VERA BARINOVA, STEPAN ZEMTSOV: WILL ANTI-CRISIS MEASURES OF SUPPORT HELP THE RUSSIAN MID-SIZED BUSINESS
The Vedomosti daily carried an article by Vera Barinova, Head of the Innovation Economy Department, Gaidar Institute and Stepan Zemtsov, Senior Researcher of the same department in which they reviewed the restrictions, risks and options of support for the small and mid-sized businesses in Russia.
The COVID-19 epidemic and measures aimed at reducing the incidence of the disease have dramatically affected households’ consumption of goods and services. The small and mid-sized businesses were hit the worst: revenues of restaurants, cafes, hotels sports and entertainment centers, beauty parlors, nonfood stores and taxi services fell dramatically. At the same time, these businesses had to pay wages to their workers, taxes, loans to banks and payments to their counterparties. A considerable cash gap has occurred and the number of companies with overdue payments has increased.
By estimates of experts of the RANEPA and the Gaidar Institute, in the least favorable scenario the wave of bankruptcies in the supply chain may affect over 67% of all companies and self-employed entrepreneurs, while their turnover may decrease by 77% in April-May 2020 as compared with the previous months. In this situation, the President and the Government proposed measures of support for small and mid-sized businesses:
In our view, not all the measures will have a long-term positive effect on the development of the entrepreneurship; there are risks of growth in a fiscal and credit burden, as well as administrative costs after the epidemic is over; also there is a risk of rendering support to beneficiaries who do not actually need it.
By estimates of the RANEPA’s experts [1], over 90% of small and mid-sized businesses did not take advantage earlier of state support instruments because of being unaware of such support measures, mistrust of the state, small amounts of the support and excessive reporting. These factors may affect the efficiency of the applied support instruments during the crisis period, too. It is noteworthy that not all entrepreneurs know wh ere and what support they can receive and remain wary of the officials because additional checks may follow and more costs can be incurred. So, it is important to systematize all support measures (rendered by various agencies and various regions) within the framework of a single digital platform and, probably, a mobile app with targeting and interactivity ensured [2]. For enhancement of trust towards the system, it is necessary to develop simultaneously clear and explicit criteria for provision of financial support, as well as carry out the subsequent analysis of the efficiency thereof.
The main factor of the development of the small business is the consumer demand volume which is currently decreasing along with households’ revenues. In most regions, residents have reduced their consumption, having preserved only expenditures on food, housing and public utilities and basic essentials. As per the Rosstat’s surveys, in Q1 2020 54 % of small manufacturing companies said that insufficient demand on the internal market was a main factor limiting their development; in the services sector this share is even higher. So, the material support to families with children declared by the RF President on May 11 as an integral part of the demand promotion policy will help the small business, too, but not in all sectors. Growth in volumes of state purchases from small and mid-sized businesses with strengthening of control over payments on completed contracts may become an additional instrument of support. But there is a risk of supporting ineffective small companies affiliated with the big business and public officials in regions.
A high level of taxation as a main barrier for development is referred to by over 53% of small manufacturing companies. With the VAT rate increased and online cash registers introduced last year, this factor has become the second most important one. So, entrepreneurs believe that tax and insurance payment deferrals as well as the reduction of insurance contributions are among the most efficient instruments of support. Unfortunately, deferrals may lead to growth in a tax burden in the post-crisis period. In our view, it is necessary to discuss further reduction of insurance contributions in the badly-hit industries because this support measure is currently applied only to that portion of wages which exceeds the minimum monthly wage. In addition, it is proposed to return in full all funds paid by the self-employed who were officially registered in 2019 and paid the income tax (about 340,000 persons), while all business income tax payers who were registered for the first time are to be provided with the “tax capital” for paying taxes in 2020. However, a number of experts believes that more substantial tax privileges should be granted in future only to those companies and entrepreneurs who paid scrupulously taxes and contributions on a regular basis before.
Also, there is a risk that a temporary moratorium on audits of small and mid-sized businesses may result in a sharp increase in the number thereof in future because supervising authorities will seek to fulfill the earlier approved plans of audits. Numerous companies are not aware of all requirements until the violations have been identified. To reduce further the administrative costs of businesses, it is necessary to update, simplify and place in the online mode the ultimate check-list of all forms of the audits as a continuation of the “regulatory guillotine” policy and introduction of the risk-oriented approach. Also, to reduce the costs of the small and mid-sized businesses it would be expedient to develop a mobile app for self-employed entrepreneurs so that they could get registered, carry out operations and submit reporting (by analogy with the app for the self-employed).
In the past few years, as the interest rates on loans to small and mid-sized businesses were falling the volume of lending kept growing. Reportedly, in Russia over 30% of small and mid-sized trading companies and 22% of the services sector companies received loans. Among the financial support instruments for the small and mid-sized businesses, the most important ones include the subsidizing of a portion of the interest rate on loans [3], interest-free loans on immediate needs and wages, as well as the repayment holidays for self-employed entrepreneurs. According to the data of the RF Ministry of Economic Development, over 23,000 interest-free loans worth Rb58bn have been approved and this support measure helped save over 800,000 jobs. For reference, in the worst-hit industries there are over 590,000 small and mid-sized businesses with over 1 million people employed. The unveiled program of underpinning employment with an option of writing off the loan completely, provided that 90% of the workers have been retained, may save up to 7 million jobs. But the idea of writing off previous loans to small and mid-sized businesses, as proposed by some experts, will not be welcome on the banking market and among reputable entrepreneurs, nor is it likely to have any effect on maintenance of the employment.
Also, the RF President made public a decision on making additional allocations (Rb12bn) out of the national project funds to regional institutes for development which render microfinance support to small and mid-sized businesses. However, there is a risk of a debt overburden on the business and the expansion of the access to funding may fail to produce a substantial effect because most entrepreneurs do not risk taking a loan due to economic uncertainties and a low profit margin.
To take advantage of the available support instruments, companies or self-employed entrepreneurs have to get registered in the Unified Register of Small and Mid-Sized Business Entities and be attributed to the worst-hit industries. At present, the list of such industries includes 42 types of activities. However, for the business community it is not quite clear by which criteria these industries have been selected. Lack of the well-defined and formal criteria and application of different calculation methods may reduce the target orientation of the proposed instruments, as well as confidence in them. It is noteworthy that not all companies of one and the same industry and in all regions were badly hit. The situation is complicated by the fact that lots of companies failed to submit reporting on time and, consequently, were not included in the updated register of small and mid-sized businesses; in addition they stated the outdated OKVED codes which did not correspond to their actual activities. There is a risk that the badly-hit companies may not receive adequate support in time. For this reason, by the end of May over 70,000 small and mid-sized businesses updated their reporting in order to be included in the register; in providing the support, additional OKVED codes may be taken into account and the proposal was made to extend the period during which the type of activities can be specified till July 1, 2020. But to prevent support from being rendered to businesses which were not actually hit, it will be needed to develop the methods of identification of the actual lines of activities of small and mid-sized businesses, as well as make fine adjustments of support measures based on actual financial reporting of specific companies.
It is important right now to envisage instruments aimed at overcoming long-term negative implications of the economic crisis and facilitating the adaptation of small and mid-sized businesses to new conditions, including sanitary and epidemiological requirements. These support instruments include assistance in digital transformation of enterprises (the creation of Websites, introduction of online payments, organization of remote working, automation of production processes and other), digitalization of state services, upgrading of the business climate, support of start-ups, training and consulting. In our view, an example of an effective long-term instrument is the allocation of educational allowances to studying mothers in Moscow; this instrument helps them master in an online mode a new profession, including the principles of entrepreneurial business.
[1] Antonova М.P., Barinova V.А., Gromov V.V., Zemtsov S.P., Krasnoselskikh А.N., Milogolov N.S., Potapova А.А., Tsareva Yu.V. The Development of Small and Mid-Sized Business in Russia in Terms of Implementation of the National Project— Moscow: The Delo Publishing House, RANEPA, 2020. - 88 pages.
[2] Antonova М.P., Barinova V.А., Gromov V.V., Zemtsov S.P., Krasnoselskikh А.N., Milogolov N.S., Potapova А.А., Tsareva Yu.V. The Development of Small and Mid-Sized Business in Russia in Terms of Implementation of the National Project— Moscow: The Delo Publishing House, RANEPA, 2020. - 88 pages
[3] not above the key rate of the Central Bank of Russia
By estimates of experts of the RANEPA and the Gaidar Institute, in the least favorable scenario the wave of bankruptcies in the supply chain may affect over 67% of all companies and self-employed entrepreneurs, while their turnover may decrease by 77% in April-May 2020 as compared with the previous months. In this situation, the President and the Government proposed measures of support for small and mid-sized businesses:
- granting of tax and insurance payment deferrals to the worst-hit sectors and relief fr om payment thereof in Q2 2020;
- reduction of insurance contributions from 30% to 15% if the worker’s wages exceed the minimum monthly wage;
- provision of subsidies to Russian banks to facilitate the rescheduling of loan payments;
- granting of repayment holidays to individual entrepreneurs whose income fell by more than 30%; provision of the free of charge financial aid in April and May 2020 to the worst-hit industries for payment of wages;
- provision of interest-free loans for immediate needs and payment of wages;
- loan write-offs for the worst-hit industries provided that they managed to retain employment (from June 1, 2020);
- introduction of the moratorium on tax audits in respect of small and mid-sized businesses.
In our view, not all the measures will have a long-term positive effect on the development of the entrepreneurship; there are risks of growth in a fiscal and credit burden, as well as administrative costs after the epidemic is over; also there is a risk of rendering support to beneficiaries who do not actually need it.
By estimates of the RANEPA’s experts [1], over 90% of small and mid-sized businesses did not take advantage earlier of state support instruments because of being unaware of such support measures, mistrust of the state, small amounts of the support and excessive reporting. These factors may affect the efficiency of the applied support instruments during the crisis period, too. It is noteworthy that not all entrepreneurs know wh ere and what support they can receive and remain wary of the officials because additional checks may follow and more costs can be incurred. So, it is important to systematize all support measures (rendered by various agencies and various regions) within the framework of a single digital platform and, probably, a mobile app with targeting and interactivity ensured [2]. For enhancement of trust towards the system, it is necessary to develop simultaneously clear and explicit criteria for provision of financial support, as well as carry out the subsequent analysis of the efficiency thereof.
The main factor of the development of the small business is the consumer demand volume which is currently decreasing along with households’ revenues. In most regions, residents have reduced their consumption, having preserved only expenditures on food, housing and public utilities and basic essentials. As per the Rosstat’s surveys, in Q1 2020 54 % of small manufacturing companies said that insufficient demand on the internal market was a main factor limiting their development; in the services sector this share is even higher. So, the material support to families with children declared by the RF President on May 11 as an integral part of the demand promotion policy will help the small business, too, but not in all sectors. Growth in volumes of state purchases from small and mid-sized businesses with strengthening of control over payments on completed contracts may become an additional instrument of support. But there is a risk of supporting ineffective small companies affiliated with the big business and public officials in regions.
A high level of taxation as a main barrier for development is referred to by over 53% of small manufacturing companies. With the VAT rate increased and online cash registers introduced last year, this factor has become the second most important one. So, entrepreneurs believe that tax and insurance payment deferrals as well as the reduction of insurance contributions are among the most efficient instruments of support. Unfortunately, deferrals may lead to growth in a tax burden in the post-crisis period. In our view, it is necessary to discuss further reduction of insurance contributions in the badly-hit industries because this support measure is currently applied only to that portion of wages which exceeds the minimum monthly wage. In addition, it is proposed to return in full all funds paid by the self-employed who were officially registered in 2019 and paid the income tax (about 340,000 persons), while all business income tax payers who were registered for the first time are to be provided with the “tax capital” for paying taxes in 2020. However, a number of experts believes that more substantial tax privileges should be granted in future only to those companies and entrepreneurs who paid scrupulously taxes and contributions on a regular basis before.
Also, there is a risk that a temporary moratorium on audits of small and mid-sized businesses may result in a sharp increase in the number thereof in future because supervising authorities will seek to fulfill the earlier approved plans of audits. Numerous companies are not aware of all requirements until the violations have been identified. To reduce further the administrative costs of businesses, it is necessary to update, simplify and place in the online mode the ultimate check-list of all forms of the audits as a continuation of the “regulatory guillotine” policy and introduction of the risk-oriented approach. Also, to reduce the costs of the small and mid-sized businesses it would be expedient to develop a mobile app for self-employed entrepreneurs so that they could get registered, carry out operations and submit reporting (by analogy with the app for the self-employed).
In the past few years, as the interest rates on loans to small and mid-sized businesses were falling the volume of lending kept growing. Reportedly, in Russia over 30% of small and mid-sized trading companies and 22% of the services sector companies received loans. Among the financial support instruments for the small and mid-sized businesses, the most important ones include the subsidizing of a portion of the interest rate on loans [3], interest-free loans on immediate needs and wages, as well as the repayment holidays for self-employed entrepreneurs. According to the data of the RF Ministry of Economic Development, over 23,000 interest-free loans worth Rb58bn have been approved and this support measure helped save over 800,000 jobs. For reference, in the worst-hit industries there are over 590,000 small and mid-sized businesses with over 1 million people employed. The unveiled program of underpinning employment with an option of writing off the loan completely, provided that 90% of the workers have been retained, may save up to 7 million jobs. But the idea of writing off previous loans to small and mid-sized businesses, as proposed by some experts, will not be welcome on the banking market and among reputable entrepreneurs, nor is it likely to have any effect on maintenance of the employment.
Also, the RF President made public a decision on making additional allocations (Rb12bn) out of the national project funds to regional institutes for development which render microfinance support to small and mid-sized businesses. However, there is a risk of a debt overburden on the business and the expansion of the access to funding may fail to produce a substantial effect because most entrepreneurs do not risk taking a loan due to economic uncertainties and a low profit margin.
To take advantage of the available support instruments, companies or self-employed entrepreneurs have to get registered in the Unified Register of Small and Mid-Sized Business Entities and be attributed to the worst-hit industries. At present, the list of such industries includes 42 types of activities. However, for the business community it is not quite clear by which criteria these industries have been selected. Lack of the well-defined and formal criteria and application of different calculation methods may reduce the target orientation of the proposed instruments, as well as confidence in them. It is noteworthy that not all companies of one and the same industry and in all regions were badly hit. The situation is complicated by the fact that lots of companies failed to submit reporting on time and, consequently, were not included in the updated register of small and mid-sized businesses; in addition they stated the outdated OKVED codes which did not correspond to their actual activities. There is a risk that the badly-hit companies may not receive adequate support in time. For this reason, by the end of May over 70,000 small and mid-sized businesses updated their reporting in order to be included in the register; in providing the support, additional OKVED codes may be taken into account and the proposal was made to extend the period during which the type of activities can be specified till July 1, 2020. But to prevent support from being rendered to businesses which were not actually hit, it will be needed to develop the methods of identification of the actual lines of activities of small and mid-sized businesses, as well as make fine adjustments of support measures based on actual financial reporting of specific companies.
It is important right now to envisage instruments aimed at overcoming long-term negative implications of the economic crisis and facilitating the adaptation of small and mid-sized businesses to new conditions, including sanitary and epidemiological requirements. These support instruments include assistance in digital transformation of enterprises (the creation of Websites, introduction of online payments, organization of remote working, automation of production processes and other), digitalization of state services, upgrading of the business climate, support of start-ups, training and consulting. In our view, an example of an effective long-term instrument is the allocation of educational allowances to studying mothers in Moscow; this instrument helps them master in an online mode a new profession, including the principles of entrepreneurial business.
[1] Antonova М.P., Barinova V.А., Gromov V.V., Zemtsov S.P., Krasnoselskikh А.N., Milogolov N.S., Potapova А.А., Tsareva Yu.V. The Development of Small and Mid-Sized Business in Russia in Terms of Implementation of the National Project— Moscow: The Delo Publishing House, RANEPA, 2020. - 88 pages.
[2] Antonova М.P., Barinova V.А., Gromov V.V., Zemtsov S.P., Krasnoselskikh А.N., Milogolov N.S., Potapova А.А., Tsareva Yu.V. The Development of Small and Mid-Sized Business in Russia in Terms of Implementation of the National Project— Moscow: The Delo Publishing House, RANEPA, 2020. - 88 pages
[3] not above the key rate of the Central Bank of Russia