Russia’s big business / small business paradox

Tim Worstall, who runs a company that trades extensively in Russia, has a few observations on the Russian business climate, from the perspective of the smaller business owner:

The annual global market for one material we deal with (and we have a majority of that market) is around $3 million a year. That’s not the margins, that’s gross. These sorts of sums might be of interest to the local krishas, but not to the people who actually get to make the central rules. Whatever they could get out of controlling that market would pay for a night out at a club, no more. So they don’t bother.

For us that’s just fine, we carry along merrily, paying our taxes but not having some bunch looking over our shoulder. But it contains the seeds of a huge problem for Russia in the future. Any time a sector or market looks like becoming big enough to be interesting, big enough to help pay for a foreign villa, the rules are going to be changed so that the bureaucracy can get its cut. And obviously, this will mean that just as people find an interesting new market, they’ll face a new tax/bribe burden. That just isn’t going to be good for the development of the small and medium enterprises (SMEs in the jargon) upon which everyone is now agreed continuing economic growth depends.

I have to say that, while I was in Russia, as far as I noticed, the small scale of an industry or company never seemed to deter the local krishas (krisha means ‘roof’ in Russian – which colloquially means someone who gives your company ‘protection’ in return for a fee).  I met a guy in Irkutsk selling paintings on a street-corner for a local artists collective, and he told me in detail just how much he had to pay to keep his paintings from being scratched up – of course, given the small scale of his business, this only (only!) amounted to about $15 each month.  Every industry, it seemed, no matter what size, had its own form of krisha. 

Maybe its just that, while the low value and overheads of the smaller industries means that private – almost freelance – krishas can operate, in the highest, most valuable industries, the only krisha with the resources to dominate is the government, with its bureaucratic support structure.

The inspiration for Tim’s piece, by the way, is an interesting article in the Guardian today by Nick Paton Walsh, which pretty much argues that Putin, in the guise of Kremlin, Inc. (or should that be Kremlin, Inc. in the guise of Putin?) is gradually establishing control of Russia’s primary industries, buying up controlling stakes in energy sector companies like Gazprom.