GaWC Research Bulletin 104

This Research Bulletin has been published in H Dahles and O van den Muijzenberg (eds) (2003) Capital and Knowledge in Asia: Changing Power Relations London: Routledge, 198-208.

Please refer to the published version when quoting the paper.

(Z)

Business Services in Transitional Economies: The Case of Russia

O. Gritsai

The rise of business services – this concept is preferred here to producer services¹ – is an essential part of the post-industrial transition. Therefore, most of the theories regarding the role of business services in the economy, their impacts on social structures and spatial patterns are biased to the advanced Western economies. The question is how (and if) these theories can be applied to societies, where post-industrial processes are at a much earlier stage and which adjustments these theories require when applied to a historically and socially different context under the impact of different political factors.

From this perspective, the experience of the transitional economies of Eastern Europe is an interesting case. In its most pronounced form the impact of socio-cultural and political factors on economic trends is represented in Russia, a country where Europe meets Asia in all sorts of ways. The development of capitalism in Russia has been interrupted for more than 70 years. Business services did not exist in Russia’s planned economy. Their quick growth in the 1990s, after the beginning of the market reforms, is one of the attributes of the post-socialist change. Nevertheless, even in Moscow its share (7–10 per cent of the total employment in 1993 and 11–14 per cent in 1998)² is still much lower than in the advanced Western economies. Being one of the booming sectors, business services play a major role in shaping the Russian new middle classes and promoting social mobility in its different forms.

This chapter examines the impact of business services development on social transformations in Russia, and on the forms of social mobility under the transition from a state-led to a liberal market economy. The study focuses on the different opportunities emerging for the big urban cores vis-à-vis the province in benefiting from the business services’ propulsive effects and for the old and the new elite for upward mobility. It explores to what extent patterns of business services development in transitional economies can be explained by Western theories and in which ways these findings can be put to use in Asian economies.

CONCENTRATION AND DE-CONCENTRATION OF BUSINESS SERVICES: CAPITAL CITIES VERSUS THE PROVINCE

A high concentration of business services in the major cities, especially in their central districts, is one of the key points of the existing theories of business services development. Linked with the location of corporate headquarters and requiring a high quality of urban environment, business services strongly contributed to the post-industrial transformation and radical restructuring of the urban cores in the 1970s and 1980s (Sassen, 1991, 1995). In the 1990s the trend changed. Many of the headquarters and business services companies moved from the central districts to the periphery of metropolitan areas, although this concerns mostly companies or units with routine functions and activities or with standardized types of services. This process may be interpreted as a reproduction of the concentration of the elite functions of the most important metropolitan areas, though at a new qualitative level. This re-concentration is followed by a general spatial diffusion of business services and other post-industrial activities. Sassen (1995) argues that the emerging new geography of the centre with a kind of decentralized re-concentration of economic activities in a number of clusters, linked via digital highways and intense economic transactions, undermines the traditional understanding of the centre associated with the downtown area or the central business district.

Such a trajectory, from concentration to de-concentration and, again, re-concentration in a new form seems to be universal for the spatial diffusion of any basic innovation, as in this case, the diffusion of activities driving post-industrial transformations. If this is true, the less developed countries could also be expected to follow this trajectory with some time lag adopting new developments in their non-western cultural and political domains.

At first sight, the spatial patterns of business services in Russia look similar to those of Western countries in the 1970–80s. Both business services and major centres of decision-making are strongly concentrated in Moscow providing about 30–45 per cent of the national employment in this sector (Gritsai, 1997b). The decentralization of business services is going very slowly, even in the financial sphere. Within Moscow the new business activities are also strongly concentrated in the city centre with very few signs of decentralization. The question is, if and when this trend is going to change and whether this change will happen as it did recently in the West.

Our earlier research (Gritsai, 1997a, 1997b; Gritsai and van der Wusten, 1999) shows that in Russia the strong centralization of decision-making and innovation, with its roots deep in the national history, is a much more persistent phenomenon than it is in Western countries. This centralization was even more reinforced by the socialist planned economy.

Since the pro-European reforms of Peter I, Russia has been a kind of a dualist society with sharp social contrasts between the capital cities (St. Petersburg and Moscow alternately) and the province. By their socio-economic structure and lifestyles these two cities have always been absorbing Western influences while the province remained to a large extent traditionalistic. The theme of the capital city (whichever it was) exploiting the province and being not ‘truly’ Russian has been on the agenda for over three centuries, provoking ongoing debates about the national identity among Western-oriented people versus Slavofils, Eurasians, etc. Large distances and bad roads still keep these contrasts alive despite the criticism and attempts to overcome the ‘friction of space’.

Under the reforms of the 1990s, this contrast has been reproduced in a new form. Moscow became the strongly dominating core of decision-making in private business, which is attracted to the capital city by a concentration of political power, communication facilities (including the largest international airport in Russia), quality of services and cultural climate. Moscow is by far the strongest economic region with a lot of new employment opportunities. It is not realistic to expect that under the current economic difficulties the province may modernize as quickly as the capital city to provide a compatible business environment. Besides, at a purely psychological level, Moscow still represents the myth of a better world to many provincials, hardly available (because of a restrictive registration system and high costs of living), highly attractive and deeply hated at the same time. This explains why business services and company headquarters show a particularly strong preference for locations in the capital city. Federalism and regionalism are political categories, but in the economic sphere these categories play a much weaker role, given the proportion of poor regions that depend upon donations from the Centre.

Another important constraint to the spatial de-concentration of business services is the imprint of Soviet urbanization. A conflict between the new socio-economic processes and the inherited structures, materialized in institutions, laws and the old fabric of the built environment, became an important attribute of all the post-socialist cities, having a big impact on the speed and forms of urban transformation.

In Moscow, for instance, many of the business services are situated where the old Soviet institutions were located, as these old institutions actually generated the new companies. This process was connected with a reinvestment and redistribution of public resources by the most entrepreneurial part of the nomenclature or with private initiatives of all sorts of specialists, trying to commercialize their knowledge. This interdependence between the new and the old structures makes the spatial pattern of business services development in Russia rather complicated and dependent not only on market mechanisms or state regulation but also on formal and informal links between the new and the old elite on the one hand and on sophisticated property relations on the other.

One of the imprints of the socialist urbanization is the superimposed role of the Moscow city centre. This centre has always been considerably better maintained than the more peripheral residential areas and provided with all types of services and infrastructure to serve as the main showcase of the country. This policy contributes to the persistent social attractiveness of the capital’s city centre, which even after years of reforms still looks like a different world as compared to the more remote residential districts of the city.

Another important characteristic of Moscow is that it never experienced any suburbanization. The notion of suburban living has a completely different meaning in Russia than in the West. The quality of the urban environment rapidly deteriorates as one moves from the centre to the periphery and the words ‘suburban’ or ‘peripheral’ carried a distinctly negative flavour for Moscovites until recently. The urban fringe is represented mainly by new residential quarters with high-rise buildings or industrial zones, often seriously dilapidated. Immediately behind the city boundaries one can find old-fashioned villages and agricultural lands. So far, there are very few cores in the urban periphery, which have the potential to develop into modern business districts competitive with the Centre.

Some signs of sub-urbanization appeared in Moscow in the early 1990s after the beginning of a cottage boom, but it has a purely residential character. It will definitely take years before it may be followed by the decentralization of working places, especially in such activities as business services and company headquarters which are sensitive to the quality of their social environment. It is also symptomatic that Western investments, even if they are located in the vicinity of the capital city, hardly generate any particular industrial districts or business areas. Foreign companies may use local resources, markets and labour for their production but turn to the capital city as regards banking and professional services. Moreover, Western companies operating in Russia as a rule utilize services offered by Western business services companies, located primarily in Moscow, while Russian business services cater to the domestic market. This generates two basically different worlds of business services, which co-exist alongside each other without interlinkages and co-operation. This separateness impedes the otherwise stimulating effects of foreign enterprises on the local economy.

Analysing the trends of urban transformation in Western countries, Sassen (1995) argues that there are also considerable differences among them, in particular between the European and the American patterns. In Europe, the expansion of office functions in the old centres is limited because of protective measures, lack of parking space, and land plots of some size for office buildings, which drives many offices out of the centre. In American cities centres have been rebuilt many times, leaving vast spaces for adjustments to the requirements of the time. Moscow has features of both European (cultural heritage) and American (chaotic land-use) cities, but on the whole spatial resources for the extension of office functions in the city centre are still not exhausted there. This serves as an extra argument in favour of the persistence of the existing monocentric structure into the near future.

The post-socialist type of the built environment and the remaining elements of the old Soviet management are the most important constraints for Russia at the moment to follow the standard Western trajectory of the spatial organization of business services. It is hardly possible to expect spontaneous decentralization of the high-ranked business functions while market-mechanisms are still not working fullscale, while the legal system is not fully developed, while the urban administration consists partly of the old nomenclature, and while the structure of investments in urban development contributes to the reproduction of the existing disparities.

ADVANCED BUSINESS SERVICES AND FINANCE, INSURANCE AND REAL ESTATE IN THE METROPOLITAN AND PROVINCIAL ENVIRONMENT: SOCIAL BACKGROUND AND SPATIAL PATTERNS

The differences between the two major sectors of business services – advanced business services (ABS) and the finance, insurance and real estate sector (FIRE) – can be related to their degree of stability, links with other economic sectors, and spatial choices. In Russia and other transitional economies companies operating in these sectors often have a different origin, social background, and pattern of spatial behaviour than companies in these sectors have in the West. These differences make it difficult to apply Western theories to the patterns of development of these companies in transitional economies, as the examples below will illustrate.

1) In Western economies the origin of the different business services sectors is usually related to different social classes. The FIRE establishments act more like brokers of capital and, for them, the availability of funds, network relations, and political power is essential. Therefore, the FIRE sector is dominated by large firms, often connected with large corporations, and tends to be related to the ‘old elites’. ABS businesses, on the other hand, rather act as brokers of knowledge, taking advantage of an academic education and working experience at a professional level. This sector consists mostly of small and medium-scale companies run by highly specialized experts, and is related to the ‘new professionals’, constituting the basis of the ‘new’ middle class.

These class-related differences only partly apply to Russia. Like many other commercial activities, business services in Russia had a very quick start and their origin is much more mixed. Indeed, many of the new companies in the finance sector were established by members of the former Soviet elite and sometimes even on the basis of state institutions or enterprises. The origin of the initial capital in such cases is hardly ever advertized, but it is not difficult to trace it to the state capital, ‘lost’ in the process of privatization and redistribution in the early 1990s, such as the mysteriously disappeared funds of the Communist party, which became the favourite subject of speculations in the mass media for already more than 10 years.

However, in many cases, having capital or knowledge was not enough to start a new business. Among the new bankers or business advisers there were a lot of ‘gamblers’, better prepared to take the risks to run a private company within an insecure half-market environment than were the real professionals. Some of these ‘gamblers’ managed to build up a substantial capital on the wave of easy money-making, which very quickly turned them into real ‘brokers of capital’. A perfect example of such a broker is the well-known financial ‘oligarch’ Berezovski who, in Soviet times, pursued an academic career in mathematics.

In the ABS some of the ‘new professionals’ came from the Communist party and komsomol (communist youth movement) elite, lacking specialized knowledge but possessing their own networks and managerial experience. Being able to recruit professionals from the academic environment, they took over the administrative part of running commercial consultancies, which many of the Russian academics, raised in the tradition of ‘pure science’, considered a dirty job. This flexible recruitment is especially convenient for the academics, trying to combine work in the prestigious but poorly paid state academic sector with contract research in commercial companies. The practice of having two and more jobs has become very common among Russian academics (and other professionals) during the last decade. Later on, in the 1990s, more companies were established by professionals, but the art of operating in the complicated and legally unstable Russian bureaucratic environment is still considered to be an asset, and this keeps the old elite highly represented in the so-called professional services.

These examples show clear contrasts between Russia and the West, with the ‘old elite’ running the ABS, capitalising on their skills to mobilize ‘brokers of knowledge’, and with former professionals moving into the FIRE sector, using their professional knowledge for building up a capital.

2) The literature suggests that the Western ABS establishments use primarily a well-educated male workforce of analytic professionals or managers, whereas FIRE establishments, especially banks, have more female employees, many of them less skilled and trained only to perform repetitive tasks (Coffey, 1996). In Russia, again, this is only partly true, because of a traditionally high representation of women on the labour market, including a high share of females with an academic education, even at the PhD level. In the 1970s and 1980s social sciences, humanities, law, and economics had an overwhelming majority of female students in high-schools and universities, as these were disciplines of secondary importance to the Soviet industrial economy, leading to potentially poorly paid jobs and being generally more attractive to girls than to boys who enrolled in the technical schools. As a result, the current cohort of professionals in the ABS-related fields has a relatively high share of females. This concerns mostly the age cohort of 30–45, which was crucial in setting up the new ABS companies in the1990s.

The orientation of banks and other FIRE companies towards the less educated female labour force also looks pretty peculiar in the Russian situation. Many of the bank employees are women with a high education, many of them graduates of technical high-schools and universities, who preferred a less skilled but better paid job in commercial banking and other FIRE sectors to a professional career with an uncertain future in their own field.

3) It is common knowledge that both ABS and FIRE companies depend on face-to-face contacts with clients and are sensitive to prestigious locations and proximity to the clusters of business activity. ABS companies, providing professional made-to-measure expertise for each particular case, are services of a more individual character. FIRE activities have a relatively high share of standardized operations and routine jobs, offering numerous packaged products or sets of services. According to Dahles (1999), Western literature on business services suggests that ABS establishments, sending their employees out to visit clients, are less dependent on a representative office location than FIRE establishments are, as the latter are usually visited by their clients. In this context Dahles suggests that FIRE companies, especially their headquarters, remain more persistent in their choice for a central location, whereas the APS establishments are more easily inclined to leave metropolitan areas. This pattern is reinforced by the massive use of information technology making communication of the ABS companies with their clients mostly virtual.

In the case of Russia this sort of locational pattern is not common, nor will it emerge in the foreseeable future. The reason is not only the already mentioned differences in urban traditions and structures, but also because of social values and rules, distinct from those of western societies.

Firstly, representation and prestigious location of the office play a much more important role in Russia, especially for activities, which are supposed to demonstrate a higher social status. A luxurious office that makes an impression of opulence on the client seems to be important even for small companies. In the ABS sector the importance given to the office is not less pronounced than in the FIRE sector because in Russia professional consultants are more often visited by their clients per se. It is true that information technology makes professional services less dependent upon the location, but in Russia, with its domination of the old city centres in business life, a good address still remains a kind of a reliable trade mark.

Secondly, another factor keeping the ABS companies in the urban centres is the availability of office space. In Moscow, as well as in other big cities, central areas had a relatively high residential population until recently, which quickly decreased in the 1990s under the pressure of the market. The reconstruction of the former residential buildings or of those which were earlier occupied by numerous Soviet institutions, and the construction of new office complexes became a booming business in the 1990s. In 1996–7 both office supply and office prices, often set for a long-term rent (up to 50 years), became exuberant and, as a consequence, part of the new office space remained unoccupied. Many of the professional consultancies, especially small companies, rent (or buy) big apartments to use as office space. These apartments are still registered as residential space, which helps the companies to avoid high taxes and bureaucratic difficulties. Another group of professional services, being spin-offs from bigger institutions (such as high-schools, research institutes, state committees, etc.) are often located, at least formally, in the office of their mother company. The practice of educated professionals having several interrelated jobs and several salaries makes it even easier to fiddle around with office space. Therefore it is difficult to speak of market forces pushing offices out of the city centre.

4) In the Western literature a big gap is observed between major cities and the province as far as the variety and quality of ABS is concerned. This gap is explained in terms of a narrower client base, a less qualified and less skilled workforce, and less wide-ranging experience (Dahles, 1999). In Russia this gap is even bigger than in the West because of the strong concentration of research and higher education in Moscow and St. Petersburg and because of large differences in the quality of these sectors between the two urban centres and the province. As a result, many provincial universities produce very few specialists able to establish and operate local business services and to compete with the companies in the capital city. The provincial small and medium-sized businesses also fail to provide a stable client base for business services, being simply not strong enough financially to use local professional services on a regular basis and lacking trust in banks. As a consequence, they prefer to keep most of their assets at home in cash, which deprives the FIRE sector of working capital.

BUSINESS SERVICES AND THE NEW MIDDLE CLASSES: THE ROLE OF SOCIO-POLITICAL AND CULTURAL HISTORY

The new middle classes play a pivotal role in post-industrial transformations, although their origin varies in different types of societies. In Western countries the middle classes were nurtured among the urban citizens while, in Asia, they developed mostly from the agrarian and colonial bureaucracies (Robison and Goodman, 1996a). In Western countries the share of the population, which can be related to the middle classes – not only by income but also by education and qualification level, way of life, and consumption patterns – has become as large in the last decades as the sociological interest in this category has declined. In the countries where the post-industrial transition is lagging behind, the emerging middle classes are looked at as carriers of progressive transformations and indicators of efficiency.

In Russia the concept of the middle classes has practically been frozen for 70 years, although the social group known as Soviet intelligentsia (engineers, scientists, university teachers, medical doctors, journalists, etc.) was to a certain extent (by professional structure, education, and qualification level) comparable with the Western middle classes, setting aside the differences in income (Starikov, 1998). The new Russian middle classes that appeared after the reforms of the 1990s, seem to be a combination of fragmented social groups, united by a similar level of income and at the same time divided by social status, education, and way of life. It is only the Russian upper middle class (well-paid professionals, managers of commercial enterprises, owners of successful middle-sized companies) which resembles the Western middle classes in terms of consumption level and lifestyle (Savin, 1998). The lower segments of the Russian middle classes are too fragmented to show similarities in lifestyle or consumption patterns. They, in fact, can be compared with only the lowest segment of the Western middle classes. This category includes owners of small companies, ordinary employees of commercial enterprises (both professionals and supporting staff), the middle level of the state bureaucracy, street salesmen, and also parts of the Mafia, all of them united only by their income level.

Russian experts assume that real changes in lifestyle and consumption pattern may be expected when the new generation – the children of the present Russian new rich or upper middle class, will enter the labour market. Many of them are obtaining an education abroad and adopt foreign lifestyle patterns, which sets them apart from their parents. The question is how many of them will return to Russia instead of looking for jobs abroad. Today, the social base of the new middle classes is strongly undermined by a significant brain drain of professionals and academics settling in the West. Russian sociologists write about the continuing de-intellectualization of the social structure (Belyaeva, 1996).

Another difference between the Russian middle classes and their Western counterpart is age. In the advanced economies a large part of the new middle classes belongs to a generational cohort which, in the 1960s, entered higher education in larger numbers than ever before and developed into a social group with distinct orientations, tastes, and dispositions (Featherstone, 1990). In Russia the new middle classes are mostly people in the cohort of 25–40 who, from the beginning of the reforms, benefited from the growing commercial sector. Young professionals found themselves in a more advantageous position than the older specialists because of their mobility, their ease with changing life patterns and risk taking, their knowledge of foreign languages, and their minds devoid of Marxist dogmatic thinking.

The growth of the commercial sector caused a strong polarization among the Russian middle classes. The most active professionals from the younger age cohorts, who became involved in commercial business services activity, saw their income and social status grow considerably, approaching the elite or the new middle classes in Western economies. At the same time, many of the professionals, especially the older ones, remained outside the commercial sector and found themselves among the social losers, staying practically below the poverty line with their public budget-funded salaries.

In spite of a potentially sound social basis for the new middle classes – the share of employees with a higher education has been traditionally high in Russia – this group is clearly underrepresented in society. The crisis of 1998 has hit the new middle classes severely, undermining their already unstable position in Russian society. Its share in the population went down from 30–33 per cent before the crisis to 20–21 per cent after it.³ The per capita income of all the groups of the middle classes declined considerably in the fi rst three months of the crisis, with the upper middle class turning out to be the biggest loser. But while the crisis was extending to Russian society at large, their incomes started growing again. The upper middle class, in particular, regained its position more quickly than other social groups did. In the long run it was the lowest category of the middle class that suffered most from the crisis.

While the middle classes as a whole are generally underdeveloped in the Russian society, the new professional classes are strongly under-represented among these middle classes. The major part of the professional classes is concentrated in Moscow and St. Petersburg, whereas in the province this social category remains very weak. The provincial middle class is dominated by the owners of small companies, most of them operating in consumer services, commerce, or small-scale production. The rise of consumer services in the Russian province reflects not so much the growth of incomes but rather the initiative of private business to compensate the deficiency of goods and services, inherited from the central planning system. It may be too early to expect that industrial growth will take off quickly to benefit business services. So far, the industrial activity in the country is not strong and occurs mostly in the resource-intensive industries with little impact on the provincial economies.

This has at least one positive side for the province: the crisis of 1998 turned out not as devastating as in Moscow and St. Petersburg, due to a low share of ‘white collar’ workers who are most exposed to economic instability. The crisis caused further deterioration of the provincial middle class structure, although its total share in employment decreased insignificantly (from 6–10 per cent before to 5.5–9.5 per cent after the crisis). The upper level of the middle class (highly qualified specialists from big commercial companies, managers of small and medium companies, high-ranked employees of the state sector) was among the clear losers with its share falling from 1–2 to 0.5–1.5 per cent. The middle category (owners of enterprises with 3–5 employees or of retail units, specialists working in advertising and the leisure industry, bank employees, mediators in commercial services) declined from 3–5 to 2–3 per cent. At the same time the share of the lower category (street salesmen, independent providers of commercial goods, supporting staff of commercial companies) increased from 2–3 to 3–5 per cent (Butuzova, 1999).

CONCLUSIONS

The patterns of business services developments in Russia illustrate how the political situation, socio-cultural factors and built environment re-shape processes which, according to Western theories, could be expected at this stage of post-industrial transformation to develop in a similar way as in Western economies. In the Russian case the most powerful factor is the post-socialist inertia, which is impeding market processes. The reforms of the early 1990s initiated some sort of a wild capitalism, when the entrepreneurial spirit and business networks were often more important for operating a business than knowledge and even capital. Economic and political instability, the weakness of the legal basis and corruption certainly work as extra aggravating factors.

In this context it is difficult to say whether it is the old elite or rather new people outside the old establishment who benefit more from the existing business opportunities. Both the ‘elite continuity’ and ‘new opportunities, new people’ hypotheses are quite appropriate for Russia and other transitional economies. What makes the Russian experience different from the Western and Asian situation is that the concepts of ‘old elite’ and ‘new people’ mean different things. The post-communist old elite has favourable positions not only because of its family background and wealth, but also because of its formal and non-formal networks, contacts and bureaucratic experience, and access to the former state capital available for privatization. The ‘new people’ lacking these connections, but capitalizing on ‘new opportunities’, are not only professionals using their knowledge as a capital asset. This category also comprises of people with very different social and educational backgrounds, willing and able to take risks to run a private business. In this respect the patterns of social mobility, connected with the expanding services sector, are not as clearly shaped as in the established market economies, both developed and developing. Among those who enter the business services sector some may not seek social advancement but consolidation of their formerly held position, while others who are looking for social advancement may fi nd prosperity or face bankruptcy and social degradation.

The analysis of post-industrial processes in transitional economies may be used for understanding similar developments in other non-western societies and Asian economies in particular. Both Asian and transitional economies had a later start with post-industrial transformations than the advanced Western economies had. In both Asia and Russia, governments are making attempts to accelerate transformations by means of innovative policy. In both cases business services are characterized by a strong spatial concentration in the main economic regions and largest cities, a slow diffusion to the province, an underdevelopment of the middle classes and their fragmentation. Both the categories of the new rich and the ‘old elite’ are very important to the changing social structure, attesting to the fact that changes are recent and quick.

Differences in the way post-industrial processes proceed in Asian and East European countries are explained predominantly by their specific political and socioeconomic background. Asian countries are passing through accelerated processes of industrialization and ‘de-industrialization’ after de-colonization. Eastern Europe is experiencing the second coming of capitalism and extended industrial development. Most of the Asian economies have been open to internationalization since their independence, while Eastern European countries were hidden behind the iron curtain for several decades. Cultural differences between Asia and Eastern Europe also have a big impact on economic performance and social patterns. Nevertheless, the main lesson learned from this case-study of business services in Russia, i.e. the necessity to ‘edit’ or even reconsider Western theories before applying them to other parts of the world, may be useful for all sorts of social studies on non-western societies.

NOTES

1. Both terms 'producer services' and 'business services' are used interchangeably in the literature. The term 'producer services' emphasizes the difference of this sector from consumer services, 'business sevices' reflects their character.

2. Assessments of the author based on the Russian employment statistics, which give only aggregated figures on basic activities.

3. Estimated by the experts of the Institute of socio-economic problems of population and the Laboratory of social technologies in Moscow (Savin, 1998).
 

Edited and posted on the web on 8^th April 2003