SME’s Have Finally Gotten Russia’s Attention

Paul Goncharoff

This past October 23rdbrought cold, rain and the foretaste of winter. On the bright side, I received a phone call from the incredibly dedicated, hardworking and active Ms. Oksana Romanchuk who is Member of the Board and Business Ambassador to the UK for “OPORA RUSSIA“.

For those who might not know, OPORA is the All-Russian Non-Governmental Organization of Small and Medium-Sized Business. She thought of me and asked if I would be interested in coming to their 15-year jubilee event at the VDNKh. Quickly agreeing, as I wanted to get a fresh sense of the changes now happening within the SME sector in Russia, but also to see and hear firsthand what President Putin had to say about this sector of the economy.

As Putin would attend, the advance security measures were tight, and each attendee had to be vetted in advance. It seemed that despite my being an American, not exactly the flavor of the month given US attitudes towards Russia, I was cleared quickly, efficiently and notified that I was “good to go” by email.

When talking about the Russian economy in global news media, it seems that the reporting interest is focused on oil, energy or recently agriculture, all of which are very visible drivers, but not the only ones by far. Not much attention is paid to the many and varied efforts of small and medium sized businesses in Russia, which contrary to popular opinion are growing steadily, despite the earlier headwinds of tradition and inertia. In fact today growing the small business economy is considered a “national project” of vital importance.

OPORA is the NGO that supports and lobbies as needed and wherever needed in the interests of Russian SME’s. Just to get an idea of their size, the have 346 active offices throughout the 85 regions of Russia, and 20 representatives covering 26 countries. OPORA directly represents about 450,000 entrepreneurs who are involved with them, and have directly created over 5 million jobs in the SME sector.

It is also an excellent point of contact for those small and medium businesses who are seriously interested in expanding into the Russian market. I work with several such companies from the US, UK and elsewhere who have been helped tremendously and supported by the people and services of this organization when setting up their business in Russia.

This area is open to a broad range of business, especially for non-Russian SME’s. Taking advantage of the many opportunities that sanctions have unintentionally created in Russia. From the need for “import substitution”, to the ease and efficiency of accessing the Eurasian markets through cost effective manufacturing in Russia. The one belt, one road economic project with China, and the Eurasian Economic Union is effectively making a hugely populated market (Asia, Central Asia, and Middle East) available to SME’s that set up in, and operate out of Russia.

Among their key activities, include the Legal protection and defense of entrepreneurs, lobbying efforts to enhance a favorable business environment, stimulating the development of entrepreneurial activity and developing international cooperation programs.

Equally important to all small businesspersons is their “Bureau for the Protection of the Rights of Entrepreneurs and Investors” which effectively provides support and protection for small and medium enterprises to assure and in some cases restore their rights should they have been breached. These activities are hugely important as they deal with both private (situational) issues of small and medium business and general (systemic) legal and enforcement challenges.

It was apparent from the start that the programs that were conducted for this jubilee session were as a result of requests by the SME’s themselves, addressing issues that are key in their operating environment. All told, more than 25 discussion groups were ongoing in several halls on topics ranging from the digital economy, fintech, cross border e-commerce, construction & development, regulations, and services. There were specific export opportunity presentations by representatives from the UK, China, Japan, Italy and Israel through to Vietnam.

What made this event pleasantly different was the very open interaction and accessibility between the attendees and the entire executive command and management of OPORA, from their president on down. Between presentations, I had the opportunity to meet and talk with Ms. Marina Bludyan, the Vice-President of “OPORA RUSSIA” who is also the Chairman of the Board of Directors of research, development and manufacturing for “FENIX”. She is a vibrant and strong advocate in promoting supportive measures to increase non-raw materials exports by Russian SME’s to the world market, looking to achieve at minimum a 10% increase by this sector before 2024.

The forum membership raised a number of actionable issues, which are being addressed for resolution by OPORA as well as relevant government ministries. In brief, their “wish list” of areas needing improvement in 2018 is as follows:

  1. The current lack of a “single” digital window for state support.
  2. The current lack of an investment “elevator” for SMEs.
  3. Insufficient accountability of customers when in violation of payment terms.
  4. Onerous currency controls.
  5. The number of inspections in 2017 – 1.7 million, is still too high.
  6. The number of cases initiated by economic regulations are + 4%, not good.
  7. Number of entrepreneurs convicted for infractions are + 66% for 4 year, not good.
  8. Reporting requirements have a tendency to grow larger.
  9. Underdeveloped venture financing.
  10. The inability to submit to banks all required documents in electronic form.
  11. Undervalued collateral.
  12. High reserve requirements for lending (75% in Russia vs. 50% or less elsewhere).

Vladimir Putin arrived later that afternoon to a genuinely warm reception as he visited, talked with people and walked through the venue. The bottom line he emphasized was his commitment, and the commitment of the Russian Federation to meet and expand the opportunities for SME’s throughout the country. One of the priorities he stressed is to increase government purchases from small and medium enterprises as opposed to using historically traditional sources of supply.

“We need to expand the access of products from small companies to the domestic market. I would like to note the purposeful and productive work of OPORA in the development of small and medium-sized businesses. When we combine efforts with you, we also achieve something; in this case, we can talk about certain progress. In 2015, when we began SME sourcing activities, companies with state participation bought goods and services from small and medium businesses for an amount not more than one hundred billion rubles a year, and this year, according to preliminary data, this is already more than three trillion rubles. By 2024, we will endeavor to bring the volume of purchases to five trillion rubles, an achievable result,” he said.

The year 2024, which Vladimir Putin mentioned, is a milestone that has been set when the ecosystem for small and medium businesses should achieve significant traction in the Russian economy. If today, all SME’s employ less than 20 million people; by 2024, the number of employees in small companies is projected to conservatively reach 25 million.

One of the positive tools he announced was the three-year moratorium on scheduled inspections for most types of state control over small enterprises, which ends this December. This moratorium will be extended a further two years. Essentially these “supervisory holidays” are an exemption from having to comply with many of the reporting formalities that can be onerous. The formalities themselves are in the process of being streamlined and largely digitized, so by 2020 the reporting formalities should be less time consuming and costly, hence the extension.

The Russian president also proposed giving entrepreneurs the right to complete and fill out the register of business inspections along with the inspectors themselves, a double check security mechanism. “You can make it so that entrepreneurs could post information about who are the inspecting auditors, what was their purpose, with what results, and what real results,” he said. In addition, the president asked the Prosecutor General’s Office together with OPORA’s assistance to set up a mechanism to increase the transparency of inspections.

He went on to say, “Last summer, meeting with representatives of NGOs in Petrozavodsk, we agreed that a law on social entrepreneurship would be adopted by the end of 2017 that was in July 2017, now 2018 is ending, and we missed a year there. I draw the attention of the Ministry of Economic Development, it is necessary to remove all differences, to work closely with parliamentarians; with the business community so all the issues that are still inconsistent in order to pass this law as soon as possible. I also ask the Agency for Strategic Initiatives to fine-tune in the regions the mechanism for disseminating best practices for supporting social entrepreneurship”.

According to Vladimir Putin, in the next six years, the contribution of small and medium-sized businesses to GDP should exceed 30%. Today it is about 20% of GDP.

At the end of the day, and after speaking with a number of businesspersons who are in the small and medium business sector, their response was positive. One said, “The government has been far more proactive these past two years in trying to simplify and disassemble the old bureaucratic barriers that were inherited from the Soviet times and simply made more complex through the 90’s until not too long ago. Remember, what we call privately owned SME’s today, were criminally illegal just 30 years ago. I see and feel the difference in my bottom line, and in the real business potential that has opened up. After all, enhancing small business is most assuredly in the national interest at every level”.