Russian Style Business

23.03.2016

Russia has recently considerably moved up in the World Bank’s Doing Business ranking. All we have to wait for is a comfortable business climate in the country.

 Investments on President’s Instruction

Decrees signed by Vladimir Putin in May four years ago stipulate that Russia should go up the Doing Business ranking to 50th position in 2015 and 20th position in 2018. The ranking assessing the business climate in more than 180 countries worldwide across 10 topics has been prepared by the World Bank (WB) since 2003. Russia occupied line 120 in 2012 and it is supposed to move up to line 20 in 2018. The interim result, namely line 50 by 2015, has almost been achieved. In the 2016 ranking Russia got 51st slot having gained 11 positions. As of now the most significant adjustment has occurred in Getting Electricity with Russia’s position having improved from 143rd to 29th. According to the WB’s assessment, costs of this procedure contracted more than three-fold.

Moreover, the obligatory procedure of checking meters was cancelled, so it will take you 160 days to obtain a permit now while earlier it took 238 days. Moreover, based on the latest ranking, just ten days are required to start a business in Russia; the process now is three times faster than five years ago when an entire month was required to register a legal entity. Despite the rapid leap in the WB’s ranking, Russia is still lagging behind its Eurasian Economic Union neighbors. Belarus and Armenia outstripped Russia in the past as well (the difference in the latest rating is 7 and 16 positions respectively) while Kazakhstan leaped forward in 2015 having jumped 36 lines up to 41st position.

[citata id=436] Working groups of the National Entrepreneurial Initiative (NEI) have been set up in the framework of enacting presidential decrees on improving the business climate in Russia and advancing the country in the Doing Business ranking; this activity is carried out together with the Agency for Strategic Initiatives (ASI). According to CEO of the ASI Andrey Nikitin, the NEI and ASI are cooperating with each other in the road map format to make sure that Russia’s advance in the World Bank’s ranking has applied nature. This helps define the most serious obstacles for business development, says Andrey Nikitin.

According to him, the agency together with the NEI has developed 11 road maps, which allowed to pass about 70 legal acts at the federal level aimed at lowering administrative barriers for entrepreneurs. One more road map is in the pipeline outlining measures aimed at the Doing Business advance in such spheres as Protecting Minority Investors, Resolving Insolvency and Getting Credit (in relation to borrowers and lenders’ rights in secured transactions and exchange of loans). Russia’s advance in the ranking should convince potential investors in safety and appeal of doing business in the country.

State Sector Pressure

However, Russia’s triumphant move up observed recently has not yet resulted in the investment activity expected by the authorities from the business community. In 2014 the foreign direct investment calculated in line with the country’s Central Bank methodology, stood at $20.9 bn, 3.3 times lower than in 2013. The United Nations Conference on Trade and Development (UNCTAD) mentions sanctions introduced against Moscow by the USA and EU and the political crisis in Ukraine as some of the reasons for a lower inflow of foreign direct investments into Russia.

“Moreover, don’t forget that the macroeconomic situation in Russia now is not altogether favorable,’ added Yaroslav Lissovolik, Chief Economic at Eurasian Development Bank. The expert added that, taking this into account, the weight of Doing Business is not that significant. In his opinion, the current advance of Russia in the WB’s ranking is a stepping stone for the future. ‘When the economy recovers it will be one of decisive factors for foreign investors to come to Russia.”

Sustainability of the Russian economic model with a significant role of the state sector has come under pressure against the backdrop of a sharp drop in commodity prices, agrees the World Bank’s Vice President Jan Walliser. As he stated at the last Gaidar Forum, while Russia continues to lag behind in such sectors as ease of obtaining construction permits, connection to utility networks and international trade. As to access to utilities, this issue is primarily related to the country’s geographic features, according to the World Bank’s Vice President.

“For the WB’s ranking to start attracting investors other measures not covered by it are required. For example, those targeting cutting state budget costs,” sums up Mr. Lissovolik.

 Construction Sector Hikes Up Indicators

When defining its position in the Doing Business ranking Russia focuses on such an indicator as Dealing with Construction Permits. According to the ranking’s co-author Valentina Saltane, Russia still does not have the strongest stand in this indicator, as well as in Getting Electricity.   She goes on to say that Russia has strengths, namely, the country is on the winning side in Registering Property (12th position) and Enforcing Contracts (14th position).

“‘The result is calculated not as a sum of ranks the country has for each indicator, but is based on the proximity to the leader,’ Andrey Nikitin explains. ‘If we create the best model in the world for registering enterprises, then Russia will go just three lines up in the ranking while an ideal construction model will move Russia 15 positions up”. This is luck for economy. Construction accounts for 59% of investments in fixed capital. According to Rosstat (the Federal State Statistics Service), in 2014 this amount stood at RUB 6.1 trln. Besides, development of the sector boosts production of construction and finishing materials, furniture, mechanical engineering, and trade thus improving overall economic development performance. In Dealing with Construction Permits Russia moved 59 lines up over 2014-2015 getting to lines 22 and 27, respectively.

According to Valentina Saltane, this is due to introducing a new evaluation criterion for quality of construction where Russia got 14 points out of 15. At the same time, bureaucracy remains high. ‘To obtain a permit you need to undergo 19 procedures; on average it takes over eight months,’ Valentina Saltane commented on the new ranking results.

[citata id=440] The Moscow Construction Complex notes that, based on the World Bank data, they have managed to secure a 2.5-fold cut in the time required for administrative procedures in construction. For example, now just nine administrative procedures need to be completed to build a low-risk project (warehouses and low-rise residential buildings). This resulted in a shorter approval time (from 239 days to 99 days) and lower developers’ costs (a drop from 2% of the cost of construction to 0.9% in case of a warehouse). According to Russia’s Ministry of Construction, 17 procedures were required in St. Petersburg earlier to obtain a permit for building a warehouse, which would take 237 days, and costs would reach 1.6% of the overall project cost; now just seven procedures remain.

This is due to cancellation of interim checks by supervising bodies. When defining Russia’s position in the ranking the WB takes into account the situation in Moscow and St. Petersburg as these local markets have more capacity. Andrey Nikitin also thinks that there are visible changes. ‘Unlike other indicators, the builders’ comfort largely depends on quality of regional legislation,’ he notes. To achieve results in this field it is necessary to take on board the best practices from the National Investment Climate Rating in Russian regions (ASI project). It was calculated in 2014 for the first time; then regarding the indicator showing efficiency of procedures for issuing a construction permit the worst results for the time required to obtain a construction permit was 560 days. In 2015 the figure was 262 days. An average time across Russia has also improved over the same period of time reaching 148.7 days vis-à-vis 206.9 days one year earlier. The Ministry of Construction has been acting in line with the action plan approved in 2013 in order to improve the entrepreneurial climate in construction.

“Lowering administrative barriers at all stages of investment and construction project implementation is one of our tasks. Resolving is should cut the project implementation time and ease investors’ financial burden,” explains the head of the Ministry Mikhail Men.

Procedures for securing land for construction have been simplified over the two years. The regions obtained a right to decide on their own when land for investment projects could be provided without holding a tender. Investors were relieved from the necessity of taking part in the tender to secure a land plot for the engineering survey period. Market participants received a complete comprehensive list of procedures that could be required by government bodies and network organizations; as of now it includes 141 items with 10 of them requiring approval by the regions. Two thirds of the listed procedures are related to connection to resources, others are land-related procedures and procedures allowing to get a construction permit.

“This does not mean that every construction project needs to undergo all the procedures. Their number depends on a mechanism used to obtain land and types of utility networks the construction project will be connected to,” clarifies the Ministry of Construction. Conducting procedures that are not on the list or violating their order is subject to administrative sanctions. One of the activities aimed at lowering barriers is providing services online, which is now typical in Moscow. All over the country there is now the same opportunity for getting a construction permit, an occupancy permit, for certification of experts who have a right to carry out expert evaluation of design documentation and state expert examination of design documents and engineering survey results.  The Ministry of Construction also has a mid-term plan stipulating preparation of regulatory documents required to cancel excessive or duplicate actions and to improve execution of the listed procedures. Implementation of this plan will enable to cancel about 40 excessive administrative procedures in construction.

 Russia Ready to Jump Higher

[citata id=178] By 2018 Russia should climb another 29 lines up in the ranking. Simeon Djankov, one of authors of the article prompting to create the Doing Business ranking (issued in the Quarterly Journal of Economics in 2002 and offering analysis of regulatory acts regulating entrepreneurial activity of startups in 85 countries) expressed doubt in an interview that Russia would be able to get to 20th position in Doing Business.

Andrey Nikitin’s reply to this is the following: initial changes are always faster than improvement. “We understand that the time of easy victories is over, the higher  Russia is ranked, the more difficult it is to advance further,” he notes. Co-chairman of Business Russia (Delovaya Rossiya) Alexey Repik advises to get used to the fact that officials’ efforts will always be not enough.

“The situation is changing all the time. The investment climate is improving, business tasks are getting more ambitious,’ he explains saying that while on business trips abroad he regularly hears foreigners criticize their governments for the similar reason. According to him, you can always find fault with something. ‘The most important thing is that government officials’ enthusiasm has become a key element for them to get closer to businessmen.”

Vedomosti

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