Private Sector Management: The Case of Russia

In the past decade, Russia has been moving from economic and political socialism toward economic and political democracy characterized by market principles of supply and demand. Until August 1998, Russia's small business sector was growing rapidly and dealing with the associated chaotic and often inconsistent economic transformation creatively, opportunistically and mostly off-the-books. This rapid growth came to an abrupt halt when Russia devalued the ruble by 183 percent in August 1998. Using longitudinal in-depth personal interviews, and benefitting from the knowledge and perspective of an ongoing research project begun in 1988, this article focuses on the performance, behavior, and values of managers in Russia's private sector in 1995, 1997, and October 1998. Specifically, the goals in this article are: (1) to describe and evaluate the performance of the Russian private sector in 1995, 1997, and 1998; (2) to portray the behavior and values of Russia's private-sector managers; (3) to present methods and extent of underreporting of economic activity; and (4) to assess the future of Russia's private sector. Historical Background Much has been written about Russia's perestroika, the economic restructuring that has been transforming the country from a centrally planned to a free market economy. Briefly, three distinct strategies have been used to transform Russia's economy: quick fix, gradual change, and shock therapy (see Aslund 1989; Desai 1989; Goldman 1988; Kornai 1980; McCarthy, Puffer, and Shekshnia 1993; Shama 1993). The quick-fix strategy (1987-1989) sought to restructure the Soviet economy within a socialist, centrally planned, one-party system. Restructuring was intended to improve the efficiency of the existing system through fine-tuning that would allow limited market forces to operate within an otherwise centrally planned economy. During this period, many quick fixes were tried to stimulate the economy and failed because they threatened management and workers alike and resulted in lower production and higher prices. The gradual change strategy (1989-1991) produced numerous laws and comprehensive economic restructuring plans to increase the efficiency of the Soviet economy. Emphasis was put on price liberalization, conversion of manufacturing enterprises from military to consumer goods, and more liberal laws for cooperatives and joint ventures. During this period, private-sector companies were legally allowed to operate as "cooperatives" and "joint ventures," which stimulated the emergence and development of Russia's small business sector. This strategy produced "shock without therapy" and eventually brought about the failed coup of August 1991, leading to the disintegration of the Soviet Union, the formal secession of the Baltic states, the formation of the Commonwealth of Independent States (CIS), and the election of Boris Yeltsin as president of Russia. Gradual change had failed, and shock therapy became inevitable. The strategy of shock therapy (1992-present) produced a series of decrees which freed almost all prices, allowed private ownership of land, permitted privatization of collective farms, encouraged privatization of small enterprises, and enabled the transfer of many state enterprises into joint stock companies. In 1992, this strategy resulted in an annual inflation rate of 1,353 percent and a 20 percent decline in the GDP. By 1993, the monthly inflation rate was only 25 percent, and the rate of decline of the GDP had eased. Official Russian statistics continued to show a contracting economy in 1994, 1995, 1996, and 1998. Only in 1997 did official statistics show a modest growth in GDP and relatively low inflation. During this period of rapid transformation, Russian management, especially in the private sector, adapted resiliently and became market-oriented. Two elements of this emerging culture (which some termed "wild capitalism") have been entrepreneurship and tax evasion, manifested in underreporting such a ctivities as production, sales, and profit. …