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. Last Updated: 07/27/2016

Hurdles Still Too High for the Little Guy

MTA Moscow policeman questioning a woman vendor about her license to sell food products during a spot inspection at an outdoor market last summer.
Shop talk at major economic forums usually revolves around big issues, but it was a small matter that created the most buzz among the Russian delegates at this year's World Economic Forum in Davos.

A study presented on the last night of the exclusive annual Swiss powwow seemed to show, to the pleasant surprise of Economic Development and Trade Minister German Gref and other Russians in attendance, that reforms were actually working -- at least in one small sector of the economy.

In an effort to assess the effectiveness of recent legislative changes designed to encourage entrepreneurship, the World Bank, together with the Center for Economic and Financial Research, or CEFIR, a Moscow think tank, interviewed 2,000 small businesses in 20 regions across the country and found that red tape was getting less sticky.

Although several delegates evinced a degree of skepticism -- Russia's small and medium-sized business sector is miniscule compared to many of its emerging market peers, thanks in no small part to official corruption -- the study did seem to suggest that the climate is improving.

For example, businesses registered fewer problems with state inspectors after a law regulating inspections came into effect in the summer of 2001. The law limits the number of times a government regulator can "visit" a business to once every two years.

The list of state inspectors limited by the new law is long but not quite complete -- some of the most feared organizations, like the police and the Tax Ministry, are not mentioned.

Still, the number of inspections dropped by 26 percent between 2001, when the first part of the survey was conducted, and the second round in 2002.

Although the improvements came quicker than expected, CEFIR itself was a little wary of the results, warning that "improvements in the regulatory environment may be caused by a seasonal cycle, and not by reforms."

Economic Development and Trade Deputy Minister Andrei Dvorkovich, whose ministry commissioned the report, also greeted the results with caution, saying the numbers didn't necessarily prove anything. "But we can say high figures have turned into less-high figures," he said.

Nonetheless, the survey shows that some headway has been made in at least one crucial area -- licensing procedures, long the bane of businesses involved in anything from transport to retail.

Licensing is a huge source of institutionalized corruption. Obtaining the dozens of licenses needed to operate legally takes time and money, something in short supply for any small business.


According to CEFIR, the number of firms that applied for licenses between the first and second rounds of the survey dropped 10 percent to 19 percent, which suggests a reaction to the new law on licensing that came into effect a little over a year ago. The law cut the list of activities requiring licensing from 1,600 down to 100 and lowered the maximum cost of a single license to 1,300 rubles ($41). It also extended the validity of licenses to five years from three.

The authors of the report said the findings, although encouraging, fall short of the reforms' projected goals.

In the case of licensing, for example, CEFIR noted that while the total number of license requests fell, many regional governments and regulatory authorities did not comply with the law in full. Licenses often cost more than the law stipulates, and many were valid for less than the required five years.

As the number of required licenses falls, each individual license becomes harder and more expensive to obtain. For example, a store that now only needs a liquor license to operate, must now get a health certificate, proper tax status and register with the local police. Each document necessitates a meeting with the same officials who used to give out licenses in those areas before the new legislation was implemented.

Yekaterina Zhuravskaya, who led the research, said the report accounts for the possibility that administrative barriers are shifting to other areas, but said "in this case they are not."

Small businesses interviewed by The Moscow Times noticed little change in their relationship with officialdom.

"We have inspections every week; it's just part of the way business is done," said a cafe manager on the Arbat.

"On Militia Day, two cops came into the cafe and sat down, so I offered them coffee and pastries, free of course, and asked them how I could be of help." The police told the manager, who asked that his name not be printed, that the cafe owner usually makes a $100 contribution to their "veterans fund" on the holiday. His response was to smile and say: "I'll just go upstairs and talk to the management, would you fellows like anything else?"

Other small businesses say license complications remain.

Small Progress
Percentage of firms applying for a license, and average cost of a license
20012002
% of firms applying for a license2919
Average cost per license, $355253
Days to acquire license3733
Source: CEFIR
"In order to get a license to ship goods by truck, you need a document on professionalism, traffic safety and medical fitness," the owner of a cargo company said in message posted on the Kremlin's web forum for small businesses (www.reformline.ru). "Each document requires you to show you have had training in that field, which is nonsense. Each one costs 2,000 rubles."

Often, small businesses nip the problem in the bud by acquainting themselves with officials independently, so that there is no call for an inspection.

"You have to know your officials," said a young woman who runs a flower shop on Tverskaya Ulitsa. "There are documents that have to be processed and stamps that you need, and it won't happen if you don't grease the wheels.

"We've known these people for years. We ask them how their kids are even as we're paying them bribes."

Although corruption is ingrained in the business culture, observers see no resolution for the problem other than legislative reforms.

"You can't just get rid of the regulating authorities entirely. There has to be regulation," said Alexei Vorobiyev, an economics analyst who co-wrote a recent Aton report on small business in Russia.

Vorobiyev said the CEFIR report provides an accurate picture of the small business climate and that the government is acting in good faith. "Since the new government took power it has been trying to put theory into practice," he said of President Vladimir Putin's administration.

He said reforms are the way forward, but that a lot has to be done with public opinion before the business-to-government relationship becomes more transparent.

"As public opinion formulates and reforms are pushed in the regions, the activities of small businesses will become more civilized," Vorobiyev said.

However, he added that the responsibility for reform does not lie solely with the government. "It is businessmen themselves who often prefer to solve problems by using gray schemes."

CEFIR director Zhuravskaya agreed, saying businesses need to form social organizations to promote the rule of law and offer support to businesses trying to resolve administrative problems legally. "Such efforts need to be highly publicized," she said. "Often a business does not have the time, expertise or money to take a bureaucrat to court on its own, and it's easier to pay a bribe."

For reforms to be effective there has to be more scrutiny of how laws are being followed across the country, and bureaucratic responsibility is paramount. "Currently, there is no clear form of repercussion for a bureaucrat who doesn't follow the rules. He needs to be scared," she said.

Two other reform bills aimed at improving the small business climate have also gone into effect recently, but when it comes to registration and simplified tax legislation, there have been no improvements.

As Prime Minister Mikhail Kasyanov put it in March: "Registering a firm has become more complicated and more expensive."

According to CEFIR, this is because the rules, one of which came into effect in January 2002 and the other this January, have not had the time to make a difference.

"Our next round of surveying will focus on the effect of these laws," Zhuravskaya said. The third round will also show if the licensing and inspection laws continue to be effective.

Because Russia's economy is based on natural resources, its health largely depends on external factors outside its control. Policy-makers say incubating the small and medium-sized business sector could help wean Russian off the oil bottle, but the sector's contribution to the economy is still miniscule in comparison to developed nations with diversified economies. According to the Russian SME Resource Center, small and medium businesses account for only 10 percent to 11 percent of gross domestic product. In Europe the figure is between 63 percent to 67 percent and in the United States it is 50 percent to 52 percent.

Businessmen blame the growth of the bureaucratic sector for their woes.

It has apparently reached such proportions that even friends of oligarchs are not immune. Alexei Mordashov, head of the Severstal steel empire, recently recounted the story of a business partner who had to spend six months collecting 137 signatures in order to open a small retail chain.

"The problem of how government institutions function is coming to the forefront," he told Putin during a roundtable in the Kremlin.