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MODERNIZING RUSSIA PROJECT Part I: Society’S View of Doing Business in Russia

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MODERNIZING RUSSIA PROJECT Part I: Society’S View of Doing Business in Russia Center for European Policy Analysis MODERNIZING RUSSIA PROJECT Part I: Society’s View of Doing Business in Russia Denis Volkov Stepan Goncharov Maria Snegovaya 2 April 2020 CEPA BRIEF CEPA Center for European Policy Analysis All opinions are those of the author(s) and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis. About CEPA The Center for European Policy Analysis (CEPA) is a 501(c)(3), non-profit, non-partisan, public policy research institute. Our mission is to promote an economically vibrant, strategically secure, and politically free Europe with close and enduring ties to the United States. Our analytical team consists of the world’s leading experts on Central-East Europe, Russia, and its neighbors. Through cutting- edge research, analysis, and programs we provide fresh insight on energy, security, and defense to government officials and agencies; we help transatlantic businesses navigate changing strategic landscapes; and we build networks of future Atlanticist leaders. © 2020 by the Center for European Policy Analysis, Washington, DC. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the Center for European Policy Analysis, except in the case of brief quotations embodied in news articles, critical articles, or reviews. Center for European Policy Analysis 1275 Pennsylvania Ave NW, Suite 400 Washington, DC 20004 E-mail: [email protected] www.cepa.org Cover image: “Moscow, Russia” by Artem Beliaikin via Pexels. 2 Center for European Policy Analysis MODERNIZING RUSSIA PROJECT Part I: Society’s View of Doing Business in Russia Denis Volkov Stepan Goncharov Maria Snegovaya April 2020 2 Center for European Policy Analysis The Issue From the Editor: The Russian political system has several distinctive features: it is patrimonial (power and money/property are thoroughly mixed); the rule of law is so weak that it cannot, as in the West, separate power and property; property rights are weak and unstable; and informal, personal politics often trump formal politics since institutions are also weak. The distribution and redistribution of property among elites — often more than differences over issues — is thus a central dynamic of the system. On the one hand, these characteristics make the emergence of state-dominated oligarchic business almost inevitable. On the other hand, strengthening property rights may help foster the development of a middle class where small and medium businesses are the foundation of a more pluralistic political system. In this CEPA/Levada brief, the authors explore popular attitudes toward business and how they may be changing. he end of the Soviet Union brought increased opportunity for private business, which had only operated in limited capacity Tbefore 1991. But for private enterprise to flourish in Russia, market-based reforms — including the rule of law and reliable property rights — were needed. Boris Yeltsin introduced some of them, but many businesses in the 1990s were still forced to depend on protection rackets and relationships with criminals and security services in order to operate. Under Vladimir Putin, conditions temporarily improved but the business environment has largely deteriorated as unjustified criminal prosecution of entrepreneurs spread in the country followed by the 2008 financial crisis. What are the implications for Russians wanting to do business today? 2 Center for European Policy Analysis Contents Key Takeaways 1 Introduction 2 Methodology 3 Attitudes Toward Entrepreneurs 4 Entrepreneurial Experience and Desire to Open a Business 7 Business Conditions in Russia 10 Pressure on Business 12 Questions for Further Study 14 Acknowledgements 14 Endnotes 15 Cyberwarfare and Critical92 Infrastructure, 4 Center for European Policy Analysis KEY TAKEAWAYS Only 14% of Russians have experience running their own business and that number has Overall, the findings indicate modernizing declined over the years. About a quarter of attitudes of Russians toward private enterprise. the population (27%) would like to open their Most respondents think highly of businessmen own business. This group of respondents and their contributions to the development includes the youngest Russians, respondents of the country. These views are particularly with previous business experience, and more pronounced among younger, better educated, educated and economically better-off citizens. and economically better off respondents. This Those who want to start their own business contrasts sharply with Putin’s own beliefs that think that it will provide unique opportunities most businessmen are crooks, as well as the for self-realization and the formation of a state’s ongoing policies of prosecution and sense of independence from the state, and seizure of private enterprises in Russia.1 The even open the possibility of moving to another results indicate the deepening divide between country. the attitudes of the authorities and those of the Russian population more broadly. Almost three-quarters of those polled found it difficult to open a new business in Russia. And Contrary to general belief, Russians’ attitudes only a fifth of the population thought that the toward entrepreneurs are positive and have business environment in Russia was improving. improved in recent years. Today they are at their highest point (over 80% of respondents A majority of respondents thought start-up believed that small and medium-sized capital, connections to the authorities, and businesses benefited the country) in the 16 state support were key preconditions to years since the Levada Center began measuring creating a successful business. Most named responses to that question. In addition, many economic problems (high taxes, corruption, Russians believe that some of the most lack of start-up capital and high loan rates) as intelligent, talented, and capable people in key impediments to doing so. Russia work in business. Respondents see the main contribution of Russian entrepreneurs to While respondents did not mention the the development of the country as the creation wide prevalence of illegal “raider” seizures of jobs and the contribution of taxes to Russia’s of business in Russia as a key obstacle to budget. success, over a third of our respondents were aware of such practices. In addition, 40% At the same time, trust in the business sector mentioned unjustified criminal prosecution is much lower than that in other public and of entrepreneurs as impediments. Half of political institutions — the army, president, the respondents reported a prevalence of security services, and the church. This is unlawful pressure on businesses from various probably due to the widespread belief that inspection bodies. The majority thought the entrepreneurs evade taxes. Also, among attacks of security officials on entrepreneurs the most respected Russian businessmen, are driven by the self-interest of state officials respondents primarily named state-linked rather than desire to enforce the law. However, oligarchs rather than entrepreneurs who only 6% of Russians were able to name specific developed their own business from scratch. cases of unlawful pressure on entrepreneurs. Society’s View of Doing92 Business in Russia, 1 Center for European Policy Analysis INTRODUCTION forced to leave the country or put in jail. Over time, attacks on businessmen by state Russia’s experience with entrepreneurship authorities or state-linked businessmen spread is relatively short-lived. Throughout most of to smaller companies. This has been coupled the Soviet era, private business activity was with a process of deprivatization in which banned. By the end of the Soviet Union in 1991, the state increasingly nationalized formerly the state allowed a limited number of market- private enterprises. The Federal Antimonopoly based small businesses. Still, the conditions Service of Russia estimated that the share of needed for private enterprise to develop, such the state and state-owned companies to GDP as the rule of law and durable property rights, doubled from 2005 to 2015 from 35% to 70%.3 were absent. The environment improved At least in part, these actions by the Russian under Boris Yeltsin, the first president of the authorities were intentionally designed to Russian Federation, who launched multiple increase Russian citizens’ dependence on the free-market reforms, including privatization state.4 and trade liberalization. A society emerged in which private business and entrepreneurs Originally these developments were offset were a significant and necessary component. by a booming economy. However, following the 2008 financial crisis, economic growth Doing business in the 1990s was challenging. in Russia slowed down dramatically. This has The absence of law enforcement forced contributed to more interventionist policies by many business people to seek out protection the state at the expense of economic reforms. rackets from criminals and security services. These trends further undermined the business Violent clashes between business competitors climate and the country’s long-term growth and illegal business practices spread.2 Yet the prospects. The economic situation further 1990s featured a rapid rise in the number of deteriorated after Western countries imposed enterprises — briefly interrupted by the 1998 sanctions on Russia following the illegal financial crisis — mainly due to lower levels of annexation of
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