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Analysis & Opinion
03.04.08 Medvedev’s Economic Pledge
By Yelena Biberman

Predicting the future of the Russian economy may have became slightly easier on March 27, when President-elect Dmitry Medvedev promised to boost Russia’s small businesses in order to overcome the country’s excessive dependency on the energy sector. At a State Council meeting in the town of Tobolsk, the historic capital of Siberia, Medvedev proposed “a radical measure” in the form of “barring” the access of supervision bodies, which are notoriously corrupt, to small businesses. “They can only enter if there is an appropriate instruction from a court or a prosecutor,” he said.
According to the report disseminated at the meeting, the annual turnover of small businesses in Russia is slowly increasing. It totaled 11 trillion rubles in nine months of 2007, or more than 900,000 rubles per company. In 2006, this indicator was 700,000 rubles.

There are currently 1.1 million small enterprises in Russia. In 2007, they employed some 10 million people. The annual employment gain in small business accounts for 3-4 percent, which translates into 300,000-400,000 new jobs every year.

Meanwhile, firms employing less than 100 people account for only 10 to 15 percent of Russia’s gross domestic product. Marshall Goldman, professor emeritus at Wellesley College and senior scholar at the Davis Center for Russian and Eurasian Studies, pointed out that this number stands in sharp contrast to some 50 percent in the United States and in parts of Europe.

The report also noted that trade and services are the most widespread sectors in small business – together accounting for more than 72 percent of turnover. Industry and construction account for 9 percent and 5.4 percent, respectively. The turnover of small agricultural enterprises and farms accounts for 0.7 percent and 0.9 percent, respectively.

Big challenges for small firms

Alexander Ioffe, president of the Russian Association of Small and Medium Enterprises and adviser to the Mayor of Moscow, said that one big problem for the Russian economy is that its small business is highly concentrated in Moscow and St. Petersburg. Twenty percent of all Russian small businesses are registered in Moscow, he pointed out. This fact speaks of the need to focus particularly on creating conditions favorable to small business development in the regions.

According to Vera Veselova, vice-president of the All-Russian Public Organization of Businesswomen, bureaucratic officials acting with impunity constitute a problem that is especially prevalent in the regions, where many local bureaucrats live off the fees and fines they collect from the registration, gathering of documents and licensing procedures. “If all the controlling posts are eliminated, that would be enough to help small businesses,” Veselova said.

Ioffe noted that while many complain about the lengthy registration process, getting a company registered is currently the easiest part of the process of launching a small business in Russia.

Another big challenge faced by Russia’s small business sector is Russia’s unique culture that favors big enterprises, Goldman argued. “Russians seem to love gigantomania – the bigger something is, the more comfortable and secure they feel,” he explained.

Empowering the middle class and women

Medvedev linked the development of small business in Russia to the expansion of the Russian middle class. He added that he hopes that the middle class will make up 60 to 70 percent of Russia’s population by 2020.

This class would play not only a key economic role, but also an important political role by “opposing big government and leading the way in trying to restrict the role of government in daily and economic life,” Goldman said. “So to the extent Medvedev can nurture and promote the development of small business, that will be very important for Russia and probably the most important thing he can do to transform Russia into becoming a ‘normal country’.”

Currently, the majority of small business owners in Russia are women, and studies show that economic empowerment of women significantly contributes to economic and social development. Veselova urged a special emphasis on female entrepreneurs in Russia because “When we help small businesses led by women, we get double the rewards.” A former successful businesswoman and, at present, an organizer of women entrepreneurs across Russia, Veselova said that she had observed many Russian women involved in small businesses be motivated not only by helping their families, but also their communities – to do something not just for their wallets, but also “for their souls.”

The All-Russian Public Organization of Businesswomen actively promotes this kind of giving back to the society by, for example, offering a $10,000 award to women who have three or more children and want to start their own business.

“Small business needs not so much to be assisted as to be just left alone,” Veselova summed up.

This is exactly what Medvedev proposed. “I think my proposal will evoke complex emotions, or something close to a heart attack, among some fire-fighting and sanitary workers, as well as some police officers, because this is how they make money – both officially and illegally,” the president-elect admitted.

However, Medvedev’s big plans for small business are unlikely to realize without balancing off the more complex part of the equation, which includes the general lawlessness especially prevalent in the regions and the incredibly low wages of the very fire-fighters, sanitary workers and policemen that he so eloquently characterized.
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