In 2002 then-President Vladimir Putin sent to the State Duma a bill that would limit taxes on small business to a flat rate of 20 percent. The much-anticipated bill also included a clause that would allow some businesses to operate without going through the cumbersome licensing process.
At that time backers of the measure thought it would make Russia one of the most small-business-friendly countries in Europe. Combined with the flat income-tax rate of 13 percent and changes to the Labor Code, a business-friendly environment was being created for entrepreneurs and free-market enthusiasts. Add to that the possible passage of a law freeing land for sale – and Russia would become even more attractive to investors.
Even with passage of such legislation progress remains difficult for small business owners. In 2007 the city of Moscow outlined a comprehensive program to encourage small business and a few other Russian cities have followed suit.
Small business is a still a tough sell in Russia. Even though many small family businesses have been created, the excellent article by Brook Horowitz in a recent edition of the Moscow Times points out that “there are still too many obstacles for the entrepreneur in Russia: The bureaucracy around setting up and registering a company, the bribery required for obtaining approval from various government agencies, and the unpredictability of the overzealous tax police make market entry and ongoing operations costly.”
In 2007 the city of Moscow crafted a program to enhance the availability of small businesses for the Moscow region. It’s a model which more cities should follow. The primary direction is being provided by well known service groups such as the Moscow Chamber of Commerce and Industry, Moscow Fund of Professional Training and Promotion of Innovative Activity, “Alliance Media” National Business Partnership and the “IMC Network” International Association.
That being the case however we live in a very different world than when the program was crafted in 2007. With the Moscow program set to expire at the end of this year, small business owners are sure to point that most loans are difficult if not outright impossible to secure, and finance or business training for new entrepreneurs is hard to come by.
As Horowitz writes, “While the government has expressed its support for small business, in reality the attention has been on the bastions of Russian industry — mainly oil, gas, metals and defense. As a result, we have seen little of the much-discussed diversification of the economy.”
The Moscow government offers a helpful website for those completating starting a new business. Across Russia there are more and more employment centers catering to people who have recently lost their jobs but with Russian unemployment projected to top 9 million by the end of 2009, the government’s goal of creating 400,000 new jobs this year is ambitious at best.
Researcher Alessandro Kihlgren says there are reasons why small business development has been disappointing in Russia compared with other transition countries such as Poland and the Czech Republic. Kihlgren’s report suggests however “the picture may not be so gloomy as official statistics suggest. As far as St. Petersburg is concerned, it witnessed an exceptional – by Russian standards – growth in this sector in the 1990s, although it still trails compared with Moscow. This, despite the lack of support from the local administration and despite having an income per capita close to the Russian average.”
But this is not the 1990s and Kihlgren points out that in contrast to other countries, Russia does not have an entrepreneurial tradition and experienced communist rule longer. What is especially distinctive about Russia was the strong influence of interest groups during the 1990’s which favoured the allocation of entrepreneurship to largely unproductive activities.
Russian businessman Dr. Igor Dukeov in speaking to the Moscow American Chamber of Commerce outlined several reasons why small businesses struggle to survive in Russa. Those reasons are:
– Businesses complain about tax regulation. If a small business were to pay all required taxes, it would equal 42-75% of monthly income. That is high. If businesses paid all these taxes, they wouldn’t survive.
– Overall salaries are lower than in the West. There is presently not a lot of consumer income. Entrepreneurs have been forced to keep prices low.
– Most of the salary of a person is spent for buying food, about 60%. About 20% is used for buying consumer goods. Another 10% is used to maintain apartments, pay services, etc.
– Bottom line: Bribes and unexpected “fine” can easily eat up what little profit a small business might have at the end of a month or quarter.
In his speech at the January World Economic Forum Prime Minister Vladimir Putin said, “The 21st-century economy is an economy of people, not of factories.”
Many small business owners across Russia are trying to hold on to see if indeed people, small business people, are at least equally important as large government owned industries.