Russian Corporate Capitalism

from Peter the Great to Perestroika


New York       Oxford




Russian Entrepreneurship in Comparative Perspective [pp. 72-]


The high rates of participation by foreigners, Russian Germans, Poles, Jews, and Armenians in Russian corporations [in the late tsarist period] require explanation. Why did Russian society not generate its own cadre of accomplished corporate managers in the era of the so-called Great Reforms? A glance at the careers of some of the most prominent Russians who leaped with more enthusi­asm than expertise into the dangerous world of corporate high finance reveals the weakness of what might be called their cultural conditioning. Comparisons with recent scholarship on the phenomenon of entrepreneurship in other cultural settings not only throws into relief some of the reasons for the widely divergent patterns of economic behavior among persons from different cultural backgrounds in the Russian case but also provides an opportunity to make a modest critique of the theories of entrepreneurship in light of evidence from imperial Russian history.


In the past half-century, historical scholarship on entrepreneurs has undergone an impressive evolution. A recent contribution to the literature neatly summarized the achievements and shortcomings of previous theo­ries of entrepreneurial behavior. Schumpeter's emphasis on the creative individual who combined factors of production in new and more produc­tive ways than before despite the resistance of tradition offered a useful corrective to equilibrium theory. Then A. P. Usher and N.S.B. Gras exam­ined successful businesses and laid the foundations of business history at the Graduate School of Business Administration at Harvard University, where the Business History Review is still published. The landmark collec­tion of essays edited by Hugh Aitken, Explorations in Enterprise, summa­rized the findings of the Harvard school. During the Cold War, when American social scientists sought formulas that would promote non-Communist modes of economic development, attention turned from Eu­rope and North America to the poorest countries in the world, where entrepreneurial impulses appeared relatively weak. Already, Thomas C. Cochran had begun examining the influence of cultural tradition on entrepreneurship in Latin America. Psychological barriers to entrepreneurship were identified by David McClelland in The Achieving Society (1961). At the same time, Everett Hagen sought to explain entrepreneurial success by pointing to the necessity of community solidarity and hard work on the part of minorities, whether religious or ethnic, as a means of fighting discrimination; his examples included dissenters in England, Protestants in France, samurai warriors in Japan, and Jews in Europe.48

Recent research has focused on why some ethnic groups adapt more successfully than others to a given economic environment. Examples of successful entrepreneurial groups include Chinese and Indian shopkeepers in Seychelles, who preserve strong, patriarchal families with high rates of savings, emphasize the education of children, and maintain family ties with relatives abroad, in Southeast Asia and India, respectively. In con­trast, the families of Creole shopkeepers in the same villages in Seychelles lack solidity, and their businesses consequently suffer from poor access to credit, as well as a lack of unpaid labor of family members.49


The most intriguing facet of this recent work has been the effort of researchers to transcend the abstractions of social science in favor of flex­ible theories drawn from Darwinian biology. As two pioneers of this methodology explained it, an appreciation of the role of the entrepreneur requires that we seek the selective factors that determine the fate of entrepreneurial innovations. In the framework of the new metaphor, the entrepreneur introduces variant behav­ior into a community; but the ultimate historical significance of his activities is the result of the selective process. It is only if an innovative act is copied, and its frequency increased, or has secondary effects, that it appears as a patterned regularity, or institution in the community. ... In the populationist view, both successes and failures can be viewed as individuals seeking new or mod­ified ways to obtain goals. Theoretically they are the source of both social pattern and its change.50


Likewise, Janet T. Landa recently offered an analysis of "ethnically homogeneous middleman groups"—Jews in Europe since the Middle Ages, Chinese in Southeast Asia, Indians in East Africa, and Lebanese in West Africa—in an effort to discover links between ethnicity and entrepre­neurship. She followed other social scientists in defining ethnic groups according to the usual criteria of shared origins, common values, a sense of separateness from other groups, and visible signs of distinctiveness. She also stressed, however, that a comprehensive definition of ethnicity must include a provision for the transmission of shared values from one genera­tion to the next; "the cultural traits of ethnic groups are treated as a group inheritance that is transmitted most often, but not exclusively, through family upbringing."51


By examining entrepreneurship in a global context, Landa was able to offer a useful corrective to the theory of Oliver E. Williamson, who ac­counted for the rise of firms in his analysis of three kinds of economic interactions: through markets, the vertically integrated firm, and long-term contracts among firms. Williamson's typology lacked explanatory power in poor countries, where such capitalist institutions did not exist:

The particularistic kinship/ethnic trading networks are the dominant form of economic organization in non-Western LDCs [less-developed countries]. As such, particularistic trading networks may be considered a fourth kind of economic organization in which relational contracting takes place between traders linked by particularistic ties of mutual trust. . . . [They] may be con­sidered to be an intermediate form of economic organization, lying between markets (contracts) and hierarchies (the vertically integrated firm). They are an efficient form of economic organization that emerged for the protection of contracts, given thee conditions of contract uncertainty and the historical-institutional context in which these ethnic middlemen-entrepreneurs operate.52


Landa's findings found support in research on entrepreneurs in a variety of other historical settings. Among Norwegians in rural Wisconsin between the world wars, for example, "a common ethnicity seemed to increase the probability that the person would honor obligations of trust." Likewise, in Latin America in the 1970s,

kin-based groups linked together by social networks . . . provided the paths for the flow of information, including information about the reliability of information and consequently the reliability of those kin groups and associ­ated social networks that supplied the information. The ideology of kinship assured that members of kinship groups—and participants in their networks—would fulfill the obligations without the need to appeal to formal sanctions.


Finally, in Nicaragua, business groups that controlled "a great variety of enterprises in different sectors of the economy" provide a key ingredient of economic success: "financial intermediation in which the group facilitates both the making of investments for members with excess savings and the securing of credit for members with net capital needs."53


These patterns had analogies in the Russian Empire before 1914, where the rudimentary contract and bankruptcy law provided little de­fense against unscrupulous debtors, suppliers, and customers. Several of the ethnic groups prominent in Russian corporations resembled Landa's ideal type of ethnic middlemen. The statistics suggest that Germans and Jews conformed most closely. Although the parallels between Puritans in England and Old Believers in Russia has been drawn in the historical literature, and although several Old Believers distinguished themselves in corporate entrepreneurship, among them Petr I. Gubonin, Timofei S. Morozov, and Koz'ma T. Soldatenkov in Cycle 4 (See Table 3.5), their corporations remained restricted to textiles and related banking operations or occasionally to railroads, not to the kaleidoscopic variety typical of the Moscow Germans.


Vasilii A. Kokorev, one of the many Old Believer merchants imbued with enthusiasm for economic nationalism after the Crimean War, showed unusual energy as he launched grandiose corporate plans in international trade, railroad and steamship transportation, insurance, banking, petro­leum, and agriculture. However, he lost his fortune as easily as he gained it. Although his Old Believer coreligionists may have contributed some funds to his schemes, Kokorev always acted alone, as a gambler whose impetuosity alarmed his more cautious associates. In particular, he failed to convince the tsarist government of the cogency of his plan to finance the emancipation of the serfs and the construction of a railroad network by the proceeds of a reformed vodka tax-farming scheme. After the collapse of his railroad and petroleum ventures, he owed his financial recovery to the State Bank, which rescued him from bankruptcy and forgave millions of rubles' worth of debts to the state.54


In this respect, the shortcomings of the older literature on entrepre­neurship become evident. The Old Believers may have provided a good example of Hagen's theory of entrepreneurial activity as the defensive response of a minority group to governmental repression, but that expla­nation had no relevance to Europeans who became wealthy in Russian corporations under the last three Russian emperors. Knoop, Rau, Spies, and Whishaw owed their superior business abilities to their mastery of the merchant traditions of Germany and England. Jewish and Armenian en­trepreneurs may have developed their entrepreneurial expertise as a defen­sive strategy, but they did so in communities that had reached cultural maturity outside the power of the Russian state, long before it absorbed them in the late eighteenth and early nineteenth centuries. In this case as well, Hagen's explanation adds little to our understanding.


More promising is the factor of "relationships of confidence and trust" among business partners, a general phenomenon explicitly stressed by Greenfield and his colleagues. Each successful group of entrepreneurs "seems to have a characteristic group or network of persons on whom he can depend and whom he can trust. From the members of this unit he is able to mobilize the kinds and quantities of resources needed to carry out the new combinations. Just who constitutes this trusted coterie in any particular case varies widely."55


As Landa noted, trust is most often cultivated among members of a family network or an ethnic group. Both the intimate knowledge of subtle messages among persons who share a similar cultural background and the distrust of outsiders contribute to the feeling of loyalty that is essential to reducing or eliminating what economists call opportunistic behavior: the cheating of one party by another in the absence of effective incentives or sanctions. In a large corporation, the complexity of managerial functions and the relatively large number of persons unrelated by family ties render supervision more difficult than in a small firm. The need for trustworthy personnel becomes all the more important.


The colonies of German, French, English, and other ethnically distinct merchant groups in the major Russian cities depended on trust within each group to carry out economic operations. Trust and friendship among merchants occasionally bound individuals from vastly different cultural backgrounds. According to a letter from Ludwig Knoop to his brother, several Russian merchants figured prominently among his closest friends. In the words of one biographer, Knoop "enjoyed unlimited trust; the Russian merchants were satisfied with Knoop's verbal assurances in the largest contracts, and only in later years did they begin to adopt developed forms of business relations.'"56


Likewise, trust occasionally  operated  across ethnic  lines  among Swedes, Russians, Armenians, and Azeris in Baku, where capitalist institu­tions developed very late. Hagelin, a Swedish technician in the employ of the Nobel Brothers Petroleum Company, once sealed with a handshake a promise to process oil from a gusher owned by an Azeri named Shamsi, who eventually collected over a million rubies in royalties from the Nobel corporation without ever asking to audit its records. A Russian merchant once explained to Hagelin his willingness to buy fuel oil from Nobel Brothers at slightly higher prices than those set by other suppliers: "With Nobel there are always forty pounds [funty] in a pud" [that is, Nobel did not “short change” his associates and customers]. Thus, Nobel's reputation as an enlightened European businessman sufficed to build bonds of trust in the notoriously lawless and violent frontier town of Baku. Access to investment capital and modern technology played crucial roles, but superior entrepreneurial ability, including the ability to inspire trust among customers, also appeared to be an essential factor in determin­ing the survival of corporations. Trust also proved crucial among the Azeris of Baku. Of a prominent Azeri oil producer who loaned money at high rates of interest to fellow Moslems without written contracts, Hage­lin wrote: "It was profitable for him to be honest. Besides that, according to Moslem concepts, trust was binding [doverie obiazyvalo]. A written contract could be evaded. A contract indicated a lack of trust. Trust, based on one's word, was always sacred."57


Without attempting a contribution to the theory of entrepreneurship, this chapter has offered new statistics and biographical data from the history of corporate capitalism in Russia in an effort to identify leading entrepreneurs and managers and the cultural determinants of their eco­nomic success. Among the key patterns were the tiny size of the Russian corporate elite and its heavy geographical concentration. In some impor­tant sectors and regions, Russians gradually displaced foreigners, but this trend proceeded slowly.


These findings raise further questions about the cultural and political causes of the slow pace of corporate development in the Russian Empire. As noted in Chapter 1, the most interesting topic for further investigation is the disappointing performance of capitalist institutions in the era of the Great Reforms, from the early 1860s to the mid-1870s. The most likely reasons appear to be the weak entrepreneurial tradition in Russia before the Great Reforms; the complexities of the new projects in rail transport, ?? three or four words at bottom of 82 missing?? which overwhelmed all but the most skilled entrepreneurs, among whom foreigners, Jews, Poles, Armenians, and Old Believers figured prominently; and the inability of the landed elite to embrace modern business techniques instead of relying on tradi­tional connections at court, the arguments of Minarik and Bokhanov notwithstanding.


The failings of Russian corporations in the 1860s contrasted sharply with the successes of Japanese businesses under the Meiji restoration. There, the efficient state bureaucracy pioneered the creation of enterprises in heavy industry and then transferred successful enterprises to an equally efficient managerial elite drawn not only from displaced samurai warriors but also from a long tradition of merchant enterprise. These two sources of domestic entrepreneurship—an enlightened bureaucracy and a vigor­ous native merchant class—barely existed in Russia. Under the tsarist regime, merchants had endured centuries of discriminatory legislation; and the state's own economic program under the last three emperors consisted of restrictions on banks, a large number of state-owned enter­prises that competed directly with corporations, and, eventually, state con­trol of railroads. The tsarist bureaucracy gave only the slightest support for technological innovations outside industries tied to the military, tradi­tionally the state's highest priority, as in efforts of the imperial army and navy to discover military uses of electricity from the late 1860s to the early 1880s, before it became commercially viable.58


Thus, statistics and the memoir literature reiterate three of the main characteristics of Russian capitalism under tsarist rule: its institutional immaturity, its geographical concentration, and its foreign nature. These features emerged once again in the brief period of reform at the end of the Soviet period, when, just as before 1917, they contributed to the creation of resentment against foreign and domestic capitalists.