Entrepreneurial Development in Russia

Vladikavkaz Institute of Management students. (Photo: Staff)

In June of this year, a young Russian entrepreneur launched a new business venture in his hometown of Vladikavkaz: an educational center that prepares high school students for university entry exams. The business already has 18 employees. It is poised to expand soon into offering foreign language instruction, according to its founder, Azamat Gagloev, a student at the Vladikavkaz Institute of Management, a CIPE partner organization.

Thanks to this success, Gagloev won recognition in October as part of the Global Student Entrepreneur Award competition, held at a government-sponsored innovation center in Moscow. The program that helped Gagloev design his business plan receives support from both CIPE and the Russian government’s ministry of economic development. When Gagloev was born 21 years ago, such a scenario would have been scarcely imaginable.

When the Soviet Union broke up in 1991, operating a private business had only been legalized two years earlier. Even then, substantial limits were still in place on private sector activity. The general populace was skeptical of individuals trading goods and services, activities that since the 1920s had been forbidden by law. Nowadays, of course, the opposite is true. Where once the Soviet government rooted out and destroyed private businesses, now Russia and other Soviet successor states commit significant resources and rhetoric to nurturing and protecting those businesses. Substantial impediments to doing business still exist in the former Soviet Union, but problems are usually associated with government inaction rather than action. Prosecutors turn a blind eye to corruption. Leaders don’t encourage the creation of pro-entrepreneur political parties. State-controlled banks ignore the credit needs of small businesses. Still, on paper, private enterprises in the region often enjoy just as much legal protection and government support as those businesses in countries with centuries of unbroken capitalist tradition.

One useful way to view the state of private enterprise development in the region is the Doing Business indicator compiled by the World Bank. The annual survey ranks 183 countries by looking at factors that include the ease of starting a new business, paying taxes, and obtaining electricity. Excluding Latvia, Lithuania and Estonia, the three former Soviet republics now in the European Union, countries in the region are ranked from a high of 16 in the case of Georgia to a low of 166 for Uzbekistan. Among the region’s bigger economies, Kazakhstan ranks 47^th, Russia comes in 120^th and Ukraine places 152^nd.

One element not captured by the World Bank’s study, however, is the level of democratic development and how it impacts doing business. This is the sphere where the pace of progress in the countries of the former Soviet Union has not kept up with private enterprise development. It’s also the area where most of CIPE’s resources in the region are devoted. Supporting Azamat Gagloev with the training to launch a business in Russia is just one small element of this broader program.

This post is part of a series on the fall of the Soviet Union, the 20 years of reforms that followed, and the challenges that lie ahead.