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. Last Updated: 07/27/2016

Loan Scheme to Help Small Business




TUAPSE, Southern Russia -- He's battled to boost wealth in some of the most stubborn and violent economies in the world, emerging unscathed as an adviser to the Ceaucescu regime in Romania and from the aftermath of war-torn Vietnam. But French banker Pierre-Yves Divisi? donned a kamikaze headscarf when he addressed Russian regional leaders to try to convince them of a scheme for raising funds for the country's struggling small businesses.


"It's a question of willingness," said Divisi?, who was a leading financial wizard at Credit Lyonnaise during its prime in the 1970s. "Do you trust your country, your region, your entrepreneurs? All the rest is bullshit. If you trust them, you will find funds to start the money pump."


Divisi?, a consultant for TACIS, was coming under fire from regional officials at a conference Friday organized by the European Union's technical assistance program. He was telling them of plans to set up a scheme that would make it profitable for regional companies to lend money to small businesses. The money would be guaranteed by the World Bank, European Bank for Reconstruction and Development and Western banks, as well as new agencies in the regions themselves.


President Vladimir Putin has frequently said the government must do more to develop the small and medium business sector, which produces just 12 percent of gross domestic product, compared to 70 percent in European economies. The sector remains bogged down in red tape and is starved of cash due to the unwillingness of local banks to provide inexpensive loans for longer than two years.


Developing the sector is seen as key to raising living standards, creating wealth and increasing employment in a short period of time.


But several officials had doubts about the scheme, which also proposed tax breaks for purchases of equipment and the creation of regional and international agencies to guarantee local companies' equipment purchases. Fears were raised that officials would never be able to break through the bureaucracy.


"I appreciate your love for papers and signatures, but we're not going to play your games. You can take it or leave it. If participants tell me they don't like the scheme, then fine, there are plenty of other countries around," said the impassioned and flamboyant Divisi?.


"All over the world people are looking for good investments and I think this is one such project. It is a big project for small companies," he said at the TACIS conference held in the Gazprom-owned Nebug Hotel on the shores of the Black Sea in the Krasnodar region. It also was attended by regional leaders from Moscow, St. Petersburg, Bashkortostan, Kemerovo, Voronezh and elsewhere.


Similar schemes, where the risks of extending long-term loans to cash-starved small businesses are diminished by sharing the load among a number of different agencies, were used across Western Europe to restore economies after World War I and II. Other developing nations, including Hungary, the Czech Republic, Vietnam, Taiwan, Chile and Bangladesh, have also used the system to generate cash to develop small and medium businesses.


Under the scheme proposed by Divisi? an enterprise would apply to a regional leasing company for a loan to buy equipment to build itself up. It would pay the leasing company a 10 percent fee on the loan plus interest, which he said would be available for cheaper terms than those offered by local commercial banks. That 10 percent would then be transferred to a regional guarantee agency, which would receive the fee in return for guaranteeing the loan.


Risks against currency devaluation would be guaranteed by an international leasing agency, which in turn would receive funding from a major Western bank. Startup capital for the international leasing agency would come equally from the regional leasing agency and an international financial institution such as EBRD, the World Bank or a leading commercial Western bank.


The loans available would be for about five years at interest rates of around 30 percent, Divisi? said.


"The scheme is for entrepreneurs who have good projects, but who cannot get necessary financing because of a lack of collateral and cannot get long enough credit," he said.


Complicated? Officials at the conference also were confused. But Divisi? insisted that the scheme could turn a profit for all agencies involved.


He said failure rates on the loans were likely to be below 10 percent, which would allow the regional guarantee agencies to spin a profit.


Complex as the scheme may sound, Anti-Monopoly Minister Ilya Yuzhanov, who attended the conference, said in a interview that Divisi?'s plan was very similar to "gray" mechanisms used by major Russian corporations. Yuzhanov's ministry also is in charge of a federal fund for support of small and medium enterprises, an institution TACIS has been working with since 1997.


He said the international leasing agency set up to guarantee the loans would most likely be based in the offshore zone of Cyprus.


Given that the "gray" schemes of offshore zones and tax breaks are based on existing legislation, regional officials' fears about pushing the proposed project through red tape might not be a problem. Yuzhanov said the main problem was finding the political will.


"The main point is that the regional elite, from both local administrations and enterprises, realize that this sector is where Russia's economic future lies. It depends on the wishes and will of concrete people," he said.


Divisi? said the plan would have another incentive for investors. Tax breaks provided to the UN by the Russian government also would be extended to small businesses using the scheme, meaning that deliveries of equipment would be exempted from value-added tax and customs duties. Divisi? said tax exemptions would be in force regardless of whether the equipment was domestic or imported. Even if it was domestic, it would still be considered formally as imported by the UN, he said.


Details of that part of the scheme had one Tax Ministry official shouting: "But that's tolling" f a tax evasion scheme used by major aluminum exporters that was recently outlawed.


However, Divisi? and a UN representative in Moscow, Frederic Claus, both insisted the scheme was in line with existing Russian legislation.


However, even though Divisi? said that several regions like St. Petersburg, Kemerovo, Tomsk and Moscow had already agreed to take part in a pilot scheme, Anti-Monopoly Ministry officials said the project could be in jeopardy because TACIS was no longer funding it. Ever since the European Union ruled to call a halt to funding programs in Russia to show its opposition to Chechnya, further TACIS programs have been put on hold.


New projects begun this year have already been budgeted for in previous years' budgets. The deputy head of the EU Commission in Russia, Andrea Fontana, said TACIS has no plans to provide further technical assistance and the ministry should be able to implement the program on its own.


The indefatigable Divisi? also said he thought the ministry would have few problems in setting up the program f and hinted he might give further support to the project with or without TACIS.