Help for Small Business

Many commentators have managed to air their opinions on the draft law, On State Support for Small Business, since it passed its first reading more than a month ago. In short, the general opinion is that the law is a bad one, containing a lot of good intentions but not the mechanisms to realize them. But, since there is nothing better to be had, the reasoning goes, it should be passed anyway. Nonetheless, there is still time to consider the draft and to think about ways of improving it.


The new legislation will restrict the number of enterprises that will be considered "small businesses." Until now, a business in the production or construction sectors has been considered "small" if it employs fewer than 200 workers. The new law will lower that figure to 50. In the area of retail and wholesale trade, the figure is currently 15 employees, and the new law will actually raise it to 25.


These changes are significant. According to our survey of nearly 1,700 enterprises, more than 20 percent of all small businesses in Russia are either industrial or construction concerns employing between 50 and 200 workers. On the other hand, in Russia -- unlike the West -- there are relatively few businesses in these sectors that employ fewer than 50 workers.


By "throwing out" a significant portion of the businesses in these sectors, the new law will naturally increase the proportion of non-production (trade and service) businesses that will qualify for small-business support. In fact, Russia seems to be creating the preconditions for a time when government support, in the form of direct and indirect financial aid, will fall exclusively to the trade and service sectors.


The draft law also stipulates that the pertinent regulations issued by the administration and various federal and local bodies must be brought into conformity with the new law within two months of its passage. However, the draft fails to enumerate precisely which regulations and which government organs are affected. The question of who will undertake the laborious task of making this determination is highly significant since it may ultimately determine whether the law works or not.


The draft also creates a mechanism by which enterprises can apply for official status as "small" businesses and a mechanism for appealing unfounded rejections or delays. However, it does not stipulate penalties for officials found guilty of rejecting applications unfairly. In addition, in order to appeal such a rejection, according to an already existing presidential decree, an enterprise must pay a government fee equal to 20 minimal salaries, which currently is about 500,000 rubles ($150). Such a fee is already prohibitive for many small businesses and will only become more so as time passes. Both these matters could be resolved by creating a mechanism by which officials found guilty of arbitrary decision-making would have to compensate businesses for the appeal costs.


Another significant issue addressed by the draft law concerns the funds that support small business. The draft envisions a pyramidal structure with the Federal Fund of the Russian government at the top and state funds created by local government agencies forming the base. These local funds, despite the label "non-commercial organizations," have become extremely profitable. They are allowed to provide consulting and information services to the organizations they oversee and to attract foreign and local investment by organizing bidding, exhibitions, auctions, lotteries and issuing securities. Moreover, according to the new law, the funds will be able to keep any profits they accumulate, and those profits will not be subject to taxation. Experience has already shown that these funds quickly begin to work not for small business, but for themselves.


The draft also says that all small businesses will, for a period of five years, be subject to the tax laws that were in effect at the moment of their registration. This is simply absurd. In Russia, small businesses are regulated by presidential decrees, government regulations, as well as the acts of local legislatures: In short, the environment for small business is extremely unstable and their tax situation changes literally from day to day. If the new law is passed, each business will in effect have its own tax regime, and the burden on the tax authorities will be simply unmanageable. All this, naturally, will create fertile ground for corruption.


Finally, the new legislation will require the executive branch to take measures to create informational structures for small businesses. However, it stipulates that only businesses engaged in certain "high priority" activities will be able to participate. But, in order to create a normal market infrastructure, it is obvious that all small business must have equal access to information resources.


According to our survey, Russian small businesses are literally starving for information today. Managers told us that they need information about domestic market conditions, management legislation, sources and conditions of credit, suppliers, potential partners, management and production techniques and about foreign markets. They also said that the main reasons that they cannot get this information are the small number of agencies supplying it and the high cost of getting it from agencies that do. It would seem that, under current market conditions in Russia, providing this service must be a function of the government. But providing such information only to "high-priority" businesses will inevitably lead to the withering of other small businesses.


The Center for Economic Reform has presented a report containing these and other suggestions to the Duma in hopes of improving the draft legislation. The second reading of this crucial piece of legislation is scheduled for Dec. 16. Time is running out, but it is not yet too late.





Tatyana Alimova and Vladimir Buyev are researchers at the Center for Economic Reform. They contributed this comment to The Moscow Times.