Wednesday, April 27, 2005

Bad News From Russia

The Wall Street Journal reports that things have not changed much for Russians wishing to start a small business. Link. (subscription required)
Marina Ivashina got sick of local bureaucrats meddling in her baby-food business here, so she complained to the Kremlin. Two days later, her bank account was frozen. Five months after that, her business folded.

Ms. Ivashina is one of countless grass-roots entrepreneurs laid low by the resurgent forces of Russian officialdom. In her case, it's the authorities of Oryol, a sleepy town, 240 miles southwest of Moscow, which for 16 years has been ruled by the same man, Governor Yegor Stroyev. Critics say he's crushed all opposition and given relatives and cronies a free hand to run the economy. Locals nickname him the "boa constrictor." [...]

Ms. Ivashina's case shows that the crackdown on Yukos is no isolated incident. Across Russia, entrepreneurs who run afoul of local government can be targeted with tax audits, punitive fines and intrusive inspections. Some, like Ms. Ivashina, are forced to close. [...]

In a recent poll by Russia's national small-business association, Opora, entrepreneurs said they were more likely to fall victim to illegal actions by officials and policemen than by criminals. Less than 1% of them said they were sure that they could protect their lawful interests against the regional authorities in court, while nearly 70% said they had only a slim chance or none at all.

In many ways, Oryol is typical. Local government across the country is still dominated by former Communist Party bigwigs like Mr. Stroyev who quickly swapped class struggle for the free market. But their control of the bureaucracy meant they could maintain much the same leverage over the local economy as they had during Soviet times. Firms close to -- and often indirectly owned by -- the governor enjoy sweeping perks and preferences while independent private business struggles to survive.

The roots of stifling bureaucracy go deep in Russia. It wasn't just started by the Communists, although they combined it with terror, in the form of the Gulag. Read Dostoevsky for a view of pre-Communist Russian bureaucracy.

Under Yeltsin, moves were made to disband many of the organs of totalitarianism, but hardly any laws were changed. A legal framework for private property and privately owned businesses was never established. So when an unreconstructed Communist like Putin came to power, he was able to move the country back toward where it had been when he was a KGB official. Instead of state ownership, we have kleptocracy by former top Communist officials and their relatives. This was a world-class case of lost opportunity. Russia could have been a thriving, rapidly growing society today, instead of a continuation of Soviet stagnation.


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