High taxes, low demand dampen growth

Experts from the HSE Center for Business Tendency Studies at the Institute for Statistical Studies and Economics of Knowledge have found that limited demand, high taxes, lack of financial means and a high level of uncertainty in the onward course of economic development all reduce the length of time for which businesspeople can plan, in turn obstructing investment and innovative initiatives

A surfeit of tax pressure, demand deficit, and economic uncertainty in the country, combined with expensive bank loans and a limited financial, personnel, and material resource base are the main factors limiting the activities of companies in key sectors of the Russian economy.

That is the conclusion reached by experts from the HSE Center for Business Tendency Studies at the Institute for Statistical Studies and Economics of Knowledge, in their research program that covered 20,000 organizations in different sectors of the Russian economy (the survey was carried out by the Russian Federal State Statistics Service).

Stretched to the limits of demand

The extent of the impact that negative factors have on business depends on the particular economic sector a company is in.

So, for example, in Q1 2014, 62% demand deficit was considered the main cause of vulnerability in business by executives in wholesale companies, 47% of executives in industrial organizations, 45% of executives in retail firms and 39% of businessmen in the service sector.

'Industrial enterprises are stretched to the limits of demand. This factor is most apparent in enterprises that manufacture vehicles, produce paper and pulp, or make machinery and equipment – as was indicated by about 60% of their managers,’ the Center’s report noted.

Economists also stress that of those enterprises surveyed in the construction sector, in addition to the 'lack of orders' they also have to contend with 'customers' inability to pay'. These factors were highlighted by almost half of respondents (19 and 27% respectively).

Taxes dampen trade

High tax comes second (after demand deficit) as a key problem impacting business development.

In 1Q 2014, an unduly heavy tax burden was identified by 54% of executives in wholesale firms, 54% of managers in retail firms, 40% of those involved in industry, 38% of those in construction and 37% of businessmen in the service sector as having a serious negative impact.

'High taxes topped the list of problems limiting the development of retail trade. Among wholesale traders, it was those dealing with consumer electrical devices, radios and TVs for retail sale (65% of respondents), perfume and cosmetics, equipment, and chemicals (62% each) who chiefly indicated high taxes as a factor,' the research found.

No money for development

The third destabilizing factor for Russian business is the lack of funding. This was highlighted by 43% of executives in wholesale firms, 40% of entrepreneurs in the service sector, 39% of those in industry, and 28% of executives in retail firms.

'From the point of view of most company managers in the service sector, it is the lack of funds that has been the main limitation on effective growth. Businesspeople in other sectors surveyed also included limited funding as one of the most important problems that make it difficult to do business,' the HSE expert team noted. 'There is also a distinct growth in the annual range of the impact this factor has on industrial, wholesale and service enterprises.'

The financial limitations go beyond a deficit of the company's own funds, and include a number of factors that are vital to various areas of activity, such as high interest rates for bank loans, which can be prohibitive.

Disoriented business

Business leaders' assessment of the impact exerted by 'economic uncertainty' is the most subjective of all the factors limiting economic activity. As economists at the Center found this was the main obstacle to investment activity.

'In the first half of 2014, about a third of respondents from the industrial sector felt that the country's uncertain economic climate was an impediment to business development. In April 2014, 33% of participants in the survey came to that conclusion, which is almost half the proportion seen at the height of the crisis (about 60% in 2009) but significantly higher than before the crisis – when this figure was 20%,' the study found.

Thus, the Center’s economists conclude that one third of senior executives in major and mid-size industrial companies do not understand the economic processes underway in the country, or are not in a position to adequately manage production in these constantly changing economic circumstances.

The negative business and investment climate, and rapidly shifting rules of the game initiated by regulators at all levels decrease the timespan for which businesspeople can plan, while also impacting their motivation to carry out investment, innovation and modernization initiatives. ‘In these circumstances, some businesspeople are wary of taking any risky steps to re-organize or restructure their businesses, and prefer to invest financial resources in raising wages or dividends, and in placing profits earned abroad for some time, until circumstances in the Russian economy improve,’ the research says.

An evaluation of the factors limiting the growth of industrial production

Figure 1. Proportion of organizations of total number, %

 

Comment by the Director of the Center for Business Tendency Studies at the HSE Institute for Statistical Studies and the Economics of Knowledge, Georgy Ostapkovich:

Unfortunately, in certain economic areas, modern Russia has seen the system of sector-specific training, education, and re-training of qualified specialists weaken to the point of collapse. These categories of specialists are still on the scene, but over time their numbers have reduced and are currently individual cases on the employment market. Working in an environment that is essentially uncompetitive, they legally demand a salary that equals their level of qualification. These demands are outside the realm of possibility for many companies in the key sectors of the economy.

The problem of a lack of qualified personnel may become even more acute, if the economy starts to see the import substitution referred to by Russian President Vladimir Putin, particularly where this relates to high-tech production. You can invest trillions of roubles in the defence sector, in engineering, and other high-tech sectors, but Proton will keep on failing. If a significant volume of funds is not invested in human capital, but only in production, then the impact of this investment will be negligible.

 

July 07, 2014