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Russia: Small Business Confronting Corruption

  • Sophie Lambroschini

In most industrialized countries today, about half of the gross domestic product is created by small and medium-sized businesses. Not so in Russia, where some 30 million people working in modest enterprises account for only one-tenth of the country's GDP. In part one of a two-part series on Russia's small businesses, RFE/RL correspondent Sophie Lambroschini examines the burden of local corruption.

Moscow, 29 June 2000 (RFE/RL) -- Russia's giant utility monopolies and its "oligarchs" -- the rich businessmen with influential government contacts -- are said to benefit greatly from state help. But the country's small business men and women -- whose work ranges from brewing beer to selling shoelaces -- get little, if any, such aid. According to one recent poll, more than 90 percent of them say they have never received any help from the state.

Nor do most of Russia's small entrepreneurs have financial or political contacts to help them out. Many of them are at the mercy of well-connected local officials who habitually demand bribes. Small business owners say paying bribes can be a prohibitive business expense.

Take Tatiana Vinogradova, for example. She is a former factory worker in Tula, a city 200 kilometers south of Moscow that had lots of defense-oriented jobs until the defense industry crashed along with the Soviet Union in the early 1990s. As a result, in 1992, Vinogradova joined trainloads of poor Russians who traveled to Poland to buy cheap goods and then returned to sell them in Tula's cold and dreary outdoors markets.

Two years ago, after many such trips, Vinogradova finally was able to close her outdoor stall and open a counter inside Tula's main children's store, Children's World (Detsky Mir). She thought her efforts had finally paid off -- until, five days after she had set up her business, an official from the government's trade inspection bureau came by to look over her display of Mickey Mouse sweaters and colorful bibs.

Vinogradova told RFE/RL that the official made an all-but-impossible demand:

"You know how she did it? My goods are from Poland. So she starts with, 'It's a Polish label, where's the translation into Russian?' I can't translate them all -- a thousand baby sweaters! But she doesn't threaten me with the law, she simply asks for a bribe. And I actually agreed to go on her leash and gave her the bribe. I gave her about $1,400 a month [a few times], thinking that then it would be over. But there was no end to it. So I told her I was closing my counter. But she said, 'Yes, but I know you have another stand in the main shopping mall.'"

When the trade inspector showed up there, too, Vinogradova feared that her business would soon be gobbled up and decided to take her chances with another law-enforcement organ -- the anti-mafia police. The police equipped Vinogradova with marked bills and a hidden microphone to trap the corrupt official. At the last minute, Vinogradova said, she almost felt sorry for the woman:

"When she took the marked bills, I thought, 'Wow, you've signed your own death warrant. The directors of Children's World and other stores all knew her very well. They literally drank to my health for three days, isn't that something? Because she had terrorized the whole city -- everyone paid, and everyone kept quiet about it."

Tula's small-business community was lucky to receive cooperation from the police. In Moscow, that kind of help is not often forthcoming.

Nikita Kuznetsov is a lawyer who works for a small-business support group called the Moscow Region Movement for Markets and Small Businesses. He says that in the capital, law-enforcement officials represent the greatest menace to small businesses.

Kuznetsov points out that Russian laws are often imprecise and unreasonably demanding, making them ideal tools for corrupt law-enforcement officials. He cites unrealistically high federal and local tax rates that force small businessmen to resort to "creative accounting" -- that is, lies and fraud. What's more, Kuznetsov says, the same high tax rates also make small businesses quite vulnerable to official bribes.

Russian law allows any police officer -- including a traffic policeman -- to check the price list of any business. According to Kuznetsov, that opens the door to official bribes. He recounted a typical case to RFE/RL:

"A man has a store, an ordinary store -- what is called a 'trade kiosk.' The economic crimes police come to see him and confiscate his goods, worth about 60,000 rubles ($2,200). They inventory the goods and take them away, so you have a store without goods. The next day, the businessman is ordered to appear at a police station. There, they tell him confidentially, "We confiscated your goods worth 60,000 rubles. Give us 30,000 rubles, and the goods are yours. Does he give them the money? Yes, he does -- because there is no other way."

Recently, Kuznetsov's movement organized a demonstration against a Moscow municipal decree obliging all market stalls to install cash registers. The decree was aimed at better control over what is called "gray market" commerce -- small sales that can evade taxes because there is no means of checking the accounting. The cash registers, which cost up to $400 each, were to be equipped with electronic chips to record the sales.

Kuznetsov says: "This means the little babushka who might starve by living only on her pension -- but is making ends meet thanks to a little stand where she sells cigarettes -- will have to invest in a machine that will eliminate her profit."

For Kuznetsov, Russia is far from ready for complicated, Western-style business regulations. He says that the best way to reduce the country's small-time -- but extensive -- police corruption is to reduce government rules to a minimum:

"Reduce the powers of the state as a controlling organ -- that's a classic free-market principal. How can you fight bribe-taking? Only by eliminating the pretexts for taking bribes -- or at least reducing them to a minimum. We need a law that clearly states the conditions under which official intervention -- and eventual confiscation of goods -- is authorized. If a regulation simply says that a militiaman is allowed to verify suspected business fraud, then that's what he'll do -- with almost unlimited powers."

But in Russia today, state intervention in business seems to be growing, not diminishing. One new difficulty for small businesses is the growing monopolization by regional officials of highly profitable economic areas. Nikolai Petrov, an analyst with the Carnegie Endowment in Moscow, cites the example of small vodka distilleries, a booming local business.

Petrov says that not only do regional officials try to keep factories within their territory -- so as to collect their revenues -- but they also try to control the overall market, by setting up companies that squeeze competitors out of the regions. They introduce requirements for all kinds of excise stamps and quality certificates that prevent others distilleries' vodka from entering the local market.

Petrov notes that complying with these bureaucratic requirements usually takes so long and costs so much in bribes that by the time a competitive distillery actually collects all the necessary authorizations, the regional official's distillery is already solidly in place.

In Moscow, the high cost and instability of property leases pose another major problem for small businesses -- the difficulty of obtaining loans. This is especially true of loans needed for investment in production -- for which, in the eyes of Russian banks, there is no valid collateral. Kuznetsov of the Moscow Region Movement says:

"When the property is not privately owned, no one will extend you long-term credit because the only stable collateral for loans is land. [That means] if the land is not yours, your business is not considered stable."

Three months ago, the State Duma finally adopted an aid program for small businesses intended to provide them with technical assistance as well as financial support. Its aim is to reduce all the administrative obstacles that hold back the development of small businesses in Russia today -- a very tall order, indeed.