Russian entrepreneurs

Unit 6

After the end of communism and the collapse of the Soviet Union in 1991, Russia began the slow and hard process of moving toward the 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 micro entrepreneurs. 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. Unemployment 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 estimated 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.

RUSSIA’S VODKA KING

Once upon a time, in the village of Kayurovo, Yaroslavl Province, there lived five brothers. Their father was a peasant serf. In the 1810s, many of the serf peasants in the Upper Volga area obtained permission from their landlords to drop farming and do seasonal work instead. The two elder brothers, Yakov and Arseny, went into the wine business. The successful wine dealership enabled the brothers to buy their freedom from the Demidov family that owned them, and they adopted the name Smirnoff, which in Russian means "quiet" or "submissive." Arseny's son Pyotr was born in 1831.

Pyotr Smirnoff started to work for his uncle at a wine-cellar on Varvarka Street at the age of seven. Like any other apprentice, Pyotr did all sorts of jobs about the house, swept the floors, washed up, polished samovars and boots for the prikazchiks and ran errands in Moscow. In reward for his zeal, he received a few kopecks a day.

Pyotr's father Arseny purchased the family's freedom in 1857 and became a merchant of the Third Guild the next year. At the time the family was headed by Arseny's brother Ivan. He was an active philanthropist and helped the local church and commercial school. The pa­triarch of the family died unexpectedly in 1873.

By then Pyotr's career was on the rise. He had be­come the head salesman at his father's wine-cellar opened in 1859 on Pyatnitskaya Street. He transformed his father's wine-cellar into a vodka distillery, which em­ployed nine workers. In 1863 Pyotr moved up to the Sec­ond Guild after having declared the required capital.

In the mid-1860s Pyotr Smirnoff owned several wine-cellars and the vodka distillery, which now had 25 work­ers. In 1871 he became merchant of the First Guild. He was now the leading supplier of liquor in Zamoskvorechye in Moscow. The house at 1 Pyatnitskaya became his headquarters and residence. Today the building has been restored basically as it was in Smirnoff's time.

By 1871, the Smirnoff company was among the 30 Moscow enterprises that supplied their goods to all parts of Russia, including Central Asia. It won its first award at the World Fair in Vienna in 1873. The company's output that year was 1,299,000 liters worth 600,000 rubles. In 1875 the output went up to a million rubles' worth, and the number of workers to about 100.

Pyotr had never received a formal education and, indeed, had never learned to write properly, but like many self-made men he had immense respect for education. He sent his children to elite schools, after which his sons joined his business.

Pyotr Smirnoff made up for the shortcomings of his own education by hard work and high moral standards. He always kept his word and demanded the same of his partners. Gone were the times when cheating and swindling were the road to success (like they are today).

When hiring prospective job-seekers, Pyotr would subject them to a test during the interview. He would offer them some of his choice vodka. At first the applicant would refuse, claiming to be a teetotaler, but Pyotr would continue to press him. If the hapless fellow finally agreed to down a couple of glasses, that was it: "I thought you said you never drank," Pyotr would say. "I can see there's no way I can do business with you. Get out."

As to the workers, they didn't even pretend not to drink, but there were two golden rules at the Smirnoff distillery: don't steal and keep your drinking under control.

High profits enabled Smirnoff to take a paternalistic attitude to his workers and provide them with social ser­vices and facilities, which were later introduced on a na­tional scale in the country by the Soviets. Smirnoff built cheap housing for his employees, and the largest apart­ment building also had a kindergarten, laundry, bath­house, pharmacy and out-patient clinic. After working for 25 years, employees received a life-long pension, and children from needy families had access to free education.

In the mid-1880s, Pyotr Smirnoff expanded his distill­eries and became the largest distiller not only in Russia but also in the world. The number of workers he em­ployed reached 1,500, and the number of labels printed for his bottles rose to 60 million a year. At the turn of the century the Smirnoff Company offered 400 different kinds of alcoholic drinks. The most famous and popular was the 21 vodka and the Nezhinskaya Rowanberry. The Smirnoff Company became the official alcohol supplier for the Czar's court in 1886. In addition to vodka, Smirnoff stocked a broad range of wines. The secret of Smirnoff's success lay in the high-quality spirits and top-grade fruit, grapes, and berries used in making liquor.

In 1895, the state monopoly on hard liquor was rein­stated, first in the eastern provinces and later throughout most of Russia. This was a terrible blow for the Smirnoff Company, whose output plunged 15 times, and for Pyotr Smirnoff personally. His health deteriorated, and his condition was diagnosed by some as monopolies. In 1897 he drew up his last will and testament. Pyotr Smirnoff died in 1898 and was accorded a regal funeral. In addition to his family and colleagues, thousands of common folk and workers followed his coffin.

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