Small business in Russia – who is to blame and what is to be done

Russian weekly magazine „Russian Reporter“ published an interview with the Head of the Supervisory Board for the Russian entrepreneurs’ association „Russian Foundation“ (http://en.opora.ru/) Sergei Borisov, who contrasted the Russian Government’s imprudent measures with its desire to put Russia among the top 20 countries for doing business. The debate regarding the Government’s attitude towards small and medium business in Russia was spurred by the recent increase of mandatory social contributions that put as many as an estimated 300,000 small companies and entrepreneurs out of business since the beginning of 2013. 

Sergei Borisov is against the tax system that in effect filters out smaller businesses and individual entrepreneurs unable to pay the minimum social contributions prescribed by law. While there are forces within the Russian Government that are prepared to fight for every tax ruble – for instance, the Ministry of Labor recently requested to make social contribution tax evasion a felony – Sergei Borisov would like to relieve businesses with a monthly turnover of less than 100,000 rubles from paying any social contributions during their first year. The Russian Tax Administration claimed that 65 percent of the companies that closed their business after the increase of the mandatory social contributions weren’t operational anyway, but Borisov finds the figure arbitrary and believes that the President should punish the responsible officials who acted with gross negligence and ruined many businesses across the country. Borisov claims that there were instances when individual entrepreneurs were forced to pay contributions even though they were on maternity leave or serving in the army. As a result, after the Government increased the minimum social contributions for small businesses, approximately 100,000 new individuals applied for welfare benefits. Borisov wonders where does the Government intend to find the money to patch this new hole and warns that Russia might be approaching another recession soon. 

While the Russian Government seems to look down on entrepreneurs who are unable to meet the minimum social contribution payments, existence of micro-businesses is essential to many small, remote settlements. Borisov stated that the Russian Government provides approximately EUR 575 million for the support of small businesses annually, while France, with a population of less than half of Russia’s, allocates EUR 30 billion for the same purpose. The Government should also introduce minimum outsourcing requirements for companies participating in Government tenders, requiring them to place 20 percent of the estimated order value with small businesses. Instead, the Government seems to be much more concerned with big businesses, which is not surprising given its dependency on oil revenues and ostensible desire for modernization and innovation, which can only come from big companies with sufficient R&D budgets. Borisov argues that such attitude affects both the business and the political climate in Russia negatively. Government’s negligent approach towards the small business has already angered many entrepreneurs. However, Borisov argues against small business going into politics, as it would make itself too vulnerable in the environment with inadequate law enforcement and judicial capacities. In his own words, “I wouldn’t recommend anyone getting into that fight”. Borisov also hopes that the new Head of the Russian Central Bank will reconsider its strict monetary policy to make loans more accessible to the small businesses. He believes that the prosperity of Russian entrepreneurs is essential for changing the mentality of the population for the better.

Borisov’s interview is accompanied with statistics sourced from the “Russian Foundation” polls, showing a somewhat brighter picture compared to the previously quoted Global Entrepreneurship Monitor Report for 2012 (see previous blog post). According to the polls, 13 percent of the surveyed stated that they plan to open their own business. This figure is the highest in Ulyanovsk (21 percent), and the lowest in Volgograd (a mere 1 percent). 1.8 million small and medium sized businesses in Russia employ 11.48 million people, and 3.8 million individual entrepreneurs add 5.3 million jobs to the figure. The share of small businesses in the country’s GDP is estimated at between 20-25 percent.