Trapped in Informality: The Big Role of Small Firms in Russia’s Statist-patrimonial Capitalism

Manifestations of patrimonialism such as corruption and state predation on business are widespread in many emerging economies. This paper presents the case of Russian political economy, dubbed ‘statist-patrimonial capitalism’, which is marked by state threats to private property rights through bureaucratic extortion or legal harassment. How can we explain the resilience of Russia’s statist-patrimonial capitalism? Predominant accounts focus on the lack of institutional constraints on state predation. The paper offers a different perspective by exploring the often-overlooked contribution of small- and medium-sized enterprises (SMEs). First, statistical data show a steady rise of SMEs in the 2000s despite increasing state predation, suggesting that SMEs are not simply subjugated by the state. Second, in-depth interviews with Russian entrepreneurs reveal that business contributes to the maintenance of the statist-patrimonial system through the mechanism of the ‘informality trap’: firms that choose the informal strategy have difficulties to return to the legal sphere and get stuck in informality. The drivers of informality include firm-specific characteristics, institutional factors and socio-cultural factors dubbed ‘normality’. The mechanism of the ‘informality trap’ highlights the agency of firms in corrupt polities and may be applicable to other emerging economies.