The UK Times finds signs of progress in the vital small business sector in Russia. While Gazprom/Shell and other megadeals dominate the headlines, as in the U.S., the real measure of any capitalist economy's health is small businesses growing, hiring more workers, and having access to capital.
In Russia, the mafia is most notorious deterrent to going into business, but Russian entrepreneurs responding to an OECD survey ranked bureaucracy as the biggest obstacle to success.
On the supply side (lest we be seen here at Russiablog as only trumpeting bad news!) the flat tax legislation from 2001 is already paying major dividends. Russian tax receipts are up dramatically, proving that a radically simplified code works much better than a complicated code, and that lower taxes actually boost revenues. According to Daniel Mitchell at the Heritage Foundation, the former worker's paradise now boasts a more investor-friendly tax code than the United States (though Russia still needs the rule of law, infrastructure, and a healthier, growing population to begin catching up with the U.S.). For a map of European countries that have adopted the flat tax, click here.
Skeptics in the U.S. and Europe will insist that Russia's yearly 10% GDP growth rate since 2001 is all due to higher oil and gas prices or unrelated economic reforms. It is true that the vast majority of foreign investment in Russia is still in the oil and gas sector. As one experienced American business consultant in Russia recently told me, "Russia's in the process of creating 'national champion' industrial firms where the country's strongest--natural gas and oil." Nonetheless, at least in the enclaves of Moscow and St. Petersburg, entrepreneurs are finding improving opportunities, especially in service industries.
As documented here, and here, privatization remains a dirty word for most Russians, given their experience with the oligarchs in the early 1990s. However, it appears that Putin's economic advisors are learning that prosperity comes from bottom-up, rather than top-down reforms. Strengthening the rule of law while cutting back on red tape should be the primary goals of the Putin government and Putin's successors. Russia must be prepared for the day when oil prices come back down to earth.
