Russia’s entrepreneurial landscape according to Ernst & Young (EY)

“Russia’s entrepreneurs are positive about the future,” says Ernst & Young’s (now known as EY) 2013 G20 Entrepreneurship Barometer report.

Released in August 2013, the report amalgamates and analyses research from 1500 surveyed entrepreneurs across the world, including the BRICS countries.

According to the report Russia falls into the third quartile, the same as Brazil and China, but below South Africa, and has made strong progress in its efforts to foster entrepreneurship.

Given that the country only opened up as a market economy in the 1990s, Russia has done well in comparison to other “rapid-growth markets” surveyed in the report. For Russian entrepreneurs themselves, there is opportunity thanks to a number of factors:

• Growing consumer market
• Rising disposable income
• Vast resource reserves
• A highly skilled workforce

What is perhaps most promising about Russia’s development is its performance in the area of “coordinated support” offered to entrepreneurs. From the rise of incubators to dedicated industrial parks, there is more than enough to rank Russia first of all the 20 countries surveyed for the report.

The country’s entrepreneurs still face their fair share of challenges though, particularly with access to finance: 59% of local entrepreneurs consider it difficult to access to funding. However it is worth noting that this is not unique to Russia, but rather a common thread (70% of entrepreneurs express difficulty accessing finance) among all the countries surveyed.

In terms of Russia’s strengths, there have been marked improvements in the availability of business incubators, networks and mentorship. A high level of mergers and acquisitions (M&A) funding shows Russia in good stead compared to other rapid-growth G20 economies. Surprisingly, or not surprisingly, Russia scores the highest for tax and regulatory matters of all the BRIC economies, and even scores higher than the EU and US.

Doing business in Russia remains fraught with political, legislative and administrative issues such as corruption. There is also a concern over Russia’s economic reliance on oil exports and whether this model is sustainable.

Below is a summary of the full report on Russia.

Access to funding — Pillar ranking: 15

The weakest aspect of Russia’s overall entrepreneurial landscape is its performance on access to funding. However its performance varies on different sources of funding. M&A is the highest of all G20 countries at 5.0% (as a proportion of GDP) — the average was 3.0%. With venture capital Russia scores below the rapid-growth countries for ease of securing funding, but there has been huge VC growth, doubling from the US$500m in 2011 to US$1-billion in 2012 according to a report by the RVC and Ministry of Economic Development.

Russia’s IPOs raise 20 times less than the G20 average, but the Moscow Exchange’s Innovation and Investment Market launched the IPOboard — an online information and trading platform — in 2012 to help companies raise M&A and VC. Its effects are still in its infancy though.

In terms of what the government could do, survey respondents said that tax incentives for investors could be introduced “to boost access to funding”.

Entrepreneurship culture — Pillar ranking: 10

Entrepreneurship is yet to be fully embedded into Russian culture. Fewer than half of local respondents agreed that Russian culture is supportive of entrepreneurship or that it is encouraged as a career choice.

Despite this Russia’s entrepreneurs are incredibly optimistic in their responses about how things are improving.

More entrepreneur role models are what respondents felt would help encourage young people to consider the potential for starting their own ventures and there is a need for new and scalable businesses built on research and development (R&D). 1.1% of Russia’s GDP is spent on R&D, and the country is well respected in sectors such as aerospace and nuclear power.

Tax and regulation — Pillar ranking: 9

Reducing regulatory burdens was noted by Russian respondents as the most effective way to boost entrepreneurship in Russia. Setting up a business in Russia takes slightly longer and involves more red tape than the G20 average — 25 days to start a business versus 22 days of the G20 average — but it is a cheaper process.

Not only is the cost of starting a business cheaper, but so is the cost of failure. For example, dealing with insolvency is almost half as costly in Russia as on average in the G20 rapid-growth countries.

50% of respondents felt that it was easier to start a business now than it was three years ago. A key factor in this is the time required to deal with taxes: Russia’s three-year average is 262 hours, but as of 2012 this fell to 177 hours, and is one of the major reasons why Russia improved so markedly in The World Bank Doing Business Index report for 2012.

In terms of further improving this pillar, respondents feel that the creation of online support services and government agencies that help with regulatory compliance would be beneficial initiatives.

Education and training — Pillar ranking: 14

Russia’s spending on education — a key enabler for entrepreneurial growth — is mostly in line with the G20 average (4.1% of GDP versus 4.8% average). There is indication that attainment levels are slipping though.

Russia’s tertiary-level qualifications are one of the highest in the world, but most of these qualifications are held by older people suggesting that this advantage will narrow over time.

Future skills’ levels in Russia are more a concern at secondary level, where the country’s participation rate is lower than the G20 average.

Respondents feel that there needs to be more effective entrepreneurship training through informal channels (networks, mentoring) rather than through formal education.

Again, the need for entrepreneurial role models is seen by respondents as the best way to create a more positive perspective on entrepreneurship — and no doubt improve its acceptance into Russian culture.

Coordinated support — Pillar ranking: 1

Russia tops the G20 rankings in this area. This does not mean that Russia offers the highest quality of entrepreneurial support in the G20, but rather that entrepreneurs in Russia were the most likely to “report an improvement in support over the past three years.”

Most notably there are more opportunities for entrepreneurs to learn from each other in the form of seminars, workshops and master classes. Respondents would still like to see more from the government such as start-up schemes and improved access to business incubators and entrepreneur clubs and associations.

The government is developing a major innovation centre in Skolkovo with a focus on IT, energy efficiency, nuclear power, biomedicine and space technology. Its aim is to “create conditions that will boost innovation.”

Scientists, researchers, designers and engineers will work with entrepreneurs to commercialise the new technologies that come out of the centre.

At the end of 2012 there were a total of 303 industrial parks across Russia. As one of the most effective business development initiatives in the country this figure is expected to rise considerably. About one in four entrepreneurs say that access to business incubators has greatly improved over the past three years, but there does remain scope for growth.

Image by Creative Tools via Flickr