How did Russia do this year in the Doing Business report and what is behind its (good) performance?
As you know, the Doing Business Report measures 11 areas of business regulation that affect firms throughout their life cycle, from initial registration to getting a location, obtaining financing, running daily operations, and -- in case things go wrong -- dealing with problem contracts and insolvency issues.
This year Russia was ranked 51st out of 189 measured economies, which confirms the positive tendency of the past 4 years and that Russia maintained a strong reform momentum.
Russia leads the BRICS bloc by a large margin.
Particularly worth mentioning is Russia’s performance on the Getting electricity indicator where Russia is ranked 29th this year due to significant reforms and a new set of indicators on reliability of service.
Also, this year Russia scored amongst top 10 best performers globally in registering property (8) and enforcing contracts (5).
More specifically, the Doing Business Report recorded 5 notable positive reforms in 5 areas of regulation:
- Starting a business. The Russian Federation made starting a business in Moscow easier by reducing the number of days required to open a corporate bank account.
- Getting electricity. Russia made obtaining an electricity connection simpler, less time-consuming and cheaper by eliminating a meter inspection by electricity providers and revising connection tariffs.
- Registering property. Russia made transferring property easier by reducing the time required for property registration.
- Getting credit. Russia improved access to credit by implementing a centralized collateral registry and allows a general description of a combined category of assets granted as collateral. Creditors can now immediately check whether the potential borrower has already used a certain asset as a collateral.
- Paying taxes. Russia made paying taxes less costly for companies by excluding movable property from the corporate property tax base.
What changed in the methodology and how did Russia do in the new areas captured by the changed methodology?
A number of new changes were introduced this year -- as in the past year-- in the methodology. In prior years, the report focused mostly on efficiency of regulation (rapidity and cost of access to services).
However, this year additional changes were introduced to also capture the quality of business regulation (for example: how reliable a service is, the ease of access to information for users, and availability of recourse and/or dispute resolution mechanisms in case of problems, etc.).
This year’s report added indicators of quality to 5 out of 11 indicator sets:
- The indicator on dealing with construction permits now includes an index of the quality of building regulation and its implementation. The index includes 15 questions assessing amongst others the existence of quality controls before, during and after construction as well as the qualification requirements of professionals involved in the construction cycle. Russia scored 14 points out of 15 on this index – as high as Singapore.
- The getting electricity indicator now include an index on the reliability of electricity supply and transparency of tariffs. Russia scored 8 out of 8 points on the new index – that is as high as Germany.
- The registering property indicator include an index on the quality of the land administration system. The index includes 30 points covering the reliability, transparency and geographic coverage of the land administration system and availability of land and property dispute resolution mechanisms. Russia scored 26 out of 30 points – a higher score than the US, Canada and Australia and higher than all BRICS economies.
- The Enforcing contracts indicator was also expanded to include a quality of judicial administration index, measuring availability of specialized courts, alternative dispute resolution, and judicial case management, including electronic services. Russia's upright movement on this indicator is due to country's good performance on the new index.
- Finally, this year Doing Business is also changing the methodology for the trading across borders indicators to increase their policy relevance.
For each economy, the export product and partner are now determined on the basis of the economy’s comparative advantage: in the case of Russia, the report looked at exports of iron and steel to Italy.
The import product is auto parts, and the import partner is selected on the basis of which economy has the highest trade volume in that product – in the case of Russia Germany for auto parts.
The indicators now measure the time and cost of border compliance and documents preparation for both export and import. The report also includes data on the time and cost for domestic transport, but it does not use these data in calculating the ranking on the ease of trading across borders.
Unfortunately, Russia did not rank well on the revised indicator which underscores the need for further improvements.
Indeed, for example, despite the fact that Russia leads the BRICS zone in the aggregate ranking this year, if we compare Russia to China in the area of exports, it takes twice as long to prepare the required export documentation, it takes 3 times as long to complete all border control formalities and the cost of domestic transport of a shipment is twice as high.
What reforms should Russia focus on going forward?
As I mentioned earlier, Trading across borders is one area where Russia should continue focusing its efforts. However, this will require joint efforts on the part of all stakeholders involved in the process, not only the Federal Customs Service, which has in fact been actively modernizing. It also depends on the playing field conditions of the domestic transportation market for traders in Russia.
Another area where Russia should pursue its efforts is construction permitting. Over the past few years Russia made impressive improvements towards increasing the efficiency and transparency of the permitting process. Further gains could be made however by ensuring the wide spread adoption of electronic construction permitting services.
I would also like to highlight the importance of further improving investor protection and minority shareholders - since this is critical to enable a conducive investment climate which is essential for economic growth.
In addition, there are a number of areas essential to support business development and private sector growth in which Russia continues to lag behind but are not captured by the Doing Business indicators:
- Labor productivity where Russia continues to lag far behind OECD averages;
- Inadequate supply of skilled labor which is often cited by businesses as a constraint for doing business;
- And very importantly: competition
On this last point on competition, research conducted earlier by the World Bank showed that while there is evidence of entry of new businesses in the economy, young firms tend to die earlier than in comparator economies.
Old firms are indeed more able to hold on to their market positions than their peers in other countries. And this is the case even when they are less efficient than their younger rivals.
There thus appears to be an issue of low survival rate of new firms, which emphasizes the importance of focusing on improving the general operating business environment for firms.
Thus, establishing a fair and conducive competition environment and modernizing the licensing and inspection regime for firms – areas on which the Government is currently working – should play an important and positive role in easing firms’ operating environment and facilitating their access to markets.
And finally, for such a large country as Russia it is important to improve connectivity. There is great disparity in terms of connectivity across regions in Russia. Yet good connectivity is essential to support economic development. Connectivity is a cross cutting area that includes transport infrastructure, export competitiveness, logistics and trade facilitation, internet coverage, etc. Looking at all these areas in aggregate would be essential to get a good sense of how connected different regions are and help identify policy and investment needs to address the gaps.