VZCZCXRO5600
RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHMO #1136/01 1241321
ZNR UUUUU ZZH
R 041321Z MAY 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3131
INFO RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 MOSCOW 001136 
 
SIPDIS 
 
STATE FOR EUR/RUS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV RS
SUBJECT: RUSSIAN SME SECTOR: DESPERATELY SEEKING SOLUTIONS 
 
¶1.  (U) This message is sensitive but unclassified and not for 
internet distribution. 
 
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Summary 
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¶2. (U) The economic crisis has hit Russian SMEs hard, resulting in 
significant setbacks to the sector's development.  Access to credit, 
administrative barriers, corruption, and high levels of taxation 
continue to be the most serious obstacles.  Hoping that the sector 
will feature more prominently in Russia's future economic growth, 
President Medvedev and other GOR officials have been vocal in their 
support and have refocused attention on promoting SMEs.  The impact 
of their policy initiatives, however, has yet to be seen. 
 
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SMEs Pessimistic About Future 
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¶3.  (U) According to the latest OPORA (small business association) 
survey of 300 SMEs from 30 Russian regions, 28.4% state that their 
current business situation is bleak.  Citing a lack of credit and 
high interest rates, 47.6% expect business prospects for SMEs to 
deteriorate further during the coming months.  Shrinking demand and 
delayed payments are further exacerbating their financial situation. 
 Price reductions, and wage, personnel, and production cuts are 
options for coping with the crisis, but are considered by many SMEs 
as measures of last resort.  Finally, the poll notes that only 4 
percent of SMEs have stated that they see no alternative to selling 
their business. 
 
¶4.  (U) According to the poll, many SMEs have been forced to strive 
for better cost efficiency, in some cases enhancing their 
competitiveness within their own niche markets and in other sectors. 
 The crisis has also resulted in other "benefits" for SMEs.  More 
qualified personnel have come onto the labor market, and reduced 
demand for commercial space has led to lower rents. 
 
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GOR Attempts to Rejuvenate SME Sector 
------------------------------------- 
 
¶5.  (U) Business NGOs such as OPORA and Delovaya Rossia are using 
the crisis to demonstrate their effectiveness in lobbying with the 
government and translating SME sector concerns into concrete 
legislative proposals.  Measures advocated by these organizations 
include: (1) increasing by 43 percent the total amount of money 
channeled to the SME sector from the federal budget; (2) introducing 
tax holidays; and, (3) freezing tariffs for electricity, gas, and 
other natural monopolies. 
 
¶6.  (U) The GOR has recently adopted a number of measures to support 
SME development.  For example, the implementation date of the new 
SME inspection law has been moved up from July 1 to May 1.  The law 
is intended to reduce the frequency and duration of government 
inspections and instill greater transparency by creating an official 
schedule, made available to the public, listing all planned 
inspections.   The law also introduces an inspection registration 
ledger for entrepreneurs to monitor the process.  The ledger is 
intended top provide a clear record of inspection activities, 
allowing SMEs to comply with requirements and prevent violations by 
tax authorities. 
 
¶7.  (U) The law simplifies business licensing and registration by 
requiring SMEs to submit a simple notification rather obtaining 
separate approvals from a multitude of agencies.  The GOR hopes that 
the reduction in cost and time needed for businesses to begin 
activity will boost ht number of SME start-ups in Russia. 
 
¶8.  (U) Additional GOR measures include acceleration and 
streamlining of the approval process for SMEs seeking a pre-emptive 
right to purchase leased real estate at market prices.  On March 31, 
Economic Development Minister Nabiullina reported that SMEs had 
already submitted 581 applications, of which 392 had been approved. 
The GOR is also expected to adopt a decree significantly decreasing 
lease payments for state- or municipally-owned real estate in the 
near future. 
 
¶9.  (U) The GOR is also continuing its efforts to provide benefits 
to SMEs in their transactions with natural monopolies.  At the end 
of 2008, the GOR approved a decree to decrease electricity grid 
connection charges for SMEs by about 20 to 40 times, depending upon 
the region.  On December 30, Medvedev signed amendments to the 
federal procurement law, requiring municipal authorities to 
establish procurement quotas for SMEs (similar to those introduced 
at the federal and regional levels).  According to Deputy MED 
Minister Anna Popova, the GOR is also preparing amendments 
stipulating that Russia's natural monopolies give preference to SMEs 
in awarding outsourcing contracts, although details are still being 
developed.  According to MED forecasts, this would result in about 
 
MOSCOW 00001136  002 OF 002 
 
 
one trillion rubles in orders for SME goods and services. 
 
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Tax Incentives 
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¶10. (U) On April 22, Prime Minister Putin also announced a number of 
new tax initiatives to help SMEs cope with the economic crisis. 
Putin proposed raising the threshold for small businesses access to 
the simplified tax system from 30 million rubles in annual revenues 
to 60 million rubles ($1.77 million); making funds that SMEs receive 
under federal or regional SME support programs tax-deductible; and, 
eliminating a requirement that all SMEs that pay taxes on imputed 
income must use cash registers.  GOR agencies must present 
legislation eliminating mandatory cash register use to the Duma by 
July 1. 
 
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Support for Regional Programs 
------------------------------- 
 
¶11.  (U) Putin also promised that the 2009 budget allocation for SME 
support would be increased from 10.5 billion rubles ($290 million) 
to 25.5 billion rubles ($700 million), to be used for regional 
programs.  In order for a region to qualify, it must co-finance up 
to 30% of the federal funding and propose concrete spending plans. 
 
 
¶12.  (U) The GOR program supports regional initiatives in the 
following areas: grants of about US$ 8,300 to qualified start-up 
businesses that create new jobs, which is especially critical given 
rising regional unemployment; regional guarantee funds that cover up 
to 70% of the loan amount; subsidization of interest rates of up to 
10% of the annual interest charged by commercial banks; and, 
financing for microloans and regional microfinance organizations. 
Through the program, regional microfinance organizations would be 
able to get up to 1 million rubles from the federal budget for 
on-lending to microenterprises.  The MED expects the program to 
extend up to 20,000 loans in 2009, which would maintain and/or 
create about 500,000 jobs. 
 
¶14.  (U) The VEB (VneshEconom Bank) is implementing its own SME 
support program, which provides financing to 63 regional banks for 
on-lending to regional SMEs, as well as providing credit 
cooperatives and microfinance organizations with loans and loan 
guarantees.  The state has already channeled 30 billion rubles (US$ 
0.8 billion) to VEB for 2009.  According to VEB, since the beginning 
of 2008, SMEs participating in its program have on average increased 
revenues by 41 percent, jobs - by 39 percent, and tax payments to 
regional budgets - by 32 percent. 
 
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Comment 
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¶15.  (U) While the crisis is seriously constraining SME sector 
development, some SMEs see opportunities to grow by cutting costs, 
introducing new technologies, and increasing labor and capital 
productivity.  The success of these efforts will depend on the GOR's 
ability to fine-tune the legal and institutional environment.  In 
that regard, the GOR is moving forward with many initiatives to help 
SMEs that had been stuck either in the Duma or in various GOR 
agencies.  Moreover, despite cuts in federal budget expenditures, 
the GOR appears committed to SME programs and has even increased 
financing for SME sector support. 
 
¶16.  (U) Comment, cont.: However, as the economic crisis continues, 
it appears that more budgetary resources will be channeled into 
social spending (unemployment compensation, job retraining, and 
other employment support programs) at the expense of other 
priorities, including SME development.  Government job support 
programs could help SMEs but will most likely be targeted at the 
larger employers (often state corporations) and the single-company 
towns, primarily in heavy industry, minerals extraction, and 
automobile manufacturing.  Lastly, it is unlikely in the foreseeable 
future that the government will have sufficient funds to invest in 
the infrastructure (e.g., higher education, R&D) that would enhance 
the environment for more rapid SME growth.  Therefore, despite its 
rhetoric and some good initial steps, the impact of GOR policies 
remains to be seen.  End comment. 
BEYRLE