MISCELLANY

  

Thinking Small in Russia :

Share prices of some of Russia’s oil and gas giants jumped over 100 percent over the past year, while the Russian stock index rose over 60 percent. Will Russia’s economy finally realise the potential that has eluded it for centuries? The answer is not only in the p/e ratios of big firms, but also in the overlooked realm of small business. A recent study by the European Commission’s Tacis programme estimated that Russian small and medium-sized enterprises (SMEs) - companies with upto 250 employees - account for the surprisingly robust 40 percent of total Russian sales revenue and at least 45 percent of total employment.

Small business in Russia is very important than many people realise. The Russian Working Center for Economic Reform estimates that 35 percent of small busines is in retail, and 21 percent each in production and construction. About a third are located in Moscow and another 25 percent spread out in seven regions, with Samara and Nizhny Novgorod known as vibrant clusters. Russia could yet see an even stronger boom if the outstanding problems are tackled.

Taxation has been a headache since the demise of communism. SMEs were vulnerable to the vagaries of tax collectors since, unlike bigger firms, they lacked resources and expertise to ward them off. Responding rationally businesses minimised reportable income and paid whatever was needed to make the tax man go away. While this approach ensured survival, it impeded growth. By operating within the “grey economy”, Russian SMEs couldn’t get loans other than from equal grey money lenders. And because their tax contributions were small, Russian policy makers overlooked them as a potential source of growth. On President Vladimir Putin’s initiative, however, the parliament just approved changes to the tax code that are designed to render taxation of SMEs simple, fair and transparent. SMEs with up to 100 employees and maximum annual revenue of 15 million rubles ($ 4,80,000) can now pay either a 15 percent flat profit tax or a 6 percent flat revenue tax.

The corruption headaches of SMEs are similar to those associated with taxation. Russian businesses, including SMEs are subject to a bewildering array of licenses, approvals and inspections. Less well equipped than larger companies to make their way in this morass, SMEs are more vulnerable to corruption. The Information for Democracy Foundation recently estimated that SMEs on average spend between $ 2,000 and $ 4,000 a year bribing officials alone. But improvements have been made in this area as well. The number of businesses for which licenses are required has been reduced to 104 from 200. Efforts are underway to create a federal inspection agency that would streamline the inspection process and reduce scope for abuse.

The shortage of formal sources of finance remains a problem. However, Russian entrepreneurs are proving to be reliable borrowers. International Moscow Bank, one of Russia’s most prestigious banks, recently introduced a loan programme for small businesses, while Sberbank already has a substantial small business loan portfolio. KMB Bank, a bank established by the European Bank for Reconstruction and Development, has an SME loan portfolio of over $ 125 mn. There is still plenty of room for others, though : the Resource Centre for Small Businesses estimates that fewer than half of small businesses have ever applied for a formal loan.

What are the key obstacles still preventing Russian SMEs from catching up with their European Union colleagues ? Regulatory changes will have to be enforced consistently to change SME behavior. One stop registration is still not a reality. For more financing to be made available, regulations for collateralised lending should be overhauled. Banks need to be able to obtain collateral when they want it, but they also should not be forced to take collateral if they don’t consider it necessary. Finally, the government should consider extending the new tax regime to larger small businesses.

The stakes aren’t simply economic. In a recent survey conducted by Professor Timothy Frye of Ohio State University, Managers of new private businesses were more likely to vote for market-oriented parties than managers in state-owned or privatised firms. As important for the future of Russian democracy, almost two-thirds of the new private business managers believed that elections should not be cancelled under any circumstances. So don't lose hope if the Russian stock market falls.

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