This year, as in the previous two years, a number of methodological changes were introduced in the Doing Business methodology to help refine its measurements. Therefore, while Russia was ranked 51st in last year’s published report, comparability from one year to another in some of the indicators where changes were introduced may be limited.
What is important is to look at long-term trends. And, in the case of Russia, dynamics have been positive owing to the strong reform momentum initiated 5 years ago - with Russia improving from 124th position in 2012 to 40th this year. Now, looking at specifics, this year Russia made further important improvements in 3 key notable areas: the ease of starting a business, the ease of dealing with construction permits and the ease of obtaining electricity connection.
This year it became easier to start a business in Moscow: two steps were combined in one. The payment of a duty for the state registration of an LLC was combined with the registration procedure itself as the majority of entrepreneurs prefers to pay the duty using payment terminals located in the one-stop shop for company registration. These developments resulted in a significant improvement in the global rankings from 41th position last year to 26th position this year on the Starting a business indicator – that is a jump of 15 positions. Overall on average, it now takes about 10 days to register a company in Russia.
The Government’s continued multi-year reform efforts in the construction permitting area (both in Moscow and St. Petersburg) also led to further streamlining in the number of procedures and time required to obtain a construction permit -- resulting in an improvement of 4 positions in the global rankings in the Dealing with construction permits indicator (from 119th to 115th).
Likewise, the reforms initiated 3 years ago in the area of electricity connection led to further positive improvements in the form of additional substantive decrease in the cost of grid connection.
Russia ranks top 20 globally on two indicators - property registration (9th) and enforcing contracts (12th). For instance, it takes less than a year to settle a commercial dispute in Russia, compared to the global average of 637 days. And it only takes 15 days to register a property transfer, which is less than three times the global average of 51 days.
Russia continues to lead the BRICS group by a large margin. Also, vis-a-vis the OECD group of countries, Russia’s position in the ratings is only about 10 points below OECD countries’ average ranking - with Russia even scoring higher than 9 out of 35 OECD member countries. In addition, Russia continues to do very well and is at par with leading OECD economies on quality dimensions of regulation introduced in the ratings last year such as: Reliability of electricity supply and transparency of tariffs. Businesses in Russia face almost no power outages and Russia received a perfect score placing it amongst leading economies such as Germany, Norway, Korea, the Netherlands or New Zealand; Quality of the land administration system which is part of the Registering property indicator - and where Russia is in the same league with other top performing large countries such as the US, Canada and Australia.
This year, the scope of the Doing Business report was further expanded through the addition of new measurements related to tax administration, gender equality and minority investors. Russia did relatively well on all three and we hope for further improvements in these areas.
Particularly noteworthy are the new dimensions measured as part of Paying taxes indicator. The paying taxes indicator was expanded this year to include post-filing processes - the processes that occur after a firm complies with its regular tax obligations. In particular, the indicator now measures the time it takes to comply with and obtain a value added tax (VAT) refund and comply with and complete a corporate income tax audit. Russia scores relatively well on the post-filing index in paying taxes, because it is easy to comply with and obtain a VAT refund.
The indicator now also looks at what happens in case a company made an error in its tax liability leading to an underpayment of due income tax, and voluntarily notifies the tax authority. In 74 economies - even following immediate notification by the taxpayer - the error in the income tax return is likely to trigger an audit. However, this is not the case in Russia.
It is interesting to note that this year the pace of reforms recorded by the Doing Business report in the world is very high. 136 economies worldwide implemented 282 business regulatory reforms making competition steeper amongst countries. This represents an increase of more than 20% compared to last year. Because of that, Russia in fact dropped in a couple of indicators (electricity connection and property registration), even though positive changes or no change in performance were recorded in these indicators.
This observation underscores that it has become harder to progress. Now that Russia has reached 40th position based on the good results obtained through its recent multi-year reform efforts (in key areas such as company registration, tax administration or property registration), further gains will require additional long-term efforts to modernize complex areas such as the construction permitting, and trading across borders support infrastructure.
While the Government’s focus on Doing Business helped generate multiple tangible improvements for entrepreneurs in Russia, Doing Business covers/measures only a selected number of areas. The report measures the efficiency and quality of business regulation (across 190 economies) through 11 proxy indicators that capture the cycle of doing business ranging from company registration, to obtaining various types of approvals, and - when and if needed – enforcing contracts or closing a business.
The report does not cover: incidence of bribery and corruption, the ability of firms to access markets, firm productivity and propensity to innovate, the quality of labor force, the quality of physical infrastructure. the level of development of the financial system. Yet, understanding these and addressing bottlenecks in these areas would be just as critical - if not more - to helping build a truly conducive investment climate. The reform agenda is therefore much broader.
Let’s take a closer look at some of the critical priority issues in need of attention in these important areas.
One of the key objectives of the Doing Business report is to incentivize countries to simplify and streamline business processes, create electronic platforms and establish single-interface services (“one-window shops”). By introducing electronic services, countries can substantially reduce in person-interaction between government agencies and businesses – which in turn minimizes potential opportunities for corruption and increases the efficiency and transparency of business services.
In Russia, the government plans to deliver at least 70% of all government services through e-channels by 2018. Russia has in fact already made significant progress on the delivery of ICT-enabled services for both citizens and business. In areas that matter most to business, the availability of electronic services has already resulted in substantial improvements in the ease of paying taxes, dealing with customs procedures, registering property and dealing with commercial courts, amongst others.
We are also aware that the Government is planning to further modernize business services by introducing and rolling out enhanced electronic systems in other areas such as construction permitting for example. All these reforms will continue to pay off in the coming years and – once implemented in practice to the benefits of entrepreneurs – may contribute to further enhance Russia’s performance in the Doing Business ratings.
However, one additional critical area in need of reform - beyond the scope of the Doing Business report – that could significantly reduce the burden imposed on businesses relates to inspections. Indeed, in a 2016 survey of 400,000 companies in 81 regions, carried out by the Russian Agency of Strategic Initiatives, entrepreneurs reported to be most concerned by inspections, corruption and roads quality. Inspections continue to be burdensome for business, requirements are not clear and often outdated, and the whole inspection process lacks transparency.
The Russian Government renewed its effort in this area and embarked on reforming its regulatory enforcement system/business inspection regime in order to improve market surveillance outcomes while moving away from unnecessary regulations, inefficient enforcement, and rent-seeking behavior. We are very supportive of this reform and look forward to its implementation.
Ability of firms to access markets
For companies to survive and grow, they have to have access to market opportunities. The ability to register a company promptly and without too much bureaucracy involved - as measured in the Doing Business report - is important but many other conditions need to be in place for a company to survive and grow.
The ability of companies to operate and grow for example largely depends on how well product and service markets function in a given country and how open they are to fair competition. Competition however in Russia continues to lag behind as was recently confirmed by Russia’s low performance on the latest GCI report’s indicator that measures the “intensity of local competition” (81st out of 138 measured economies).
The analysis of geographic and product market structure within Russia further reveals a high degree of concentration, which negatively impacts the entry and exit behavior of firms. The large presence of the state in economic activities may also create an uneven playing field.
A critical role that governments can play in support of competition is through public procurement. Public procurement represent between 10% and 25% of GDP worldwide, which makes the procurement market a unique pool of business opportunities for the private sector and firms of all sizes, including SMEs. In fact, where businesses - particularly small and medium-size enterprises - have a fair chance to compete for government contracts, it can give them the necessary boost to further develop their activity, and even propose innovative goods and services that will meet demand in other markets.
Given the important role that public procurement markets play in most economies, there have been discussions about including a new indicator in the DB rating - called “selling to the Government” - that would measure public procurement processes. A pilot data collection exercise was conducted this year focusing primarily at legal aspects of public procurement. Russia did well in most areas confirming the overall adequacy of its legal framework. However, it will be important to monitor how effectively the system works in practice and assess its impact on actual firm access to market opportunities afforded by Government or state corporations’ procurements.
Firm level productivity and innovation
Looking at firm-level productivity trends over the past decade, data shows that it has weakened as a driver of economic growth in Russia. Russian companies are relatively poor at innovation. Only 10 percent of enterprises report technological innovation activity, compared to about 30–40 percent in OECD countries. Even within this 10 percent, only a small minority is undertaking more sophisticated forms of R&D.
More broadly, as evidenced by the latest Global Competitiveness Index report “firm level technology absorption” in Russia fares poorly with Russia ranking 86 out 138 in this area. However, it is the ability of companies to improve efficiency and develop innovative products and services using new technologies that is at the core of productivity growth.
Russia’s long-term growth will to a large part be determined by sectoral productivity growth, making economic policies directed to increasing firm-level productivity increasingly relevant. Improving the business climate directly opens up opportunities for the creation of formal jobs in the private sector. Similarly, supporting innovation that can unlock firm productivity depends on enhancement of human capital and skills.
Quality of labor – skills
Inadequate supply of skilled labor is often cited by businesses in Russia as a constraint for doing business. And, by skilled labor, we don’t only mean narrow occupational skills - such as welding or accounting – but also social and behavioral skills such as ability to communicate well, collaborate and work in teams, as well as high-order cognitive skills, i.e., the ability to solve problems and think creatively.
These skills are actively sought by employers and in particular by innovative firms, which are important. When and where in short supply, they can significantly constrain productivity growth and innovative development.
Infrastructure and connectivity
Availability and quality of infrastructure is key to allow businesses to connect to markets. Yet, insufficient infrastructure or degradation of existing infrastructure is becoming a constraint to economic growth in Russia – with acute spatial disparities between larger agglomerations/ trading centers and remote areas.
Data shows that within its vast territory, many regions are poorly accessible: over 40% of land mass lacks reliable access to transport network and on third of settlements do not have all-season roads. Poor quality of roads was in fact cited in the above mentioned ASI survey of entrepreneurs across 81 regions as one of three keys bottlenecks hindering business development.
This was also echoed by the World Bank’s 2016 Logistics Performance Index (LPI) where the quality of trade and transport related infrastructure in Russia ranks low (94th out of 160 measured economies) – confirming the need to focus on these important dimensions
Development of the financial system
Russia’s overall level of financial development is at par with the BRICS-T group. However it lags behind in terms of financial institutions depth and efficiency.
Last Updated: Oct 25, 2016