Russian entrepreneurship in dire straits

Russian business daily published an editorial on the unwillingness of Russian citizens to open their own businesses. The editorial was motivated by the Global Entrepreneurship Monitor report for 2012, which indicated that a mere 2.2 percent of the Russian adult population plans to open a new business. This is the lowest percentage among all surveyed countries and the lowest indicator for Russia itself since 2006. When the existing business owners in Russia are taken into account, the percentage of those wanting to open new business rises to 3.8 percent, compared to the average respective percentage for the BRICS countries and Eastern Europe of 21 and 24 percent, respectively. Furthermore, 93 percent of Russians are not even considering the possibility of opening new business, while 83 percent claimed they never attempted to do so. Almost 50 percent of the owners who shut down their business in 2012 stated they don’t want to be entrepreneurs any more.

The Russian Ministry of Economic Development claims that the figures do not take into account those entrepreneurs who prefer to stay below the radar and are not visible in the official statistics or polls. Authors find this explanation unsatisfactory, as the existence of such businesses would demonstrate pretty much the same thing as their absence – that the conditions for doing legal business in Russia are inadequate. Even the Business Ombudsman Boris Titov, appointed by President Putin in 2012, does not dispute this. One of the most disturbing consequences of government regulation became evident in 2013, when approximately 300,000 individual entrepreneurs closed their businesses after a twofold increase of mandatory social contributions for workers.

Not surprisingly, the Global Entrepreneurship Monitor report found that the government policy towards business is the primary obstacle for the development of entrepreneurship: the absence of transparent regulations and logic, vague legal framework and its weak enforcement, and corruption. This is unlikely to change as long as the government forms its business policies in accordance with the requirements of monopolies and large businesses managed by oligarchs. In addition, small private businesses find it difficult to access funding at reasonable rates and complain about the inadequate physical infrastructure. Ombudsman Titov agrees that the corporate lending rates and the energy utility costs in Russia are the highest among the BRICS countries. Some might find it surprising that the tax burden in Russia, estimated at more than 40 percent of a total company’s turnover, is among the highest within the BRICS group of countries.

Authors ironically remarked that Russia might achieve President Putin’s goal of entering the top 20 countries on the World Bank’s Doing Business list by 2020 with no one left to do business.

Who benefits from the Great Game in Central Asia

Russian daily published an op-ed by Vladimir Milov, president of the Russian political party „Democratic Choice“, in which he criticizes the Russian government’s liberal policy towards immigration from Central Asia. According to Milov, regardless of individual politicians calling for the introduction of a visa regime between Russia and the Central Asian countries, the Russian Government continues with its loose immigration policy towards these countries. Russia’s generous relationship towards Central Asia is founded on two premises: first, Russia already invested too much political capital into the idea of economic integration with Central Asia; second, it is believed that the Russian economy would suffer if the country decided to cut the immigration of cheap labor force from the Central Asian countries.

However, Milov argues that such immigration actually hurts the Russian economy as it turns the balance of payments in favor of central Asian countries. Money transfers from the immigrants working in Russia to their home countries are higher than the Russian exports to those respective countries – for example, private money transfers from Russia to Uzbekistan in 2011 amounted to USD 4.3 billion, while Russia exported USD 2.3 billion of goods to the same country. In Tajikistan, private transfers from Russia constitute 47 percent of its GDP. Similar relationship is observed between Russia and other Central Asian countries, which seems to support Milov’s argument.  

Milov goes on to state that the political and economic orientation towards Central Asia makes no sense for Russia. Russian exports to Central Asia (just below USD 20 billion in 2012) represent only 3.7 percent of the total Russian exports (USD 525 billion), and it is hard to believe that these countries will become top export markets for Russia in the near future, as the average monthly salaries in the region range from USD 100 in Tajikistan to USD 500 in Uzbekistan. The idea of building a bridge between Europe and the Pacific region through Central Asia is redundant, as Russia has direct access to the Pacific and shares almost eight thousand kilometers of border with China and Mongolia.

Furthermore, Milov argues that by indirectly subsidizing the economies of Central Asian countries through loose immigration and work requirements for their citizens, Russia supports autocratic and corrupt regimes that are doing very little to enhance the standard of living in their respective countries. The only thing Russia gets in return for its loose immigration policy is their dubious political loyalty, which could turn out to be of little worth should these regimes be overthrown. Milov is also concerned about the appearance of radical Islamist movements in some Central Asian countries. Besides, Milov claims that Russia is losing the battle for economic and political influence in Central Asia to China, which is making the countries in the region financially dependent by providing them with substantial loans. Thus, Milov argues, while Russia provides open borders and geopolitical subsidies, it is China that commands economic influence and enjoys access to resources in Central Asia.

Russian Government’s foreign debt reduced to USD 49.8 billion

Relying on the data from the Russian Ministry of Finance, business daily RBK reported that the Russian Government’s foreign debt decreased by 1.9 percent since the beginning of 2013, to USD 49.8 billion. Government debt owed under the euro-denominated bonds was reduced by 1.8 percent, to USD 34.27 billion, while indebtedness to the international financial institutions decreased by 7.3 percent, to USD 1.88 billion. Another major item in the structure of Russia’s foreign debt are guarantees denominated in foreign currencies with a total outstanding value of USD 11.3 billion. According to the Russian Central Bank, Russia’s total foreign debt increased by 17.2 percent in 2012, to USD 631.78 billion.

In 2012, the Russian central government operated a budget of USD 418.03 billion, or approximately 21.2 percent of Russia’s GDP, with a zero deficit.

Gazprom has gas to last a 100 years

Russian business daily RBK quoted Gazprom’s Head of Geological Department Andrey Tretyakov, who stated that Gazprom’s gas reserves are sufficient for the company to continue producing gas for another 100 years. During his participation at the Adam Smith Institute conference „Oil and Gas in the Russian Arctic“, Tretyakov added that Gazprom will have to deal with the challenges posed by the development of shale gas extraction and the utilization of gas hydrates. President of the Oil and Gas Industry Association, Mr. Gennady Shmal, stated that the liquified natural gas (LNG) will be of major importance to Russia in the future.

Gazprom’s CEO Alexey Miller stated last week that the Russian gas monopolist plans to match its 2011 exports in 2013, as the current market conditions are favorable. Gazprom’s exports decreased in 2012 against the backdrop of reduced consumption in Europe, but the company retained its market share of 55 percent in the total European Union imports. International Energy Agency (IEA) confirms this, stating that Russia will remain the largest supplier of gas to Europe in the medium term. However, IEA experts forecast that Russia will lose its position of the largest gas extraction country to the United States by 2035. According to IEA’s estimates, Russia and the United States will extract approximately 784 billion and 821 billion cubic meters of gas in 2035, respectively. China is expected to increase its gas extraction fivefold in the same period and become the third largest producer of gas in the world.

According to the Petroleum Resources Management System (PRMS) standards, Gazprom’s proven and probable gas reserves are estimated at 28.7 billion tons of fuel equivalent, valued at USD 269.6 billion. In 2012, Gazprom extracted 488 cubic meters of gas. Gazprom has a share capital of approximately USD 3.76 billion, divided into 23,67 billion shares with a nominal value of USD 0.16. The Russian Government controls more than 50 percent of the company.

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Russian officials continue to worry about the economic performance in 2013

Russian business daily reports on rising concerns regarding the performance of the Russian economy in 2013. As the Russian Minister of Economic Development Andrey Belousov stated, „We’re not in recession yet, but we might get there. Such a risk exists. …I believe [it might happen] by autumn.“ The Deputy Minister of Economic Development Andrey Klepach recently stated that the Ministry reduced its forecast for economic growth in 2013 from 3.6 percent to 2.4 percent. However, Klepach described the latter figure as optimistic – judging by the GDP performance during the first two months of 2013, the growth for the entire year might be as low as 1.7 percent. Klepach also noted that the growth of 5-6 percent, required by President Putin, is unrealistic in the near future.

The Russian Ministry of Economic Development is expected to propose economic stimulus measures to the Prime Minister Medvedev, whose government is adamant to keep the central government expenditures in check. On the other hand, the Ministry of Economic Development insists that the Government should loosen its fiscal policy and increase capital investments. The Ministry finds it essential that both the Government and the private sector increase investments in the transport infrastructure and economic sectors that rely on human capital – healthcare, education, science. Besides, Klepach argued that certain projects can be performed only by the Government, such as the construction of a modern highway between Moscow and St. Petersburg: “It would have been reasonable to construct the Moscow-St. Petersburg highway during the 15 years of high oil prices, but with the current policies, we won’t see it constructed before 2018. [As things stand now] Someone could write another book titled “A Journey from St. Petersburg to Moscow”*”.  

In addition, the Ministry of Economic Development insisted that the government investments should increase by a factor of between 2-2.7 in real terms by 2020, compared to 2007, in order to diversify the economy. Having spent three months to find the resources, at least on paper, the Government eventually accepted the proposal. However, in reality it turned out that it will be difficult to fund even the current level of expenditures. According to the Higher School of Economics, the central budget might experience a shortfall of 500 billion rubles (USD 16.1 billion; the total central government revenues for 2013 are projected at USD 412.9 billion) in 2013 as a consequence of lower than projected privatization revenues and increased VAT returns.

Experts’ economic growth forecasts for 2013 vary between 2 and 3 percent, with most of the analysts suggesting that the growth will pick up in the second half of 2013 thanks to the contribution of the agrarian sector, which underperformed in 2012, and the economic recovery in Europe. What happens after 2013 is a matter of concern, though: without the increase in productivity and competitiveness, the economic growth could hover around 2 percent, which is grossly insufficient to fix the current state of infrastructure and bring about a noticeable increase in the overall standard of living.  

* – “A Journey from St. Petersburg to Moscow” is a book on the disturbing experience of traversing the road between the two largest cities of the Russian Empire and witnessing the socio-economic conditions at the end of the 18th century. It was written by Alexander Radischev, who was soon proclaimed a dissident and exiled to Siberia.

Russian oil industry to pay for the roads

Russian business daily reported that the Russian Ministry of Finance discovered a combined deficit of 108.7 billion rubles (USD 3.5 billion) in the Federal and local road infrastructure funds. The deficit is a consequence of tax incentives provided to the oil refining industry – in order to stimulate the sales of ecologically friendly fuel, the Government set the excise duties for higher-quality fuel lower than the duties for low-quality fuel. As both the oil companies and consumers switched to higher-quality fuel faster than the Ministry of Energy predicted, the overall revenues from excise duties fell.

The deficit will primarily affect the local authorities, as more than 70 percent of their road infrastructure funds depend on excise duties. The Ministry of Finance considers tackling the deficit by increasing the duties on higer-quality fuel, but that won’t be enough to solve the problem. Therefore, the Minister of Finance Anton Siluanov proposed to modify the oil export duties and increase the mineral extraction tax by approximately 5 percent. According to Raeffeisenbank’s analyst Andrey Polischuk, given the price per barrel of USD 100, the latter measure would increase the mineral extraction tax to approximately USD 22 per barrel and bring additional USD 3.6-3.7 billion in taxes. An increase in oil export duties is already projected in the budget and is not sufficient to fix the road infrastructure funds deficit by itself.

The mineral extraction tax accounts for 18.8 percent of the federal budget; oil companies contribute 88 percent of the total mineral extraction tax collections, while the gas industry adds another 10.6 percent. Representatives of several large oil and gas companies were not available for comments on the proposed measures to close the road infrastructure financing gap. Analysts find frequent changes in tax policies to be irresponsible and damaging, as well as not entirely reasonable. An interesting argument is provided by one of the local experts, who considers it strange to dedicate a percentage of the total mineral extraction tax revenues to a particular purpose, as they were always used arbitrarily, as a general budget income. However, with the oil and gas sector playing a dominant role in the economy, the Government’s only option seems to be to increase its reliance on oil and gas revenues even further.

Shades of grey Russian economy

Business daily published an editorial commenting on a recent statement by the Russian Deputy Prime Minister Mrs. Olga Golodets regarding 38 million Russians that are employed „who knows where“. According to Mrs. Golodets, this group, not registered as either employed or unemployed, makes up a large percentage of Russia’s 86 million-strong workforce. Stating that these people are „invisible“ to the administration, she went on to complain that Russia is 20 years behind the rest of the world in most, if not all, professions.

According to the Russian Statistical Bureau, the total Russian workforce in January 2013 consisted of 75.2 million people, of which only 4.5 million are registered as unemployed. Authors suppose that Mrs. Golodets included students and disabled persons in her estimation of the workforce size, which is higher than the official numbers. Moscow’s Higher School of Economics estimated that as much as 24-26 percent of the total employed workforce (17-18 million people) works in the “grey” economy. Other estimates are even higher, claiming that the grey economy employs 30 percent of the total employed workforce.

It is obvious that the official employment in Russia steadily decreased during the last few years. The reduction of unemployment that the officials boast about is a result of increased grey economy, not reflected in the official employment figures. Authors believe that this phenomenon is a result of increased taxes and administrative burden – from the beginning of 2013, mandatory contributions to the pension fund for self-employed individuals more than doubled, from 17,208 (USD 555) to 35,665 (USD 1,150) rubles per year. It is believed that the measure is directly responsible for putting as much as 317,000 self-employed individuals and small enterprises out of business.

Unregistered employment in Russia has always been significant. One of the studies showed that 38 percent of workforce without a high school diploma are not registered with the government by their employers, while the percentages for those with a high-school diploma and a university degree are 21 and 13 percent, respectively. Among the sectors, trade accounts for 60 percent of all unregistered employees. Geographically, the largest percent of unregistered employment is found in Southern and Siberian Federal Districts – it is estimated that 30 percent of the total employed workforce in those regions isn’t registered, compared to the national average of 24 percent. Needless to say, illegal immigrants form a significant percentage of the unregistered workforce.

The editorial ends with a conclusion that such extremely high numbers are a consequence of general mistrust towards the Russian Government, which is not able to provide adequate guarantees for the protection of individual liberties and private property, including the protection of businesses from racketeering. On top of that, labor productivity in Russia is 3 times less than that in the United States and 2.6 times less than in France.