Few Causes for Optimism in Small Enterprise
St Petersburg Times
February 18, 2003
OPINION By Irina Khakamada

The notion that Russia's small-business climate has improved of late seems to be gaining currency. From research and my own experience, however, I can say that this isn't the case.

Business daily Vedomosti reported in late January, for example, that the small-business climate has improved, and relations between government and small-business owners have taken a turn for the better. The article cited statistics presented at the Davos forum by Yekaterina Zhuravksaya, head of the Center for Economic and Financial Research.

I have no problem with upbeat talk aimed at creating a positive image of Russia abroad, but this particular image doesn't correspond with the reality back home. I recently organized a series of trips through the regions to collect information about business conditions first-hand. The results of this research show that more than half of all entrepreneurs say that the business climate in Russia is invariably bad. Among the main problems facing small business, they name the difficulty of obtaining financing, leasing and buying property, corruption, inspections, tax rates and the complexity of accounting procedures. All of these factors, with the possible exception of limited access to financing, attest to the excessive pressure that government puts on business.

A group of analysts led by former Economics Minister Yevgeny Yasin has reached similar conclusions (the group's full analysis can be found at www.hakamada.ru). Government red tape stifles small business more than anything else - i.e., the endless inspections, approvals and other procedures that bureaucrats use to put pressure on business. Overcoming the various administrative barriers ends up costing business up to $8.5 billion per year, or 2.9 percent of GDP. Assuming that these costs are spread proportionately across small, medium and large businesses, small businesspeople end up shelling out as much as $850 million every year.

Small businesspeople are also compelled to make "voluntary contributions" to all manner of pet projects dear to the hearts of bureaucrats at all levels. These contributions amount to some $4 billion per year, or 1 percent of GDP, of which small business coughs up approximately $400 million.

Huge sums are also spent on gifts to individual bureaucrats to take care of specific problems, mostly involved with leasing property from government agencies. According to the latest estimates, this form of corruption costs Russian business some $33 billion per year, of which $3.3 billion falls to small business.

The government has launched a campaign to cut red tape, but the results to date have been less than encouraging. Plans to establish "one-stop" registration for businesses have not worked in practice. The number of operating licenses has been trimmed, but getting one can be as hard as ever. Police, tax police, economic-crime units and other law-enforcement agencies do not fall under the new "anti-inspection" law. And the new Administrative Code has effectively increased the number of agencies with inspection powers from 40 to 63!

The total burden that government places on business, therefore, comes to some $40 billion per year, or up to 13 percent of GDP. Nearly $4 billion of that falls on small businesses. This figure represents income that could, otherwise, be plowed back into enterprises to expand production and raise wages, or business owners could use for personal expenditures, such as insurance and education.

As of Jan. 1, just over 800,000 small businesses were registered in Russia. At the same time, the federal bureaucracy alone employed more than 1.5 million people. The result is akin to something from the works of Saltykov-Shchedrin: Every entrepreneur (although not he alone, of course) feeds two "generals." So, why doesn't the government want to hear what "the hand that feeds it" has to say?

The main reason is that small business has no place in the current balance of political power. Big business has lost some of its influence under President Vladimir Putin, but it can still pull any number of levers to influence economic and political decisions. And big business is primarily interested in liberalizing currency laws, the conditions for entering the World Trade Organization and profit-tax breaks for investment.

However, big business should also take an interest in the development of small business. After all, major companies always need new sources of employees with the on-the-job experience that smaller companies can provide. Big business has exhausted its ability to hire and train inexperienced workers, a point noted on a recent edition of the talk show "Vliyaniye" featuring Yukos CEO Mikhail Khodorkovsky. Yet, while large companies can absorb the costs of dealing with Russia's bureaucracy, small business is defenseless. OPORA, a small business support organization, has stepped in to fill this gap, but its influence to this point remains limited.

The banking sector is primarily concerned with cultivating relations with the Central Bank and its policies on interest rates, exchange rates and structural changes in the sector. Bankers may say that making credit available to small business is a priority but, in practice, this goal comes a distant second to their shareholders, major borrowers and, lately, development of the consumer-lending and mortgage sectors.

The interests of the bureaucracy, even its liberal wing, are directly opposed to those of small business. Cooperation is, therefore, possible only in specific conditions, and on a limited number of issues - as a rule, not issues that are of primary concern to businesspeople themselves.

Government officials view small business, first and foremost, as an additional source of income that can be applied to chronically underfunded sectors of the budget such as social programs, public services and amenities, etc. Beyond that, small business provides extra personal income obtainable as a result of nontransparent administrative and regulatory procedures and contradictions in the regulations governing these procedures, or by plain extortion. It is not normally in the bureaucrat's interest to ruin a business. They try, instead, to keep it healthy, but dependent, so that they can continue to milk it regularly.

The best way to support small business is not to hinder its efforts at self-organization. Legislation affecting its interests should not be passed without seeking input from small-business associations. Indirect assistance should be provided via a specialized infrastructure to the most promising and innovative small-business groups. It is significant that the government is now considering scaling back the powers of police and other agencies to inspect traders and perform other economic checks. At present, police sometimes inspect outdoor markets as often as twice a week. New legislation has not helped to alleviate this problem.

But the best way to help small business is not to change the rules of the game every time the wind blows. Entrepreneurs need stability if they are to take care of business, rather than spend all their time familiarizing themselves with new laws.

Only once such measures are taken will small-business owners and their supporters stop reacting with skepticism to claims about the improving climate for small business in Russia.

Irina Khakamada is a deputy speaker of the State Duma and co-leader of the Union of Right Forces party. She contributed this comment to the Vedomosti newspaper.

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