Draft
How Trust Is Established in Economic Relationships
When Institutions and Individuals Are Not Trustworthy
(The Case of Russia)
Vadim Radaev
Professor, Chair of Economic Sociology
State University – Higher School of Economics
E-mail: radaev@hse.ru
This draft paper is to be presented at the Workshop on Trust and Honesty
(Collegium, Budapest, 22-23 November, 2002)
Contents
Introductory remarks
Data sources
Project 1. Transaction Costs in Russian Business
Project 2. The Costs of Legalisation
Creating distrust in business relations
Informalization of formal rules
Lack of one-sided trust
Lack of reciprocal trust
Infringement of business contracts
Request for honesty
Creating trust in business relations
Contractual forms of protection
Checking up business partners
Establishing business networks
Building conventions among business actors
Stigmatisation of defectors
The state as a source of trust and distrust
Expectations from the state
Building conventions with the state
Conclusion
Bibliography
1
How trust is established in economic relationships when institutions and
individuals are not trustworthy (the case of Russia)
Vadim Radaev
Introductory remarks
Market relations are not confined to free competition and price-making
mechanism. Market is a part of the economy as instituted process [Polanyi 1992]. It is
constituted by sets of rules, regulations, and other institutional arrangements,
including relations of trust. Starting with its general notion we would define trust as a
belief that the other agents would act in a predictable way and fulfil their obligations
without special sanctions [Coleman 1988]. Specifying this notion we differentiate
between two levels through which trust relationships have to develop. The first level
of trust is achieved through a predictability of behaviour of the other actors. The
second level of trust is reached through mutual obligations to follow accepted
conventions, which are voluntarily taken by the market actors. We also accept a
division between one-sided trust in institutions and reciprocal trust among business
actors [Rose-Ackerman 2001a, 2001b].
Today Russia demonstrates a prominent example of a low-trust society.
Formal rules are contradictory and unstable here. There is a lack of their formal
enforcement, which produces a high level of uncertainty. The state legislative and
regulatory policy is non-predictable by the market actors. As a result, one-sided trust
in institutions remains on the low level.
One could expect that this deficiency of one-sided trust should be
compensated by the reciprocal trust in business partners. However, what makes the
situation even more demanding, reciprocal trust in business to business relationships
is low as well because honesty often does not pay here. Although business actors put
the highest value to honesty in relations, they do not trust each other entirely due to
the frequent infringement of business contracts and non-transparency of business
transactions.
Taking this into account, the central issues for investigation in the paper are
the following:
2

How are economic relations established when formal rules are not
effectively enforced and both institutions and individuals are not
trustworthy?

How does the trust emerge and develop in these relationships?

What is a role the of state in development of one-sided trust in institutions
and reciprocal trust among business partners?
To study these issues we borrow conceptual tools from two inspiring sources,
including the new institutionalist theory [Eggertsson 1990; Fligstein 1996, North
1992] and the literature on trust [Gambetta 1988; Hardin 2001; Rose-Ackerman
2001b; Stompka 1999]. Using these toolkits, in this paper we will treat issues of trust
and distrust in Russian business relationships on the empirical level.
Data sources
Our empirical evidence is based on data collected from two projects:

Research project “Transaction Costs in Russian Business” (1997-1998;
funded by the CIPE),

Research project “The Costs of Legalisation” (2001-2002; funded by
Russian Business Associations RATEC and ACORT).
Project 1. Transaction Costs in Russian Business. This project included a
standardised survey and set of in-depth interviews collected with the non-state
enterprise managers and entrepreneurs.
Standardised survey was conducted in November 1997 - January 1998. 227
filled questionnaires were collected from the heads of non-state enterprises in 21
regions (mainly in the European part of Russia). All main areas of the economic
activity were represented. Selected basic parameters of the surveyed enterprises and
entrepreneurs are presented in the Table 1 [for detailed description of research
outcomes see: Radaev 1998, 2001a].
In-depth interviews were conducted from May 1997 to April 1998. In total 96
interviews were recorded. The main focus was made upon the emerging areas of nonstate businesses. Our sample included 27 follow-up interviews, which were conducted
for the second time with the same respondents (the first survey was carried out by the
3
Centre for Political Technologies in 1993) 1. The data focuses on the issues of
corruption, contract enforcement, use of force in business relationships, and problems
of the market entry for Russian entrepreneurs.
It is important to mention that both surveys were carried out before August
1998. Therefore, the financial crisis could not seriously distort the picture.
Table 1.Basic parameters of the sample
Parameters
1
%
Privatised state firms
- 18
Newly established private firms
- 82
Small firms
- 79
Large and medium-size firms
- 21
Male entrepreneurs
- 75
Female entrepreneurs
- 25
Have university degrees
- 83
Do not have university degrees
- 17
(One of the) owners of the enterprise
- 79
Managers of the enterprises
- 21
Members of business associations
- 28
Non-members of associations
- 72
Moscow entrepreneurs
- 19
Other regions
- 81
The author and research team of the Centre for Political Technologies (Moscow)
(head – Igor Bunin) conducted the surveys. The U.S. Centre for International
Private Enterprise (CIPE) funded the research. We would like to thank I.Bunin,
R.Kapelyushnikov, A.Zudin, N. Nazarova (Center for Political Technologies) and
V.Gubernatorov (Russian Federation Chamber of Commerce and Industry) for
valuable support in the implementation of the project.
4
Project 2. The Costs of Legalisation. This project was initiated by two newly
established business associations:

Association of Trade and Production Companies of Electric Durable
Goods and Computers (RATEC). It includes companies dealing with the
wholesale trade and retailing of the imported electric durable goods and
also some home producers of these goods.

Association of Retailing Companies (ACORT). Its companies develop
retailing networks dealing with electronics, food, clothing, footwear,
furniture, construction materials, stationary.
Thirty eight in-depth interviews with owners and top managers of the Russian
companies were conducted in two major series. Fourteen interviews were recorded in
2001 and twenty four interviews were recorded in 2002. The main target of these
interviews was the estimation of transaction costs of different modes of activity
including semi-legal (grey) and illegal (black) business schemes with the special
focus to custom procedures2.
Both studies were devoted to a broad range of institutional issues. For this
paper we draw the aspects of the studies devoted to formation of trust and distrust in
business relations.
Creating distrust in business relations
From the standpoint of any conventional institutional theory, the observer of
the market transformation in the post-communist Russia faces the following puzzle:
Puzzle 1.
Market relationships should be based on legitimate
formal rules and high level of trust. New markets
intensively develop in Russia today though neither of
these conditions exists.
2
The author and research team of the State University – Higher School of Economics
conducted these surveys. We would like to thank the President of RATEC
Alexander Plyatsevoy, Executive Director of ACORT Oleg Sazanov, and the
President of INP “Public Agreement” Alexander Auzan for facilitating the project.
Svetlana Barsukova, Tatiana Kazantseva (first series of interviews), and Vladimir
Karacharovsky (second series of interviews) were extremely helpful in collection
and systematization of important parts of the data. Technical support was provided
by Evgenia Nadezhdina.
5
Dealing with this institutional controversy we will use the following set of
assumptions:
Assumption 1.
Formal rules are contradictory and unstable in Russian
economy. They become subject to informalizaton. The
state policy is non-transparent and non-predictable. This
situation produces a high level of uncertainty.
Assumption 2.
Institutional instability undermines one-sided trust in
formal institutions. It raises demands for reciprocal trust
among business partners.
Assumption 3.
Reciprocal trust in business to business relationships is
also low due to the frequent infringement of business
contracts.
Informalization of formal rules. Conventional economic theory is largely
based on the assumption of existence of the efficient legislation and relatively costless
state and arbitration control, which provide enforcement of formal rules [Williamson
1985]. This assumption displays its obvious weakness in case of Russia, in which
public institutions are not able to impose effective sanctions against opportunism and
malfeasance.
A principal reason is that institutional arrangements in Russian business are
strongly influenced by a developed mechanism of the informalization of rules. The
latter is considered here as a continuous transformation of institutions, in which
formal rules are largely substituted by the informal arrangements and built into
informal relationships. We described the main elements of the informalization of rules
elsewhere [Radaev 2001c]. Here we recall them very briefly.
First, formal rules are imposed by the public officials in a way, which leaves
room for their discretion and creates a high level of uncertainty for the market actors.
Second, confronting high costs of compliance with the formal rules, economic
agents create specific governance structures to avoid formal rules on a systematic
basis.
Third, public officials establish selective control, in which formal rules are
used for extortion and selective pressures on economic agents.
Fourth, economic agents, in turn, bargain with the public officials on terms
and conditions of the formal rules implementation.
6
Fifth, multiple arguments and interpretations are produced to legitimate
practices of informalization.
Russian entrepreneurs have proved to be very innovative in inventing informal
business schemes to cope with the discrepancies in formal rules without direct
confrontation with the state authorities. Normally, it takes less than one week to adjust
to a newly adopted formal rule. The best corporate and free-lance lawyers and
accountants are engaged in elaboration of the business schemes with various degrees
of legality. As a result, Russian business is largely non-transparent. Our study of the
area of imported electronic goods demonstrate that the largest share of these goods
has been brought into the country by using grey (semi-legal) schemes, which does not
strictly follow the law. Involvement into the shadow activity leads to nontransparency of Russian business, which prevents formation of the trust relationships.
“One of the reasons of the low trust is that our market is overshadowed and
non-transparent. Therefore, everyone is scared to get opened”
(2002, head of cell-phone selling company).
Lack of one-sided trust. Informalization of rules largely originates from
common distrust in the state authorities as the main provider of formal rules. To
illustrate this, we bring a fragment of survey data collected by the Fund of Public
Opinion (FOM) on the level of one-sided trust in the state institutions in Russia. We
took data of seven nation-wide surveys and elaborate a simple index computed as an
average sum of differences in percentages of positive and trustful attitudes and
percentages of negative and distrustful attitudes to the same institution. If this index
falls below zero, it means that distrust among the population prevails. The outcomes
are presented in the Table 2.
We should add that all attitudes are stable over time and apparently negative
with one exception for the attitude to the Presidential Administration, which is
associated with the newly elected President Vladimir Putin. Legislative authorities are
trusted even less than executive bodies. Let us add that comparative opinion polls
demonstrate relatively low trust in institutions in Russia if compared to the other
countries [Rose-Ackerman 2001a].
7
Table 2.Trust in institutions in Russia (2000-2001, average of 8 nation-wide polls)
Political and governmental institutions
Index (%)
President Administration
+3.6
Regional Administration
-8.4
Local Administration
-10.7
Russian Federation Government
-6.7
Council of Federation
-11.9
State Parliament
-29.4
Regional parliament
-15.5
Source: www.fom.ru/reports/frames/short/d011703.html
Now let us bring two illustrative examples from our own 1998 data dealing
more specifically with the business relationships. First, we asked what the
entrepreneurs would do if confronting a case of malfeasance on the side of their
business partners. It turns out that only 24 % of Russian entrepreneurs would address
the Arbitration court when dealing with the dispute settlement. A majority of
businessmen (55 %) would try to negotiate and persuade their partners by the
informal means. 11 % of the entrepreneurs would use force to cover their losses.
Thus, a major part of entrepreneurs prefer informal ways of dispute settlement.
There are several reasons for that. First, the Arbitration court has proved to be one of
the most corrupt institutions, which are widely used for asset stripping and aggressive
mergers. Second, these Courts are not independent from the direct influences of the
government officials and business corporations. Moreover, they are frequently used as
instrument of unfair competition to push out the rivals. So, the courts are not trusted
in Russia at present. Third, arbitration procedures are time-consuming and costly. It
may cost from 1.5 to 5 % of the disputed sum (which may be specially difficult for the
small firms). Fourth, there is no guarantee that justice will be established due to many
gaps in existing legislation. Fifth, even in case of success in the court, it does not
necessarily mean that the losses will be covered. The court executives are few and not
very efficient. They often fail to reach a defector. According to the opinion of our
respondent:
8
«It is worth to appeal to the Arbitration Court only if you deal with the
reputable business organisation»
(1998 head of trading firm).
This citation reflects a certain paradox: one should trust in other business
actors as a precondition of taking them to court.
Our second example deals with the question what the entrepreneurs would
most probably do when confronting the use of force and coercive pressures in relation
to their firms and them personally. Only 13 % of them claimed that they would call
for the police (militia). At the same time 23 % of entrepreneurs would appeal to
private (either legal or criminal) protection agencies. 34 % of business people would
prefer to cope with it on their own. Finally, 30 % of them avoided any definite answer
[Radaev 1998, 2001b]. It means that the state has lost a large part of its capacity of
imposing law and order. And it is difficult to rely upon the state protection agencies
when the formal rules are violated.
Entrepreneurs presented one more remarkable argument for avoiding formal
court and police procedures:
«By appealing to the court you can ruin your relationships... It is not a usual
way of doing things. There are two categories - «us» and «them». All state
authorities involving tax inspections and arbitration court are viewed as
«them». It is a mauves ton to address them»
(1998, head of production and trading firm).
Thus, apart from inefficiency of the state authorities and high transaction costs
there exist implicit conventions, which pursue the entrepreneurs to resolve delicate
issues among themselves without attracting a third party. This logic of negative
solidarity dividing «us» (businessmen) and «them» (authorities) is still influential.
And formal appeals to the state are judged frequently on moral grounds as attempts to
break somebody down. This is a specific case illustrating how reliance on public
institutions could undermine interpersonal trust instead of giving it more strength.
Lack of reciprocal trust. When one-sided trust in institutions is low we could
expect that it should be compensated by higher reciprocal trust in kin, friends, and
business contractors. Our evidence demonstrates that business to business
relationships are not subject to such an simple causation.
There is a widespread distrust displayed in business relations. First of all, it is
reflected in the attitude to the newcomers and outsiders. However, even in case of
9
long-term relations with regular partners it presents a serious problem. The dominant
feeling was expressed by one of our respondents in the following way:
«I do not trust entirely anyone in business»
(1998, head of real-estate firm).
It is remarkable that this statement refers not only to the rule-based trust but
also to affect-based trust based on personal ties with family and friends [RoseAckerman 2001b]. These strong ties are obviously preferred to relations with
strangers. And many entrepreneurs started their businesses making teams with their
relatives and friends. However, in the course of 1990s affect-based trust was largely
undermined as well.
«... It does not matter if you have very confidential relations with somebody
and that somebody loves you tenderly. Payment arrears could happen easily»
(1998, head of the firm selling medical equipment).
«In those few special cases when I removed the principle of pre-payment I was
punished severely.... And it was my personal acquaintances who did that to
me»
(1998, head of advertising agency).
Are there any differences in relation to Russian and foreign companies? There
is a stereotypical vision that western companies are more transparent and more
reliable (which is partially accepted by our respondents). Besides, for many years it
was a matter of high prestige for Russians to have their business partners from the
West. Nevertheless, after getting experience of cooperation with the foreign
companies, some of the Russian entrepreneurs got fundamentally frustrated provided
initial expectations were high. In the end, no fundamental difference in attitudes to
domestic and foreign business partners is demonstrated.
«Unlike the situation which was five years ago, we use to check up our
western partner more thoroughly than the Russian one»
(1998, head of a group of companies).
«We do not trust western partners because they do not always follow their
obligations. We use to part with them in case of failures»
(1998, head of tourist firm).
The main reason for distrust in Western companies was also pointed out in our
interviews. When perestroika commenced, many swindlers along with quite reliable
businessmen from the West were attracted to the emerging Russian markets as a land
10
of new opportunities. And at the beginning it was difficult to distinguish between
swindlers and reputable businessmen by checking their credit history and reputation
because information channels were not well developed in Russia. And many Russian
entrepreneurs became victims of their initial one-sided trust in the institutions of
Western business. After being cheated Russian entrepreneurs became more cautious
and selective in relations to western firms.
Infringement of business contracts. Lack of reciprocal trust is closely
connected with the opportunistic behaviour in business relationships. What is the
source of this opportunism? It originates from the frequent infringement of business
contracts, which leaves a large room for risk and uncertainty in Russian business at
present. To measure the level of this sort of opportunism in relationships among
business partners we put forward the following questions:
 How often business contracts are violated in Russian business in general
today?
 How often do the entrepreneurs face contract infringement in their own
business activity?
Our data confirms the existence of a high level of opportunism. Nearly
everyone (92 %) admitted that infringements of the business contracts use to happen
in Russian business nowadays. It includes 49 % of the respondents, who consider that
contract infringement is frequent. And only a negligible part of entrepreneurs (8 %)
do not see a problem here at all. Let us mention that these results were also supported
by our previous research findings in the 1996 nation-wide survey of entrepreneurs
[Radaev 1996, p. 74-76].
As for the personal experience of entrepreneurs, it strongly correlates with
their general attitudes. A vast majority of entrepreneurs (82 %) reported that they
confronted with that sort of opportunistic behaviour in their own day-to-day business
activity. One third of them (32 %) faced it on a frequent basis (Table 3).
Table 3. Infringement of Contracts in Russian Business (row percent, N = 227)
Infringement of contracts
Frequent
From time to
time
Absent
In Russian business in general
49
43
8
In one’s personal experience
32
50
18
11
There has been a continuous debate among Russian experts whether the
chronic inter-enterprise payment arrears result from the macroeconomic instability
and rigid monetarist policies of the Russian Government or they are largely an
outcome of conscious opportunistic strategies of the enterprise managers “seeking
their self-interest with guile” (O.Williamson). In our opinion, both factors might
contribute to distortions in the payment systems. In any case, it produces serious
institutional effects creating distrust among business partners.
Request for honesty. One could ask if the level of trust is identified as an
important problem at all. Our data gives a positive answer here. In our 1998
standardised survey we put an open-ended question to the Russian entrepreneurs to
reveal what the most important personal qualities are, which are highly valued when
looking for the business partners. Almost forty characteristics were pointed out in
total. Having been clustered, they help to display the most demanding issue required
from the business partners. It turns out that nearly everyone points into the same
direction saying that business partners must be honest and trustworthy. As we are
informed by the economic and sociological theory, it is intuition and intellect,
creativity and motivation that are normally imputed to «the real entrepreneur»
[Radaev 1997, chapter 6]. However, these personal qualities were not frequently
mentioned. Honesty and trustworthiness were absolute winners over all other issues
(Table 4).
Table 4. Most important personal features of business partners (N = 227)
Features
%
Honesty, trustworthiness
- 79
Responsibility, liability
- 29
Professional skills, competence
- 19
Accuracy, precision
- 12
Initiative
-8
Financial sustainability
-4
Gender, ethnicity
-1
Work experience and others
-2
12
So, Russian entrepreneurs are quite conscious about honesty. And we would
argue that their concern is neither about high moral values nor about generalised trust.
When laying claims for honesty the entrepreneurs care about very practical rules of
business conduct, like payments on time and reliability in payments in general.
Creating trust in business relations
Let us turn to the main question of our study now. How do entrepreneurs cope
with the situation when their business contractors are not entirely reliable and the
«third parties» responsible for the dispute settlements are not trusted? Here we come
to the following puzzle:
Puzzle 2.
Business partners do not trust each other much.
However, malfeasance in business relations is
decreasing.
It is confirmed by the following insight of our respondent:
«The problem of reliability of partners... always exists in business. However,
it becomes less demanding now»
(1998, head of stock market).
Does it mean that honesty start paying back? We would argue that it is not the
case or at least not the main reason. Our argument is presented in the following
assumptions:
Assumption 4.
Formal contractual relations are not sufficient for the
enforcement of reciprocal trust. Informal private
ordering is widely used here.
Assumption 5.
Various precautionary measures are taken and closed
business networks are built to raise a predictability of
behaviour of the other market actors.
Assumption 6.
Business to business conventions are built to elaborate
common rules of conduct and impose mutual
obligations on the market actors.
Assumption 7.
Established conventions of reciprocity stimulate the
development of one-sided trust in institutions.
13
Confronting opportunism and malfeasance, Russian entrepreneurs had to
impose methods of the private ordering. Business people do not become more trustful.
Rather they become more cautious when arranging business deals.
«The number of violations has decreased for the number of business ties has
diminished. Before he gave money to somebody and it was not paid back. He
was running all around saying that he was cheated. Now he does not give
money and nobody lets him down. So there is nothing to complain for. The
situation is different»
(1998, head of trading firm).
«Everyone is now more cautious than before»
(1998, head of construction firm).
Contractual forms of protection. Given Russian entrepreneurs had to
exercise control over transactions at their own risk, they take some precautionary
measures. They start with introducing discriminatory elements into the business
contracts. The requirement of pre-payments could serve the most prominent example
here. In case of transactions with the new partners, pre-payments were considered as a
compulsory instrument.
«Partial pre-payment is the only real guarantee»
(1998, head of trading and production firm).
One more precautionary measure is to start business deals with some small
probing contracts or/and divide the transfers into several stages to ensure the
outcomes. If the probing contracts prove to work successfully, business partners
increase the volume of the delivered goods and services step by step.
“Initially, when we start working with a new company, we get very bad
contract conditions, including 100 percent pre-payment and other things.
Then in some time normal relationships are established. And conditions
change for the better”
(2002, head of retailing network).
In spite of these efforts, any formal contract provides no perfect protection
from opportunism of the market actors. First, the culture of formal business
contracting is not highly developed in Russia so far. Second, formal contracts are not
able to cover all necessary issues and anticipate all possible intervening factors. It
means that the parties must rely on various sort of relational contracting [Williamson
1985]. Third, having signed a contract the entrepreneur still is by no means protected
14
from violation of rules. The contractor could simply grab the money and disappear. It
means that the status of the firm and personality of their leaders do play an important
role here.
«No doubt it is necessary to sign contracts in any case. But anyway,
implementation of this contract depends on the person»
(1998, head of real estate firm).
«The informal word weights much more than any signed contract in our
market»
(1998, head of investment company).
“You are not able to put everything on paper… And many decisions are taken
across what is written in the contract… There are certain rules, which could
be more powerful than formal papers”
(2002, head of retailing network).
Checking up business partners. As far as formal contracting is not sufficient
to secure positive outcomes, the entrepreneurs are supposed to develop noncontractual elements of business relationships. First of all, they start to check up their
potential partners thoroughly before making business deals.
«We use to check up every new partner thoroughly and for the long time. And
if we start working with him/her we ensure the conditions, which provide
sufficient guarantees for us»
(1998, head of the group of companies).
«We do not sign serious contracts before check-ups and do not deal with the
new partners»
(1998, head of holding company).
«It is possible to have a business without check-ups. But in this case one has
to be alert and expect failures. It is necessary to calculate risks and be ready
for something. It takes more energy to make a transaction. One is supposed to
ensure each step from a variety of failures»
(1998, head of retailing network).
At the beginning of 1990s Russian entrepreneurs took full risks of
malfeasance given the lack of reliable and systematic sources of business information.
By the end of 1990s opportunities for getting data on financial sustainability and
business reputation of the market actors are considerably improved. The data on
potential business partners is collected both from public and commercial registers and
databases. Foreign partners are checked up through the embassies and trading offices
of the large firms in the foreign countries.
15
«It was impossible before. Now we are dealing with the Ministry of Home
Affairs and banks. They can make inquiries about any client for us»
(1998, head of industrial production firm).
«We have got opportunities for checking-up firms and their founders. There
are long «black lists» already»
(1998, head of stock market).
All in all, big transactions are ensured by the prior check-ups. But even after
getting positive information, the entrepreneurs are still cautious with the newcomers.
«A sufficient number of partners has been already checked up. It is not a
problem to find out anything you like. You are not able to come to the business
from nowhere anymore. Nobody would give you anything like it was before»
(1998, head of investment company).
«There are small contracts on 30 thousand and big contracts on 300 thousand
[dollars]. No one would make a deal on 300 thousand with a newcomer right
away»
(1998, head of investment company).
We have to add that collecting business data costs both time and money. But
even a very detailed inspection can not guarantee positive outcomes. The
entrepreneurs have to close their business relationships from the outsiders.
Establishing business networks. Contracts are largely enforced through
personal business networks, through which social capital is accumulated [Coleman
1988]. Business network is defined here as a stable and relatively closed set of
interpersonal links between regular business partners. It is based on a combination of
formal control and informal exchange of services. We have all grounds to argue that
these networks play an increasing part in Russian business.
«We are giving goods in credit only to permanent clients. We would never
give it to any others... If you make purchases you should deal through your
own acquaintances. Otherwise, you have no guarantees. They will sell
distorted goods to you»
(1998, head of the wholesale firm).
«It is vitally important to have permanent partners now. They are valuable not
for that they pay back on time but for that they pay back in principle»
(1998, head of firm selling fuel).
«We did not make alliances before. Now we are very active in making
alliances with our Russian partners. And we have our joint projects. We
would never do it before because they would cheat you and never get the work
done»
(1998, head of computer firm).
16
Russian businessmen have become more selective, especially when dealing
with the newcomers and outsiders. They reasonably prefer to stay within «their own»
exclusive business circles. One of our respondents postulates it very clearly:
«We are dealing with smaller and smaller number of people. Some time ago
one could disseminate a hundred personal cards just to somebody. Now we do
not use cards because we do not meet new people. And even if you are
introduced to somebody new it is done via those with the high reputation. The
circle has not closed down completely but it is extending very slowly»
(1998, head of several firms).
Business networks no doubt are established to overcome distrust among
business partners. What sort of trust is built through these networks? On the initial
stages the many Russian entrepreneurs started up their businesses with their friends
and personal contacts. According to our 1993 survey data of 277 Moscow
entrepreneurs they started up with the following companions [Radaev 1993, p. 7-8]:
Personal acquaintances
- 42 %
Friends and their kin
- 23 %
Kin members
- 17 %
People unknown before
- 11 %
Given many uncertainties in the business environment, relations were largely
built upon the affect-based trust. Then a serious shift happened in the course of the
1990s. Initial business teams were often dismantled. Former partners started up their
own firms. Friendships often became an obstacle to efficient leadership. All in all,
business and former friendships started to fall apart. We have several clear
statements in support of this observation:
«Good acquaintances, as a rule, would let you down in major part of the
cases»
(1998, head of lawyer firm).
«It is a fundamental truth in business: those will survive who will understand
that he/she must end with friendships in the right moment»
(1998, head of trading firm).
It means that affect-based trust is largely replaced by the reputation-based
trust. Strategic alliances are increasingly built upon not personal and long-term
friendships and kin relationships but more upon recognition of the professional and
managerial skills and business reputations. The firms and their leaders are divided
into «respectable» ones (“they will not let you down”) and unknown ones (“you
17
should be cautious with them”). Thus, the business networks are used to disseminate
information on unreliable business agents and to build up reputations.
«Nobody would deal with a man who has cheated once... If the sum is not
significant he will be just blacklisted as an unreliable partner»
(1998, head of marketing department).
«Information is transferred instantly. And in case of contract infringement you
run a risk of losing all your partners... As soon as you failed to fulfil serious
obligations you find yourself cut off the resources. And your bank is closing
down. It is a real close entity»
(1998, head of commercial bank).
By and large, honesty may not pay in free market relationships while it starts
paying within closed business networks. These networks reduce risks, help to
overcome interpersonal distrust and produce a sort of segmented business ethics. This
makes the situation more predictable and creates opportunities for the development of
mutual obligations through the new business conventions.
Building conventions among business actors. Established business networks
stimulates the process of further institutional change. They present a structural basis
for building up new business conventions among the market actors. We define these
business conventions as shared understandings of the market situation and accepted
common rules of business conduct.
Leading market sellers use to monitor the actions of their contractors and
competitors closely. But this monitoring is not enough to cope with the market
uncertainty. It should be supported by the face to face negotiations. These
negotiations are arranged on two interconnected levels. On the political level, leading
market actors join the ranks of business associations to work on strategic rules of the
game. On the business level, they arrange informal roundtable meetings to discuss
tactical issues. These business meetings can be carried out both within and beyond the
walls of business associations.
Business to business negotiations are not easy as far as their participants could
see each other as direct competitors. And quite naturally, initial level of their mutual
trust is restricted. Even being members of the same business association and
exchanging information and ideas, they would never be fairly open with regard to
their market situation and business strategy.
18
“There are some unreliable managers. When you start sharing with them some
of your new ideas… they could somehow get silent and in a while you could
see them implementing your own plan. I remember these things… As a result,
you get reserved when discussing issues. First you would give a small part of
the idea and see if the partner is interested. Normally, it becomes a long-term
process”
(2002, head of wholesale company in electronics).
However, our study of the electronic durable goods market in 2001-2002
demonstrates that in spite of obvious constraints, a major part of our respondents
believe that successful negotiation is possible and does take place. What makes
preconditions of success? In the considered market many leading sellers have known
each other on a personal basis for seven or eight years at least. They use to meet each
other quite often and identify themselves as members of the same business networks.
Reputations have been built within these networks in the 1990s. Above all, personal
contacts are encouraged by the fact that business owners and managers dealing with
the electronic consumer goods have close profiles in terms of their age and
background. Most of them are between 30 and 40 years of age and have
engineering/technical university degrees. They have similar histories of their business
start-ups and development. All in all, with inevitable reservations it makes a good
ground for confidential relationships.
“I think that the level of mutual trust is high enough. We have a unique
situation in our business (of electronics – VR)… Nearly everyone graduated
from the same universities and came to business at the same time. Almost all
top managers are of similar age and background. Exceptions are rare. And
they understand each other easily”
(2002, head of retailing network).
Business negotiations and personal contacts are very helpful to raise mutual
understanding and formation of the initial level of trust. Though no one could expect
that adopted conventions would last for the rest of their lives. Agreements are
normally kept by the leading actors within certain period of time (normally it lasts for
about a month). Then these conventions need to be maintained and renegotiated on a
periodical basis.
“There are wonderful relations in the market. If the folks once a month come
to an agreement on a coordinated price policy they would keep it.
Approximately in a month somebody starts to fall apart. First one actor breaks
it, then the other does it… In a month we should meet again to look into the
eyes of each other and make an agreement again”
(2002, head of the cell-phones selling company).
19
Stigmatisation of defectors. Having established conventions, the market
actors also elaborate special instruments of demarcation among those who deserve
trust and those who are stigmatised as non-trustworthy. Our respondents make an
important distinction between three prevalent models of action, namely:

Acting by laws

Acting by rules

Acting by no rules
Acting by laws presumes following the official formal rules (for example,
paying the full amount of taxes and duties to the state). In fact, most entrepreneurs are
not able to hold this line consistently with regard to all legal norms in Russia. Large
transnational companies having big financial capacities and strict corporate codes can
be an exception to this.
A major part of Russian market sellers follow a different line, which is defined
as acting by rules. These rules (pravila) differ from laws though they are always
related to laws. Existence of this institutional gap does not mean that Russian business
is thoroughly criminalised. Rather the firms operate in so called ‘grey’, or semi-legal,
market segments. Empirically, this prevailing model of acting by rules is not easy to
define for many things are not clearly explained on a verbal level by the
entrepreneurs. However, our interviews collected in 2001-2002 bring some light to
this sophisticated problem. We would conclude that acting by rules means at least the
following:
1. Avoiding behaviour which «damage the market» (for example, undermine
an existing price level by big and spontaneous clearances)
2. Avoiding «black» (illegal and most risky) business schemes, which could
let your contractors down in case of the controlling inspections
3. Rejecting ordered check-ups (zakaznye proverki) in relation to competitors
meaning that state controlling bodies should not be sent to competitors to
disrupt their activities as it is frequently done
4. Settling disputed issues through negotiations
Leading market sellers try to define themselves as those who act by laws
or/and rules, and therefore, to distinguish themselves from defectors who do not
comply with the rules. The latter are stigmatised as ‘otmorozki’ (following no rules),
‘chernushniki’ (black dealers) whose actions are damaging for the market. This
20
category of market actors use sharply reduced prices. They evade tax payments
running a risk beyond an acceptable point. They are reluctant to negotiate and do not
follow accepted conventions. Therefore, they are presented as those who could not be
trusted.
“We can easily reach an agreement with some companies. And these
agreements on the price levels could be kept for months… But at the same time
there are firms, which follow no rules (otmorozki). There is no sense to talk to
them. They would not understand simple words”
(2001, head of cell-phone selling company).
Subordination of the market ‘outcasts’ by the leading sellers justify their
policy aimed to push defectors out of the market. Here the state becomes an important
instrument. And we need to understand what role is played by the state in the
formation of trust and distrust relationships.
The state as a source of trust and distrust
Any conventions among the market actors could be easily undermined if they
are not backed by a stable state policy. Relations of the market actors with the state
present a complex mixture of trust and distrust, in which distrust is dominant. It is
reflected to some extent in the following puzzle:
Puzzle 3.
Market actors do not trust the state authorities. But even
more they do not trust institutions, which are not backed
by the state.
We will develop our argument based on the following assumptions.
Assumption 8.
The state as a major source of legitimisation of rules is
expected to take the final responsibility for all serious
institutional failures.
Assumption 9.
No strong reciprocal or one-sided trust could be
established without reference to the state policies or
direct intervention of the state.
Assumption 10.
Predictability of the state policies is an important
precondition for the trust formation.
Expectations from the state. Attitudes of the market actors to the Russian
state contains some elements of almost enigmatic character. Let us illustrate it first
with two examples, which are beyond the scope of our empirical analysis. The first
one could be borrowed from the history of Russian financial bubbles in 1994-1995.
21
At that time a large amount of private savings were grabbed off by the teams of
swindlers arranging so called ‘financial pyramids’ [in detail, see: Radaev 2000]. What
was really striking that the victims came to the state to reclaim their money back.
Formally speaking, one can treat it as a clear manifestation of irrational behaviour
because the firms collecting money were privately owned and the state was not
supposed to take responsibility for their actions. However, it was the state that was
blamed for the losses in the end.
The second example comes from the history of the 1998 financial crisis, after
which a part of private savings got lost in the bankrupt commercial banks. Although
the crisis was caused by the state default, after the crush there was a massive inflow of
private savings to the Sberbank, which was the largest state-run bank. Thus, money
came back to the state, which was a fundamental reason for the ‘market failure’.
Both phenomena could be explained with the help of the concept of moral
economy [Polanyi 1992], according to which the state as the most powerful actor must
stand behind any public and private economic institution, especially in case of their
failure. The state is made responsible for the minimal level of means of subsistence
irrespective to the reasons for which the actors lost them. A sort of reciprocity is
expected here. As a result, one-sided trust in institutions emerges along with the
expectations of the state support. Only those institutions are considered as relatively
reliable that are explicitly backed by the state. These expectations are often not
reflexive. However, they are quite persistent whatever people would say about their
attitudes to the actual state policy.
Turning back to our empirical observations, on a rhetorical level the leading
market sellers always use to emphasise their independence from the state. However,
in their actual policy claims they largely seek the state intervention rather than the
state withdrawal [Fligstein 2001]. And their trust in institutions are also dependent on
the state policies. The instrumental considerations are also important here. The
market actors try to use the state to implement their own conceptions of control. For
instance, leading market sellers draw a borderline distinguishing “bad firms” (defined
as “black firms” or “acting by no rules firms”) and “good firms” as a sort of signalling
to the state authorities. They want to see the “bad firms” out of the market. However,
the market leaders are often reluctant to combat defectors directly through blacklisting
and other means leading to an open conflict. They prefer to use a capacity of the state
for legitimate violence against them.
22
It is not the one-sided trust only but also the reciprocal trust, which strongly
depends on the state activity. The point is that reciprocal trust is largely built upon
predictability of actions of other market actors. Predictability makes the first step
towards trust in relations, in which distrust still prevails. As far as the state is the main
provider of formal and informal rules, no profound reciprocal trust could be
established among business actors without a predictability of the state policies. Any
business to business conventions would be seriously undermined is case of
spontaneous changes in regulatory framework. Therefore, all these conventions are
built upon certain expectations of the state actions.
To decrease uncertainty business representatives have to establish continuous
and immediate contacts with the public officials. That is why the success of business
associations efforts is frequently measured by density of these contacts. The next
question is whether it is easy to build up relationships between leading market sellers
and the state.
Building conventions with the state. There are several fundamental
difficulties on the way of establishing conventions between business and state
representatives. First, there remains much of the mutual tensions among business
leaders and public officials, which prevent successful negotiations. Entrepreneurs tend
to see every public official as a bribe-taker taking care predominantly of his/her
private gain. At the same time public officials tend to treat every entrepreneur as a
smuggler evading tax payments and customs duties.
“The main problem is… how the state treats us. There is an impression that all
businessmen are either potential or actual criminals now”
(2001, head of wholesale firm selling durable consumer goods).
“The state authorities treat everyone as illegal and one hundred percent
defecting people”
(2001, head of retailing network).
Second, when negotiations between the business and the state commence, a critical
situation of coordination normally takes place for the main parties apply to different
orders of worth when making their claims [Thevenot 2000]. Business leaders make
their accounts according to the market order of worth thinking how to minimise costs
and keep prices at the level attractive for the customers. Public officials apply to what
we would name as bureaucratic order of worth. Their main concern is to fulfil their
administrative plans for collection of the tax payments and custom duties and keep a
23
balance of interests for all political parties involved. This balance of interests includes
preservation of opportunities for getting a private gain by the representatives from
different controlling bodies.
Third, parties in negotiation are far from being equal for power relationships
are nearly always asymmetrical. The state always has upper hand in making policies.
State authorities play the role of incumbents imposing their rules while business
agents are viewed rather as challengers of these rules [Fligstein 2001a, 2001b]. All
suggestions of business owners and managers can be easily turned down by the
authorities with no plausible explanation. It means that it is difficult to expect that
mutual obligations will be taken and strictly fulfilled here. However, at least a
predictability of the state policy may seriously contribute to the formation of trust.
Fourth, non-transparency of the government actions exists. It produces
uncertainty and makes conventions unstable. The point is that the public officials are
able to change a part of the formally adopted or informally accepted rules at any
moment of time. And these changes could not be easily envisaged by the market
actors. There were several occasions in the year of 2001 when the State Custom
Committee of the Russian Federation issued an official order and then cancelled it in a
short while producing nothing but a destabilising impact on the market.
“These companies simply did not join us (business association – VR) because
they do not trust this state. They do not trust these authorities because they
know that there might be a trap. And they would let their folks down”
(2001, head of wholesale firm selling electronics).
“When considering relations between the business and the state authorities I
would rather estimate them at the zero level. It means that quite positive
moves on the side of the state authorities are accompanied by absolutely
inadequate and controversial measures. We have a sort of “equilibrium”
here”
(2002, head of wholesale firm selling electronics).
During the years of 2001-2002 there have been some positive shifts in these
relationships. However, the lack of trust among representatives of the business and the
state still presents one of the major constraints limiting capacities of building both
one-sided and reciprocal trust.
To conclude, a general logic of the trust formation in the distrustful
environment can be described as follows. It starts on a micro level with the informal
private ordering and closed business networks. They serve as instruments for creating
24
elements of the interpersonal trust. The character of these reciprocal relations is also
changing over time. Starting previously with the affect-based trust, the market actors
move towards the reputation-based trust. Investment in reputation contributes to the
development of one-sided trust in public institutions, like business associations. In
turn, these associations become vehicles for establishing trust in the state authorities.
Finally, predictability of the state policy encourage both one-sided and reciprocal
trust.
Conclusion
New Russian markets present a prominent example of the low-trust
environment. Formal rules are contradictory and changeable here. They become
subject to intensive informalization. The state policy is often non-transparent and nonpredictable, and therefore, become a major source of institutional instability. This
situation produces uncertainty and undermines one-sided trust in formal institutions.
Reciprocal trust in the other market actors is also seriously undermined for
honesty often does not pay here. Entrepreneurs confront with a high level of
opportunism and malfeasance in business relationships coming from the frequent
infringement of business contracts.
Capacities of formal litigation in the contract enforcement with the assistance
of Arbitration courts and other third parties are limited. Russian entrepreneurs have to
impose methods of the private ordering including informal ways of the dispute
settlement. Although entrepreneurs do try to protect themselves by introducing
discriminatory elements into the business contracts, especially in relation to the
newcomers and outsiders, non-contractual forms play a major role in preventing
malfeasance. To cope with the situation of reciprocal distrust entrepreneurs collect
business information and check up their potential business partners. They also build
up closed business networks. All these precautionary measures are necessary to create
the first level of reciprocal trust, i.e. predictability of behaviour of the other market
actors.
The second level of trust relationships needs a fulfilment of some mutual
obligations. This requires a set of conventions among the market actors. To reach
shared understandings and elaborate common rules of the game the leading market
sellers have to go beyond mere monitoring of actions of their contractors and
competitors and arrange face to face negotiations with them. These negotiations are
25
held on the political level of business associations and on the business level of
informal roundtable meetings. Through continuous negotiations the market actors
(including direct competitors) start to overcome their initial mutual distrust. Leading
market sellers also elaborate special instruments of demarcation distinguishing those
who deserve trust (acting by rules) from those who are stigmatised as non-trustworthy
(acting by no rules).
Business to business conventions would not last long without taking into
account the policies of the state as the main provider of formal rules. No real
reciprocal or one-sided trust could be established without intervention of the state.
Although market actors do not trust the state authorities, even less they trust the
institutions, which are not backed by the state as a most powerful source of
legitimisation of rules. The state is supposed to take a final responsibility for all
market institutions, especially in case of their failure whatever the reasons are. The
state controlling bodies are also used as an instrument producing a legitimate violence
against defectors in the market.
It means that all conventions in the market are established with explicit or
implicit reference to the state policies. And to reduce uncertainties the market actors
have to build up some conventions with the public officials. Development of mutual
obligations between the business and the state as the second level of trust
relationships is under question here for the state always has an upper hand in
negotiations. But at least a predictability of the state policies can be achieved.
Summing it up, trust formation in the low-trust society starts at the micro level
of interpersonal relations in different market segments. Then it develops from the
mutual trust in members of the business networks to the one-sided trust in institutions
dealing with these networks. As a precondition of it, the state with a predictable
policy must stand behind the market institutions. In turn, it stimulate further
development of reciprocal trust and create conditions for the continuous trust selfenforcement.
26
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