told me. Another more optimistic entrepreneur had just opened a high tech laser-cutting materials workshop with around 20 employees – just the kind of business Russia needs, making good use of its still impressive human and technical capital. However, it turns out this venture was more out of necessity than choice. His prefabricated building business had been ‘taken over’ by competitors, against his will, and another side-line in printing merchandising materials and school textbooks was frozen due to a seemingly endless tax inspection.

However, this doleful picture is not the whole story. There has been a statistically measurable rise in start ups – in micro-businesses – defined as having 15 employees or less. While starting small is typical the world over, in Russia it has specific connotations. The smaller the business, the more potential there is for it to disappear into the informal economy and escape taxation and regulation partly or entirely, especially as the law on self-employment is unclear, as discussed in a previous blog post. Indeed, one informal fix to burdensome and predatory state regulation is spinning off part of a business into the underground, a phenomenon I’ve witnessed first-hand. A large proportion of the informal economy is connected to micro-businesses – largely made up of sole-traders.

If the state wants to support legal micro business, one way would be to bring back their most visible incarnation – the street kiosk – typically selling newspapers and magazines, hot food and beverages, or even clothes, domestic goods and toys. While long bedevilled by issues like mafia extortion and high rents, these micro-retailers are making a comeback outside Moscow and St. Petersburg. While the demand is clearly, there is a long way to go, and many municipalities are not keen on these small businesses. There are some 16,000 kiosks nationally, down from 42,000 some years ago. Certainly though, the resurrection of the kiosk, along with the high number of informal sole traders shows that entrepreneurialism is alive and well in Russia. However, that this is limited to the niche of individual self-exploitation – whether in street kiosk or shadow economy self-employment – is far from the dream of popular ownership of the means of production that James Scott lauds for its emphasis on autonomy, civic society potential and self-reliance. We’re back to the argument about Russia’s ‘missing’ middle-class (Balzer’s phrase)- or at least the entrepreneurial conception of it.