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Entrepreneurship in the Russian Far East: Risks and Protection

September 07, 14:16 UTC+3
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Key conclusions

Developing small and medium enterprises remains a critical task for the Far East

“The numbers rose by just 0.28% over the last year, within the limits of statistical accuracy. Meanwhile, if we look at the figures within the regional breakdown, almost all growth was provided by the Magadan Region, where the number of small and medium businesses grew by 70%. Two other regions have a small upside. <…> There has been no large-scale uptick of new businesses and flourishing business activity,” said Oleg Fomichev, State Secretary, Deputy Minister of Economic Development of the Russian Federation.

Challenges

Excessive administrative burden

“Our first and foremost priority is to reduce the administrative burden. The administrative environment in the Far East is much more aggressive than in any other part of the country. This has also been proved by the national rating, where we see that the administrative burden of investors is 2.5 times higher than in regions taking the lead in the national rating,” said Alexander Krutikov, Deputy Minister for the Development of the Russian Far East

“We polled our residents. <…> 50% of all investors faced problems with inspection and supervision authorities,” Alexander Krutikov added.

“The next parameter is the average number of inspections and supervision activities in respect of a legal entity or individual entrepreneurs over year. <…> The Far East has a worse situation than the country on average in respect of this parameter.  <…> We have not seen positive dynamics so far,” said Elena Myakotnikova, Corporate Director, Agency for Strategic Initiatives.

“As far as the Far East is concerned, various control formats are 2-4 times higher than in other Russian regions. The Federal Agency for Fishery has especially more cases (4 times higher). The Federal Service for Veterinary and Phytosanitary Supervision and the Federal Service for Supervision of Natural Resources are authorities being highly active here,” noted Boris Titov, Presidential Commissioner of the Russian Federation for the Protection of Entrepreneurs’ Rights.

Entrepreneurs believe going to court for help is useless

“I regret saying the majority of businessmen believe that it is almost impossible to win a case against the government in court and just 4% think this could happen,” Boris Titov said.

“Businessmen are largely confident at present that there is no sense at present to apply to the court for the purpose of protecting its interest against tax inspections and that a clear message exists not to satisfy such claims,” said Elena Avakyan — Executive Director, Non-Profit Partnership for Advancement of Corporate Law; Counsel, Egorov Puginsky Afanasiev & Partners.

Problems with tariffs setting

“We understand how huge the problem is. The point is not merely in the methodology of setting tariffs but also in the fact that tariffs are often calculated improperly, with deliberate violations,” Boris Titov noted.

Illegal business

“Illegal business is an enormous challenge. <…> Probably more ‘carrots’ are needed here, rather than 'sticks'. Conditions should be created making it more beneficial for small companies to work openly and legally,” Boris Titov said.

Unstable and ambiguous laws

“Instability of current laws and ambiguous standards are definitely a factor affecting the investment climate,” said Marina Shemilina, Commissioner for Entrepreneurs’ Rights in Primorsky Territory

Solutions

Reducing the number of inspections and supervision by prosecutors

“We are working out measures to improve legislation, particularly aimed at reducing the number of inspections of entrepreneurs. <…> Even now prosecutors turn down almost a half of scheduled and unscheduled activities suggested by inspecting authorities,” said Yury Chayka, Prosecutor General of the Russian Federation.

“Since 2015 we are an operator of a unified register of inspection, which provides public access to inspection activities data and mitigates risks of unjustified visits of inspectors,” Yury Chayka added.

“The Office of the Prosecutor General of the Russian Federation is indeed our main ally in our activities,” Boris Titov noted.

Improvement of laws and the reform of supervision activity control

“We are preparing a draft paper in cooperation with the Ministry of Economic Development that will essentially set a new model for operation of inspection and supervision authorities in advance development territories and Vladivostok Free Port. This is a model that will be based on the principle of confidence in an investor and the benefit of the doubt,” Alexander Krutikov said.

“We are developing a system of key performance indicators for each territorial federal executive agency, which will be based on assessment of the contribution of that authority exactly into economic development of the Far East,” Alexander Krutikov added.

“I have two suggestions: to eliminate such indicators as an amount of gathered fines from KPIs of government agencies and to put forward an issue of staff downsizing accordingly, if we want to reduce the number of inspections,” said Sergey Kolesnikov, President, TechnoNICOL Group of Companies

Introducing the ‘first warning’ standard

“The number of administrative fines actually fell by 25% over this half of the year, while the number and the portion of first warnings increased,” Oleg Fomichev noted.

Development of the transport system

“Shortage of border crossings. Railways and the port zone are not enough. However, if we speak about industrial export growth and if we want the trade turnover with China to rise from 80 bln to 200 bln, then I see delivery of products from the Khabarovsk Region by motor transport [as a tool] in this sense. Furthermore, I believe motor transport is the future for delivery of industrial products,” Sergey Kolesnikov said.

“If we have developed the logistics and transport crossings, than we would have been much more competitive on the Chinese market,” Sergey Kolesnikov added.

Judicial reform

“A judicial reform is not a dream but a vital necessity,” Elena Avakyan said.

“I fully support the initiative of establishing special investment courts for residents of the free port and advanced development territories,” Marina Shemilina said.

“The principle of ‘Three NOs,’ <…> Not to open a criminal case when no damage data is available, and when there are no decrees of authorized agencies - when contractual relations are in place,” Marina Shemilina noted.

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