Influential Russian business associations searching for exits out of global crisis
Top Russian leading business associations are joining efforts with each other and the government in searching for quick exit from the negative situations in the domestic and global economies caused by the currently raging global financial crisis and equity slides, reminiscent of the worst images of the 1929 stock market collapse that heralded the Great Depression of the 1930s.
Thus, a key step in this direction from the government is the setting up of a Special Council under the Russian Presidency in October by President Dmitry Medvedev, which will be headed by First Deputy Premier Igor Shuvalov that will henceforth oversee the development of the local financial market. Specifically, the major tasks of the new organ, according to the presidential decree, include scrutinization of issues facing the development and stability of the financial market, evaluation of measures already taken as well as reviewing bills that will affect the market.
Whilst from the business side, only October alone saw several gatherings of the most influential representatives of the Russian business circles — including the powerful Russian Chamber of Commerce and Industry (RCCI), Russian Union of Industrialists and Entrepreneurs (RSPP), Association of Russian Banks (ARB) and other influential professional bodies — meeting in different compositions and formats, from roundtable braining storming sessions among representatives of single or interrelated industries to national conferences, which featured all key players from all sectors of the local economy.
RCCI leads the search for exits from the crisis
However, irrespective of the delegate compositions and the formats of these assemblies, the participants were united by common issues: in-depth analyses of the causes of the current global economic meltdown, evaluation of the bailout measures adopted by the Russian government and Central Bank as well as those adopted by foreign governments and 
Central Banks and, finally, the search for additional steps to be taken so as to quicken the end of the increasingly ‘contagious global economic malaise.’
The locomotive of the ongoing searches for solutions to these problems has been the RCCI, which has been involved in the organization of two of the most influential discussion platforms. At the first conference, titled, “The Difficulties in the Economico-financial Sector and the Ways to Overcome Them,” the participants offered different opinions on the additional measures that need to be taken to augment those already adopted to address the problems faced by businesses in the country. “These problems faced by entrepreneurs,” the experts noted, “are not only exacerbated by the current global financial crisis, but also by the ‘imperfections’ in the local taxation legislation.”
The second conference, headlined, “The All-Russian Taxation Forum: Taxes, Innovations and Business” is a traditional annual platform for joint discussions of taxation issues by the government, business communities and other experts in taxation. However, this time around, the forum attained the feel of ‘a concilium of doctors over a seriously ill patient’ as key government and business experts engaged in brain storming discussions as they searched for mechanisms that will enable them not only to survive the current crisis with minimal losses, but also how to consolidate their assets in the post-crisis period. Thus, opening the forum, RCCI President Yevgeny Primakov said the development of the Russian economy cannot be considered today without factoring in the negative impacts of the global crisis on the socio-economic and political situations, because “Russia will not be able to remain ‘an island of stability’ in the raging financial storms.”
“The development of the Russian economy cannot be considered today without factoring in the global crisis as it will not be able to remain ‘an island of stability’ in the raging financial storms.”
Calling taxation policy a very serious instrument in rerouting the economy onto the innovative development path, Primakov called on the government to make better use of this fiscal mechanism, “especially now, when it has assumed a new importance.” And, hailing the measures taken so far by the government to stabilize the domestic economy, Primakov, however, called for the injection of more new measures to stimulate the economy, which will not only help consolidate, but also boost the positive dynamics in GDP growth and the successful transformation of Russia into an innovative economy. Highlighting the role of a prudent taxation policy in the achievement of these stated missions, Primakov offered seven ways on how to use taxation policy to foster an innovative economy (see Proposals on how to use taxation policy to foster an innovative economy). “I would say that taxes are in the forefront of any policy aimed at stimulating businesses,” Primakov added. “This is why the government needs to revoke some of the decisions taken before the negative impacts of the global crisis reached Russia, specifically, the postponement of VAT reduction.”
Talking about the need for the diversification of the economy, Boris Titov — the chairman of Delovaya Russiya, an NGO comprising entrepreneurs in non-commodity and processing sectors — noted that Russia currently has two different economies: the powerful raw-materials-based economy, and the weak and underdeveloped processing economy, both of which exist in different worlds and according to different laws. “In crisis, both economies suffer, but the bigger hit is taken by the latter because it is weaker,” he added. “In June, about 200 CEOs in the processing sector penned an ‘SOS memorandum’ to the government, where they complained about the rising overhead costs, taxation pressure, etc. They warned that if nothing is done to remedy the situation that about 40% of companies in the sector will stop operating by yearend.” Speaking on the use of taxation to stimulate businesses, Titov said he opposes the idea to amend the current taxation legislation now in an emergency manner, as being proposed by some experts, because such hasty amendments will lead to confusion and backlogs while the new rules are being adopted. “The best option is simply to reduce the tax burden.”
“These problems faced by Russian entrepreneurs are not only being exacerbated by the current global crisis, but also by the ‘imperfections’ in the local taxation legislation.”
Mechanisms for accessing bailout packages obscure
Speaking at the second conference, Primakov noted that it was time to buy back the debts and stocks of Russian companies that have been devalued by the global crisis, while other speakers specifically asked the government help companies repay bloated debts by taking stakes, but only in companies, where changes of ownership will lead to more calamitous effects. Hailing the $50bln disbursed by the state to Vnesheconombank to help Russian corporations pay up their foreign debts as a prudent move, the speakers, however, expressed concerns over the ambiguity in the mechanism of transferring this capital to companies.
Similarly, a similar problem exists in the distribution of the billions of rubles, which the government has pumped into boosting liquidity in the banking system,
stabilization of the financial system, support of the equity market and the economy in general. The speakers maintained that this problem, typical for Russia, stemmed from greed as banks, despite the huge state financial injections, are not giving out loans to companies, while those, which are ‘kind enough’ to give loans, usually ask for ‘Shylock interest rates,’ reaching as high as 25-30% per year. “The government needs to urgently obligate banks, which have received the government’s bailout packages, to make loans easily accessible to all needy companies, including the SMEs,” Primakov added.
A similar view was also aired by Titov, who subjected CEOs of large bank to caustic criticism: “The decision to inject capital into the market is a good one, but one, however, cannot call the banks’ decision to withhold and/or use the state funds to solve their own problems a correct one,” he added. “Specifically, instead of granting loans to smaller, cash-starved banks, as prescribed by the government, the larger banks are simply acquiring them. Can such approach be called the realization of the state’s support program for businesses?” he asked rhetorically. “Similarly, it is difficult to call a situation, where banks grant loans from the money received at minimal interest rates from the government at rates that are several times higher an honest one.”
In a related development, the RSPP said it also welcomed the government interventions on the stock market aimed at stabilizing the economy, restoring investors’ sentiment and fair prices for shares, but noted that the business community should have a stronger say in the measures being taken to curtail the financial crisis, stressing that the government should desist from boosting its long-term role in the economy. “The government should not make a habit of such interventions and also it should refrain from pursuing a policy of nationalizing the country’s private banks and other financial institutions, because such policy will distort price formation and eventually lead to creation of bubbles.”
The taxation authorities also came under fire, as corporate lawyers accused them of arbitrarily and frequently abusing their powers when dealing with businesses, such as blocking their accounts on flimsy charges. “Tax inspectors are only too eager to use this power, which often puts law-abiding corporations on the brink of bankruptcy,” Vadim Zaripov, director of the Analytic Department at law firm Pepeliaev, Goltsblat & Partners (PGP), said. “It only needs the postal system to fail to deliver tax filings on time or, what is usually frequently the case, for these filings to get missing right in 
the tax offices for tax authorities to use this power.” Also, Zaripov said over 70% of companies polled by PGP named blocking of corporate accounts the biggest problems in the interactions between businesses and the government. As a way out, he proposed amending the taxation legislation to “make tax officials personally liable to legal actions for unjustified closure of accounts and introduce a simple and clear procedure for getting compensations for damages accrued from such unjustified closures.”
The Russian financial system on a recovery path
Speaking on the situation in the Russian financial sector, ARB President Garegin Tosunyan noted that the financial market will be stabilized within the next few weeks, thanks to the ‘psychological impact’ being exerted on the market by the measures taken by the state to normalize the industry. One of these measures, according to Tosunyan, is the government’s decision to guarantee bank deposits in case of defaults by raising the sum that will attract 100% compensation from the previous level of 400,000rubs to 700,000rubs, the average sum of deposits held by 85-90% of Russian private depositors, effective from October 1. “We still need to raise this level, because such step will be an additional indicator that the whole market situation is under control,” he added. “This, in turn, will prevent panic from depositors, who after hearing rumors about this crisis, could start mass withdrawals of their deposits, and thus cause bank runs. This could cause additional problems for the banking sector and more negative consequences for the whole economy.”
“Russia could emerge from the global financial mess ‘an economically stronger nation with a higher status’ if a more prudent approach is taken to tackle the current crisis.”
The ARB has also weighed in on the financial crisis. Thus, highlighting the principal difference between the origins of the economic problems in the West and Russia, which were caused by ‘crisis of overproduction of cheap loans and other financial instruments in the Western banking systems as contrasted with the ‘loan starvation’ in Russia, which forced local banks and other corporations to borrow heavily overseas, Tosunyan forecast that Russia could eventually emerge from the global financial mess ‘an economically stronger nation with a higher status’ in the post-crisis period, if more prudent approach is taken to tackle the current crisis. “Russia, of course, will not be able to totally avoid the negative impacts from this crisis. This means that it is time to seriously think about adopting effective long-term measures to support the economy and also learn the necessary lessons from the past mistakes that led to the current crisis.”Speaking on the situation in the Russian financial sector, ARB President Garegin Tosunyan noted that the financial market will be stabilized within the next few weeks, thanks to the ‘psychological impact’ being exerted on the market by the measures taken by the state to normalize the industry. One of these measures, according to Tosunyan, is the government’s decision to guarantee bank deposits in case of defaults by raising the sum that will attract 100% compensation from the previous level of 400,000rubs to 700,000rubs, the average sum of deposits held by 85-90% of Russian private depositors, effective from October 1. “We still need to raise this level, because such step will be an additional indicator that the whole market situation is under control,” he added. “This, in turn, will prevent panic from depositors, who after hearing rumors about this crisis, could start mass withdrawals of their deposits, and thus cause bank runs. This could cause additional problems for the banking sector and more negative consequences for the whole economy.”
The ARB has also weighed in on the financial crisis. Thus, highlighting the principal difference between the origins of the economic problems in the West and Russia, which were caused by ‘crisis of overproduction of cheap loans and other financial instruments in the Western banking systems as contrasted with the ‘loan starvation’ in Russia, which forced local banks and other corporations to borrow heavily overseas, Tosunyan forecast that Russia could eventually emerge from the global financial mess ‘an economically stronger nation with a higher status’ in the post-crisis period, if more prudent approach is taken to tackle the current crisis. “Russia, of course, will not be able to totally avoid the negative impacts from this crisis. This means that it is time to seriously think about adopting effective long-term measures to support the economy and also learn the necessary lessons from the past mistakes that led to the current crisis.”
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