Small & midsize business
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Joera Mulders
June 19, 2011
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A detailed survey commissioned by SME branch organization OPORA found the best conditions for small and mid sized businesses in the Moscow Oblast, Krasnodar Krai and the Chelyabinsk Oblast.  The regions with the worst conditions are Khabarovsk Krai, the Rostov Oblast and the Irkutsk Oblast. Among the cities with more than a million inhabitants Chelyabinsk offers the most comfortable conditions. Rostov-on-Don has the worst conditions. Moscow came in 7th place. The main problems for entrepreneurs throughout Russia are the shortage of manpower, a lack of capital and the high electricity prices.

Ranking here. Individual category scores for the regions here. To see detailed scores for each region, download the complete 171 page report. Your Russian market research has never been this easy! This post consists for the larger part of an almost direct translation of this article in Ekspert magazine. My additions are in italic.

The rating, presented at SPIEF 2011 by OPORA president Sergei Borisov, consists of 5 categories: ‘Real estate and infrastructure’, ‘human capital’, financial resources’, ‘bureaucratic climate and security’ and ‘supply chain’. 6000 managers of SMEs and individual entrepreneurs from 40 regions participated in the survey. According to the survey the main weaknesses of the entrepreneurial climate are the shortage of manpower (in particular engineers and skilled workers, a lack of capital and the high electricity prices, coupled with difficulties with getting new connections. Almost half of the entrepreneurs encounters problems finding a plot of land. Every third entrepreneur can not find a location for his production.

My calculations of the share of respondents combining ‘outright negative’ and ‘quite negative’:

High electricity prices (62.6%)
Shortage of ‘non-productive’ specialists – bookkeepers and such (61.8%) *
Shortage of qualified engineers and technical specialists (56.2%) *
Access to capital ( from 42.4% for short term loans to 49.6% for long term loans )
Getting a new electricity connection (44.7%)
Customs procedures  (39.9%)
Getting a plot of land (39.1%)
Corruption (39.1%)
Bureaucratic barriers (35.8%)
Finding a production location (34.6%)
Transport infrastructure (31.1%)
Lack of skilled workers (28.8%)
Quality of equipment (24.9%)
Access to distribution channels (24%)
Internet access rates (23.4%)
Controlling organs (19.3%)
Access to various suppliers (13.0%-14.1%)
Law enforcement (9.3%)
Criminals (4%)

* Availability of skilled specialists in Russia is worst among EC 27 – EU member states plus Island, Norway and Turkey.

According to Borisov the development of small and mid sized businesses in Russia is also hampered by high rates for internet access. ‘Global practice shows that is those countries where the internet is most accessible, the small business sector grows several times faster, than in countries where access is poor’. Another problem, inhibiting the development of business and the growth of labour production is the aging equipment, used by many companies. Investment into new machinery is often hindered by the complexities of finding new capital. It is still very difficult to get a long-term loan.

Interestingly previously notorious issues involving bureaucratic barriers and corruption are receding into the background. ‘Only 10% of the respondents claimed to encounter corruption in the region. On average bribes account for 5% of the companies turnover. In 2007 that percentage was 9.6%.’ There are also less complaints of tax officials. Recent legislation has greatly diminished the number of their visits (literally: raids).

Of the survey’s respondents 37% claims to never  make ‘illegal payments to state officials’. 19% admits to paying bribes and 44% choose not to answer. So in which situations do Russian entrepreneurs pay bribes? Note how corruption is about giving and taking. One of the reasons for the tenacity of corruption as a phenomenon is that is a means to beat your competitors. These percentages are calculated on the basis of answers of those 19% of respondents who admitted to paying bribes.

to get state orders (31.6%)
to pass controls – sanitary, fire dept. (31.6%)
to obtain a plot of land (31.1%)
to get state subsidies, tax exemptions (29.8%)
new connection to electricity, gas, hot water (29.5%)
to get certificates, technical regulations (27.1%)
taxes (16.7%)
customs procedures (16.6%)
in court (15.1%)
to get illegal employees (9.1%)

According to the data received in the survey, regional governors show more concern with the plight of the entrepreneur than mayors. One in 10 respondents partakes in a support program, realized by the regional authorities.

The leading position of the Moscow oblast is easily explained. It’s the same as in the capital, only cheaper. Entrepreneurs in the Moscow oblast have the best chance finding good personnel. In addition to the 6 million citizens of the region itself, many inhabitants of neighboring regions come to work here, as well as the many people who come to Moscow in search work, but can’t find it there. The salaries in the Moscow oblast are also considerably lower than in Moscow. In a similar way, small businesses have easy access to the financial resources available in the capital, as well as its network of suppliers and logistic infrastructure, all while the competition is lower than in the capital itself.

Krasnodar Krai can thank its high rating to the relatively good access to capital. Already for some time the policies of the regional government have been focused on creating good conditions for SME’s, partly because the region’s big business sector has always been comparably small, Borisov explains.

The lack of production locations can be mended by the construction of new industrial parks and business incubators. The problem of aging equipment can be remedied by government programs supporting leasing constructions, says Natalya Larionova, director of the SME department at the Minsitry of Economic Development.

The vice-president of the VEB Mikhail Kopeikin promises that his bank will lower the credit rates for small and mid sized companies. Participants of special programs can already get loans at an 10% annual rate, while not long ago such rates went up to 16%, Kopeikin notes.

More than two third of the regions do not have clear competitive advantages and can be characterized by average conditions or even depressiveness, says Natalya Zubarevich, director of the regional programs of the Independent Institute for Social Policies.

The situation may improve when the competition for investments and human capital between regions is increased, the expert thinks. At present the competition for funding is low. In the majority of cases investments go there, where there is oil and gas. where pipelines are constructed or the federal authorities conduct political projects. The modernizing impact of these investments is doubtful. As long as they get their federal money, the subsidized regions have no incentives to develop competition. That’s why the decentralization of the budget relations is so necessary.

Nowadays, 80% of all taxes go to the federal budget and only 20% to the regional and municipal authorities. To create better conditions for the development of business, it should be the other way around.
Below a comparison of Russian data to the EC27 average. Russia’s strengths: cheap labor force, less regulation (including ways to bypass regulation). Russia’s weaknesses: shortage of skilled laborers and specialists, access to capital and poor infrastructure.