Trapped between mafia and market: Peter Pringle in Nizhny Novgorod meets Russians coping with the transition to a capitalist economy

HER two guns had gone missing and Vera Pavlova was agitated. 'I thought they were in here,' she said searching inside the safe at the back of her cheese shop. 'I'm sure they were . . . well, it doesn't matter, I am not afraid of the mafia, we are now paying our own security guards.'

A large woman with dyed blonde hair and a mouth full of gold teeth, Ms Pavlova was sitting at her desk surrounded by elaborately painted pictures of Christ and talking about the problems of privatisation for those who once ran state-owned stores. The good side was that she could sell what she liked and had the opportunity to make money, the ugly side was that she had no idea whether her store could turn a profit, and she had to cope with the mafia, something Nizhny Novgorod had not known under Communism.

After the mafia had come to see her she had bought two guns and hired some youths skilled in karate. She said: 'I was nervous when they came, but I'm not afraid of anyone now. Under Communism we used to bribe the tax inspectors, give them a piece of cheese or a bottle of vodka, now the racketeers even ask the street vendors for 1,000 roubles (pounds 3.40) a day, and if you don't pay, they turn over the stall and beat you up. As usual everything in Russia is ugly.' Like so many other Russians trying to cope with the traumas of the transition to a market economy, Ms Pavlova has turned to the Orthodox church for assistance. 'God helps me. God gives me what I ask. Without God I would never have achieved anything.'

Turnover at the shop has increased threefold since she bought the store in April but so have taxes and the wages bill is up nearly 20-fold trying to keep pace with price increases. The 4.5m roubles she and her partner, Igor Kanashkin, spent on the shop has to be paid back to the state like a mortgage, so much a month over five years. Sales amount to 5m roubles a month with about 1m in profit, but 22 per cent goes on taxes, 13 per cent on expenses and almost all the rest in paying back the city government. 'We don't know what will happen,' she sighed. 'We are just on a wave.'

Better known in the West as Gorkiy, this city of half a million, 250 miles east of Moscow, where the dissident physicist Andrei Sakharov spent his enforced exile, Nizhny Novgorod has been chosen by the Russian government as the model of their scheme to privatise small businesses. Since April more than 170 shops have been sold at auction for sums of up to 10m roubles.

Anatoly Chubais, the Russian government official overseeing privatisation, calls the experiment the breakthrough in the selling off state property. But in a nation of 80,000 enterprises employing 500 or more people each and hundreds of thousands more with fewer workers, the sale is only a small step towards reform. The kinds of things being sold, from groceries to clothes and foreign electrical goods, do not help Russian factory owners trying to convert their production lines from military to civilian goods, but the auctions have produced a formula for the sale of small state-owned businesses.

The city's mayor, Dmitri Bednyakov, who was appointed personally by President Boris Yeltsin, is optimistic. He and the chairman of the city council approve the shops for sale. They want 1,800 shops to go under the hammer in the scheme that was worked out with the World Bank.

Debts are liquidated and then the buyer has three options: an outright purchase over five years, rent for five years and then buy at a 30 per cent discount, or leave after five years and have the new owner reimburse investments. If the old collective buys the concern the price is reduced by 30

per cent.

In the beginning the prices were astronomical - in the several million rouble range. 'People felt that this might be their only chance,' explained Mr Bednyakov. 'They thought the mayor and the chairman of the city council would soon be fired and the business experiment would be over. Also, people had accumulated a lot of money, and they were willing to spend it.'

One new owner is Elena Chuzova, who bought a state-run crystal glass store with 12 others from the original collective for 10m roubles. 'Where our money comes from is a commercial secret,' she said. The cavernous shop, typical of many Soviet-era stores, is in the basement of a block of flats and has a huge warehousing capacity, part of the reason for the high price.

Like many other new owners they sell anything from clothes from the West to wines and liquor from Moldova. It's rare to find Russian goods. These shops are the target for bottom of the line products being dumped by German and other manufacturers. But the 39-year-old Elena Chuzova doesn't mind; neither do the customers.

A consignment of so-called perfume from Germany had sold out. It came from Minsk, where Ms Chuzova's father used to be in the Soviet air force. 'We have our own connections; if you don't have contacts you will not achieve anything,' she said.