Sewing has stopped in eastern Ukraine.

Putin Leaves Private Businesses in the Cold

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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As Russian President Vladimir Putin keeps the world guessing what he's going to do about falling oil prices and the Western financial sanctions against giant Russian state-owned companies, people who turned Russia into a capitalist country are going through a difficult period of soul-searching. These people are entrepreneurs, founders of medium-sized companies, and for them, winter is coming.

Russia doesn't have a Mittelstand, the powerful cohort of medium-sized businesses like the one that ensures Germany's economic resilience and export might. In the 1990's and early 2000's, however, attempts were made to build one from scratch. Retail, agricultural and consumers goods manufacturing companies sprang up seemingly from nowhere, run by often eccentric but always charismatic leaders who became the darlings of a business press that was as new as their firms.

One of these founders was Vladimir Melnikov, owner of Gloria Jeans. Orphaned at 12, in 1960, he quit school to work in a factory in Southern Russia and develop his then-outlawed entrepreneurial talent. By the time the Soviet Union fell apart, he had served three prison sentences for hard currency operations and running an illegal garments business, and was on his way toward becoming a multimillionaire. Unlike many of his colleagues from the Soviet shadow economy, who moved into oil or metals, he stuck with sewing jeans.

In 2013, Melnikov's company had 36 factories in Russia and Ukraine, 628 stores and sales of $841 million. Gloria Jeans occupied the niche just below the likes of Zara and H&M, becoming particularly strong in clothing for children and young adults. The ex-convict has hired McKinsey consultants and top managers from Ikea, Sears and Levi's to help grow the business, and he survived Russia's 1998 debt default and the 2008 financial crisis by thinking on his feet, shifting production to where it was cheapest and imitating the latest styles. I've bought Gloria's unpretentious, well-made jeans and t-shirts for my kids -- it was almost impossible to avoid.

Thoughout his life, Melnikov, who is 66 now, stuck to his native Southern Russian region of Rostov, bordering on Ukraine.Gloria Jeans is headquartered there. Not for long: Melnikov now says he wants to move it to Hong Kong by next year after transfering 80 percent of the production to China.

Gloria's nine factories in eastern Ukraine are now closed: Melnikov says "bandits" -- he doesn't care from which side in the conflict between pro-Russian separatists and Ukrainian troops and paramilitaries -- demanded protection money, and then electricity supply became uneven. As for Russia, its siege mentality and state capitalism are making Melnikov's life almost as difficult as it was when he was starting out in the Soviet Union. "Market people, entrepreneurs have nothing to do here," Melnikov said in an interview with Snob.ru, explaining that he'd rather brave cutthroat competition in Asia. "We will die in Russia and we're likely to die in Hong Kong, but here we will die as slaves and there we will die as winners."

Few Russian entrepreneurs are as bold as Melnikov, who says he doesn't believe Russia can withstand a Western "siege." Many think that way, though, and are willing to hint at it.

Yevgeni Dyomin founded his toothpaste company in 2000. Now, 11 percent of Russian households buy Splat toothpaste, which uses all kinds of unexpected ingredients, from Siberian berries to gold and can even be black. That's a big audience for Demin's letters to customers which the entrepreneur packs into every toothpaste box. Usually, the letters tell inspiring anecdotes or talk about values, but the latest one touches on life in isolation.

"Before finding ourselves inside a besieged fortress, it's important to understand how we're going to source food and the goods necessary for comfortable living," Dyomin wrote. "For people to take your views into account, it's not enough to be just strong, it's important to be smart."

People like Melnikov, Dyomin or the four Russian businessmen who co-signed a mild but desperate-sounding appeal for peace with their Ukrainian colleagues and billionaire Richard Branson in August realize that their hopes, born when the Soviet Union crashed, are out of place during Putin's third presidency. In 2013, the combined sales of Russia's 200 biggest non-state-owned companiesgrew just 4.4 percent, slower than the 6.5 percent inflation. Putin's support base is in the state sector, and he doesn't care what happens to that embryonic Mittelstand. That could be one reason for the continuing capital flight, which Russia's central bank estimates at $85.2 billion in the first three quarters of this year.

After Putin is gone, and unless he is replaced by someone even more bent on rebuilding the Soviet order, Russian private business may have to start from scratch again.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net