VZCZCXYZ0002
PP RUEHWEB

DE RUEHMO #2591/01 3261451
ZNR UUUUU ZZH
P 221451Z NOV 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5387
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

UNCLAS MOSCOW 012591 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS WARLICK AND HOLMAN 
NSC FOR GRAHAM, KLECHESKI, AND MCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER AND MEDWARDS 
 
E.O. 12958: N/A 
TAGS: ECON EINT RS
SUBJECT: RUSSIA: BARRIERS TO BUSINESS: CREDIT, TAXES, AND 
BUREACRACY 
 
 
THE MESSAGE IS SENSITIVE BUT UNCLASSIFIED -- NOT FOR INTERNET 
DISTRIBUTION. 
 
¶1. (SBU) Summary.  A recently-released survey of 3,000 
business shows a surprising convergence of opinion between 
small, medium, and large enterprises about what stands in the 
way of commercial success in Russia.  Respondents uniformly 
identified the high cost of credit, high tax rates, and 
ineffective government as their top concerns.  These results 
seem generally consistent with what entrepreneurs have told 
us during interviews for the Economic Weekly "SME Success" 
series: credit is expensive and access is somewhat limited; 
taxes are too high and the tax code is incomprehensible; the 
bureaucracy is too slow and property rights are murky; energy 
prices are escalating.  While corruption remains a concern, 
the survey confirms our anecdotal evidence that it has become 
more routine and predictable, and thus almost a part of the 
business planning process, and therefore registered 
surprisingly low among barriers to business identified by 
survey participants.  End Summary. 
 
INDEM SURVEY: BARRIERS TO BUSINESS IN RUSSIA 
 
¶2. (SBU) INDEM, a well-known non-governmental organization in 
Russia, regularly conducts research on topics such as 
corruption and economic development.  In its most recent 
report, "Business and Corruption: Prevention 2006," INDEM 
staff surveyed approximately 3,000 small, medium, and large 
businesses in the Moscow Region, Smolensk, and Volgograd. 
Participants were asked to rank order the seriousness of 33 
obstacles to doing business in Russia. A full copy of the 
report is available (in Russian) at INDEM's website at 
www.indem.ru. 
 
CREDIT EXPENSIVE BUT EASY TO GET 
 
¶3. (SBU) Survey participants indicated that while banks were 
more willing to consider loans based purely on business plans 
(with no collateral) the cost of borrowing is still 
prohibitively high in Russia.  SME entrepreneurs we have 
talked to agree that commercial credit is much easier to 
obtain now, but still expensive.  Banks consider business 
loans (especially those with less fluid collateral) 
inherently more risky and, therefore, charge higher interest 
rates -- on average 10.7%, depending on the region. 
 
TAXES TOO HIGH AND TAX CODE TOO COMPLEX 
 
¶4. (SBU) After the high cost of credit, businesses uniformly 
cited a high tax burden as a significant impediment to 
growth.  No less irritating to business is the tax code 
itself, which made into the top five barriers.  SMEs are 
notorious for hiding their income -- most tell us that they 
keep up to 80% of their earnings under the table.  They 
complain to us that they cannot compete with firms that cheat 
on their taxes if they do not cheat themselves.  The 
bookkeeping alone necessary to register employees and comply 
with tax regulations is too cumbersome and the chance of 
getting caught is negligible.  A downside for firms that 
conceal so much of their earnings is that they (and their 
employees with falsified pay stubs) can borrow only a 
fraction of what they ought to be able to with their real 
income, given that banks will only accept official income for 
credit applications.  More and more firms see access to more 
substantial credit worth the heartache of leaving the comfort 
of the shadow economy. 
 
BUREAUCRACY INEFFICIENT 
 
¶5. (SBU) Bureaucratic hurdles continue to annoy (a top three 
concern).  Entrepreneurs tell us the paperwork required to 
run a business is cumbersome and hurts their bottom line.  In 
this rapidly growing economy, businesspeople do not have time 
to waste waiting for bureaucratic permissions while their 
competitors race ahead.  Entrepreneurs pay well known amounts 
to an array of people to facilitate their paperwork.  They 
see it as a expediting fee-for-service and a widely accepted 
practice.  In fact, were the bureaucracy to formalize these 
expediting fees and pay staff overtime for clearing those 
papers more quickly, the market result would likely be nearly 
the same. 
 
PROPERTY RIGHTS WEAK 
 
¶6. (SBU) Lack of legal protection for property also ranked 
high among business concerns.  Protecting your real estate is 
 
an ongoing headache for business.  As hard as finding new 
space to lease or buy may be, entrepreneurs we have talked to 
are equally concerned about holding on to their space.  As 
real estate prices sky rocket in many Russian cities, 
landlords often forcibly evict tenants from buildings even if 
the lease is still in force.  In a November 15 meeting, INDEM 
President Georgiy Satarov cited the Federal Law on the 
Privatization of State and Municipal Property (which states 
that all municipal property ought to be auctioned off by 
2009) as a particular hurdle for SMEs.  The concern is that 
SMEs currently leasing such property may lose it when a new 
owner takes control.  Satarov believes the law should be 
amended to give SMEs preferential rights to purchase the 
property they are leasing before it gets opened up to others. 
 
 
ENERGY PRICES TOO HIGH 
 
¶7. (SBU) Rising energy prices have hurt Russian businesses, 
as elsewhere.  According to the study, the high cost of 
energy was of particular concern to large companies (number 
4), but also ranked in SMEs' top ten.  Businesspeople say 
that recent increases in energy costs have seriously hurt 
their bottom line.  Not stated in the study is another 
serious problem facing entrepreneurs -- the difficulty of 
hooking up new developments to existing utility services.  We 
have met businesspeople who are eager to build greenfield 
facilities but who are forced to stay in their current 
dilapidated structures simply because of a lack available 
electricity. 
 
CORRUPTION A PROBLEM, BUT MORE ROUTINE NOW 
 
¶8. (SBU) INDEM,s survey asked a variety of questions about 
corruption, focusing on court decisions, lack of 
predictability, and the efficacy of the undertaking.  All of 
these scored lower on the list than one might have expected. 
We enjoyed the fact that the survey clearly assumed that 
corruption was present, and merely sought to clarify its 
pervasiveness and whether it is an impediment to business. 
The answers seemed clear: corruption exists, but it is a 
manageable cost of doing business. Our "SME Success" 
interviewees say that everyone knows exactly what to pay to 
whom for what.  And, like other "fee-for-services," they 
usually get what they pay for.  For most small and medium 
entrepreneurs, at least, bribe-paying in Russia appears to 
have hit its supply-demand equilibrium. 
BURNS