If you have read some economic history on the Soviet Union, you’ll know that once the Iron Curtain fell and the market became open, it created a lot of prosperity for those who were in the right positions and had the right connections. Since almost all means of production in Russia were state owned at the time, when the Soviet Union fell there was no clear ownership over the state assets anymore, and the people we now know as Oligarchs were able to make deals with state officials and get some once in a lifetime deals on state assets, obviously laden with corruption of all sorts. The Russian story gets quite detailed with people falling in and out of favour with the government, suspicious deaths of Oligarchs and eventually with Vladimir Putin seizing power. I would recommend reading the Wikipedia page on Russian oligarchs if you’re curious.
While the Russia story is fascinating, I wanted to use this post to talk about some smaller scale success stories that occurred as a result of the transition to a free market in some of the Soviet Union satellite countries. Since I have family in Poland and an uncle who runs a small furniture factory out of an old barn, I thought his story and the story of a few entrepreneurs in this small village of 2000 people would make a great example. After the fall of communism in Poland in 1989 and the privatization of the market, it opened opportunities for many people, even small business owners to ride the wave of economic growth that would come. As an example let’s take the story of one family in the village where my mother grew up. The business owner has a very well known story in the village and it is a story of right place right time in his case.
Around the time when the market was opening up and becoming more privatized Greg took out some business loans from multiple banks to purchase land and equipment for his furniture business. Since they were only beginning to regulate open market banking you could shop around at various banks and get each one to lend you a chunk of money for your business. During communism inflation was consistently hitting double digits every month to the point where it hit 1200% in 1990. These two factors set him up for great success with respect to timing. If you have a means of production to make current income at sell goods at current market prices, but your loans were taken out while hyperinflation is happening, you can pay down those loans for pennies on the dollar in a few short months (or groszy on the złoty for my Poles). I’m not entirely sure who would be lending money in an economy with hyperinflation, but I would imagine the lenders tried to protect themselves with very high interest rates or maybe only lend money pegged to a more stable currency. But even interest rates might not be a great defence depending on the severity of the inflation. When there is hyperinflation it’s a very bad time to be a lender and a very good time to be a borrower. So Greg and a few others in the village became significant land owners and business owners and paid next to nothing for it. Now he owns a small shopping mall in the town of Krosno nearby and a vacation home in Spain, so he’s done well for himself. Timing isn’t everything, building a business is not an easy endeavour, but it can help speed things up a bit.
As another example from the same village let’s take my uncle. He was just getting out of school when communism fell. So him and a friend decided to try and start up their own furniture businesses and they worked together to learn all the tricks of the trade required to set up shop. I don’t think he ever expected his business to do as well as it has. At the time he was just trying to find a way to work and make some money. While he didn’t get the very lucky timing of taking out loans while hyperinflation was hitting, he was able to ride a different wave of prosperity. Poland joined the European Union in 2004. This meant free trade and the goal to bring up countries like Poland to higher standards of living. With the free market, the free trade of the EU and the direct financial assistance given to Poland, their economy began to grow. All the while my uncle was selling his furniture to dealers in larger cities and building a network of connections and people who wanted to buy his product. He expanded and bought new equipment and now runs a very sustainable small business.
Poland is now quite “westernized” in it’s standard of living, there is opportunity if you want it, and the big cities are doing quite well and you can find some very well paying jobs in Warsawa. This more advanced stage also introduces multinational corporations who now see a business case to open up stores in the country, for example IKEA. When I had this realization that IKEA might come in and steal all the business from the small furniture manufacturers, I was somewhat concerned for my uncle. But funny enough I actually think something even more interesting has happened. IKEA isn’t exactly known for having top quality materials or amazing variety. What I think has happened is by introducing this new player in the market is it actually elevates my uncles product to a more premium level.
The people who may buy from IKEA to outfit their small apartment in the big city, aren’t necessarily the same people who are staying long term in Poland and are looking for something that is better quality and can be built to order. They serve two completely different markets, and there is space for both of them. Also reflecting back on one of my later blogs about how zoning bylaws in North America don’t encourage small business, the design of a European country is simply more friendly to a wider variety of commerce and smaller businesses in my opinion. Overall, I think there is a more local attitude that still prevails in Europe while in North America we tend to prioritize huge multinational corporations and big box stores.
It is possible that over time things will change, and my uncle will have to find a different way to sell his products. But for now I think his business will continue to grow and serve his market. From a purely economic perspective I find it fascinating how many similar stories there are to his in the soviet satellite countries and Russia itself. Even just within my family’s small village in Poland there are numerous well known entrepreneurs who set up shop around the fall of communism and have expanded their reach to supply stores across the country.
Every once in a while the economy presents a great opportunity to start up a business and in the moment you might not even realize it’s happening. As a recent example, investing in the stock market during COVID. The only thing I wish I did differently was borrow more money to invest with. Hindsight is 20-20 in these situations at there is always risk to borrowing money and you can never really predict what will happen in the future. Our present economy has becoming challenging for a lot of people and if you read the news, there has been news of thousands of tech layoffs in the US. However, many of these employees turn around and start their own companies once they get let go and are finding great success doing so. There is a lot of opportunity available even now, and great sustainable businesses are often built during challenging times. Understanding the past can give you insights into what economic forces were in effect during that moment in time and help improve your radar for understanding when and where the next opportunity might present itself. Communism and COVID are just two of many different examples around the world of global economic shifts that can present great opportunities for people who are ready and able to capitalize on them.
All the best,
Oliver Foote