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20 Jul, 2009 06:54

Small business bears brunt of downturn

Despite Russian unemployment falling to its lowest in 6 months the economic downturn is playing havoc with the viability of Russia’s small business sector.

The current crisis is not his first. Already in Moscow in 1998, Alex Shifrin, Head of the Creative Factory, witnessed the collapse of the banking system and the Rouble losing two thirds of it's value overnight. However he says the 2009 crisis is hurting smaller businesses disproportionately.

“There is still business out there. The reality of the crisis is that – and the difference with the 98 is that – this time it is more about protecting the corporate profits. If last time around everyone was in the same boat, the banks were closing, the Rouble was significantly devaluating, this time around jobs are being cut, marketing and advertising budgets being reduced to save corporate profits.”

Small and medium-sized enterprises should account for 60% of GDP according to Russia's development plan 2020. But small businesses can't afford to borrow at the 20% rates charged by Russian banks, according to David Jones, Chairman of Pristav Collection Agency.

“The greater problem is more in commercial lending, in particular small and medium business lending, which is necessary to start this economy. If the small business owner has to pay, let's say 30% interest rate, which would be quite common, and see that he would not be able to make a 30% return, then he just would not take the loan out.”

Some people say recession is a good time to start a business – after all, you have less competition. But that assumes you don't need to borrow. If you want to run a bakery – or offer your customers hot pancakes – you'd have to do it very well. The cold reality is that at least a third of your costs would go simply to pay your loan.