The Climate is Changing for the Better

Business notes improvements in economy

Yesterday, Russian Business Week opened, during which the Russian Union of Industrialists and Entrepreneurs (RUIE) will celebrate its 20th anniversary. On the eve of that event, RBG conducted an interview with the RUIE President Aleksandr Shokhin. Aleksandr Nikolayevich answered questions taking into account the results of the annual surveys of the Russian business community arranged by the RUIE, as well as information provided by the Fleishman-Hillard Vanguard agency which questioned foreign business representatives in Russia in 2011.

– Aleksandr Nikolayevich, the years of the rapid growth due to natural resources export ended with the economic crisis at the turn of 2008. Has the situation changed?

– The resource-oriented model of the export economy has turned out to be highly vulnerable in comparison with other developing market countries. However, GDP and industrial production in 2011 showed quite steady growth.

In 2011, foreign investment increased, however changes in their structure during recent years were less positive. According to the results of three quarters of the previous year, the share of direct investments fell below 10% of the total amount of the received investments.

And taken as a whole, the investment activity recovery rates against the background of the 2009 failure seem insufficient. Fixed capital investments in 2009 declined by almost 16%, increased by only 6% in 2010 and by 5.6% during the eleven months of 2011.

The inflation rate is also worth mentioning. On the one hand, the rate of price growth has reached a record-breaking low:  The year 2011 will become the third one in succession when the Federal State Statistics Service records an inflation rate below 10%. On the other hand, manufacturing prices growth still remains a burning problem. However it is not as acute as in the previous year.  It has risen above 14% in January – November 2011.

According to macroeconomic data which is neither the worst nor the best, the most important thing is to improve the business environment.

As social research shows, the crisis period has restricted companies’ planning horizon even more. Amid the crisis and the post-crisis revival, the majority of entrepreneurs were not eager to look further than 3 years ahead in the future. In 2011, the situation changed – over 45% of the companies discussed development strategy for a period exceeding three years.

In order to evaluate the investment climate quality, it is important to know whether there are barriers to a business start-up and launch in a new market. Over one third of the companies consider that their regional market is, to some extent, closed to “strangers”. At the same time, more and more companies believe it is quite easy to enter a regional market, even when a company from another region is concerned.

The other question is the following: Is it easy to start a business from scratch in any region? Surveys of entrepreneurs show that the procedure to set up a new company after submitting documents for state registration until receipt of all documents required for the start-up averages 39 days. This definitely decreases our competitiveness to a considerable extent, particularly in relation to our partners in the Customs Union.

– Has private ownership safety, the quality of the licensing, control and supervision systems, and the legal framework of business regulation improved?

– The level of private ownership safety is one of the most alarming indicators. The basis is low (in 2007, 65% of respondents assessed the private ownership safety level as low), and over half of the respondents can see no significant improvements in this area, while 20% of them believe that the situation has worsened.

However, the government’s efforts to improve the quality of the legal framework of business regulation have been appreciated. The share of the companies which positively assess the results exceeds the share of the companies that believe the legislation has become worse by 15%.

As for the licensing, control and supervision system, over 30% of the companies think that the situation has improved during the past 5 years, less than 30% of respondents consider that it has worsened and 40% can see no change in it. In 2007, 40% of the surveyed companies considered that the system impeded Russian business. We addressed the companies which had obtained licenses during the past two years to assess the average time required to obtain them. 45% of the licensees managed to do it within 30 days, however, for 5% of the companies the licensing period lasted for a year and more. For over 20% of the licensees, the procedure was considerably longer than three months.

– And what about the tax load level?

– As for the tax load, the RUIE survey has demonstrated a consolidated opinion within the business community: It has increased during the past five years.

The consequences of increasing insurance contributions in 2011 were analyzed separately. A large proportion of the companies consider there has only been a moderate of insignificant impact on their activity but 13% of companies have found it impossible to work under such rates.

The infrastructure condition for business activity in the region where a company operates is no less important for a final assessment of the business climate. There are quite a few types of infrastructure where the situation is far from ideal. This particularly concerns such spheres as real estate, exchanges, airports, educational establishments, and power, heating and gas supply.

– Every year, RUIE makes a survey of the RUIE board members and board bureau. In 2011, ten events which significantly influenced the Russian economy have been identified. Can you tell us what they were?

– These include the increased participation of Russia in the integration processes in the post-Soviet countries; the elections to the State Duma; the completion of negotiations on Russia’s accession to the WTO; the crisis in Germany and other countries in the European zone; the heavily increased national debts of developed countries and downgrading of their sovereign ratings; the revolutions in the Middle East and North Africa; Kudrin’s resignation; the forecast for a record-breaking capital outflow based on 2011 results and the Fukushima tragedy. They also include the transport infrastructure crisis (frequent accidents and emergency cases in aviation, the disaster in Bulgaria, etc.) and persistent failures of the state regulation in particular markets (petrol, pharmaceutical market, etc.).

There is also the decision on the interim pattern for changing mandatory insurance rates relating to social insurance; establishment of the examination institute and the mechanism to abolish departments’ regulatory acts impeding business and investment activity and preparation of the “Strategies-2020” project involving expert and business community representatives.

– Can you name the most serious problem facing Russian business in the long term?

– Generally, there are several problems which might negatively affect business development in Russia. For example, people are becoming more and more concerned about the availability of the state-of-the-art technologies, though not so long ago the business was more concerned about the availability of financial resources. We can also see a growing anxiety about a shortage of manpower. Probably, this is the most serious problem which our enterprises will face in the near future.

– What kind of specialists do they lack?

– Entrepreneurs have been complaining about a shortage of competent specialists for a long time. We have once again analyzed the respondents’ needs for various categories of specialists according to their education level and found an imbalance in the labor market.

First of all, the companies lack specialists with a higher technical education – over 60% of the companies note a shortage of such specialists. The situation is almost equally complicated with regards to specialists with intermediate vocational education – over 60% of the companies lack such specialists.

The situation is a little better when it comes to specialists with secondary technical education and workers with basic vocational education. About 40–50% of the companies face a manpower shortage in these areas, however over 30% of the companies have managed to find the staff they required. If we assess the companies’ need for specialists according to professional groups, the situation is similar. The companies lack highly-skilled specialists and top managers. And it seems to be quite easy to find unqualified workers or service sector workers.

– Russian companies are also concerned about the possibility of competition intensifying during the next 2–3 years. Who are our competitors?

– First of all, they are domestic companies, as well as domestic companies working with the state. To a lesser extent, these include domestic companies using foreign capital and foreign companies with production facilities in Russia.

– And what about the business social responsibility level?

– Quite a stable economic situation has contributed to restoration of the pre-crisis level of social investment.  More than 85% of the companies worked with regional governments or municipalities to contribute to the region’s social development.

However, the social responsibility level of Russian businesses is still not high. In international practice, this concept covers more than just social activity and includes business conduct ethics, business transparency, products and services quality etc.

Helping veterans, disabled people, and other categories of socially disadvantaged people connected with the company remains one of the most popular kinds of social support.

– Do regional executives help to improve the infrastructure required to do and develop business?

– In 2011, we asked business representatives about regional executives’ contribution to the improvement of the business climate in the region. In 2007–2009, the situation was worsening – the regional executives were considered to be an obstacle in business infrastructure development; however the situation changed in 2010. The businesses appreciated the endeavors of the governmental bodies around Russia. As regards a more general assessment – from the infrastructure to the business climate as a whole – the results are even more optimistic.

The unity of the business climate results in miscellaneous assessments on the part of the companies. We can make one conclusion – that there is no unity of the business climate in Russia.

The results are close when assessing the uniform rules of business in the Russian regions – 82% of companies believe that those do not exist or are unlikely to exist. These include less formalized, but no less important elements of interaction between business and government, for example obligatory or non-obligatory inclusion of strict terms for job creation when making investment agreements between the regional government and a company.

The legislation that governs companies’ activity received the most optimistic assessment:  The majority of companies believed that uniform business legislation seemed likely to exist in 2011.

The idea of a uniform law enforcement system is not so eagerly supported as the idea of a uniform legislation; however, in total, almost 40% of the companies believe that there is no difference in law enforcement in multiple Russian regions.

– The companies are quite frequently affected by competitors’ violation of their rights. How can they protect their rights?

– Competitors became a great problem for many companies in 2009. Now, the share of the companies regularly facing unfair competition has stabilized at around 20%.

As for the violation of rights by authorities, the situation is a little better, but not ideal. Moreover, the share of the companies facing violation of their rights by authorities is slowly increasing.

The corruption level between business and the authorities is traditionally perceived as high. However, after the 2010 surge a decrease has begun again.

To efficiently protect your rights is not easy but it is possible. The judicial system is the most in-demand instrument. The absolute majority of the companies (79%) have trial experience.  69% of the companies have gone to court against their business contractors, and one third of the companies have engaged in disputes with the authorities.

Business has actively supported one of the breakthrough laws requiring the obligatory coordination of an unscheduled inspection with the public prosecutor’s office. It is essential – scheduled inspections were performed in 92% of the companies during the past two years, while 55.4% of them had unscheduled inspections. However, the companies were not provided with documents confirming the coordination of unscheduled inspections with the prosecution agencies in 49% of the cases.

As for the duration of an inspection in a company from its start until it receives an inspection certificate, quite a few last for 30–39 days (a fourth of the companies) and for 9 days (21% of the companies). However, for 7% of the companies inspections lasted over three months.

During inspections, the companies often face illegal requirements on the part of the regulatory and supervisory authorities.

Requirement to provide too many documents remains the main problem.  Moreover, companies are more and more concerned about an insufficient level of competence on the part of the inspection authorities.

But, despite many problems in relations with the authorities, the companies consider legal means a priority and find them efficient in the current situation. But illegal means have not become a thing of the past – a third of the companies find them useful. Personal contacts with representatives of the authorities and local government bodies are the most in-demand legal instruments to aid cooperation between business and the authorities.

– I have to ask you about innovation, how close is it to Russian business?

– I can’t say that Russian business is not innovative at all.  Half of the Russian companies produce more than 50% of their products in Russia using European or other international technical standards.

By the way, tomorrow, on February 8th, we will organize a special conference called “Innovative Russia – Answers to Global Challenges” in the framework of Russian Business Week. Among its co-organizers are the Global Venture Alliance and other major international organizations. Leading scientists, entrepreneurs, politicians, venture capitalists, investment angels, and world experts on innovative development and futures will gather to discuss the most topical questions facing Russian innovative development.

They will discuss resource and energy-saving technologies, new city infrastructures, bio-medicine, and information technologies. Russian business has quite a lot to propose and share for all these spheres. But the lack of financial assets, primarily of proprietary funds, impedes the companies’ innovative activity. Debt financing is complicated and is among the five major problems facing innovative projects. An insufficiency of cost benefit is ranked number two according to innovative business opinion, and a lack of skilled staff is third. It is notable that undeveloped innovation infrastructure restricts companies’ innovative activity less than the unpredictability of the economic activity conditions.

In 2011, more than one third of the companies allocated over 20% of their revenue to new/improved products, but this is not enough.

As for the approximate rate of the company’s expenditure on technological innovation in 2011, expressed as a percentage of the revenue, the situation is a little better than the statistics for the entire economy.

– Have the Russian ratings changed in the recognized Global Competitiveness Index as compared to the previous year?

– When it comes to the position of Russia’s competitiveness rating during the past five years, we can see a clear negative trend. Among the most “disastrous” areas of competitiveness in Russia are institutes, commodity markets, the business environment and the financial market.

If we compare two end points – the ratings of 2007–2008 and 2011–2012 – the position of Russia improved in three components:  Market size, infrastructure quality, and readiness to implement technology.  However, in the 2011 rating Russia did not retain its previous highest position. The most significant decrease was observed in index components such as the commodity market, the labor market, and the business environment – Russia lost about 26–44 positions during 5 years.

The final place of Russia in the latest “Doing business-2012” rating has slightly improved. However, we cannot speak about a significant breakthrough since the country takes 120th place out of 183. Russia takes the lowest positions in rating components such as business start-ups, obtaining permits for construction, property registration, protection of investors’ rights, and connection to electric power networks. For example, as regards the complexity of connecting to electric power networks, the country currently occupies the lowest 183rd place.

As compared to the three previous ratings, the assessment of Russian foreign trade has slightly increased. In particular, the quantity of documents required for importing has reduced from 13 to 10, and the import financial costs have decreased slightly. This improvement was anticipated – the work on the creation of the Customs Union, as was expected, contributed to an increase in customs legislation quality.

If we compare the results of reviews made by international organizations with the results of entrepreneurs’ surveys made by RUIE, we can see that assessments of particular components of business climate quality differ only in a limited number of cases.

Among the areas with low consolidated ratings are the property rights protection level, financial market development and credit availability, ease of business start-up and liquidation and the operation of institutes.

International experts assess the state of the labor market, the tax environment and the macroeconomic stability level a little more highly than the Russian companies (if we don’t take into account concerns of the international companies about the inflation rates). Russian companies take a better view of the quality of the judicial system.

But there lies the main difference – assessments according to the majority of international economic ratings demonstrate negative dynamics, while the majority of the Russian companies consider that the business climate has improved during the past five years.

In this case, we believe that the Russian business assessment is more truthful and objective: The business climate quality has definitely improved, but this is not enough. That is why, the economy will continue to grow in the nearest future.

About RBG

Today, the Russian Union of Industrialists and Entrepreneurs (RUIE) comprises over 100 industrial and regional groups of the key economic sectors: Fuel and energy, investment-banking, military-industrial, construction, chemical manufacture, consumer and food industry and the services sector. RUIE unites over 320 thousand representatives from industrial, scientific, financial, and commercial organizations in all regions of Russia.  RUIE member enterprises collectively produce over 60% of the Russian GDP. RUIE is aimed at consolidating the Russian industrialists and entrepreneurs’ efforts directed at business environment improvement, increasing Russian business status inside the country and around the world, and supporting the balance of interests between society, government, and business.

Yelena Shmelyova

Rossiyskaya Business Gazeta #834 (5)

http://rg.ru/2012/02/07/shohin.html