March 23rd, 2015

Small Businesses in Russia: 30 Years of Uncertainty

problems651Recent polls showed that, according to Russian entrepreneurs’ definite opinion, economic activity plummeted in the fourth quarter of 2014 at the prospect of a crisis. Sales have been falling, along with profits, access to finance and investment readiness have been decreasing. In the third quarter of 2014, entrepreneurs had sounded more optimistic. However, the first few months of 2015 made it clear that their hopes were deceived. Moscow, Russia’s capital, that traditionally used to feel proud of its economic miracle, was no exception this time: even there business activity has decreased.
According to some studies, economic activity hit its lowest level since 2009. As of January 2015, in the last 19 months index of economic activity has showed a thirteen fold decrease.
Small businesses in Russia are experiencing traditional problems that have remained unsolved for almost 30 years since the first producers’ cooperatives were permitted in 1986 at the dawn of Perestroika. These problems include uncertainty about economic situation, high interest rates, violations of entrepreneurs’ rights by supervising bodies, imperfections of the Russian legal system, high taxes, coupled with the lack of stability and a confusing nature of tax legislation. A separate systemic issue has to do with a growing shortage of skilled labor combined with deteriorating levels of professional education.
The creation of different bodies such as Delovaya Rossiya, OPORA Rossii and other federal and regional industry associations of entrepreneurs that are supposed to help small businesses does not help much. A position of a “business ombudsman” has recently been created in Russia. The Presidential Commissioner for entrepreneurs’ rights is “responsible for organizing the work on out-of-court restoration of entrepreneurs’ rights violated by government bodies, as well as for settling disputes between business and the authorities.”
It has in fact been acknowledged on the presidential level that today executive branch is unable to effectively solve problems of small and medium-sized businesses, and no “commissioners” can change that fact.
03.01.13_technewsrprt_img_stories_jillian-johnson_small-business-problemIn the relatively successful year of 2012, OPORA Rossii announced the results of a poll that showed the state of the business environment. Almost half of respondents (47 percent) complained about personnel shortage. A third of those who participated in the poll (36 percent) noted high tax rates. Half of respondents believed interests rates to be excessively high. It is noteworthy that more than a half of respondents simply refused to discuss the corruption problem. Those who found courage to answer the question declared that they believed corruption to be a common thing in their regions and confessed to practicing under-the-table payoffs to officials. All-in-all, already in 2012, entrepreneurs did not seem very optimistic concerning prospects for the amelioration of the situation.
An early 2015 poll, conducted by the RBC information agency, clearly reflected the current crisis situation. Today, Russian businessmen make comments such as “the authorities have to stop lying and start practicing what they preach,” “every year brings more reporting and less order,” “any businessman will tell you that it is the state that is not letting him do his work”.
In 2010, a milestone event took place in the life of small businesses when then-prime minister Vladimir Putin attended an innovation forum hosted by OPORA Rossii. In his speech, the former and future Russian president made numerous promises, and it seemed like entrepreneurs’ life was about to change. Suffice to mention his promise of 13 billion rubles in state support for small and medium-sized businesses. It is no surprise that businessmen gave the then-prime minister a standing ovation.  Five years later, the former prime minister’s promises remain what they were, promises. Even those state investments that a few enthusiasts managed to push through all bureaucratic thorns have almost entirely disappeared by the end of 2014 as a result of the ruble’s landslide tumble.
It is obvious that small businesses need a balance of interests between entrepreneurs and the state, represented by officials and the police and security forces. The latter, however, do not seem at all concerned about this. Meanwhile, where there is no balance there is going to be no stability. Such is the law of nature that will sooner or later set things right.

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