RUSSIAN SMALL BUSINESS: STAYING SMALL

On March 4 the Russian government announced the closure of the Federal Fund for the Support of Small Business, an agency created ten years ago with a budget of 25 billion rubles ($1 billion) to invest in small business promotion. The FFPMP set up a network of regional offices and secured additional funding such as a $150 million loan from Dresdner Bank in 1997. However, it was an ineffective bureaucracy that was unable to reach small businesses. A 2003 survey by the Ministry of Economic Development and Trade found that only 5% of entrepreneurs knew of the fund’s existence. The Federal Anti-Monopoly Service fought to protect the agency, which was under its jurisdiction, but after a two-year struggle the FFPMP was shut down (gazeta.ru, March 5).

At the end of 2004 there were 952,000 small companies and 4.7 million sole proprietors in Russia, Economic Development Minister German Gref told an economic forum in early March. He said small companies account for 10-12% of Russia’s gross domestic product (GDP), and employ 17-19% of the labor force. In most economies, including highly industrial economies, the small business sector is two or three times larger, so Russia still has a long way to go (Prime Tass, March 1).

In the Soviet economy, entrepreneurship was criminalized, and all businesses were state-owned, or state-controlled cooperatives. Only after 1987 did private enterprise start to be permitted. The lifting of legal prohibitions on small business in 1992 produced a brief surge, followed by a decline in their numbers.

Since 2003 a small business in Russia is defined as one with turnover of less than 15 million rubles ($550,000) a year and employing less than 100 workers. Registered small firms benefit from a simplified taxation regime: they either pay 15% of their profit or 6% of their turnover, and they are exempt from VAT. Since 2000 the number of small enterprises has increased by 30%. It is assumed that most of the growth is not new start-ups, but businesses that were already operating in the shadow economy but chose to go legitimate.

Three factors account for the under-developed level of small business in Russia. First, there are the bureaucratic hurdles to be overcome: the dozens of licenses and permits that are required and the vulnerability to shakedowns by the tax inspectors. Second, there is organized crime, offering protection in return for a share of the till. Third, there is a shortage of capital to develop the business. The bigger the firm, the more likely it is to have the resources, political connections and in-house expertise to deal with these problems. That leaves small businesses struggling to survive. On the other hand it is worth remembering that even in established market economies, new small businesses face many barriers — including a lack of demand and intense competition. In the United States, for example, only one business start-up in five is a success.

Russian President Vladimir Putin oversaw the introduction of new laws on inspection, licensing, and registration in 2001-02, which have eased the bureaucratic burden on small firms, according to a regular survey by the Center for Economic and Financial Research, most recently conducted in spring 2004. However, there are reports that the Yukos affair is being taken as a green light by some regional regulators to badger local businessmen. And Putin himself has floated proposals to strengthen the powers of the tax authorities, by giving them the right to confiscate property and to seize assets without waiting for a court order (cefir.org, Kommersant, February 1).

According to the Association for Russia’s Entrepreneur Organizations, small firms raise only 28% of their capital from banks; 52% is borrowed from family and friends, and 20% comes from reinvested profits. The banks in Russia’s regions generally lack the expertise to evaluate loans to small businesses, and they complain that strict Central Bank regulations make such lending unprofitable for them. The State Duma is currently discussing proposals to increase state support for small businesses. In this year’s budget 1.5 billion rubles ($50 million) are earmarked for supporting small business, including a new plan for business incubators. The main state-owned banks also have small business lending programs. By the end of 2004 Sberbank had lent 190 billion rubles, and Vneshtorgbank 1 billion rubles ($40 million). In December 2004 it was announced that the Russian Development Bank will borrow 2.5 billion rubles from Dutch-based ING, with state guarantees, for lending to entrepreneurs at rates of 15-21%. The European Bank for Reconstruction and Development itself set up a $300 million fund back in 1995 to aid Russian small business (Profil, February 14).

One of the most positive features of the economic transition in Eastern Europe was the rapid spread of small business. This growth helped to reduce the rise in unemployment and created a social constituency in favor of pro-market political parties. The sluggish growth of small business in Russia is yet another example of the way the Russian transition is diverging from the pattern of smaller economies such as Poland and Hungary.