Informality trap: a foundation of Russia’s statist-patrimonial capitalism^*

* I dedicate this article to the memory of my dear mentor and friend Uwe Becker and to his family: Janneke, Kiki and Max.

ABSTRACT

The paper analyses the origins of Russia's statist-patrimonial political economy, marked by insecure property rights and particularistic state-business relations. Based on in-depth interviews, the paper argues that statist-patrimonial capitalism is not only a result of top-down activity of the state sovereign and its corrupt agents but is also a system that rests on the bottom-up contribution of the bulk of economic actors - small and medium-sized firms. This contribution happened - often inadvertently - through informal practices that locked small firms in the ‘informality trap' and undermined the security of property. Back in the 1990s some of those informal practices were taken up by companies out of expediency. In the 2000s informality backfired as the state exploited it to violate property rights of virtually any business actor. Thus the advent of statist-patrimonial capitalism was facilitated, among other factors, by the informal choices and practices of business actors in the previous decade.

KEYWORDS:

• Russia
• varieties of capitalism
• patrimonialism
• informality

1. Introduction

After the dissolution of the Soviet Union in the 1990s Russia radically liberalised its political economy, privatising large swaths of the formerly centrally planned economy. In this first decade of capitalism transition, the Russian state was weak: most institutions such as tax collection, judiciary and the police were underfinanced, largely dysfunctional and corrupt. In such a hostile and uncertain environment, the mafia, criminal racketeering and private contract enforcement proliferated, while many nascent private firms got involved in corruption, tax evasion and other informal practices (Vinogradova, 2006; Volkov, 2002). It is generally expected that after the transition period firms start demanding state accountability and stable, secure property rights (Markus, 2015). This did not happen in Russia, however. To the contrary, after president Putin came to power at the turn of the century, even though state capacity increased and the mafia was pushed back, property rights remained insecure and informality got entrenched, understood as an array of practices that infringe on or exploit formal rules and make use of personal networks in order to achieve goals outside the personal domain (cf. Ledeneva, 2006, p. 3; Vasileva, 2018).

The politico-economic model that developed in Russia under Putin's rule can be called statist-patrimonial capitalism (cf. Becker & Vasileva, 2017). It is characterised first of all by the strong role of the state, which re-nationalised strategic industries, made large businesses owned by the oligarchs pay their taxes, generated an impressive economic growth, aided by the natural resource bonanza, and placed loyal elites and businessmen at the commanding heights of the economy (Vasileva, 2014). But state involvement in Russia's economy also increased in a patrimonial fashion, meaning the proliferation of clientelism, informal politics and corruption (for a detailed discussion of patrimonialism, see the introduction to this Special Issue by Vasileva-Dienes & Schmidt, 2018). This patrimonial involvement occurred mainly through informal interference of corrupt bureaucrats, who deploy the power of their position for personal gain and, most notably, threaten private businesses through predatory practices such as bureaucratic extortion, legal harassment and illicit asset-grabbing (see, for example, Gans-Morse, 2012a). Such state threats to property rights replaced private coercion emanating from the mafia and are a fundamental feature of Russia's statist-patrimonial capitalism (Gans-Morse, 2012a). They have proliferated since about the mid-2000s and nowadays occur in all Russian regions without significant variation, as research by Markus (2015) shows.

Why did informality and insecure property rights get entrenched in Russia in the form of statist-patrimonial capitalism instead of remaining a mere transitional feature?¹ By addressing this question the article seeks to explore some of the origins of Russia's variety of capitalism.

One crucial and extensively studied factor of the emergence of Russia's statist-patrimonial capitalism concerns the role of the state. The post-communist state is often identified as the ‘main culprit’ of Russia's ‘wayward transformation’ and its ‘corrupted’ capitalism (Easter, 2013, p. 200). In particular, an important factor is the lack of institutional constraints on sovereign predation (e.g. Dawisha, 2014; Hanson, 2007; Yakovlev, Sobolev, & Kazun, 2014), or, more generally, a traditional preponderance of state power resources such as coercion and capital in relation to society (e.g. Easter, 2013; Pipes, 1999). Conversely, other researchers view the Russian capitalist form as a product of the weakness of the Russian state, unable to control its lower bureaucracies that prey on business (see, most notably, Markus, 2015).

Either way, the predominant statist paradigm focuses on top-down factors² in the emergence of statist-patrimonial capitalism. Society, and business in particular, appears as a passive participant in the process. Accounts that acknowledge the active role of business focus on large firms and their political leverage (Hellman, 1998; Yakovlev, 2006). They were early winners³ of market reforms and subverted property rights security by blocking further reform in order to preserve ‘the special advantages and market distortions upon which their own early reform gains were based’ (Hellman, 1998, p. 204). Small companies, on the other hand, appear as passive victims of state predation, pushed to collude or hide, merely adapting to imperfect institutions (Gans-Morse, 2012a; Markus, 2012; Paneyakh, 2007).⁴

This article complements this account by providing a different perspective – one that reassesses the role of small business. My main argument is that statist-patrimonial capitalism is not only a result of the top-down activity of the state sovereign, its corrupt agents or cronies in big business, but also a system that rests on the bottom-up activity of the bulk of economic actors – small- and medium-sized enterprises (SMEs). Viewed from this perspective, businesses are not merely passive victims of state threats to property rights, but may have also been in many cases an active, or at least inadvertent, contributor to their emergence. This contribution happened through some of the small firms’ informal business practices in the 1990s such as tax evasion, bribery or predatory corporate takeovers, some of them targeted, ironically, at securing property. I make the case by providing evidence that small Russian business initiated some of the corrupt and predatory practices at the beginning of Russia's post-communist transition in the 1990s. I discuss the motives for such practices and scope for alternative behaviour, showing that the particular firms’ choices played a role in the emergence of Russia's statist-patrimonial capitalism. Certainly, in the ‘chaotic’ first decade of Russia's capitalist transformation some of the informal business practices were virtually inevitable. However, a notable part of informal practices was not, and it is these practices that, as I will argue, helped lay the foundation of Russia’s capitalist form as we know it today.

The main causal mechanism of this dynamic is dubbed ‘the informality trap’: having embarked on informal behaviour in the 1990s, which may have been expedient or in some cases inevitable back then given the uncertainty of transition, small Russian firms experienced difficulty in returning to the formal sphere because of their legal noncompliance and the prospect of a pending punishment. As a result, their property became a welcome target for predatory state agents in the 2000s. Thus certain choices made by the companies at the beginning of Russia's transformation locked them in the trap of informality and backfired in the long run, allowing (corrupt) state actors to turn the tables and exploit the informality to undermine property rights. To put it bluntly, by behaving informally many small Russian companies inadvertently dug their own graves – and, as we shall see, in many cases also the graves of those firms that were in legal compliance. In other words, the informality trap made the transitory behaviour of firms a persistent feature of the Russian political-economic system as we know it today and thus sheds new light on its origins.

In theoretical terms this research contributes to the Comparative Capitalism literature, following the Open Varieties of Capitalism approach pioneered by Uwe Becker (2009, 2014) (see the Introduction to this Special Issue by Vasileva-Dienes & Schmidt, 2018). In a nutshell, this approach views political economies not as stable and institutionally coherent entities, but rather as open systems subject to change, which result from various pressures, political contestation and the process of societal trial-and-error. Thus the approach is particularly suitable for analysing dynamic and rapidly changing capitalisms of emerging economies. According to Becker, factors of change may include on the one hand structural forces such as international competition, or institutional and state-related factors, be it a formal regulatory framework or informal bureaucratic discretion. On the other hand, change can be also driven by the agency of relatively autonomous actors such as companies and, notably, unintended consequences of action. Acknowledging the significance of the former group of factors, this article focuses on the latter group, and in particular on how certain actions of the bulk of Russian companies, often chosen as an adaptation to a very uncertain or restrictive environment, shaped this very environment in a recurrent fashion and thus have had implications for the political economy at large.

The article proceeds as a historical study of the informality trap using a longitudinal narrative involving process tracing of decisions by groups of firms and political actors. I first describe the informal business practices of the Russian small firms in the 1990s, analyse the motives for informal behaviour beyond pure necessity and discuss options for alternative action. Thereby I trace how small firms fell into the informality trap. I then show how in the 2000s the firms’ informal behaviour backfired and ultimately undermined the overall security of property rights. Process tracing reveals patterns that question the causal, top-down mechanisms presumed by conventional accounts, and demonstrates a step-by-step mechanism linking the bottom-up informal activity of small firms to the emergence of statist-patrimonial capitalism.

For data I rely on two sets of in-depth interviews on day-to-day interactions between small firms and state bureaucrats: one that I conducted in Moscow and St Petersburg in spring 2014 (34 interviews with Russian small and medium-sized entrepreneurs and business association executives, lawyers and experts, see Appendix) and another conducted in several Russian regions the late 1990s and published in full transcript by Kliamkin and Timofeev (2000) (22 interviews with Russian businessmen and bureaucrats on informality and corruption). While the second set of interviews gives a detailed first-hand account of informal practices and choices made by firms in the 1990s, the first set allows us to trace how some of those practices endured and backfired. This data is complemented by the results of surveys and in-depth interviews in the 1990s by the Russian scholars Radaev (1998, 1999), Paneyakh (2007) and Dolgopyatova (1999). I supplement this primary material with relevant newspaper articles and secondary literature.

The findings contribute both to the empirical studies of the evolution of Russia's political economy by re-assessing the relative role of state and business in the emergence of Russia's variety of capitalism, and to the theoretical debate about changing varieties of capitalism in emerging economies and the ambiguous role of patrimonialism.

2. 1990s: small firms fall into the informality trap

In the early years of the Russian post-communist transformation the extent of informal business practices and the shadow economy was considerable: 27% of GDP in 1993 and 50% by the mid-1990s, according to the official estimates (Kosals & Rybkina, 2002, p. 20). In the case of small and medium-sized firms, at least 30% of business activity was in the shadows, with tax evasion, double bookkeeping, cash operations and bribery being widespread (Dolgopyatova, 1999, p. 51).

While the origin of Russia’s informal business practices lies out of scope of this paper and is analysed elsewhere (Ledeneva, 1998; Vasileva, 2018), a short remark for the sake of contextualisation seems appropriate. Some informal practices constituted a continuity from Soviet times (analysed at length in the works of Alena Ledeneva), whereas others represented a qualitatively new response to new realities. For example, cultivation of mutually beneficial connections with state bureaucrats and some forms of corruption certainly belong to the old well-established repertoire of informality. But practices such as naezdy and raids (prepaid business attacks), detailed below, represented new phenomena reflecting new legal environment including legal loopholes.

The causes of informal practices can be divided into two groups of causal logic: necessity and expediency.⁵ Many small companies were pushed to conduct part of their operations in the shadows given the specificity of the Russian political-economic environment in the early 1990s (structural forces, according to Becker). At the same time we can and need to take the widespread popular belief that it was impossible to do honest business in Russia with a grain of salt: a considerable part of the informal practices was not inevitable and constituted a conscious entrepreneurial choice meant to exploit the loopholes and business opportunities of the nascent Russian capitalist order (agency and unintended consequences of action, according to Becker).

2.1. Informal behaviour by necessity

At least five aspects of the Russian political-economic environment of the 1990s compelled many companies to break the law and pushed them into informality. First, consider the regulatory environment, marked by excessive, contradictory and changing regulations (Frye, 2002, p. 574; Frye & Zhuravskaya, 2000; Paneyakh, 2007; Pastukhov, 2002). The following case can be viewed as exemplary for many of the incoherent SME regulations: for security reasons Russian jewellery shops were required to have barred windows, but at the same time those very bars contradicted fire safety rules. There was no way to satisfy both regulations. Very high taxes were also a problem: some firms reported the tax burden approaching or even exceeding 100% of profit (Polonsky, 1998, p. 525).⁶

Another aspect concerns the weakness of the law enforcement institutions, the lack of coordination between various agencies authorised to inspect business and the ineffectiveness of courts. Additionally, bureaucratic discretion in law enforcement allowed arbitrary interpretation of particular business regulations and bureaucratic extortion. Firms often succumbed to these pressures and resorted to paying bribes.

Thirdly, criminal extortion rackets pushed firms to ‘buy off’ threats or to give away substantial parts of their profits. In the absence of a predictable and effective legal environment, criminal groups (so-called roofs) supplanted dysfunctional state institutions and under a threat of violence offered their clients ‘protection services’. Calling the police in the case of a criminal racket was an ‘utterly hopeless enterprise’ (Radaev, 1999, p. 50). Criminal ‘roofs’ also performed some of the indispensable functions that the state failed to deliver, such as debt collection and the enforcement of contracts (Gans-Morse, 2012a, p. 266; Radaev, 1999; Vinogradova, 2006). In addition, monetary constraints such as high inflation, difficulties in accessing credit, non-payments between business partners and barter often pushed companies in the 1990s to step out of the legal sphere, for example by cooking the books or evading taxes.

Finally, an important driver of informal practices was unfair competition with businesses affiliated with the bureaucrats. For example, a Rostov entrepreneur recalls a state tender for laying tiles on the sidewalks of the city in the late 1990s. The winning bid came from a company controlled by Rostov's officials, producing tiles in the city's prisons, ‘of course illegally’. ‘The bureaucrats reap super-profits because no tax inspector will ever check this company’ (Kliamkin & Timofeev, 2000, p. 483). Moreover, affiliated companies enjoyed privileged access to credit and other financial privileges. Competing with such companies often required paying kickbacks or cutting costs through shifting part of the operations into the shadows.

Serious as they were, these external pressures were neither universal nor totally unavoidable. Even though it is hard to estimate the exact scope of the criminal protection rackets, there are good reasons to believe that the range of the mafia may have been exaggerated in the popular view. For example, a 1997 survey by Radaev (1999, p. 39f) reveals that only about 45% of businesses were paying protection money, amounting to about 10–20%, occasionally 30% of their profit. The majority of surveyed firms did not perceive criminal rackets as a serious problem. Similarly, a survey by Frye and Zhuravskaya (2000) found that in 1996 about 40% of small Russian retail shops had contact with criminal protection rackets. Two years later, it was just 25% (Frye, 2002).

Available data on bureaucratic extortion reveal a similar picture: the widespread view that nothing gets done in Russia without bribing the officials may be an exaggeration. For instance, a 1993 poll showed that while 62% of entrepreneurs experienced extortion (16% of them experienced it often), 38% did not experience any (Radaev, 1998, p. 64). A 1997 poll showed almost identical results (Radaev, 1998, p. 64; Radaev, 2002, p. 64). Moreover, apparently not all Russian businessmen who faced extortion by the bureaucrats succumbed to it: in Radaev's 1997 survey, 20% of businessmen reported not having paid the requested bribes despite bureaucratic extortion (1998, p. 65). A survey by Kliamkin and Timofeev (2000, p. 216) in the late 1990s came up with a similar finding: 22% of the surveyed entrepreneurs reported they had not faced corrupt activities or extortion by the bureaucrats in recent years (compared to 58% of respondents among the general population). Even though these figures are aggregated and the actual experience of extortion and the ability to resist it may vary depending on the size of the firm and business sector, these figures put the widespread belief about the occurrence of bureaucratic extortion in perspective.

2.2. Informal behaviour by expediency

Having discussed various constraints and pressures for informal business practices, we need to bear in mind that those factors were not wholly external and that there was a certain demand for such practices in the business community (Radaev, 1999). In fact, a review of available statistics and anecdotal evidence suggests that a considerable part of small firms’ informal activity in the 1990s occurred not in response to crude pressure or objective circumstances, but as a matter of a conscious choice made by the entrepreneurs (agency as a driver of change in the terms of Becker's open varieties of capitalism theory). The main reason for such choice was expediency: an attempt to cut costs, to exploit the legal uncertainty or to secure a competitive advantage or a lucrative business opportunity. I will focus on three prominent practices:

1. Tax evasion and other illicit operations with the goal to hide revenue;

2. Bribery as a way of buying the privilege to break the law (or make the bureaucrat turn a blind eye to a violation);

3. Prepaid business attacks (naezdy) and illicit corporate takeovers (raids) by means of exploiting legal loopholes and making use of corrupt judiciary and law enforcement.

(1) Tax evasion was very widespread in Russia in the 1990s: firms hid on average between 40% and 70% of their revenue. For example, in Vinogradova's sample of 45 shops in St Petersburg, only six shops reported not concealing revenue (2006, p. 457). Many tricks were used to evade taxes, such as black cash transactions, partial payment of salaries in cash, the use of shell and offshore companies as well as various, sometimes very complicated, financial schemes (for details, see Ledeneva, 2006, pp. 156–159).

An account by the co-owner of a financial company gives an impression of the aim and scope of such schemes in the 1990s:

The specialisation of our holding is devising and deploying accounting schemes, transferring our clients’ money offshore. … For each scheme we prepare a large pile of documents, which an outsider cannot sort out. Our schemes boil down to diminishing the size of necessary taxes to 2–3% of turnover. … [Or take] another example: a manufacturer produces a good, which has a cost price of 50 rubles and sells it for 100 rubles. So she pays taxes on 50 rubles. We can prepare the documents in a way that the cost price becomes 90 rubles. (Kliamkin & Timofeev, 2000, p. 415)

On the one hand it is not always easy to tell whether the goal of tax evasion is expediency or sheer survival in terms of maintaining a profitable enterprise, as most entrepreneurs seemed to lament in the interviews of the 1990s made available to me. On the other hand, there are good reasons to believe that, as Ledeneva (2006, p. 159) notes, ‘[g]iven the skills and the determination to invent such schemes, it is unlikely that the reduction of the profit tax will be a sufficient stimulus for companies to give up these practices’.

One classic example of tax evasion is found in the manipulation of customs clearance. In the 1990s it offered handsome profits to the Russian SMEs, many of whom were engaged in selling goods imported from abroad. A manager of a retail firm recalls his experience with customs when importing cars: ‘The customs officers turn a blind eye to forged documents and for a bribe let the cars pass and later levy a tiny duty on these cars’ (Kliamkin & Timofeev, 2000, p. 482f).

Another very widespread practice concerned cooking the books: official records did not correspond to the actual revenue. For example, a retail trader from Moscow keeps a record of her operations, as required by law, but grossly understates the profit:

For example, I bought the shampoo for 15 rubles, and sold it for 23 rubles, but [in the books] I write down only 18. … It is impossible to catch us. About 80% is in the shadow. This is the only possible way. Everybody works this way. Every day I sell goods for 2000 [rubles], but show [only] 300 rubles. (Kliamkin & Timofeev, 2000, p. 436f.)

The system of tax evasion became further entrenched by the prevalence of undocumented cash payments: in the 1990s many Russian customers were ready to pay in cash without receipts for a wide range of purchased goods and services including repairs, construction and renovation. In fact it was considered absolutely normal, like so many other informal ways of getting things done (Kliamkin & Timofeev, 2000, p. 207).

(2) Bribery unsurprisingly is a two-sided story involving bribe-takers (state officials) and bribe-givers (entrepreneurs). However, there is an important difference between offering a bribe and a bribe being extorted. By bribing officials, entrepreneurs bought the right to shadow entrepreneurship, or the privilege to break the law by making the bureaucrat turn a blind eye to the legal violation. For a bribe entrepreneurs might also try to secure individual privileges or lucrative state contracts.

Available evidence in the 1990s suggests that cases where companies ‘extend the envelope’ were not rare. In a 1997 survey of Russian firms, about half of the respondents conceded that entrepreneurs played an active role in corrupt relations with state officials (Radaev, 1998, p. 71). Anecdotal evidence from interviews with entrepreneurs admitting bribery abound. For example, one entrepreneur prefers to ‘grease the palm’ in case ‘if you urgently need some official document, for instance within a day, but it is normally issued within about a week’ (Kliamkin & Timofeev, 2000, p. 450). Similarly, an owner of a manufacturing enterprise recalls certifying his industrial equipment for a bribe ‘not because my equipment does not conform to standards’, but rather to speed up the process and at the same time build up a good relationship with the inspecting agency (Kliamkin & Timofeev, 2000, p. 406). What is conspicuous about these examples is that the entrepreneurs choose to offer bribe without an obvious necessity and without extortion, but rather out of sheer expediency.

Testimonies of bureaucrats further illustrate the fact that entrepreneurs initiated some of the corrupt deals. A high-ranking official from the cabinet of ministers of the Bashkortostan region of Russia recalls in a surprisingly open interview in late 1990s:

Today a person came to me and offered 30,000 rubles [about 5,000 dollars] for certain services. … This is a normal practice. The reason is that by offering me 30,000 he counts on making 300,000. … You see, I am on the other side of the barricades: I do not deal with corruption – it is the other people who have to deal with me. … Nowadays, if a mayor or a head of the administration is not tied with shadow business and criminal structures, he will not be able to work within the given legal and economic space. (Kliamkin & Timofeev, 2000, p. 572f)

Notably, evidence from in-depth interviews suggests that entrepreneurs tend to view bribes as yet another cost associated with doing business. Some of the entrepreneurs seem to compare the price of breaking the law, which is the bribe, with the cost of adhering to it: ‘In the end every bribe is justified from the economic point of view’ (owner of a clothing factory quoted in Radaev, 1998, p. 71). Thus for instance many entrepreneurs preferred to ‘buy off’ threats instead of paying fines or fulfilling the regulations. The case of handling the utilities payment is one example of such cost–benefit analysis: the deputy Director of a brick factory in Rostov explains that instead of paying for electricity the enterprise routinely bribes officials after they cut off the electricity (Kliamkin & Timofeev, 2000, p. 420). The management of the same brick factory uses various tricks to fool the gas counter in order to reduce the bill: ‘We have a silent contract with the lower officials: they turn a blind eye to the leakage of energy, and we regularly pay them before they come for an official check-up’ (Kliamkin & Timofeev, 2000, p. 421). Again, ‘cutting corners’ is considered absolutely normal.

(3) Naezdy and raids is another example of informal behaviour by expediency. While at the beginning of the 1990s firms waged their competitive battles with the help of their criminal roofs, from approximately the mid-1990s they switched to using corrupt officials, including officials from law enforcement and fire inspection agencies and the tax police in order to carry out the so-called naezdy, or prepaid business attacks. This is a very important shift that later contributed to the rise of state predation.

Through naezdy, companies typically attempted to secure a business advantage or to harm their competitors. For example, naezdy could be used to recover a debt, to prevent certain transactions, to interfere with shareholder meetings, to promote desirable results or to simply harass competitors (Ledeneva, 2006, p. 173ff). A manager of a computer firm interviewed by Radaev (1999, p. 48) concludes: ‘A better means of competitive struggle is to send the law enforcement bodies after you’. Another businessman agrees:

In the past, if someone refused to pay they could damage the shop or just burn it down. Now they’ve understood that it is cheaper and safer to get a fire inspection to close it down for a week or two. And the effect is the same. (Volkov, 2002, p. 51; cited in Gans-Morse, 2012a, p. 281).

While naezdy made the life of competitors difficult, a much graver interference with property rights that proliferated at the end of the 1990s was raiding. Raiding entails forced change of ownership and an illicit seizure of the property of a target firm by another business actor by means of the manipulation (read: often bribing) of law enforcement and the judiciary. Raiding attacks of industrial plants, profitable export-oriented enterprises and other companies became common practice at the end of the 1990s, recorded cases reaching thousands annually. This led to the largest redistribution of assets in the Russian economy after the privatisation of the early 1990s (for details, see Firestone, 2008; Volkov, 2004).

A popular raiding method, widespread up until 2002, involved manipulation of the bankruptcy law: it is estimated that up to a third of bankruptcy cases dealt with by the state arbitration courts in 2000–2001 were contract bankruptcies, initiated with the goal of raiding in mind (Volkov, 2004, p. 528). After the adoption of a new bankruptcy law in 2002 instances of raiding gradually receded. Raiding provides an example of predatory manipulation of existing legislation by companies, and undoubtedly constituted the most outright form of informal business behaviour undertaken out of expediency in the 1990s. The contribution of firms to undermining property rights through the practice of raiding is beyond dispute.

2.3. Ways to escape the informality trap

The informal corrupt practices described above opened companies up to state predation and ultimately locked them in the informality trap – a vicious circle in which initial informal behaviour entails its perpetuation. Here is the mechanism of this negative dynamic. To the extent that the informal practice entails a legal violation, the company crosses the legal boundary. If the violation is uncovered, for instance during a check-up, the state has legal grounds to punish the company (e.g. through fines, by halting its operation, through demands for back tax or, in more serious cases, criminal prosecution). The firm cannot readily defend its rights in a formal fashion because its legal non-compliance can be uncovered during a court procedure. Instead, the company is bound to resolve the problem informally – often through ‘buying off’ the threat. In turn, the bureaucrat may use the fact that bribery has taken place as a means of extorting further money under the threat of legal prosecution. The director of a wholesale trade company pointedly sums up this dynamic: ‘If you start paying [bribes], you will never be able to break free from this [vicious] circle’ (Radaev, 1998, p. 75). As a result, the company falls into the informality trap and at least part of its operation becomes firmly rooted in the corrupt sphere.

It is important to note that the informality trap was not unavoidable in the 1990s: there was room for choice on the part of the firms. Consider the choice between paying fines and bribes. If a company commits an infringement and faces fines (rather than criminal charges), it can choose either to pay an official fine or to negotiate a lower penalty for a bribe. Tellingly, companies tended to view both payments as comparable business expenses and often opted for the latter one because it was ‘cheaper’. However, there is a big difference between the two transactions: if a company opts for a fine, it remains in the legal realm and escapes the informality trap; a bribe may get a company into a vicious circle of ‘buying off’. A Moscow entrepreneur underscores the increased vulnerability of companies that bribe to state attacks because they represent ‘easy prey’: ‘As soon as you open this feeder [i.e. bribe], you become something like a “free cashier” at McDonalds … Everybody will come to you’ (Gans-Morse, 2012b, p. 11).

Business practices that did not constitute bribery or outright evasion allowed companies to avoid the informality trap in the 1990s. One of the widespread practices involved the cultivation of personal relations with state officials. Such relations involved non-monetary favours and allowed companies to get around cumbersome regulatory procedures, to avoid bureaucratic extortion and to receive preferential treatment such as access to credit. Some companies employed a ‘right person’ (e.g. the relative of a bureaucrat) or made contracts with a ‘right company’ (Radaev, 1998, p. 75). Other firms employed a ‘specialist for the work with state organs’, as an owner of a manufacturing enterprise explains:

'This is a person who can make friends with any official from the state agencies. We employ a woman. She regularly visits the respective state agencies, brings something for tea and consults with them, talks heart to heart. … And this is sufficient – there is no need to bribe. (Kliamkin & Timofeev, 2000, p. 407)

Good personal relations with state officials – often referred to as ‘administrative resource’ or ‘political capital’ – allows for a kind of a patronage that may help to avoid bureaucratic pressure and bribe extortion. The head of a firm dealing with the supply of fuel recalls: ‘If everyone knows that some firm … indirectly is connected with the interests of a high-level official … naturally there will be no check-ups, no police, no sanitary control’ (Radaev, 2002, p. 67). Similarly, the owner of a Moscow manufacturing enterprise recalls that he could avoid extortion from law enforcement agencies, which was very widespread in Moscow in the second half of the 1990s, thanks to his friendship with one of the officials at a law enforcement agency, ‘so my security was granted special attention’ (Kliamkin & Timofeev, 2000, p. 413).

Another way to avoid the informality trap was by making legal payments to service companies instead of paying bribes. This strategy sometimes allowed companies to square the circle: fulfil cumbersome regulations, stay profitable and remain in the legal realm. For example, specialised commercial firms helped resolve problems of registration, licensing and other business requirements. Thereby potential bribe expenses were included in the fees (Radaev, 2002, p. 63). Sometimes such commercial firms were affiliated with the bureaucrats (Kliamkin & Timofeev, 2000, p. 408).

Another alternative informal practice concerned the diversion of attention from actual violations by intentionally leaving or making small mistakes in the bookkeeping (the so-called oshibochki). In the 1990s, when tax evasion was pervasive, the tax inspectors’ main goal was to boost tax collection. To this end inspectors would routinely look for mistakes in the bookkeeping in order to file back tax claims and fines. By making small obvious mistakes in the bookkeeping entrepreneurs allowed tax inspectors to fulfil their duty and at the same time discouraged them from digging further and discovering a graver violation. Some entrepreneurs even openly colluded with the tax authorities, citing good personal relations. For example, a St Petersburg businesswoman not only deliberately made some oshibochki in her bookkeeping, but also routinely pointed them out to the inspector and gladly accepted a moderate fine, getting away with a graver violation (Paneyakh, 2007, p. 77).

At first sight such a scenario represents a classic route into the informality trap – after all, the company, by falsifying its bookkeeping, commits a violation that the inspector is aware of. However, what is important is the fact the entrepreneur pays an official fine rather than a bribe. On top of that, the entrepreneur maintained good relations with the inspector by allowing her to fulfil her tax collection plan.

In the 1990s Russian firms often deployed informal practices, sometimes struggling to survive, sometimes using the deficiencies of the regulatory system and legal enforcement as fantastic business opportunities and avenues for predatory behaviour. By behaving informally, firms opened the door for bureaucratic predation and fell into the informality trap. In any case, the informal activity of firms compromised property rights security and undermined formal state institutions. In the long run, in the 2000s, this contributed to the emergence of statist-patrimonial capitalism characterised by state threats to property rights, as will be discussed in the following section.

3. 2000s: state agents exploit informality and assault property rights

The proliferation of informal business practices in the 1990s had serious repercussions in the following decade for Russia's political-economic development. In the 1990s firms often manipulated weak state institutions as just another player in the market for protection or as a means of competitive struggle. As the state regained its monopoly on violence in the 2000s, aided by the surge of global commodity prices (Gustafson, 2017) and the rise of the siloviki, or law enforcement elites (Treisman, 2007), the situation reversed to the firms’ collective disadvantage. The strengthened state seized the opportunity to exploit the informality of businesses through its corrupt officials and started a systematic assault on the firms’ property rights through legal harassment, bureaucratic extortion and even raiding (Gans-Morse, 2012a). Remarkably, it was not only companies who had previously fallen into the informality trap who were facing these state-sponsored threats to property. Virtually any company could become vulnerable to state harassment as the room for manoeuvre and alternative behaviour became considerably smaller for all firms compared to the 1990s. Under these circumstances escaping the informality trap became difficult. A statist-patrimonial variety of capitalism consolidated in Russia.

Even though at first sight this development may appear as a clear top-down dynamic of state oppression, it is important to view it against the backdrop of its historic development. I argue that the massive state-sponsored assault on property rights in the 2000s was made possible by the informal behaviour of companies in the previous decade, among other factors. State agents exploited the informality of the firms and notably adopted some of the predatory techniques that the firms were using in their own competitive battles in the 1990s.

When President Putin took office in 2000, he set out to increase state capacity, curb the political influence of big business, push back the shadow economy and make companies pay their taxes. His administration succeeded in strengthening institutions by re-centralising them and improving their funding. The scope for conducting business in legal compliance considerably increased in the course of the economic reforms of the 2000s, which included a radical tax reform, a simplified customs procedure and a reduction of administrative barriers (see, for example, Aslund, 2002). Interviews show that unlike in the 1990s, after 2002 small entrepreneurs deemed it possible to do business in legal compliance and to pay all necessary taxes (Paneyakh, 2007, p. 122). As we shall discuss, this ‘coming out of the shadow’ did not necessarily safeguard companies against state predation.

At the same time, Putin's ‘restoration of the state’ happened at the expense of the quality of institutions. Institutions that were formerly assured at least some degree of accountability and control have gradually been dismantled; examples include the critical media, independent parliament and the elections of regional governors. The federal centre's interference with legal cases undermined the independence of the judiciary (Mendras, 2012, pp. 175–181). Corruption did not decrease, but rather became centralised and institutionalised (Satarov, 2013).

In this context it was the increased state capacity to collect taxes and fight economic crimes, backed up by toughened laws, that gave corrupt state officials a potent weapon to exploit the informality of firms for their private gain. Criminal prosecution by different law enforcement agencies became one of the most common extortion and harassment tools. For example, Nazrullaeva, Baranov, and Yakovlev (2013, p. 4) found an upward trend in the dynamics of economic criminal cases in 2004–2009, driven by the ‘rent-seeking’ of law enforcement officers and the system of assessment of police departments’ performance (the so-called stick system). The police also increasingly resorted to arrests of entrepreneurs on minor charges, thus weakening their ability to defend themselves against attacks (Rochlitz, 2014, p. 102). About 150,000 cases are filed annually for so-called economic crimes such as fraud or embezzlement. As only a minority of cases (10–15%) resulted in sentencing, while other cases were dropped or not brought before the court, Volkov, Paneyakh, and Titaev (2010) conclude that criminal prosecution indicates rent-seeking behaviour by law enforcement officials.

While in the 1990s corrupt state officials were for hire, in the 2000s they started acting on their own initiative. The proliferation of state-induced raiding is a case in point. The 2003 Yukos affair may have been a turning point – after that raiding increasingly became a state-initiated practice. While in the late 1990s and early 2000s private raiders ‘hired’ corrupt state officials to facilitate an illicit takeover, during the course of the 2000s state agents themselves became the beneficiaries: they started conducting raids in the interest of higher placed officials or attacked companies for their own benefit (Rochlitz, 2014, p. 100). Notably, the new state raiders were well-informed about the raiding techniques as the result of facilitating attacks and providing logistical support in the 1990s. State officials either started using the same techniques themselves or pushed raiders to carry out takeovers on their behalf.

Having examined 312 cases of raiding based on the analysis of 1500 newspaper articles, Rochlitz finds a rising involvement of state agencies in raiding: while companies are frequently mentioned as hiring raiding agencies to initiate attacks during the early years of the decade, from the mid-2000s onward newspaper articles increasingly reported that members of state agencies themselves ordered, initiated, and benefited from attacks (Rochlitz, 2014, p. 103). Among the victims in the second half of the 2000s were restaurants, hotels, car dealers, smaller supermarkets, other shops, local housing service providers, transport companies, and scientific research institutes. One of the victims was my respondent Vadim,⁷ the owner of a small Moscow dental clinic.

Vadim describes how his clinic was raided in the autumn of 2013 on behalf of his landlord, who turned out to be a highly placed state official from Tver Oblast (the property was formally registered on the name of his wife). The conflict started when the landlord suddenly demanded a sharp rent increase. Vadim disagreed as he had an unlimited lease and expected to receive at least the legally guaranteed three-month notification. The landlord insisted. Shortly afterwards Vadim witnessed his clinic being raided by a group of masked people. The lock was removed, the dentists were ‘kicked out’ and their equipment was carried out. Having contacted the police, Vadim was not permitted to file a lawsuit and was told: ‘They are the owners of the premises. They can do as they please.’ As a result, Vadim lost his business, his medical equipment and the rent deposit of 260,000 rubles (about 8000 USD). Vadim considers such raid a ‘form of business’: ‘To get this money back is all but impossible, to put it mildly. Even going to court is pointless’ (interview with B6).

3.1. Limited room to escape the informality trap

Was there room for manoeuvre to resist state attacks and avoid falling into the informality trap in the 2000s? Certainly legally compliant companies had an option to defend their rights in court. Indeed, litigation was the most widespread means to resist the attack by the corrupt officials in the 2000s: the number of firms’ lawsuits against state agencies soared (from 13,000 in 2000–50,000 in 2008) and win rates were relatively high, between 60% and 70% (Gans-Morse, 2012a, p. 274). However, suing the state was not always desirable because it could provoke retaliatory measures from inspection authorities, such as legal harassment (interview with B18; cf. Hendley, 2002). Moreover, litigation was feasible only for bigger companies that could bear the cost and mostly in case of smaller violations of property rights, such as unfair fines or penalties. Defence against criminal charges was much less promising – in fact most businessman preferred to avoid opening a criminal investigation in the first place because once a case is filed bank accounts are frozen and the owner is detained (interview with L1). As this implied the destruction of business, many firms facing criminal charges were bound to ‘buy off’ the threat and were drawn into the vicious circle of informality.

Room for other strategies that could help resist a state attack or escape the informality trap, like the ones used in the 1990s, became much narrower in the 2000s. Firstly, even conducting a legally compliant business was no guarantee against conflicts with the state. In fact, it was sometimes an invitation to trouble, because state inspectors took tax evasion for granted and could inspect a company with ‘clean books’ particularly thoroughly and perhaps impose arbitrary fines. In this sense, the informal behaviour of companies back in the 1990s made almost every company look suspicious later on in the 2000s. Moreover, few legal barriers held if forces in the state bureaucracy were determined to harass, take away or destroy a business. For example, over 100 small trade pavilions were demolished overnight in the centre of Moscow in 2016 on behalf of the city authorities. A new law declared that the buildings had been built illegally, although the owners had valid construction permits (Gessen, 2016). A co-owner of a Moscow chemical company was imprisoned for over a year on trumped-up charges of involvement in the production of illicit chemical substances, even though the company was in full legal compliance. The entrepreneur assumes that the firm was attacked because it had refused to pay kickbacks to one of its clients – the state gas giant Gazprom (interview with B10).

Secondly, the toughening of regulations often left companies without the option of paying a fine instead of a bribe, a practice which had previously helped them avoid the informality trap. For example, the 2016 amendments to the Code of Administrative Offences tightened penalties for firms and increased fines by several orders of magnitude: instances where penalties were imposed included violations concerning security standards, sanitary norms and consumer rights. Penalties imposed could also force the liquidation of the business. Similarly, the period during which back taxes could be demanded was extended from one to three years, expanding the authority of law enforcers to probe firms (Vinokurov, 2015). Facing exorbitant fines or criminal prosecution, firms had no choice but to ‘buy off’ the threat and thus fall into the trap.

Thirdly, informal connections to state officials or payments to affiliated structures, though still prominent, ceased to be a fully reliable strategy for preventing conflicts in the 2000s. This became all the more true after the onset of the economic slump in 2014, which was propelled by low oil prices and economic sanctions in the wake of Russia's annexation of Crimea. In the context of declining oil rents and intensified competition for resources among the bureaucratic elite, business was exposed to increasing informal bureaucratic pressure and bribe extortion. While before the crisis bureaucrats had expected to draw ‘dividends’ from their informal control over cash flow from private property over many years, after the advent of the crisis they seem to have been trying to extract maximum resources as quickly as possible, to ‘fleece entrepreneurs as if it was their last chance’. Under these circumstances the well-established informal arrangements ceased to work as reciprocally as previously. Anecdotal evidence suggests that law enforcement agents were extorting increasing sums of money from businesses without providing protection or services in return, but rather they threatened companies with a criminal investigation (author's private correspondence; cf. Yakovlev, 2014). For many Russian companies, the scope of choice was de facto reduced to two options: losing their business or being drawn into the informality trap.

To sum up, in the 2000s the corrupt state took advantage of the informality of some companies and exploited it to violate the property rights of virtually any business actor. From the perspective of the ‘good citizen’ firms, the proliferation of state threats to property may look like a top-down ‘statist’ story, where institutional constraints on sovereign predation are lacking and corrupt lower-level bureaucrats are out of control. However, this article demonstrated that the advent of statist-patrimonial capitalism, marked by state threats to property rights, was also made possible and in fact facilitated by the choices and practices of business actors back in the 1990s. These practices created a massive temptation for the state and made the state-sponsored assault on property rights in the 2000s possible. By having embarked on expedient, predatory informal practices in the 1990s companies dug their own graves. Ironically, they also dug the potential graves of everybody else. Being pushed into these graves by corrupt state officials became only a matter of time.

4. Concluding remarks

This article reassessed the relative role of state and business in the emergence of Russia's statist-patrimonial variety of capitalism. I found that what may seem like a statist top-down story (and may be experienced as such by the entrepreneurs) – namely the proliferation of predatory bureaucratic pressure on business in the 2000s – was in fact to some extent made possible, among other factors, by the business community proper. This leads me to conclude that the advent of statist-patrimonial capitalism in the 2000s was facilitated by the informal choices and practices of business actors in the previous decade. Certainly, the agency of small companies is only one explanatory factor of the rise of statist-patrimonial capitalism among many others that could not be properly addressed here, like for example resource wealth, the role of large state-owned and state-backed conglomerate or the rise of law enforcement elites (so-called siloviki). But the proposed reassessment of the role of business – as an accomplice rather than a victim – is important for gaining a better understanding of Russia's contemporary political-economic form and has several theoretical implications for studying the institutional change in emerging economies.

The first theoretical lesson is that we need to acknowledge the importance of bottom-up forces of society as a complementary factor to the forces of the state, politics and leadership. Change in political economies is a product of both structural forces and agency of societal actors, like posited in the Open Varieties of Capitalism approach by Uwe Becker used as a theoretical underpinning of this research. On a more philosophical level, this perspective directs our attention away from path dependency towards possibilities for an alternative path and windows of opportunity – small as they may be – to influence the course of events.⁸ The findings from the Russian case suggest that a distinct societal process may contribute to a change of the variety of capitalism, and highlight in particular the informality trap as an important but overlooked mechanism of this process. A similar complementary bottom-up dynamic of change is revealed in the case of China (see McNally's contribution to this Special Issue). However, unlike in Russia, in China informality seems to play a market-enhancing role.

Second, unintended consequences of action have been revealed as an important driver of change: business behaviour that may have seemed rational or even beneficial in the initial period of Russia's capitalist transition had the opposite effect in the long run. In this context, prevailing ideas and in particular a widespread societal ‘normality of informality’ can be viewed as an additional important factor of change.

This relates to a crucial issue raised in the introduction to this Special Issue – the ambiguous role of informality and patrimonialism more generally. Informality can be market-enhancing or at least help to overcome ‘market imperfections’ of a rapidly changing economy and compensate for the weakness of the state, like was the case in Russia's chaotic post-communist transition in the 1990s. However, informality can become detrimental if the state re-establishes monopoly on violence, at the same time weakening the checks on its coercive power, and fails to keep its corrupt servants at bay. When informality tilts into such market-hindering direction, long terms stability of statist-patrimonial political economies like the Russian one may be at risk.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Alexandra Vasileva-Dienes (née Vasileva) is a research fellow at the Political Science Department at the University of Amsterdam, where she completed her Ph.D. in 2017. She has published on continuity and change in Russian capitalism in New Political Economy (2018), Journal of Eurasian Studies (2017) and The BRICs and Emerging Economies in Comparative Perspective (ed. by Uwe Becker, Routledge, 2014) and wrote on informal Russian business practices for the Global Encyclopaedia of Informality (ed. by Alena Ledeneva, UCL press, 2018) and Russian journals. Alexandra's current research focuses on regional integration and trade in Central Asia, connecting to her 2012 documentary film about trade barriers in Central Asia on behalf of the German Development Cooperation (GIZ). Alexandra works at a foreign policy think-tank of the Friedrich-Ebert-Stiftung called FES Regional Office for Cooperation and Peace in Europe, based in Vienna.

Notes

* I dedicate this article to the memory of my dear mentor and friend Uwe Becker and to his family: Janneke, Kiki and Max.

1 This expectation is grounded in the experience of other post-communist transition economies, such as Poland or Czech Republic, that contrary to Russia or, for instance, Ukraine managed to push back informality and establish market economies (Bohle & Greskovits, 2012; Myant & Drahokoupil, 2010). Nevertheless, we need to acknowledge the stickiness of informality that may have been underestimated by the Russian liberal reformers of the early 1990s (I owe this point to an anonymous reviewer).

2 By the term ‘top-down’ I mean factors associated with the state, from the top political elite to low-level bureaucracies. These can include the role of large state-controlled or -affiliated conglomerates and, related, resource wealth (Gustafson, 2017; Goldman, 2008; Dienes, 2018)

3 Among them are ‘bankers … [s]tate managers turned private owners … [r]ising financial-industrial conglomerates’ (Hellman, 1998, p. 232f) and the ‘former communist elite’ (Hellman, 1998, p. 229).

4 An exception to this view is provided by scholars who study relatively rare business strategies to resist state predation, for example through collective organisations (Yakovlev et al., 2014) or mobilising relevant stakeholders (Markus, 2015).

5 It is not always easy to draw a line between informal behaviour that serves an expedient goal of the company and one that is a reluctant reaction to pressure, which in turn may be only perceived as inevitable and inescapable.

6 In the 1990s, tax on profit was 35%. However, businesses had to meet more than 40 additional taxes and payments, which made the overall tax burden very high. At the same time it bears notice that in some cases profits were stellar, too. Consider the case of Mikhail, a Volgograd entrepreneur who started importing Finnish ice cream in the early 1990s and sold it at a whopping 100% profit margin in his popular café chain (Polonsky, 1998, p. 529).

7 Name changed.

8 These thoughts were inspired by conversations with my mentor Brain Burgoon at the University of Amsterdam.

Appendix. List of interviews conducted by the author in April 2014

Table

Position	Code	White or grey
Entrepreneur/M, sewing factory, Moscow Oblast	B1	White?
Entrepreneur/S, publishing house, Moscow	B2	White
Entrepreneur/S, retail, Moscow	B3	White?
Entrepreneur/S, PR agency, Moscow	B4	White
Entrepreneur/S, street food, Moscow	B5	Grey
Entrepreneur/S, medical clinic, Moscow	B6	Grey
Entrepreneur/S, construction company, Moscow	B7	Grey
Entrepreneur/S, private kindergarten, Moscow	B8	White?
Entrepreneur/S, legal services, Moscow	B9	Grey
Entrepreneur/M*, manufacturing (chemicals), Moscow	B10	White
Entrepreneur/S, translation agency, Moscow	B11	Grey/ black
Entrepreneur/S, construction company, Moscow	B12	Grey
Entrepreneur/S, retail, Moscow	B13	Grey?
Entrepreneur/M, manufacturing (metal), Vishniy Volochek (Tver Oblast)	B14	Grey
Entrepreneur/M, IT services, Moscow	B15	White?
Entrepreneur/M, manufacturing (furniture), Kaluga (Kaluga Oblast)	B16	White?
Entrepreneur/M*, manufacturing (plastic), St. Petersburg	B17	White?
Entrepreneur/M*, manufacturing (metal), St. Petersburg	B18	Grey?
Entrepreneur/S, retail, Moscow
+ assistant of a Duma deputy	B19	Grey?
Entrepreneur/M, retail, Moscow	B20	Grey
Entrepreneur/M, confectionary production, Moscow	B21	Grey
Entrepreneur/S, manufacturing (industrial fans), Zelenograd (Moscow Oblast)	B22	Grey
(former) Entrepreneur/S, car retail, Moscow	B23	Grey
Business association executive, Moscow	A1
Business association executive, Moscow	A2
Business association executive, Moscow	A3
Corporate Lawyer (Centre ‘Business Against Corruption’), Moscow	L1
Corporate Lawyer, private legal company, Moscow	L2
Academic, Moscow	E1
Academic, Moscow	E2
Academic, Moscow	E3
Academic, Moscow	E4
Journalist, ‘Kommersant Dengi’, Moscow	J1
Journalist, ‘Forbes Russia’, Moscow	J2

Note: Entrepreneur = owner of small- (/S) or medium-sized (/M) business. * = CEO.

Small business: 1–50 employees; medium-sized business: 51–100 employees.

Location indicates the physical location of the business. All 34 interviews were conducted and recorded in Moscow and St. Petersburg (B17 and B18).