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RUSSIAN BUSINESS CULTURE

RUSSIA STILL STUCK ON THE WHEEL OF HISTORY?

by David A. Dyker

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The Montréal Review, September 2012

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 "Economic Policy Making and Business Culture: Why Is Russia So Different?" by David A.Dyker (Imperial College Press, 2012)

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"This is a lucid, balanced and convincing study. David Dyker is particularly insightful on the ways in which economic institutions work in Russia, the links with the past and the scope for change in the future."

-- Professor Philip Hanson, University of Birmingham

"In this thoroughly documented and accessible book, David Dyker shows the origin and history of the problem of unstable norms, which has permeated the Russian economy. In doing this he demonstrates that we cannot understand an economy outside the context of its historical roots. This book is a tour de force of how the Russian economy has become what it is today. It is an indispensable read for scholars, students and businessmen interested in Russia and will remain one of the key readings on the subject for years to come."

-- Professor Slavo Radosevic, Deputy Director of The School of Slavonic and East European Studies

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The return to the Russian presidency of Vladimir Putin gives us an opportunity to review some of the eternal questions of Russian economic historiography - why is Russian business culture so different, how much does this have to do with the peculiar traditions of the Russian state, and why does it never seem to change? The last question is the most important from the point of view of policy-makers and business leaders outside Russia, and the most intriguing. There are, after all, many countries in the world, notably Germany, Japan and China, which have unique, even idiosyncratic business cultures, cultures which have, nevertheless, show a striking capacity to evolve and adapt over the past half-century or so. But let us start by reviewing a few basic facts of Russian history.

• The majority of the population were nominally serfs but effectively slaves up to the Emancipation of 1861, and the peasantry continued to be subject to significant restrictions on their freedom of movement after that time. The early years of the twentieth century saw a movement towards establishment of a free labour market, but under Stalin a form of serfdom was reimposed on the peasants, while slave labour was widely used in the implementation of the five-year plans. Labour has typically been viewed as a passive subject for direction, rather than an active source of economic growth.

•  The Russian market economy has developed fitfully. Prior to the Emancipation, Russia's economy was dominated by semi-subsistence farming and a traditional (but highly sophisticated in its own terms) merchant culture. Only in the late 19th century did modern capitalism begin to emerge, but it was a form of capitalism under heavy tutelage from a state that was more interested in pursuing its own economic-strategic goals, notably in relation to the development of railways, than in fostering a competitive business environment. So Russian capitalist is clientalist, crony capitalism right from the start. The market was almost totally suppressed from 1928 to 1990, far longer than comparable periods in other communist or former communist countries. When the market was allowed to reemerge in the 1990s, it nevertheless displayed many of the features of capitalism under the Tsars.

•  Russia has never been a major exporter of manufactured goods, apart from some military and space-related exports in the communist and post-communist periods.

•  While totalitarian terror has dominated Russian politics for only comparatively brief (though critical) periods, the principle of autocracy has been pervasive. The principle has not excluded significant elements of cooptive oligarchy, especially in the late communist period and the Putin period, but it has meant that successive regimes have been characterised by strong top-down, vertical linkages, with horizontal linkages remaining weak. This has reinforced the clientalist tendency in the business sector, but has also made for poor coordination between different government departments.

•  Russian courts have always been weak, vulnerable to arbitrary interference from the government, and easily bribed by powerful plaintiffs or defendants.

How does all this work out in terms of the present day? Russia's contemporary dependence on exports of oil, gas and metals means that the country occupies, at the strictly economic level, an essentially colonial relationship to the advanced industrial economies. In terms of the domestic Russian economy, the orientation towards raw material exports has reinforced the traditional contempt for the human capital stock of the country. And it tends, as in other countries suffering from the 'resource curse', to produce a pattern of 'rent-seeking' - the way to get rich in Russia is not to develop an advantage in a competitive manufacturing or service sector, but rather to get a slice of the profits from hydrocarbon and metals exports. And, of course, the chief rent-seekers are the political leaders who fix the export taxes on these commodities. The export tax is the main determinant of the profitability of raw-material exports, so that the relationship with the government is the most important factor of business success for the oil, gas and metals companies. In this way, the traditional clientalist relationship of companies to the state is reinforced. At the same time, enormous scope for corruption is opened up, scope that is widened rather than constricted by the operation of the courts.

How does the principle of autocracy work out in a Putinist environment characterised by 'sovereign democracy' rather than outright dictatorship?

•  It means that different ministries within the government, all focusing on their relationship with the top leadership rather than with each other, will often pursue quite different policies in relation to key economic issues. Most notoriously the (liberally-inclined) Ministry for Economic Development is constantly at odds with the (conservative/protectionist) Ministry for Industry. This can cause major problems for companies, especially foreign companies that may lack insider connections within the ministries.

•  It means, as has been repeatedly shown during the 2000s, that in sensitive political cases, legal judgements are handed down to courts by the political leadership. It should be stressed, however, that this has rarely happened in the business sphere. (The Khodorkovsky case is an obvious exception to the rule.) A bigger problem for companies, including foreign companies, has been posed by arbitrary back-dated and retrospective tax demands. And where the political leadership decides that it wants something belonging to someone else, it always get it, as Shell found to its cost in relation to the Sakhalin-2 oil and gas development.

But none of this means that foreign companies cannot make good profits in Russia. On the contrary, a foreign company that obtains permission to operate in Russia is essentially being invited to joint the rent-seeking club. And as evinced by the case of TNK-BP, a foreign company may have a terrible time with bizarre court decisions (often reflecting bribery on the part of business rivals, or indeed partners, rather than political interference as such) and arbitrary tax demands, and still come away with excellent profits in the end of the day. Furthermore, in at least one respect, the Russian business environment is more congenial than that of most emerging economies. One of the great strengths of the old merchant culture of Tsarist Russia was respect for contracts, even contracts made informally. That tradition has survived to the present day, despite fifty years of communism, when contracts meant nothing. This is strongly confirmed by World Bank Ease of Doing Business surveys, which put Russia near the bottom of the global league table in terms of most indicators, but near the top in relation of contractual enforcement and discipline. So while a foreign company may find that Russian business partners can be difficult over matters like ownership rights, they will rarely fall down on a delivery commitment.

Why the oppressive continuity in Russian business culture? One reason is that the residual autocratic tradition makes it difficult for business to develop its own, 'organic', system of inter-company relationships. Another is that the continued preponderance of raw-material production within the Russian economy means that there is little immediate pressure on any of the major actors to change the system. Thirdly, Russia has never suffered the kind of catastrophic military defeat which mobilised forces for change in the business (and indeed political) culture of Germany and Japan. But we must be cautious here when we look to the future. Just because Russia has never, up to now, managed to break off from the wheel of history does not mean that it will never do so. Russia cannot go one for ever depending on what are, after all, exhaustible resources. A Russia of the future that depends mainly on high-tech manufactures and services for its prosperity, and on the educated middle classes that provide the human capital base for such value streams, will be a very different place from the Russia of today.

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David A. Dyker is Professor Emeritus at the Science and Technology Policy Research Center, University of Sussex (Brighton, United Kingdom). He specializes in the study of transformations and technological development in countries with transitional economies. Dr. Dyker served as a consultant for the PHARE-2 program in Romania, TACIS in Russia and the UN Economic Commission for Europe. He is the author of numerous publications and books on the Soviet economy and economic development in post-Soviet Russia.

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MORE ON RUSSIA IN THE MONTREAL REVIEW:

RUSSIAN POLITICS TODAY

by Richard Sakwa

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THE CHARACTER OF RUSSIA

by David Satter

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THE MYTH OF PUTIN THE STATE BUILDER

by Brian D. Taylor

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THE POLITICS OF INEQUALITY IN RUSSIA

by Thomas F. Remington

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