EntErprisE survEys 60347 Country notE sEriEs russian FEdEration Running a Business in the Russian Federation 2010 T he Russian Federation has, on average, the largest firms in the Eastern Europe and Central Asia (ECA) region (figure 1). Despite having large numbers of employees, a relatively small percentage of Russian firms are exporters. In addition, the fraction of firms that have an internationally recognized quality certificate, at 12 percent, is lower in the Russian Federation than the ECA average. Senior managers in the Russian Federation spend 20 percent of their time dealing with government regulations. This puts them in the second worst position in the region. Corruption and crime have been another constraining factor for Russian firms. Incidents where informal payments were requested are much higher in the Russian Federation than in ECA. However there have been improvements regarding the incidence of corruption. The percentage of firms expected to give gifts 9 or make informal payments decreased since 2005. notE no. The Enterprise Surveys1 use standard survey instruments The information collected refers to the characteristics of to collect firm-level data on the business environment from the firm at the moment of the survey or to fiscal year 2007. business owners and top managers. The surveys cover a broad range of topics including access to finance, corruption, Figure 2 Characteristics of the firms Country infrastructure, crime, competition, labor, obstacles to interviewed growth and performance measures. The survey is designed Sector to be representative of a country's private non-agricultural economy, and firms sampled are stratified by size, location2, Other services and sector (figure 2)3 to ensure that most major types of 18% firms are covered. Only firms with five employees or more Retail are included in the sample. In the Russian Federation, 1,004 11% firms were surveyed from September 2008 to March 2009. Size Manufacturing 71% Figure 1 The Russian Federation has the Medium largest firms in the ECA region (20-99 employees) 37% World Bank Group Average number of full-time permanent employees 140 Large Small Region (100+ employees) (5-19 employees) 120 39% 24% 100 80 Volga 13% Number 60 ECA Regional Average Ural Central 5% 44% 40 South 20 8% 0 Siberia Rep. of Kosovo Montenegro Uzbekistan Bulgaria Lithuania Romania Latvia Estonia Moldova Albania FYR Macedonia Poland Croatia Azerbaijan Czech Rep. Georgia Slovak Rep. Armenia Kyrgyz Rep. Slovenia Bosnia & Herzegovina Serbia Kazakhstan Ukraine Tajikistan Hungary Turkey Belarus Russian Fed. 8% Northwest Far East 12% 10% Source: Enterprise Surveys. Source: Enterprise Surveys. What is the average firm in the over 25 years. Medium and large firms are more common Russian Federation? in the Russian Federation: the average firm has 118 full- time permanent workers, while 50 percent of the firms The Russian Federation ranks relatively low in female have 30 permanent employees or less, and 5 percent of participation in firm ownership and management. Firms firms have 500 or more permanent employees. Both the with government ownership4 are roughly twice as likely size and the composition of the workforce differ across to have female ownership participation than fully private firm types. For instance, firms with government ownership firms--64 percent vs. 32 percent. Firms have, on average, more than five times as with government ownership, female Firms with many permanent employees as firms that participation in ownership, or female top are privately owned. managers are more likely to employ women government Three-fourths of the firms in the than their counterparts. Government ownership may be correlated with ownership have Russian Federation that have five or more employees are closed shareholding employing more women and with female more than five companies. Private domestic ownership participation in ownership; however, less than 1 percent of firms with government times as many as a percentage of total ownership in female-managed firms is 99.6 percent, ownership have a female top manager permanent which is significantly higher than the 95.7 while nearly 15 percent of the fully private employees as percent exhibited in male-managed firms. firms do. Similarly, less than 1 percent of foreign-owned5 and exporter firms have firms that are Female-managed firms have a lower share of government ownership. Although less female top managers compared with their privately owned. than 5 percent of firms have any foreign counterparts; on average, 15 percent of ownership participation, 1.5 percent of domestically-owned and non-exporter firms are entirely foreign-owned. The firms have female top managers. average firm has only 2.7 percent foreign-owned equity; The average firm6 in the Russian Federation is nearly 15 within ECA only the Republic of Kosovo and Turkey have years old. Firms with government ownership are nearly lower percentages (table 1). Government participation in two and a half times as old than privately owned firms (39 the ownership of private sector firms is 0.9 percent, which years vs. 14 years). Small and medium firms are younger is a bit lower than the ECA average (table 2). Overall, 93 with an average age of 11 and 12 years, respectively, percent of the firms are fully private domestic firms. compared to large firms, which have an average age of Table 1 How does the Russian Federation 2009 compare within Eastern Europe and Central Asia Descending ranking Ranking 1 assigned to the largest value (out of 29 countries) Percent of firms formally registered when started operations in the country 24 Private domestic ownership (%)* 3 Private foreign ownership (%)* 27 Government/state ownership (%)* 12 Percent of firms with female participation in ownership 20 Bank finance for investment (%) 26 Percent of exporter firms 26 Domestic sales (% of Sales) 2 Percent of firms with internationally recognized quality certification 25 Percent of firms with annual financial statement reviewed by external auditor 11 Capacity utilization (%) 17 Percent of firms using their own website 14 Percent of firms using email to communicate with clients/suppliers 11 Ascending ranking Ranking 1 assigned to the smallest value (out of 29 countries) Value of collateral needed for a loan (% of the loan amount) 10 Number of power outages in a typical month 14 Senior management time spent in dealing with requirements of government regulation (%) 28 Average number of visits or required meetings with tax officials 16 Incidence of graft index ** 25 Losses due to theft, robbery, vandalism, and arson against the firm (% of Sales) 27 Source: Enterprise Surveys. 2 Table 2 The Average Firm in the Russian Federation 2009 Russian Federation ECA EU-10 Age (years) 14.7 14.0 14.1 Percent of firms formally registered when started operations in the country 94.7 96.8 98.7 Closed Closed Closed Most common legal form Shareholding Co. Shareholding Co. Shareholding Co. Private domestic ownership (%)* 96.3 91.3 90.2 Private foreign ownership (%)* 2.7 6.2 7.5 Government/state ownership (%)* 0.9 1.2 0.5 Percent of firms with female participation in ownership 33.1 36.7 39.1 Percent of firms with female in top management position 14.3 19.1 22.7 Experience of the top manager (years) 14.5 16.1 17.1 Average number of temporary workers 11.5 5.7 3.4 Average number of permanent, full-time workers 118.0 44.0 37.3 Percent of full-time female workers 41.6 38.7 40.5 Source: Enterprise Surveys. How do businesses operate in the Russian from the bottom on this indicator ahead of Uzbekistan, Federation? Azerbaijan, and Kazakhstan at 2 percent, 4 percent and 5 percent of firms exporting, respectively. Within ECA, The use of internal financing is common in the Russian at just 1.6 percent, the Russian Federation trails only Federation as compared to the rest of the ECA region. At Uzbekistan at 0.7 percent for the lowest percentage of 73 percent, the Russian Federation has the fourth highest exported sales. Not only are there fewer exporters, Russian level of internal financing for investments and, at 12 firms also export less intensively than the average firm in percent, the fourth lowest level of banking financing in the the ECA region. The share of sales generated through region (table 3). Only Albania, the Republic of Kosovo, exports is less than half of the share generated in the and Uzbekistan have higher levels of internal financing at ECA region and almost one-eighth of the share in EU-10 77 percent, 85 percent, and 92 percent, respectively. Thirty- countries. Likewise, the Russian Federation, at 81 percent, one percent of firms use bank financing for investments trails only Ukraine with 84 percent and Uzbekistan with 83 and less than a third of firms have a line of credit or bank percent in material inputs of domestic origin. loan. Firm size is associated with the likelihood of having The Russian Federation is below the regional average a bank loan or line of credit. Sixty-four percent of large for international quality certification, ranking 25th in this firms have a bank loan or line of credit while 25 percent indicator between Montenegro and Kazakhstan. The use of medium firms and just 17 percent of small firms have of quality certificates is more common among exporters a bank loan or line of credit. Sixty-six percent of Russian as compared to non-exporting firms (53 percent vs. 10 firms are in need of credit. Of that 66 percent, 72 percent percent) and large firms as compared to small firms (28 have applied for loans, and, among them, 83 percent percent vs. 6 percent). Large firms are also more likely to report their applications as not being rejected (figure 3). With 42 percent of sales sold on a pre-paid basis, the Russian Federation ranks third highest on this measure; Figure 3 Credit needs of Russian firms only Uzbekistan and Kazakhstan have more pre-paid sales Credit Needs of Russian Firms at 54 and 47 percent, respectively. 100 90 Firms with a female top manager use bank loans less 80 often and are required to provide collateral more often. 70 Percent of rms 60 Only 17 percent of female-managed firms have a bank 50 loan or line of credit compared to 34 percent of male- 40 30 managed firms. Meanwhile, significantly more female- 20 managed firms are required to provide collateral for bank 10 0 loans or lines of credit compared to their male-managed Having loan Needing Among those needing a Among those needing and or credit line a loan counterparts (97 percent vs. 83 percent). loan, applied for a loan applying for a loan, application Firms in the Russian Federation trade relatively little with was not rejected the rest of the world (table 3). Only 7 percent of Russian Yes No firms are exporters, ranking the Russian Federation fourth Source: Enterprise Surveys 3 Table 3 Choices by the average firm in Russian Federation 2009 Russian Federation ECA EU-10 Internal finance for investment (%) 72.9 62.2 62.3 Bank finance for investment (%) 12.3 23.8 26.7 Value of collateral needed for a loan (% of the loan amount) 116.5 132.8 124.6 Loans requiring collateral (%) 84.0 81.1 74.3 Percent of firms with a checking or savings account 98.1 88.9 85.2 Percent of exporter firms 6.9 21.8 28.3 Domestic sales (% of sales) 98.4 91.0 88.6 Sales exported directly (% sales) 1.2 7.0 9.2 Sales exported indirectly (% sales) 0.4 2.0 2.2 Sales that are pre-paid (%) 42.4 22.9 10.9 Sales sold on credit (%) 39.0 49.4 66.5 Percent of firms with internationally recognized quality certification 11.7 19.9 25.6 Percent of firms with annual financial statement reviewed by external auditor 41.1 37.9 38.7 Capacity utilization (%) 74.1 73.7 81.3 Percent of firms using their own web site 55.3 48.5 63.4 Percent of firms using email to communicate with clients/suppliers 86.0 73.2 88.5 Source: Enterprise Surveys. have their financial statements reviewed by an external firms (20 percent vs. 13 percent). Medium and large firms auditor. Eighty-three percent of large firms, 41 percent of spend around 8 percentage points more time than small medium firms and 14 percent of small firms have their firms (24 and 22 percent vs. 14 percent) in dealing with financial statements reviewed by an external auditor. regulations. The Russian Federation firms perform well on internet Another indicator where the Russian Federation usage compared to the ECA region. Some performs poorly is on the Incidence of firms make better use of the internet Graft index. In the Russian Federation, the than others, with more than 90 percent Only 7 percent percentage of instances where firms were of both exporters and foreign-owned of Russian firms requested to make informal payments is firms using their own web site compared nearly twice the ECA regional average to just 54 percent of their counterparts. are exporters, and almost five times higher than the Large firms and firms with government ranking the Russian EU-10 average. The Russian Federation ownership are also more likely to use their ranks 25th in this indicator between web site than smaller firms and firms that Federation fourth Kazakhstan and Kyrgyz Republic. are fully private. The patterns for using from the bottom on There is considerable variation across web sites also hold true for using email to this indicator. regions within the Russian Federation communicate with clients and suppliers; in corruption related indicators. In the 100 percent of exporter firms and firms Northwest and South regions, firms are with partial government ownership report using email more likely to make informal payments to "get things for business compared to 85 percent of non-exporters done" (figure 4) compared to the Volga Federal District and 86 percent of fully private firms. or Far East regions. The number of power outages faced by Russian firms What constrains firms in the Russian is roughly half the average number of outages in ECA. Federation? Among Russian firms, however, non-exporters have In Russian firms, senior managers spend, on average, 20 more difficulties with power outages than exporters. To percent of their time dealing with government regulations get an electrical connection, non-exporters have to wait (table 4); this is almost twice the ECA regional average and an average of 61 days, which is three times more than is the second highest value in the ECA following Turkey the average waiting time for exporters. Moreover, non- (27 percent). Almost half of the firms spend more than 10 exporters have four times more power outages per month percent of their time dealing with government regulations. than exporters (3 outages vs. 0.7 outages) and these The amount of time spent varies based on the firms' trade outages last longer (5.7 hours vs. 2.3 hours). Note that orientation and size. The managers of non-exporters these results refer only to the nine exporting firms vs. the spend one and one-half times more time than exporting 109 non-exporting firms. 4 Table 4 Constraints on the average firm in the Russian Federation 2009 Russian Federation ECA EU-10 Number of power outages in a typical month 2.9 5.8 2.5 Senior management time spent in dealing with requirements of government regulation (%) 19.9 10.6 9.5 Average number of visits or required meetings with tax officials 1.6 1.7 1.1 Percent of firms expected to pay informal payment to public officials (to get things done) 29.4 16.8 7.4 Incidence of graft index** 18.3 9.9 4.7 Losses due to theft, robbery, vandalism, and arson against the firm (% of sales) 0.8 0.5 0.4 Percent of firms paying for security 77.7 57.7 62.0 Source: Enterprise Surveys. Another constraint for Russian firms is loss due to are the result of variations in the sample composition over theft, robbery or vandalism. These losses, as a percentage the two years.8 Therefore, the following analysis refers of sales, are high in the Russian Federation. The Russian only to those firms that were interviewed in both rounds Federation ranks third from the bottom on this indicator of surveys. followed by Estonia and Kazakhstan, respectively. Seventy- Firms interviewed both in 2005 and 2009 report an eight percent of Russian firms pay for security which is increase in the percentage of investment financed through 20 percentage points higher than the ECA average. In the supplier credit from 3 percent to 20 percent. Meanwhile, retail sector, almost 59 percent of firms identify crime, these same firms reported that the percentage of sales sold theft and disorder as a major constraint compared to only on credit rose from 18 percent to 35 percent. Firms were 27 percent among manufacturers and 37 percent among less likely to have external auditors review their financial other services. statements; the rate of review fell from 57 percent to 34 percent. Note that these results refer only to the 57 firms How has the business environment changed interviewed in both rounds. over the past three years? Compared to 2005, exporting in the Russian Federation The Enterprise Surveys data provide the tools to monitor has deteriorated (figure 5). The proportion of exporters changes in the business environment across different decreased more than three fold. The decrease observed rounds of surveys. In the Russian Federation, of the 1,004 is more dramatic for foreign-owned firms (by 4.5 times). firms surveyed in 2009, 57 were surveyed in 2005.7 Since Another export related indicator that worsened is the the same firms were re-interviewed over time, this subset percentage of sales generated from exporting. It decreased of data is more appropriate for evaluating the evolution from 6 percent to 1 percent during the three years. of the business environment and the impact of business However, there have been improvements in dealing with environment reforms than the full data sets for both years. corruption. The percentage of firms expected to give gifts Considering the full data sets would introduce effects that in meetings with tax officials decreased dramatically since Figure 4 Firms in the Northwest and Figure 5 Exports have decreased South regions face a more corrupt dramatically since 2005 business environment Change in exports statistics Percent of firms expected to pay 30 informal payments (to "get things done") 70 25 60 20 Percent 50 15 Percent 40 10 30 5 20 10 0 2005 2009 0 Total Northwest Central South Ural Siberia Volga- Far East % of exporter rms Sales exported directly (% sales) Viatsky Source: Enterprise Surveys. Source: Enterprise Surveys. 5 2005 (down from 52 percent to 20 percent). A similar characteristics from the Russian Federation 2009 Enterprise improvement is seen in the percentage of firms expected Survey. The sample of firms interviewed is representative of the manufacturing and services sectors of the economy. For more to make informal payments to "get things done." During information on the survey methodology please consult http:// the three-year period, the percentage more than halved www.enterprisesurveys.org/Methodology/. from 76 percent to 32 percent. A similar decrease is seen 7. The information collected in 2005 refers to the characteristics of among foreign-owned firms. Among firms the firm at the moment of the survey or to fiscal year 2004. in different size classes, the only significant Although there 8. The firms surveyed in both years may not be decrease is observed in medium-size firms representative of the Russian Federation's private where the incidence of bribery decreased are some signs non-agricultural economy since these are a subset of from 56 percent to 11 percent. of improvement the full sample. Firms with fewer than five employees may be included among the firms surveyed in both Although there are some signs of improvement within the firms interviewed within the firms years. The analysis presented is purely descriptive and does not aim at establishing causality between in both years, the overall picture in Russia is interviewed in reforms and their intended effects. still not very favorable for firms operating both years, the * The ownership variables represent the average in the private sector. ownership composition within a firm. These variables overall picture in do not represent the ownership composition across firms. Notes Russia is still not ** Incidence of Graft Index is the proportion of 1. The Enterprise Surveys, implemented in instances in which firms were either expected or Eastern Europe and Central Asia countries, very favorable for requested to pay a gift or informal payment over are also known as Business Environment and Enterprise Performance Surveys (BEEPS) and firms operating in the number of total solicitations for public services, licenses or permits for that country. The Graft Index are jointly conducted by the World Bank and the private sector. is defined in Gonzalez, Alvaro S., Ernesto Lopez- the European Bank for Reconstruction and Cordova, J., and E. Valladares, Elio, The Incidence Development for this geographic region. of Graft on Developing-Country Firms. World Bank 2. The major cities in each of the 7 Russian Policy Research Working Paper Series, 2007. regions are as follows: Central Region: Moscow, Voronezh, Podolsk, ECA includes Albania 2009, Armenia 2009, Azerbaijan 2009, Belarus Korolev, Twer, Serpukhov, Lyubertsy, Kaluga, Kolomna, Kursk, 2008, Bosnia and Herzegovina 2009, Bulgaria 2009, Croatia 2009, Samara, Obninsk, Zelenograd; Far East Region: Vladivostok, Czech Republic 2009, Estonia 2009, Georgia 2008, Hungary 2009, Artem, Nakhodka; Northwest Region: Saint Petersburg, Kazakhstan 2009, The Republic of Kosovo 2009, Kyrgyz Republic Lyubertsy; Siberia: Novosibirsk, Krasnoyarsk, Krasnodar; South 2009, Latvia 2009, Lithuania 2009, FYR Macedonia 2009, Moldova Region: Rostov-on-Don, Novosibirsk, Krasnodar; Urals: Perm, 2009, Montenegro 2009, Poland 2009, Romania 2009, Russian Yekaterinburg, Chelyabinsk; Volga Federal District: Novosibirsk, Federation 2009, Serbia 2009, Slovak Republic 2009, Slovenia 2009, Perm, Ufa, Dzerzhinsk, Samara, Nizhniy Novgorod. Tajikistan 2008, Turkey 2008, Ukraine 2008, and Uzbekistan 2008. 3. This figure presents the unweighted distributions by size, sector EU-10 includes 2009 data from Bulgaria, Czech Republic, Estonia, and location of the firms interviewed without any inferences to the Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, whole economy. and Slovenia. 4. Firms with >= 5% and < 100% of government/state ownership are defined as having government ownership. 5. Firms with >= 10% of foreign ownership are defined as foreign-owned. 6. The term "average firm" is used to convey the average firm The Enterprise Surveys measure the business environment in more than 100 countries in the world. A standardized questionnaire, universe under study, and implementation methodology is used to make sure information is comparable across countries and time. The full data and documentation explaining the methodology are available at www.enterprisesurveys.org. The Country Notes are a product of the staff of the Enterprise Analysis Unit. The findings, interpretations and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6