The disappearing entrepreneur

(opendemocracy.net – Mikhail Loginov – June 27, 2013)

Mikhail Loginov is a journalist and novelist based in St Petersburg. He is the author of the recently published bestselling political thriller “Battle for Kremlin”.

Russia’s small businesses are officially disappearing. Perestroika was supposed to give everyone the chance to be his own boss. Things, however, turned out rather differently.  Mikhail Loginov charts the rise and fall of small business in Russia.  

The instructions start fifty kilometres from the Russian border with Finland. ‘Remember,’ says Pavel,  ‘you’ve bought a wheel for a red Opel Zafira. And yours is for a blue BMW-X5. And yours, for a silver Nissan Tiida…’

The minibus passengers listen intently. An older woman notes down a make of car on a piece of paper, and repeats it under her breath the whole way, like a prayer. Before this morning, none of these six passengers have ever seen Pavel, but only heard his voice on the phone. He is taking six St Petersburg residents to Finland, where he will buy seven wheels for popular foreign models, and his six passengers will help him take them back to Russia, without paying duty on them.

Pavel’s one-man business takes him on this journey five times a week, and he is only one of hundreds of thousands of small business owners in Russia who pay no tax and have practically no contact with the authorities; and this tactic, they believe, is their only chance of survival.

Backstairs business

From the 1930s on, the Soviet state held a monopoly on all types of business, on however small a scale. According to Communist ideology, private property and business activity represented a direct threat to the dictatorship of the proletariat. Soviet citizens had minimal economic rights: collective farm workers could take surplus fruit and vegetables grown on their individual plots, to markets to sell; war invalids could mend shoes. Any other attempt at commercial activity would be stopped by the police, the local authorities or in some cases even the KGB.

In the later Soviet period it became clear that the State could not meet all the demands of its population, so authority learned to live with certain kinds of private initiative. Jobbing construction teams travelled around the country, putting up within a week, structures that would have taken the local builders three months to complete. Their services were particularly needed in rural areas, on collective farms where few workers were sober enough to be of any use. Itinerant teams were also essential for harvesting fragile crops such as watermelons and tomatoes. Less perishable vegetables such as potatoes and leeks were harvested by students bussed out from the cities.

Jobbing construction teams travelled around the country, putting up within a week structures that would have taken the local builders three months to complete.

This parallel system also existed in the clothing and footwear business: these goods were manufactured not only officially, under a Five-Year plan, but also unofficially; and not only in people’s homes but even in state-owned factories. Sometimes they were produced in secret, but sold through state shops; sometimes, they were produced openly, but sold clandestinely at markets. In both cases, the production cycle could never be private and open from beginning to end; ‘bootleggers’ who ran this type of grey market operation were often arrested by the KGB, and if their turnover and assets came to over a million roubles they could face the death penalty.

There was also ‘backstairs’ production on a smaller scale, with secret workshops and studios in residential blocks producing clothes, footwear, furniture and lampshades. The craft workers who made them were like a secret religious brotherhood or terrorist cell, recruited by existing members of the workshops. Clients were also recruited by word of mouth: a woman who had ordered, say, a dress or lampshade would recommend the maker to her friends and colleagues; and a good tailor or cabinetmaker’s order books might be full for years ahead.

Foodstuffs could also be found outside of the official network of shops, notorious for their empty shelves and queues; and collective farm markets, controlled by the police and organised crime. A beekeeper living in the country would bring his honey to the nearest big city, and sell it to acquaintances; and pork and beef was sold the same way, not to mention black caviar from the rather more distant Astrakhan, on the Caspian Sea.

The dangers of success

Private enterprise became possible in Russia at the end of the 1980s, thanks to Gorbachev’s perestroika. In 1988 a law was passed, allowing the setting up of cooperatives. This gave budding entrepreneurs only limited rights, but, even as socialism was still the official economic system, a market economy was springing up.

The enormous amounts of money being made by small business owners inevitably attracted the attention of organised crime

The main problem for the fledgling Russian business sector was not so much administrative restrictions as the dangers of success. Newspaper kiosks in Moscow and St Petersburg started opening round the clock, and selling all kinds of goods, including spirits and even pure alcohol. Ownership of a kiosk like this was much more profitable than a shoe repair workshop, a bakery or a hairdressing salon. The amounts of money being made by these small business owners inevitably attracted the attention of organised crime. By the early 90s, Russian hoodlums controlled not only prostitution and the drugs trade, but all business, no matter how tiny. Kiosk traders whose owners refused to pay protection money were burned out, and their owners could consider themselves lucky to be alive; and the protection of one ‘family’ was no protection from an attack by one of their rivals.

The ‘shuttlers’

In the 90s, the mainstay of Russian business was the retail trade. A typical small businessman of the time would travel back and forth between Russia and Turkey or China, and bring back suitcases of jeans, leather jackets and shirts, earning himself the nickname of a ‘shuttler.’ Boris Gryzlov, a close associate of Vladimir Putin, who leads the United Russia party and was Speaker of the Russian Parliament until 2011, would travel between Russia and China, bringing back suitcases full of Chinese watches to sell.

Some successful traders so expanded their business they even began production in Russia. Someone who imported building materials, for example, might then place an order for their manufacture with a local factory, and end up buying the factory. Those business owners who grew really rich, founded banks and financial groups; the less successful ones went bust; the unlucky ones died in the hallway of their block of flats, in a hail of bullets.

State rackeetering

By the time of Putin’s rise to power the threatening relationship between small business and organised crime had been reduced, but in its place new ‘enforcers’ appeared ­ the State. The FSB took control of big business away from the mob; and the police took over control of medium, and then small businesses. By the end of Putin’s first term, a kiosk owner was more afraid of the policeman than the gangster. Legislation became more restrictive, as did bureaucratic control. Fire, health and safety, and buildings inspectors could all enforce real or imagined breaches of rules and regulations; and always with a threat of closure. There was an established rate for the ‘services’ of these bodies. At the same time, large retail chains began to appear ­ restaurants, chemists, fashion; here, ‘sweeteners’ were being paid at a higher level. Bigger groups pass on the costs to the customer; small businesses might just go bust.

State racketeering means that many young people in Russia have abandoned their dream of opening a business, in favour of a career behind a government desk, ideally in one of the law-enforcement bodies; or a management job in a large company.

At the beginning of 2007, Yevgeny Chichvarkin, founder of Russia’s largest mobile phone retailer ‘Yevroset’, said, ‘Young people need to take risks. Don’t be afraid to start your own business. Borrow money, buy food products where they are cheap, load them onto a lorry and sell them wherever they are expensive. After a few trips you’ll have your own company.’ At the end of 2007, when food prices began to rise, many regional governors, afraid of social unrest, banned the export of food products from their regions. A year later, having been forced to sell his company at a knockdown price, Chichvarkin moved to London, where he has opened a high-end wine business.

Russian duty-free

In St Petersburg there are more than 200 proprietary dealerships selling spare parts for foreign cars. They face tough competition from the likes of Pavel whose parts are much cheaper. He imports them from Finland, whose border is a mere 150 kilometres from St Petersburg. He has no office, no secretary, no conventional advertising. His business isn’t registered and he pays no tax. ‘I’d go bust if I became an official dealer’, he says. He finds his customers on the Internet, where he also finds his volunteer helpers ­ Petersburgers who fancy a shopping trip to Finland. Household appliances, groceries, even shampoo and washing-up liquid are all cheaper in Finland. Pavel drops off his helpers at the supermarket nearest to the border, and takes their passports, which he needs for the paperwork to buy the tyres. He then returns to pick up his passengers, with a boot full of tyres. Everyone is happy: six people have had a free trip to Finland, and Pavel has seven duty-free tyres.

Once safely back in Russia, the taciturn Pavel is more cheerful and forthcoming. He tells his companions that he has rented a house on the Italian coast for the whole summer. He doesn’t remember where ­ the main thing is that it has six rooms and you can see the sea from the windows. He also talks about how last year in Egypt he paid a guide 1500 euro to show his family all the ancient sites. ‘But you could have read all about them in a guidebook’, one of the passengers remarks. ‘Like I would read a book!’ snorts Pavel.

Jewellery out of a suitcase

‘I make all this jewellery myself,’ says Polina to her latest visitor, ‘and each piece is unique. You won’t find what you’re holding in your hand anywhere else in the universe.’ Polina has lots of visitors to her exhibition stand, and many of them buy something. If they don’t have enough money on them, they exchange addresses so that they can meet again and pick up their purchase, or have it sent by post. Polina travels to most of the major exhibitions of designer jewellery and ornaments, clothes or cosmetics, held in cities in the European part of Russia. Polina makes her pieces from wire, semi-precious stones, old watches, clay, wool, polycarbonates and all sorts of other materials. She brings her own stand along with her two enormous suitcases.

Polina could rent retail premises in Moscow or St Petersburg and sell her pieces there, but she thinks the rent and other outgoings would eat up all her income. Taking her work to exhibitions around the country allows her to work, and not have to think about taxes.

Shutting up shop

Private enterprise has transformed the residential developments of Russian cities. The grey walls of the housing blocks are alive with signs: ‘hair salon’; ‘shoe repairs’; ‘passport photos’; this or that kind of shop. The businesses themselves occupy the basement and ground floors of the buildings. But many of the signs are faded, and haven’t been repainted in years; and many of these businesses have closed down, often because of competition from large shopping centres. Officially, many sole traders have closed down. In 2012 their annual compulsory contributions to Russia’s national Pension Fund came to a little over 17,000 roubles ($518) each; from January 1 2013 they have more than doubled, to 36,000 ($1098). Unable, or unwilling, to pay, business owners have shut up shop. Between December 2012 and February 2013, there were 291,431 fewer people registered as sole traders in Russia than there were a year ago; that represents seven percent of the total number of individual entrepreneurs registered in Russia.

‘I’m sure that half of them are still working’, says Andrei Zubov of ‘OPORA’ [Support], an organisation that supports small business owners, ‘but they’ve gone underground. The government was hoping to make up its Pension Fund deficit, but instead they’ve lost all these people’s taxes.’

Underground business

Aleksei, a shoemaker living in Krasnoyarsk, has never cheated the State. He gives receipts to his customers, completes all his paperwork and pays his taxes. But at the same time he does everything he can to keep his business away from the prying eyes of the bureaucrats. His little shoe repair workshop, in the basement of a housing block, doesn’t even have a sign outside. Aleksei knows that if the inspectors knew about him they would make him pay either a bribe or a fine. From the outside, it looks as though the basement is only used by tramps – the stairs down from the street aren’t even swept. But behind the ancient door is a clean and tidy workshop, with a pricelist and a display cabinet showing examples of Aleksei’s repair work. There is even a coffee machine for customers waiting while he fixes their shoes. ‘Once a customer asked me to mend a pair of boots worn by his grandfather at the time of the Second World War’, he tells me. ‘I fixed them up and now they’re wearable again.’

Aleksei doesn’t need to advertise ­ all his customers happily recommend him to their friends. In fact, he could expand his business by taking on staff and opening new workshops in other parts of the city, but it is too big a risk: ‘In Russia any business owner who sticks his head above the parapet risks losing everything,’ he tells me. ‘I don’t even know if I want to go on being registered myself, and paying 36,000 roubles ($1098) a year for the privilege. If I worked from home, I wouldn’t need to pay anything, and my customers know me. It’s like being back in the Soviet Union ­ if you want to do business, it’s better to do it secretly, otherwise you can lose your shirt.’

There are hundreds of thousands of people like Pavel, Polina and Aleksei in Russia today. They do manicures and cut hair, repair computers and people’s flats, give dental treatment, and bring honey from the provinces to sell outside health centres. Entrepreneurial instincts were not killed off by sixty years of Soviet rule, but, after a brief flourish post-perestroika, they are now being stifled. Under Communism, private business was seen as an enemy of the people; today, it is a cash cow for the tax authorities, a corrupt police force and bureaucracy, not to mention lowlife gangsters. The message is clear: better to work behind closed doors, and to hell with registration.

Article also appeared at http://www.opendemocracy.net/od-russia/mikhail-loginov/disappearing-entrepreneur bearing the following notice:

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