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. Last Updated: 07/27/2016

Urals City Sees Small Business as The Cure

KRASNOTURYINSK, Sverdlovsk Region -- With eight unemployed workers sparring over every job opening in the Sverdlovsk region, laid-off workers are emerging from state-backed retraining programs with dreams of opening their own confectionaries, cell phone repair shops and even McDonald's restaurants.

Nadia Popova / MT
Kukina is looking for a bank loan.
The Sverdlovsk government is offering more than 250 "Start Your Business" seminars across the Urals region for the next two months in the hope of reviving the local economy by convincing people to create their own jobs instead of looking for work.

But existing small business owners have a word of advice for the would-be private entrepreneurs: The regional government may make it sound attractive to be your own boss, but the grim reality is that the job involves problems with bank loans, profitability and bribes.

Those concerns seemed far from the minds of the several dozen unemployed Krasnoturyinsk residents who attended a recent "Start Your Business" seminar, desperate for any kind of job.

"I am thinking about opening an engineering design bureau," said Nadezhda Molostova, 52, who for 20 years worked in industrial design at Bogoslovsky Aluminum Plant, one of the country's biggest smelters and owned by United Company RusAl. She lost her job in January.

"There were about 30 people who were fired with me, and they want to join my firm," Molostova said after the seminar held at the municipal employment center in Krasnoturyinsk, a town of 65,000 located 450 kilometers north of Yekaterinburg.

The local trade union said 230 people have been dismissed from the plant and related service companies, while the employment center puts the figure at 424. RusAl's Moscow office did not reply to repeated requests for clarification.

The Sverdlovsk government has 60 million rubles ($1.7 million) on hand to spend on the seminars, which they hope will retrain 5,000 people to become private entrepreneurs and provide them with seed capital, up from 3.3 million rubles in 2008, the government's committee on small and medium-size business development said in an e-mailed answer to questions. It has asked the Economic Development Ministry for an additional 240 million rubles for the program, part of a national jobs stimulus program spearheaded by the federal government.

"This is sort of an MBA for free and mainly based on practice, with no sophisticated theory," said Dmitry Postnikov, who is teaching the retraining seminars in Krasnoturyinsk and heads City Hall's entrepreneurship support fund. "We will also help by providing advice over the next 1 1/2 years."

Sergei Chuzavkov / AP
Igor Konyushkin, owner of the Shpilka shoe shop in Krasnoturyinsk, says state promises of support ring hollow.
Seminar graduates will be eligible to receive a grant of up to 300,000 ($8,344) rubles by providing a business plan approved by the administration of his city. In addition, the new entrepreneur will receive one year's worth of unemployment payments -- about 70,000 rubles -- to invest in his business from the employment center of the city where he lives.

Similar seminars are to be offered all around the country, the Economic Development Ministry has said.

Trainees Speak Out

"This money is not enough to open your own business these days," complained Alexei Bedrikov, 38, a seminar attendee who repaired melting pots at the Bogoslovsky plant until he was laid off two weeks ago. "I would like to open an inexpensive confectionary because we don't have one in town. But the money from the government is far from enough."

Postnikov, who will be responsible for tracking the use of the money in Krasnoturyinsk, said he knew examples of people opening their own shops for less than 300,000 rubles and acknowledged that starting and managing a business would not be easy during the crisis.

"I told them not to put on rose-colored glasses," Postnikov said of the people at his seminar. "Being a businessman is a hard work, especially today."

It appears to be especially hard to operate small businesses in one-factory towns like Krasnoturyinsk and Tolyatti, where life revolves around the AvtoVAZ carmaker. Russia has about 600 of those towns, and local demand there for many goods and services is close to zero, entrepreneurs said in interviews conducted in five of the towns in recent days.

Nadia Popova / MT
Postnikov leads retraining seminars.
Molostova, the woman considering opening an engineering design bureau, said she understood that there would not be many orders from private clients any time soon. "The government has said it would invest in infrastructure to create jobs, so we could design projects for them," said Molostova, a trim woman wearing glasses and a gray suit.

Other attendees were more down-to-earth with their ideas.

"I want to open a business that would make a profit even in times of crisis -- a cell phone repair shop," said Sergei Katkov, 21, who was fired last month from BAZ-SUAL-Remont, a RusAl-controlled company that performs repairs at the Bogoslovsky plant. "I would never think about opening my own business before, but it is a good time now."

Katkov said he was also considering opening a McDonald's but had to analyze how popular the fast-food restaurant would be in the town.

Some people said they could not afford to wait for retraining to open their own businesses.

"We wanted to have a plan B," said Natalya, the 42-year-old wife of a bauxite miner in Kalya, a village located about 20 kilometers from Krasnoturyinsk and populated by workers from RusAl's bauxite mines.

"If my husband gets fired, we will have nothing to live on and nowhere to find other work," said Natalya, standing at the counter of her new shop. She refused to give her last name, saying she didn't want to draw attention to her husband.

RusAl has said it would cut aluminum output by 11 percent and production costs by 34 percent. But the company said in an e-mailed statement that it would not dismiss anyone at its bauxite mines, which employ about 5,000 people and supply the Bogoslovsky plant.

"Since there is crisis, I have decided to sell something that people will buy no matter what," Natalya said, showing an assortment of dry goods, including seeds, notebooks, woolen socks and lingerie.

'Small Business Is Future'

People like Molostova and Natalya are the future of the local economy, said the head of the Krasnoturyinsk employment center, Oksana Ivanova. "We believe that opening a business is the only way to fight unemployment in our region," Ivanova said. "There will be no other jobs for people fired by the metal plants."

The region's main employers are metals giants like RusAl, Urals Mining and Metallurgical Company and Magnitogorsk Iron and Steel Works, which have laid off hundreds of people and cut the salaries of thousands more as global prices for aluminum, copper and steel have tumbled in recent months.

The unemployment rate in the Sverdlovsk region grew from 4.8 percent, or 116,600 people, in October to 5.9 percent, or 140,300 people, as of the end of February, according to International Labor Organization standards. The Sverdlovsk government expects unemployment to increase up to 190,000 people this year, according to forecasts prepared by the regional employment center.

The number of job vacancies fell to 13,758 in February from 46,008 in October, and the region's economy shrank by 25 percent in January, according to the latest data available.

Hard times mean that people need to think about taking jobs that they never would have considered before, said the speaker of Krasnoturyinsk's legislature, Valery Koltsov.

"The crisis is a time of surprise changes," Koltsov said. "Our mechanics, for example, are becoming milkmen. So why not become a businessman?"

Koltsov said small and medium-size businesses provided 6 percent to 7 percent of the city's taxes, and City Hall is pinning its hopes on them. "They are our engine in the crisis," Koltsov said. "It would be great if every business took on unemployed workers."

Nationwide, small businesses generate an estimated 15 percent of gross domestic product.

The federal government plans to spend a total of 3 billion rubles this year supporting new businesses, which it hopes will create 50,000 new jobs. It has told regional governments to try to convince up to 10 percent of unemployed workers to start small businesses.

Nadia Popova / MT
Yelena Volosatova says her small food shop made a net loss in January and a profit of 20,000 rubles last month.
The Sverdlovsk regional government has earmarked 250 million rubles to support small and medium-size businesses this year, up from 85 million rubles in 2008, and has asked the federal government for an additional 589 million rubles. The money is to be spent on state loan guarantees, microloans, loan refinancing and other financial products.

The focus on private entrepreneurship is a reversal for regional authorities, who have largely ignored small businesses nationwide for years. With this in mind, several Krasnoturyinsk small business owners advised potential entrepreneurs to think twice before opening shop.

Owners' Grim Stories

Karapet Margaryan, owner of the Armenian Cuisine cafe in central Krasnoturyinsk, said his rent was increased nine times to 14,000 rubles in January and his profit halved. "I've been here for almost 10 years selling shashlik and khinkali but don't know what will happen now," said Margaryan, 49, sitting in his almost empty cafe.

"I have always been cautious. I did not take out any loans and have been very kind to our customers," said Margaryan, who has three children to feed. "None of it helps now."

Galina Kukina, the owner of two food shops in Krasnoturyinsk, said she had not seen any drop in demand but was in trouble because of her bank loans. She does not have the money to make a final payment of 300,000 rubles on a 2 million ruble loan this month.

"If I don't pay, I will spoil my credit history and cut off access to any bank loans, which are vital for my business," Kukina, 38, said sitting in her small office at the back of one of her shops, a Kopeika.

Kukina took the loan from Metkombank, a local bank, and planned to refinance it this winter. But she was unable to do so because a national credit crunch forced most banks to essentially close their loan programs.

Ursa-Bank's Krasnoturyinsk office is only offering loans to entrepreneurs who sell food -- widely seen as the most stable business in a crisis. The interest rates on the loans range from 32 percent to 36 percent, up from about 17 percent before the crisis.

"I will agree to pay 30 percent or more -- it doesn't matter. Just so the banks give me money," Kukina said.

Kukina is waiting for a 700,000 ruble loan from the Urals Bank of Reconstruction and Development, which approved her application in December. But she has not heard back from the bank since then.

"They call it an express loan," she said, smiling sadly. "But now, there is a waiting line for the money, and my city's turn hasn't come yet."

Kukina said local inspectors have not lowered their demands for bribes because of the crisis. "They still come for extra inspections and take their money," she said.

Government inspectors with fire, sanitary and other services are notorious for threatening to close small business if they don't pay bribes.

Koltsov, the legislature speaker, said City Hall was doing "all it could" to improve life for small businesses but conceded that there was a problem with rising rents and a scarcity of bank loans. "We are working on changing the rent prices but can do nothing with the banks," Koltsov said. The city owns the land under its central market, but many other shops pay rent to private landlords.

The government's promises of support ring hollow to Igor Konyushkin, owner of the Shpilka, or The High Heel, shoe shop in Krasnoturyinsk. "They always promise to help, and then we see nothing," said Konyushkin, 47.

Konyushkin said the ruble's devaluation is forcing him to raise prices significantly on his imported footwear, and he worries that no one will buy. "Who will buy boots for 9,000 rubles now?" he said.

The ruble has lost a third of its value against the dollar and 24 percent against the euro since November.

Another problem for entrepreneurs is that some wholesalers are offering a smaller assortment of goods and rationing what they stock, said Yelena Volosatova, who rents a food stall in the pavilion at Krasnoturyinsk's central market. "I used to buy a wide range of tea at the wholesale store but can only get one kind now, because they are afraid that they won't sell more," she said.

"They give me three boxes a day, but I could buy as much as I wanted before the crisis," she added.

Volosatova, 41, opened her shop a year ago after her husband was jailed over a traffic accident, leaving her to raise their 8-year-old child alone. She said she made a net loss in January and a tiny profit of 20,000 rubles in February. "Of my 20,000 ruble profit in February, I paid 12,000 rubles for rent and made additional payments for the pension fund and taxes," she said. "I have almost nothing left."

Nonfood products were barely selling at the market, vendors said. "We sell almost nothing on weekdays and a little on the weekends," said Yelena, 43, shivering from the cold in a tent-like booth outside the pavilion. "But we have to be optimistic," she said, smoothing a row of men's underwear stitched with "U.S.S.R." in the front. "Times change."