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Last Updated: Thursday, 23 June, 2005, 00:19 GMT 01:19 UK
Corruption and extortion face Russian firms
By Mark Gregory
BBC World Service business correspondent in Novgorod

A church in the city of Novgorod
Many in Novgorod pray for better times
Dynamic small firms play a crucial role in the prosperity of many successful market economies but, after a few days in the city of Novgorod, it is easy to see why Russia has so few of them.

Novgorod is a city of 300,000 people, in between Moscow and St Petersburg.

It was an important religious and political centre in the Middle Ages and it still has some fine old Russian orthodox churches and an ancient walled area known as the Kremlin.

But away from the historical sites the city is drab and grey with many run-down buildings and potholed streets.

Political intervention

The problems small Russian businesses face in out-of-the-way places like Novgorod seem as serious as the issues thrown up on a much larger scale by the Yukos affair.

Friends of Alex Zivanov have been killed in disputes
Alex Zivanov survived when his car was blown up by a bomb

Yukos, formerly Russia's largest oil company, was destroyed by exorbitant tax demands. The company's founder, Mikhail Khodorkovsky, was recently jailed for nine years on fraud and tax dodging charges.

Supporters see his treatment as political persecution by the authorities - treatment that signifies a return to capricious and authoritarian government.

There are signs that foreign investors and rich Russians have become more wary of putting money into the country as a result of what happened to Yukos.

Extortion is rife

Small firms in Novgorod have to cope with similar levels of uncertainty.

Tatiana Loginova in her convenience store
Tatiana Loginova lives in fear of her shop being burnt down
The economy is depressed and small entrepreneurs live in constant fear of shadowy local mafias.

Businesses claim the gangsters are sometimes in league with some officials working for the local authorities and it is very hard for small firms to thrive in this environment.

My first stop after arriving in the city was a small street kiosk selling confectionary.

Two years ago, the owner, Andrei, had a much larger, more profitable business distributing his wares to shops around the region. He says his dreams were smashed by the local mafia.

A rival confectionary supplier established a virtual monopoly of the market by hiring gangsters to intimidate businesses that bought Andrei's products.

First the gangsters dumped the fridges Andrei had provided for his customers' shops out on the streets, replacing them with fridges from a rival supplier.

Then, he claims, the gangsters began threatening physical violence against anyone who took his product.

The final straw came when he was mysteriously denied permission to plug in a portable cold storage unit at any convenient site near the city.

The cold store now lies rusting and useless at a site with no electricity in a village several kilometres from Novgorod.

Andrei claims his rival, who effectively drove him out of business, has close connections with people powerful in local government.

He says he discussed his grievances on several occasions in meetings with senior local bureaucrats, but nothing was done to help him.

Bombs and threats

Almost every business I spoke to reported problems with gangsters and obstructive local government officials.

Alex Zivanov, who runs a company selling security systems and telecommunications, told me that he lives in constant fear of attack.

He says he narrowly escaped death when his car was destroyed by a bomb last year and adds that many of his friends have been killed or injured in business disputes.

Mr Zivanov insists that that he is almost alone among businesses in refusing to pay protection money to gangsters.

He does, though, give extra money to the police in a vain effort to ward off intimidation.

Arnold Shalmuyev, deputy governor of Novgorod
Local politicians say things are improving
The gangsters, he says, are often local security firms that do not have enough legitimate business to keep them going.

Mr Zivanov maintains the problems are worse for small firms, as the big ones often have the resources and contacts needed to buy themselves out of trouble.

Tatiana Loginova, who recently opened a small convenience store selling groceries on a housing estate on the edge of Novgorod, claims gangsters came to her shop demanding payment every day for 10 days when it first opened.

She refused to pay, but lives in fear that her shop will be burned down.

That is what happened two years ago to another business her family runs, a store selling tools and hardware, after they refused to pay protection money.

Ms Loginova says many businesses put up symbols on their windows indicating which mafia group they have paid money to. Sometimes, she says, this does help, but there are occasions when rival gangs get angry and target a business because it is paying off someone else rather than them.

Power vacuum

Violence is not the only problem facing businesses in Novgorod.

Mr Zivanov claims small firms are overburdened with rules and regulations - some from local government and some from the federal authorities. And to make things even more difficult, the rules are constantly changing.

He says it is hard for businesses to know which rules they must comply with and which they can safely ignore. He believes officials use the endless sense of uncertainty as a lever for extorting bribes from business.

Mr Bobryshev sitting in his Italian restaurant
Business acumen has helped Yuri Bobryshev succeed
Over and over again I was told by small businesses that they find it hard to distinguish the gangsters from those in authority. They think of them as interlinked.

I put these concerns to the deputy governor of Novgorod province, Arnold Shalmuyev, who has an office in a grandiose Soviet era building which locals refer to as city hall.

Mr Shalmuyev turns out to be a rather thoughtful man with a doctorate degree in economics.

He admits that businesses face problems with gangsters and corruption, and says that is because there has been a power vacuum at local level since the collapse of the communist system.

That vacuum, he says, has been filled by gangsters.

But he claims things are now improving because the criminals are gradually learning how to be legitimate businessmen.

Optimism prevails

Many business people in Novgorod are deeply depressed about the conditions they work in, but there are one or two rays of hope.

The city boasts one of the best Italian restaurants I have ever eaten in. It was set up by Yuri Bobryshev, a wealthy entrepreneur who owns a local distillery.

He designed the restaurant after spending weeks travelling in Italy visiting eateries to find out in authentic detail how the Italians serve food.

Mr Bobryshev also runs a neat, well stocked supermarket.

It is the sort of shop you would expect to see in a wealthy country like Switzerland - not the backwoods of provincial Russia.

Mr Bobryshev was the manager of a distillery in soviet times, but emerged as the owner after the fall of communism. Many of Russia's new business elite acquired their assets in similar circumstances.

He appears to have become a real entrepreneur - a man of initiative with a flair for detail.

Amid the despair of small businesses in Novgorod, and other parts of provincial Russia, his is rare case of capitalism working as it should - creating new wealth and opportunities.

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