Can family businesses take hold in Russia?

Can former communist economies develop strong family business sectors? So far, there is no clear answer. In some ex-Soviet countries, there appears to be a strong dynastic will, or desire to pass a business on down the generations, among entrepreneurs, but in others this is less apparent.

Historically, Russia has been a place where money can be earned rapidly and entrepreneurs enjoy a lot of opportunities. Nevertheless, most of these entrepreneurs are focused on building their businesses and do not think about succession.As a consequence, Russia is an interesting example of a country where successful entrepreneurs do not tend to have dynastic intentions. Here are some reasons why:

Ownership
Business or property ownership in Russia is formally backed by law; however, it is often also dependent on the goodwill of senior government officials. This means that business owners need to ensure they have the support of these officials to assuage concerns over ownership.

Corruption
The real and perceived level of corruption in Russia is a big deterrent to the development of family businesses. Corruption can lead to an inefficient allocation of capital, as companies often have to pay off officials. At its worst, corruption can lead to the collapse of businesses, as indeed it has in some cases in Russia. This doesn’t inspire confidence in long-term decision-making, a key for the success of family businesses.

The next generation
The children of successful entrepreneurs often have little ambition to work in their parents’ businesses. And this is as much to do with their own attitude as it is to do with the attitude of their parents. People in the next generation look at Russia’s business culture and prefer to take their skills – and the family business money – outside the country. And in many cases, the owners of would-be family businesses don’t see long-term prospects for their companies.

That said, it isn’t all doom and gloom for burgeoning family businesses in Russia. Here are some positives:

Talented people
The tough business environment in Russia, coupled with its occasionally troubled past, has created a resilience among much of the population. Russians are not afraid of new challenges. This should ensure that entrepreneurs will continue to flourish in the years ahead. And some of these new businesses will eventually be passed on to next generation family members.

Low taxes
Tax for businesses in Russia is very low, much lower than in most Western European economies. If businesses can deal with the lack of legal framework, the low tax regime is a big incentive.

Consumer class
Russia is rapidly developing a consumer society, which offers many opportunities for entrepreneurs. And long-term consumer trends in Russia are positive, which should create opportunities for businesses to make the transition to second-generation control.

Although Russia does not present the best example of a post-communist economy that has embraced family business capitalism, there is pressure to improve the environment. And I certainly meet many talented people who want improve the situation. Over the longer term, I think things will get better for family businesses in Russia.

Anton Ionov, Family Business Leader, Commonwealth of Independent States, EY

 

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