Business climate in Russia

“OPORA RUSSIA” conducts regular researches of business climate in Russian regions. Research results indicate business environment weaknesses for SME manufacturing companies in 40 Russian regions.

Statistics and the result of report show that, compared to other countries, Russian small and medium-sized manufacturing business is underdeveloped. Its contribution to employment and cash flow is half less than in the United States, France or Poland. Nevertheless, according to our survey, despite crisis factors and numerous barriers to doing business, Russian small and medium-sized companies in the manufacturing sector look to the future with optimism. Three quarters of respondents – manufacturing SMEs – positively assess the current state of affairs in their companies. In addition, the majority of respondents view Russian regions as a good place to do business in general, but see serious barriers on the way to create new business. It is time for the government to support SME’s optimism by real improvements.

To make it easier to open and develop business, it is important to improve the quality of business environment in the region. Entrepreneurship or business climate in the region is a set of conditions that influence the emergence and growth of the business; this is the environment in which the company is born and grows. “OPORA RUSSIA” conducts regular researches of business climate in Russian regions. Research results indicate business environment weaknesses for SME manufacturing companies in 40 Russian regions. Analysis of individual factors, as well as international comparisons shows that the picture is far from ideal.

The situation with land and real estate for companies does not look very attractive. Every second manufacturing business faces considerable challenges when acquiring or leasing land and production facilities. Situation is somewhat better with the availability of warehouses with one third of respondents experiencing considerable difficulties. Only one fifth is having problems with finding office space.

Transport & logistics and communications infrastructure is more consistent with the needs of manufacturing small and medium-sized business. About 30% of companies see “quite a lot” of disadvantages in transport infrastructure of the region or point out that it “does not correspond at all” to the needs of their business. However, similar complaints about poor quality of the logistics infrastructure and low availability of exhibition space are experienced by around 15% of respondents. The Internet tariffs are viewed to be too high by only one fifth of respondents representing manufacturing business.

There are significant obstacles to the development of small and medium-sized manufacturing companies in energy infrastructure. For most companies grid connection is not available, and although the quality of electricity supply is rarely called low, in most cases, electricity prices are too high, and almost one fifth of companies consider that it “significantly restricts the development of their business”.

Availability of production personnel for SMEs is extremely low, and for many companies this is a serious issue. Only every third company is not experiencing significant problems in finding qualified engineers and technical personnel, and only one fifth finds skilled workers relatively easy. Every fourth company is having significant difficulties even with the search of non-production personnel.

Financial resources are not readily available to small and medium-sized manufacturing companies. Yet, for companies most is easy enough to find short-term financing. But only about one-third of the respondents face no problems in finding additional funding for a period of more than three years. When asked about the availability of venture capital funding in the region, only about half of the companies answer positively, and for each respondent who believes this funding is affordable, there are six of those who think differently.

One-fifth of those surveyed small and medium-sized manufacturing companies believe that administrative barriers do not exist in their regions. Most of the remaining respondents indicated that such barriers are “not too burdensome for business” and it is possible to adapt to them. However, a third of companies said their burden is so heavy that they cannot bear it.

Many of those who face with standards, licensing, customs procedures, do not consider them to be problematic, and a number of entrepreneurs engaged in production view the quality of tax authorities’ work to be quite high. However, only 32%of the surveyed executives said that inspection authorities never create problems for business development. And one-fifth of respondents said that they do it often enough or permanently and “inspections hamper their business development and growth”. Thus, inspectors and law enforcement authorities create more problems for SMEs than criminal.

Corruption is a very common and burdensome obstacle to the development of SME’s. Among those who did not refuse to discuss the topic, opinions are divided: but only 13% say “corruption in the region does not exist”. The same percentage (13%) of respondents frankly admits that their companies practice the informal payments to the government officials. About a quarter of respondents believe corruption is commonplace in their region in such areas as access to government contracts, inspections, land acquisition, connection to the infrastructure, government support. But those who disagree are not always in the majority, a half or even more than a half of the respondents refused to answer these questions. It is positive that the situation in the regions is not the same and there are places in Russia more or less free from corruption.

Every fourth manufacturing company uses outdated equipment. The reasons for this may be different, but if you need to upgrade your equipment, finding the suppliers will not be a problem. In general, companies do not experience any obstacles to finding component parts and business services suppliers.

A sale of products is sometimes a problem for companies: for many of them access to distribution channels is somehow limited.

Low availability of personnel, high taxes and low availability of funding rank № 1 among obstacles to the development of small and medium-sized manufacturing enterprises.

In order to address the problems of small and medium-sized business, regional and city authorities develop programs to support it. In average, every fourth company is involved in such programs. Participants generally highly evaluate the effectiveness of such programs.

In-depth analysis of the financing issues allows companies to make a number of conclusions and answer the question of what limits its availability.

Borrowing from friends and relatives and other companies (other than suppliers) is more popular in Russia than in the EU. The most common forms of debt financing in the EU such as overdrafts and credit lines, installment purchases / leasing and commercial loans are used by Russian industrial SMEs twice or four times rarely. This partly explains why the size of the loan does not exceed one million rubles in half of the cases in Russia and why the typical loan amount in Russia is four times lower than in European countries.

Still, the most popular form of lending in Russia is banking. A quarter of the surveyed industrial SMEs have filed at least one application for a bank loan during first half of 2012. Thus in more than a half of cases, the decision was positive and only in 17% of cases – negative. Even so such claims in Russia are rejected half as much as in the EU.

High interest rates on loans are considered to be a key obstacle to obtaining debt financing almost by half of manufacturing SMEs. The second important problem is a security deposit. And only 11% of manufacturing SMEs in Russia do not see obstacles in attracting funding, while in EU countries three times more companies agree with this opinion.