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. Last Updated: 07/27/2016

Unraveling the Red Tape That Binds Small Business

Bureaucrats in Moscow City Hall have a nasty reputation for strangling the growth of small business with piles of paperwork, frequent inspections and the occasional bribe. But the headache of opening and running a business is finally being eased by local and federal initiatives aimed at unraveling the red tape.

Many an entrepreneur dreaming of opening his own small business in Moscow has thrown in the towel long before setting out to find an office or hire staff. The reason: red tape.

Bureaucratic pitfalls strike fear into even the most stout-hearted of businessmen. The red tape starts with the company charter and includes registering the company name and filling out form after form at various government offices. And even after all the fees and bribes are paid, the would-be entrepreneur may find himself without a company to call his own.

"Even writing the charter can drive you over the edge," said Yevgeny Chaika, head of Gera, an agency that does the paperwork for entrepreneurs unwilling to spend months trying to clear bureaucratic hurdles.

The text of a company charter is required to contain clauses that would surprise the average person. For example, one clause must state that the company is ready to assist the government in the eventuality of war. Another inexplicably reads: "Documents that have a historic value should be deposited in the archives of the City Hall."

The first stop for a businessman hoping to open a company is the Moscow Registration Chamber to register a name for the business. But he must be careful in picking the name. The application could easily be nixed if the name is well-known or suggests that the new company is linked to the city or federal government.

A year ago, Gera tried to register a company named Italia on behalf of a client that imported bathroom and plumbing supplies from Italy.

The Moscow Registration Chamber, citing a 1927 resolution, refused to incorporate the company.

The Moscow Registration Chamber may have good reason to be overly cautious. In 1997, its head lost his job after private developer ZAO Moszhilstroi collected advance payments on various projects and disappeared.

The name Moszhilstroi could be read as an acronym for Moscow Residential Construction.

Outraged customers turned to City Hall in protest, saying they had entrusted their savings to Moszhilstroi because they thought it was affiliated with Moscow Mayor Yury Luzhkov. City Hall shook its head and pointed out that the company held the private status of a ZAO, or closed joint-stock company.

But the backlash led the city to take a closer look at business practices. In September, the authorities began to summon to their offices the founders of new businesses to make sure that they really existed.

As a result, the number of companies incorporated with faked papers dropped.

But there are side effects as well.

"It takes hours to convince registrars that the CEO of the Belgorod Ore Enrichment Combine, who runs a multimillion-dollar business, cannot come to Moscow to say hello," said Chaika.

The next step after registration is to get a stamp, which costs 300 rubles and requires several days to be granted.

Then comes the tax office.

If more than 10 days lapse between the registration at the Moscow Registration Chamber and the filing of a sheaf of documents to the tax authorities, an entrepreneur is fined 5,000 rubles ($175). Those who don't pay extra to get the stamp made quickly usually end up paying the fine.

Chaika said he registers companies only in a handful of Moscow's tax offices, known as GNI, because each has its own routines. A trip to GNI-14 requires that the filer get in line at 6 a.m., while at GNI-13 filers have to put their name on the list a month before turning up. There are, of course, people standing in the line who for a fee are willing to promptly usher filers in to see the tax inspector.

Once the tax office signs off on the papers, a bank account needs to be opened and the account details certified by the tax office.

The actual cost of setting up a business is a couple hundred dollars, if no bribes are paid.

The headaches and legwork can be avoided by using an agency like Gera, which charges $240 to $390 depending on the kind of company being formed.

Then the Nightmare Begins

Even after finally setting up shop, red tape comes back again and again to haunt businesses.

"This is when you begin to face real problems," said Sergei Larin, a private entrepreneur for the past 10 years.

The problem raises its head in the form of inspections from a slew of municipal and federal agencies, including those overseeing taxes, property, sanitation, health and the environment.

The average Moscow business had its license checked 37 times last year, while its certificates to sell various goods were checked more than 120 times, according to a survey conducted by the Business-Tesaurus consulting center.

And it is impossible to avoid officials peeping in your books.

Vladimir Buyev, head of Business-Tesaurus, said about 90 percent of small businesses' revenues come from the sales of products that require certificates and the average company has 37 certificates.

About 55 percent of all certificates can be obtained within a month, while 28 percent require up to two months and 1.5 percent more than six months.

The Business-Tesaurus survey found that the most frequent inspections from municipal bodies come from neighborhood administrations and City Hall's consumer goods department. Moscow is divided into districts, which are in turn broken up into neighborhoods, each with its own administration.

From federal bodies, the police account for 83 percent of inspections.

Oftentimes the businesses being checked find themselves quibbling with the inspectors over perceived infractions and paying bribes to avoid being shut down.

Who's to Blame?

So who is at fault for the red tape that threatens the businesses?

In Moscow, the easy target is Mayor Luzhkov, who is currently serving his third term in office and looks determined not to relinquish his iron-handed grip on the city for some time to come.

But the federal government has certainly played a role as well.

Twelve years ago, starting a private business was as easy as getting a visa at an embassy — a routine exercise that is sometimes a bit painful but has a predictable outcome and never takes more than several weeks.

When a law on companies was approved in 1988, all commercial property was in the hands of a government that felt so confident about its ability to control everything that it did not even care to regulate economic life beyond the umbrella of GosPlan, the state planning committee.

But soon after the collapse of the Soviet Union in 1991, hurdles began to be erected in the path of businessmen.

These days, the highest concentration of small businesses is in Moscow, where there are about 30 businesses per 1,000 residents, according to government statistics.

Elsewhere, the average is six businesses per 1,000 people.

Such a high proportion of small and thriving businesses opens the door to increased corruption on the part of bureaucrats, said Yevgeny Legostayev, head of a City Hall department charged with monitoring the inspections carried out by city bureaucrats.

"All the money is here," Legostayev said. "So federal authorities prefer to crack down on Moscow-based companies."

Private entrepreneurs say the rest of the country is not much better than Moscow.

For example, registrars in the Moscow region town of Zelenograd until recently charged businessmen twice the amount of their charter capital to incorporate a company. That means a $2,000 fee was charged to set up a business with a capital of $1,000.

"The registrar told us that they had registered only 32 companies over the course of five years," said Chaika, who a few years ago tried to register a small business for a client. "When she told us to pay $2,800, we understood why."

In Noginsk, also in the Moscow region, town officials call up businessmen and ask them to contribute money for renovations, police bonuses and utilities maintenance.

"Last time they invited us to pay 5,000 rubles," said a local businessman who asked not to be identified. "Those who refused were told, 'There is no place for you in our town.'"

Forget Closing Shop

A total of 700,000 businesses have been incorporated in Moscow since 1992, but only 300,000 continue to file reports in the tax office, according to city figures.

So where are the other 400,000 companies?

"The problem is that liquidating a company is even more difficult than incorporating it," said Business-Tesaurus' Buyev. "If done in line with regulations, it takes a year to 18 months."

One of the procedures required to shut down a company is that the owners have to file payrolls for every month that the firm was in operation, thus ensuring that employees are later able to produce the necessary records to collect their pensions.

This condition alone makes employers choose the easier way out, selling their company to new owners for a token amount. Companies are often re-registered with faked documents and stolen passports. In most cases, the new owners are non-Russians from former republics of the Soviet Union.

"In Russia, small businesses serve the needs of small businesses, while customers remain loyal to company leaders, not brands. So switching from one legal entity to another does not hurt one's business," said Buyev. "This is why consumers are not deterred by often-changed corporate names."

Weeding Out Bureaucracy

Both the federal government and the city of Moscow are taking steps to make life easier for small business.

Economic Development and Trade Minister German Gref has for months been hailing a plan to cut the number of licenses. The proposal was met with a barrage of criticism during a discussion in the Cabinet in March and subsequently appears to have gotten stuck somewhere in the government.

Meanwhile, Moscow City Hall is working on its own system to fight corruption. The formation of Legostayev's department to monitor inspections is part of that drive.

Legostayev said municipal bureaucrats now have to ask for permission to carry out checkups and show businesses a document issued by his center authorizing the inspection.

"Officials from inspecting bodies are required to fill out and produce a special form before they start to stick their noses in other people's business," said Legostayev.

The forms are numbered and bear a coupon that then has to be returned to Legostayev's department.

Data from the coupons are stored in a database that is expected to become operational Sunday.

"We introduced this system last September," Legostayev said. "The problem is that some businessmen are not aware of it."

At the end of May, City Hall plans to approve a list of agencies that will be allowed to conduct inspections.

A hotline — 259-7476 — has been set up to facilitate inquiries from businesses, which are encouraged to call any time a municipal official knocks on their door.

Moscow is not going it alone in attempting to cut red tape while the government struggles to ease the operations of small businesses at a federal level. Measures similar to Moscow's are under review in the Komi republic and Nizhny Novgorod.

Businessmen may be looking at the moves with skepticism that comes from years of seeing good intentions from the government get pushed by the wayside. But supporters of the anti-bureaucracy drive insist that change is really on the way.

"The state bureaucracy understands that by introducing new regulations it will be shooting itself in the foot," Buyev said.