Amid recession and predatory officials, Russia's small businesses hang on

Small businesses are a small part of Russia's oligarch-dominated economy. But despite the headwinds they face – and the instability they could bring to the current order – they are showing resilience amid the downturn.

Fred Weir
Kirill Okunev poses inside Pub-102, the British-style pub he owns and runs in Kaluga, Russia, on Jan. 25.

Kirill Okunev's British-style pub, in the heart of this provincial industrial city, is like a slice of England – if you can picture that with mainly Russian cuisine on the menu and a bitter sub-zero wind howling just outside the door.

It's one of the more successful small businesses in a town where many little retail and service shops are closing down amid raging inflation and sagging consumer demand.

Russia's recession has been sharpened by Western sanctions and plunging oil prices, but economists have been warning for years that the Putin-era prosperity based on resource exports had reached its limits. One way out of that trap would be to unleash the country's vast, largely untapped potential for private entrepreneurship.

Small and medium-sized companies like Mr. Okunev's make up just 20 percent of Russia's economic product, compared with 50 percent in the United States, and the proportion has scarcely budged in the past two decades. Though other sectors  – such as agriculture, infrastructure, and heavy industry – are getting tangible state assistance, even President Vladimir Putin admitted in his state of the nation address two months ago that small businesses aren't seeing any help yet.

But Mr. Okunev and his peers are determined to persevere.

"We just have to learn to work harder and earn less," he says. "I've been in other places, like China and Europe, where businesses routinely work on much smaller margins than was the case when times were good in Russia. If you want to survive now, you need to get used to that."

Fertile ground for business

Okunev built up a successful catering business providing cafeteria meals to the big foreign auto plants that set up in Kaluga in the past decade. He then invested his profits in the pub.

But now, the car factories are shutting down amid the economic slump, and foreigners are leaving. But Okunev insists the business acumen they brought will remain behind. Despite rising costs, he's holding his menu prices down. "I'm sure this crisis will end, but we need to adapt to a tougher climate," he says.

In Kaluga, a region of more than 1 million people, there are fewer than 15,000 small and medium businesses, according to the head of the regional government's department for entrepreneurship, Violetta Komissarova.

"The number of small companies in commerce and services is falling due to the economic crisis. There will be a painful period of adjustment," she says. "This coming year will not be a simple time. Much will depend on whether our authorities find ways to level the huge risks that businesses are facing."

The Kremlin does appear interested in changing that equation. Putin has recently held a series of round-table discussions with representatives of OPORA, Russia's national association of small and medium businesspeople. There has been a lot of talk about measures that would accelerate the sector's growth. But in a clear sign the program's not working yet, he told a group of entrepreneurs this week that "patriotism" should give them the strength to overcome obstacles.

Some experts suggest that the Kremlin faces a dilemma that may be insurmountable.

Unleashing small business not only threatens the oligarch-dominated economy – overwhelmingly run by friends of Putin – but would also boost the numbers of independent, property-owning economic actors who might soon begin to press their own political demands. The Kremlin already had a taste of this when tens of thousands of middle-class Russians took to the streets in 2011 to protest electoral fraud, and just last year when independent truckers briefly blockaded several cities.

Venal officials

Anti-business bias is deeply entrenched in Russian bureaucracy. In his December address to the nation, Putin admitted that a key problem is that venal officials literally prey upon entrepreneurs. During 2014, he said, 200,000 cases were opened by police against "economic crimes" – which usually means an infraction by some small business – though barely 15 percent of them ended in conviction.

"The vast majority, 83 percent of entrepreneurs who faced criminal charges, fully or partially lost their business. They got harassed, intimidated, robbed, and then released. This certainly isn't what we need in terms of a business climate," Putin said.

Representatives of OPORA, which has existed for just over a year in Kaluga, say they are working hard to mediate between business and government, and enjoying some success.

"The government in this region is quite progressive. They brought the auto plants here, and understand the need for good outreach to the business community," says Andrei Morozov, a small businessman who heads the Kaluga branch of OPORA. "We find an open door in the governor's office. We are allowed to take part in writing legislation. We network with businesses and lobby the government. Things are turning around."

He insists that businesspeople who get in trouble with corrupt officials are usually involved in gray market schemes, and are thus vulnerable to pressure. "One thing we tell all our members is, register properly and pay your taxes, and things will be fine. We don't have any members who are in the sort of trouble Putin described. But if you don't obey the law, anything can happen," he says.

Inapt solutions

But some made-in-Moscow ideas aren't necessarily going to work out here.

For example, Putin has ordered a three-year moratorium on the battery of inspections faced by small businesses – from fire, sanitary, building inspectors, and many more – which are the biggest source of corruption, excess costs, and delays for start-ups. A moratorium is all very well, say officials in Kaluga, but some businesses need to be regularly checked because they pose potential threats to public well-being.

"If they work with food, medicine, children, or pose a fire hazard, we'll have a special system of checks. But most, like shops, may only need one inspection in three years. Or, if there's a complaint," says Ms. Komissarova.

Similarly, she says, the plan for a one-year tax holiday for new start-ups won't fly, because people who've been living in the gray economy will take advantage of it, while those who've been working openly and paying their taxes will feel aggrieved. The regional government can't forgo tax revenues altogether.

"We can apply this idea to socially useful businesses, like daycare centers, maybe veterinary services, and so on. But not generally," she adds.

'Last on their list of priorities'

One thing everyone says Moscow could do is make bank credit more widely available. It's not just high interest rates – the Central Bank charges 11 percent, but rates charged by banks can be 25 percent and higher – but also the sheer unavailability of long-term credits, and the risk-averse attitude of bankers who will simply not take a chance on an individual who wants to start a small business.

"It's absolutely impossible to get a loan," says Alexander Razgonov, managing partner of Ultra-K, a local company that installs energy-efficiency systems in buildings. "Banks demand huge collateral and impose risk premiums that no one could afford. It doesn't matter how good your business plan is. The federal government could force at least state banks to change their attitude."

Many people say things are evolving in a good direction, and it will eventually get better whether the Kremlin helps out or not.

"I'm optimistic about this country, but I don't see a lot of effective reforms for small business," says Okunev, the pub owner. "We are nobody to them, and very last on their list of priorities. I understand that if things get worse, I'm on my own."

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