Entrepreneurship in Russia
After the end of communism and the collapse of the Soviet Union in 1991, Russia began the slow and hard process of moving towards a market economy. From the years of transition the number of Russian small business and entrepreneurship grew quite rapidly in the early part of 1990s. This was due to a series of economic reforms, including privatization. New entrepreneurship filled large gaps in the former Soviet economy, particularly in retail trade and services. However, Russian entrepreneurs face many barriers, which slow down the development of entrepreneurial activity in the country.
Some examples of such barriers are the process of registering a business and a high level of corruption in Russia. A new entrepreneur has to get tons of various official permissions, certifications, and registrations from different organizations. During this process and throughout the normal operation of a business a person is faced with corrupt bureaucracy that has the power to deny licenses, permits, office space, and access to materials unless substantial “gifts” or bribes are offered. Another problem is taxation. Corporate and individual income-tax rates in Russia are comparable to those in other countries in transition. However, the addition of discretionary regional and local charges makes it much more difficult to do business. Small business people are also confronted racketeers who offer protection of your business, which cannot be refused, in return for monetary compensations. These criminal costs substantially raise the costs of doing business. Also, gangs of racketeers known as mafias control some key inputs required for business operation. As a matter of fact Russian entrepreneur was for a long time thought of as a Mafiosi, which prevented many foreign business people from investing capital into the country. Luckily, this understanding weakened over time.
Despite all the difficulties many people own small businesses. According to the Russian SME resource center’s statistical report, in 2002 and 2003 small and medium sized enterprises with up to 250 employees constituted 94% of the total number of enterprises and 49% of total employment.
Due to an increase in economic discrimination against women after the start of economic reforms in Russia, many women became microentrepreneurs. With the fall of the communist state, the principle of “equal pay for equal work” was no longer enforced, resulting in a decline in women’s average wage levels from 70% to 40% of that received by men. Unemplyment among women also increased at a much higher rate than among men. This made many russian women turn to private entrepreneurship. At this time the estimeted total number of women engaged in various kinds of independent business is over three million, which accounts for about one-third of all self employed population in Russia.
After the collapse of the former Soviet Union in 1991, Russia began a series of political and economic reforms, including privatization, which was forbidden under the Communist system. However, due to significant barriers, the number of entrepreneurs has decreased dramatically over the last several years.
Despite some opportunities in Russia, the country’s Total Entrepreneurial Activity (TEA) is only 2.5%. Most analysts predict that entrepreneurship will continue to grow in Russia. However, it is hard to determine how events like the terrorist attack at a Russian school and the recent changes by Putin and the government will affect the entrepreneurial rise. Another barrier to entrepreneurs is the lack of qualified managers. Under communism, businessmen were told what to do, how to do it, and when to do it. As a result, many managers never developed basic strategy and management skills. This is changing in the younger generation though. As a result, young entrepreneurs could drive Russia’s economy to a whole new level in the future.
Many Russians have managed to own and operate small businesses. They have endured through organized crime by paying the gangs to protect their organizations. They have managed to thrive in an environment that doesn’t have strong contract or crime laws. They pay high taxes along with enduring strict regulations. The lack of government regulation and enforcement has allowed organized crime gangs, from street thugs to sophisticated financial swindlers, to flourish. In addition to extortion, kidnapping, counterfeiting and narcotics are increasingly becoming the activities of Russian organized crime groups. The Russian economy depends on the IMF and foreign loans. Russia’s official poverty level is defined as a monthly income of less than 829 rubles, or about $34 in the United States. More than 60 million Russians are believed to live below the poverty level.
- Entrepreneurship is Russia is developing at a fast rate. However, it’s prominent only in large cities such as Moscow.
- Entrepreneurs have somewhat different meaning in Russia. Most of the wealthy businessman that own their firms and call themselves Entrepreneurs, have become rich from the government. For example, if someone was in charge of a plant or a manufacturing facility during a Soviet Union, they basically took over it or privatized it with insignificant amount of money. There was no bidding system or a structured sale of government facilities.
- As of today there are many firms that are owned privately.
- There is enormous amount of FDI flowing into Russia
- Because of the large size of the country it’s relatively easy to start a new business without government relationships.
- If a business is making significant profits, there is a risk of protection against organized crime.
- Complicated tax and employment law
- In recent years the number of small entrepreneurship entities has been growing with the annual growth rate of 6%.
- Individual entrepreneurs have grown by 25% from 1998 to 2001
- By end of 2001 the share of employment in small entrepreneurship sector was 21-25% of the total employment in Russia. 17 million people were employed in the small entrepreneurship sector as of end of 2001
- During the recent three years have demonstrated 49% growth in investment activity in small enterprises.