Sunday, 19 June 2011

Is business a mug’s game?

Tax relief, financial aid for the self-employed and even direct investment from the state innovations fund are not enough to persuade Russians to set up in business.

That’s the somewhat gloomy view expressed in a survey on small business here by GlobeScan, an international polling service, which asked 24,000 people worldwide how hard they felt it was to start a business in their country.

And it found out that less than a third of Russians would consider setting up in business. According to GlobeScan, 74 percent of respondents in Russia “mostly agreed” with the statement: "It's hard to start your own business in this country for someone like me," while only 16 percent of respondents disagreed.

But Denis Kashuba, the general director of a small engineering company with 30 employees, said that most people’s fears are groundless. “I am not afraid of any inspection – these bad days are gone, it’s all rumours,” he said. “If a fire officer comes to me asking for money and if he is wrong, I’ll call his office and he’ll have problems,” Kashuba said, adding that he started his business five years ago “from a notebook and a table”.

Kashuba admitted that it had taken him two years of very hard work and an ascetic lifestyle to launch the venture.

But despite such examples of successful self-employment, the image of “hero-entrepreneur” is losing its attractiveness among young people. Russian public opinion researchers say that youngsters see better career prospects mostly with state institutions or state-owned corporations such as Gazprom or Sberbank.

Worse since the crisis

The financial crisis has increased this trend, experts say.

A Public Opinion Foundation survey found that students chose state organizations over private companies, and named state organizations as seven out of the top 10 most attractive employers.

Entrepreneurs’ organizations and private businessmen see different reasons for that, but all of them concluded that this tendency is quite risky for Russian society. Over the last four years there has been a noticeable increase in start-ups, thanks to the Skolkovo innovation project, Rosnano and the Russian Venture Company. But the tendency towards favoring state organizations among young people worries them.

Georgy Satarov, a former presidential adviser in the 1990s and head of the anti-corruption Idem think tank, said in an interview with Vedomosti said that independent businesses had pulled the country through after the 1998 default.

“Political competition” will eventually create independent courts and other institutions essential for the right business climate, he said, Vedomosti reported. “In the late 1990s independent business emerged in its full strength, as it wasn’t pressed like now,” Satarov said, adding: “And that was what we call democracy.”

Historical roots

Entrepreneur Vladislav Korochkin, vice-president of the Opora small business association, said that the problem has historical roots. “For decades we were told that business is bad and criminal and some have remained in this opinion,” he said. The early years of Russian reforms, so called “tough nineties” with their criminal excesses, are yet another bad historical experience, and not so far away, he said.

Korochkin said that Russia lacks its version of the so-called American free enterprise “dream”, as the idea to start a business for the sake of your family’s future generations isn’t popular here.

“Historically, it just happened that most people here do not think this way about a private business,” said Korochkin.

Alexei Devyatov, chief economist at Uralsib Capital, said the phenomenon could be explained by people having limited planning horizons.

“To plan your family business, a venture to be inherited by future generations of your family, you should think in terms of the next 20-30 years – until you reach retirement age. But most business planning here is half a year, or a year as a maximum,” he said.

A difficult investment climate impacts equally on the decisionmaking processes of both investment bankers, who invest billions, and ordinary people, who think in terms of several thousand dollars.

Bad historical experiences, red tape and corruption all play their part in crimping people’s entrepreneurial spirit, Devyatov said.

The government should be praised for its recent efforts to eliminate excessive inspections and cut down on red tape, but the burden on business of bribes and other hidden payments remains very high.

“The tax regime is very permissive here, but the weight of undercover rent-seeking payments [i.e. bribes] has reached $300 billion a year – its onefifth of the GDP,” Devyatov said.

There is an urgent need to improve the way financial support packages are used to help small businesses, Korochkin said. “For example, loan guarantee funds are very important as they allow you to unblock collateral,” he said.

Across some regions of the country the number of small businesspeople who used such loans guarantee funds was very low, and in some cases the aid was simply ignored, Korochkin said.

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