Small Business in Russia

Since the fall of the Berlin Wall and the collapse of the Soviet Union a mere decade ago, the new Russia has struggled with instilling democracy and free market philosophy into the government and population. The transition continues with understandable difficulty. Seventy plus years of communist rule bequeathed the country with local and regional bureaucratic institutions that were and continue to be overbearing, intrusive and corrupt. And nowhere have the regulations, inspections, permits, fees, and so on, been as burdensome than on small businesses. Of note is that, as of January 1, 2003, there were about 800,000 small businesses in Russia being overseen by 1.5 million federal bureaucrats. That's two regulators for every entrepreneur.

Irina Khakamada, a deputy speaker of the State Duma, recently organized several fact-finding regional visits to obtain first-hand information on the small business climate. The results were dismal with more than half of Russian entrepreneurs stating that business conditions were bad. Excessive government red tape was cited as the greatest impediment to starting, conducting and expanding small businesses. Analysis by a group led by former Economics Minister Yevgeny Yasin produced similar results.

Specific complaints include the endless inspections, approvals and other procedures that bureaucrats mandate. Added to troublesome and costly administrative barriers is the ubiquitous corruption where small business people are also compelled to make:

. . . "voluntary contributions" to all manner of pet projects dear to the hearts of bureaucrats at all levels. These contributions amount to some $4 billion per year, or 1 percent of GDP, of which small business coughs up approximately $400 million.

Huge sums are also spent on gifts to individual bureaucrats to take care of specific problems, mostly involved with leasing property from government agencies. According to the latest estimates, this form of corruption costs Russian business some $33 billion per year, of which $3.3 billion falls to small business.

Many bureaucrats utilize these and other methods to continually milk the small business community. All this occurs in an environment where they change the rules often to suit the desires of individual bureaucrats.

To counter the unethical, if not illegal, treatment of small business, the federal government recently instituted some reform by legislating that, effective January 2004, "taxation bodies rather than municipal entities and registration chambers" will register individual small businesses and the procedure will be of a declarative rather than an authorizing nature. This action will eliminate some of the levels of corruption. If a businessman only has to go to one place to be fleeced, chances are he'll be fleeced less and it will be less time consuming.

Unfortunately, the entrepreneur will still have to register with the state Pension Fund, statistical organizations, social and medical insurance organizations, and be subject to predatory inspections by fire, health, and other departments seeking bribes.

In summary, the legacy of communism is a government at all levels that is unfriendly to free market business. The recent changes are noteworthy since they indicate that some leaders are beginning to realize pressures imposed by the government on small business. Sadly, much more needs to be done to change the mindset of the leadership so that small business can flourish.