Small Business Faced With Permanent Crisis

Marcel Bard

Special to The St. Petersburg Times

Published: December 2, 2005 (Issue # 1127)

Entrepreneurs of small and medium sized enterprises (SMEs) exist in a permanent state of alert, the head of the city’s Russian Association of Small Business (OPORA) said on Tuesday.

“Due to ongoing problems associated with opening and maintaining small business in Russia, managers of SMEs are in a kind of permanent crisis, without knowing when, if at all, the risks associated with their working environment are going to decline to a more normal level,” said Sergei Borisov, the OPORA head. A situation in which business would not always be under threat of closure would be a huge step forward, he added.

As for the main reasons for the current problems, he named administrative barriers, tax instability, limited access to real estate, and, most importantly, the competition with larger enterprises.

“Large enterprises are generally given preference by regional and federal governments, because they are seen as more capable of helping the economy.” Thus they acquire monopoly status, leaving SMEs with no chance to participate.

To get an idea of how weak SMEs are in Russia one only needs to look at the statistics. The Deputy Chairman of the Committee for Economic Development, Industrial Policy and Trade from St.Petersburg‘s administration said that 42 percent of the city’s employees work in SMEs, which are responsible for 27 percent of economic output. This figure is about a third smaller than the 58 percent share in the U.K., where they account for 51.3 percent of the economic turnover. 99.9 percent of all firms in the UK are SMEs, whereas in Russia that figure is 94 percent.

OPORA, which is the only business association financed by private members only, holds four meetings a year with the Ministry of Economic Development and Trade and with the Ministry of Finance. Through this cooperation it could aspire for some kind of success.

“There was a case when 60 plots of real estate were going from the state straight into the hands of a big enterprise, without any form of negotiations,” Oleg Ashikhmin said.

“In the end, thanks to our protesting, the properties were auctioned off and changed owners. Such cases however are rare, and do not get at the root of the problems and change circumstances in which SMEs must operate.”

At the round table one Russian business man who wanted to stay anonymous, said that in 90 percent of cases the authorities refuse to refund him the VAT for his exported goods, adding that “this is not a civilized country.” He said that he only got back VAT after 6 to 12 months and never without going to an arbitrary court.

By comparison, Tina Sommer, a U.K. businesswoman, said she manages “to get back VAT within two weeks.”

The audience erupted into a spontaneous round of applause after hearing that in the U.K. small businesses with a turnover of less than $100,000 do not have to register for VAT at all.

“SMEs don’t have the luxury of a [permanent] voice in the Kremlin or on administrative levels, and therefore face big bureaucratic problems,” said the Russia Director from the Russo-British Chamber of Commerce, Neil Cooper. According to Tina Sommer, head of the Federation of Small Business (FSB) in the U.K., the FSB is a totally independent organisation with 190,000 members, and two permanent representatives in the U.K. government’s Small Business Council.

“The FSB shows that there is strength in numbers,” she said.

The main question the conference raised is whether the U.K. model can work in Russia, i.e. is it possible to gain political ground through the expansion of private business associations.

“The best support that the Russian government can give to SMEs in Russia is to not interfere,” said Olga Litvinova from DLAPiperRudnick. However, seeing how it finances its own SME business association, namely Delovaya Rossiya, the Kremlin seems to be reluctant for independent SMEs to gain strength in Russia.