RS Especially for web Ease of Doing Business: Russia amongst BRICS countries

Ease of Doing Business: Russia amongst BRICS countries

April 2012

Doing Business

According to the annual report ‘Doing Business 2012’ prepared by the World Bank, Russia was ranked 120th out of 183 countries in the Ease of Doing Business rating. Among the other BRICS nations in the rating, Russia is right in the middle, below South Africa and China (with 35th and 91st positions respectively) and above Brazil and India (in 126th and 132th places respectively) (see Figure 1).

Since last year Russia has climbed up by 4 positions. This improvement in the country’s rating resulted from a number of reforms implemented in Russia: made getting electricity less costly by revising the tariffs to connection, eliminating of requirement to obtain cadastral passport on land plots, filing a commercial case easier by introducing an electronic case filing system and made trading across borders easier by reducing the number of documents needed for each export/ import transaction and lowering the associated cost.

Starting a business
Fig. 1. BRICS Nations in the World Bank’s Ease of Doing Business rating

How much is it to build a house?

According to the report, all of the BRICS nations except for South Africa face the most serious problems primarily in:

  1. Dealing with construction permits
  2. Starting a business
  3. Paying taxes.

One of the key problems faced by all BRICS nations is the large amount of red tape that must be waded through to get a construction permit.

Russia has the largest number of formalities that must be completed to get a construction permit – 51, in other words, in this respect Russia is kind of a ‘leader’. South Africa only has 31 formalities while China and India have 33 and 34 respectively. The average number of days taken up by each formality varies between 7 and 9. Thus in Russia getting all the necessary approvals can take up to 423 days. However, despite the fact that Brazil only has 17 formalities, i.e. only a third of the amount that must be completed in Russia, the time for going through all of them is 469 days, i.e. on average, in Brazil completing each formality takes 27 days.

Construction permits are most expensive (in % of per capita income) in India – 1,631.4 and cheapest in South Africa at 21.2. In Brazil they cost 40.2% of per capital income, in China – 444.1 and in Russia – 183.8.

Thus getting a construction permit in the BRICS countries is quite an undertaking. But starting your own business is just as challenging (see Figure 2).

The easiest BRICS country to start a business in is South Africa, you have to go through just 5 formalities and the whole process would take you 19 days. Russia is also relatively business friendly – there are just 9 formalities taking up a total of 30 days. These two countries also have the lowest cost of starting a business in terms of percentage of per capita income: 2.0 and 0.3 respectively. China has the largest number of formalities for starting a business – 14, while in Brazil opening a business of your own takes the longest – 119 days; the most expensive is India where you would have to shell out 46.8% of per capital income if you wanted to start a business.

Starting a business
Fig. 2. Starting a business

Pros and cons in taxation

Based on the criteria used by the World Bank to assess national taxation systems, Russia and India have the most transparent taxation laws for the BRICS countries, even though the number of tax payments throughout the year is relatively high: 18 in Russia and 29 in India. Nevertheless, the time it takes to prepare the declarations for and pay the 3 main types of taxes and contributions (corporate income tax, VAT and labour taxes, including payroll taxes and social contributions), is less than in other BRICS countries: in Russia the whole process takes 148 hours, in India – 140. South Africa and Russia have relatively low total tax rates (% of profit): 31.3 and 46.9% respectively. The total number of tax payments that have to be made throughout the year in China is 7, but it takes an average of 398 hours per year to prepare declarations and pay taxes. And yet this does not seem so daunting next to the 2,600 hours per year that it would take you to prepare the declarations for and pay the 9 taxes in Brazil. China and Brazil also have the highest rates in percentage of profit – 63.5 and 67.1% respectively (Fig. 3).

Paying taxes
Fig. 3. Paying taxes

Despite the recently implemented reform in trading across borders, Russia was rated last among the BRICS nations on this parameter (Fig. 5). Going through all the formalities for export (8) and import (10) transactions takes an average of 72 days and the cost of these formalities is rather high as well – USD 1,800 per contained. Brazil has 13 export and 17 imports formalities but completing them would take you the least time, however Brazil has the highest cost of import and export formalities – USD 2,215 and USD 2,275 per contained respectively (Fig. 4).

Trading across borders
Fig. 4. Trading across borders

Real property, loans and investment climate

In China you would have to go through 4 formalities to register your real property, spending an average of 29 days and paying 1.3% of the property value. In South Africa there are 6 formalities taking up 23 days, in India – 4 that take 44 days, in Brazil – 13 taking 39 days. In Russia there are 5 formalities and the whole process takes 43 days. But in our country the cost of registration is the lowest – USD 0.2 per contained. Russia is followed by Brazil with 2.3, China with 3.6 and South Africa with 5.6. India has the highest cost of registration at USD 7.3 per contained.

Now we are going to talk about a few things that are not so swell in Russia. First of all loans: South Africa is the country where getting a loan is easiest not just among the BRICS countries but in the world as a whole. South Africa is first on this position in the entire rating. It has the highest strength of legal rights index (10) and the depth of credit information index (6). Compare this with Singapore, the country that tops the ease of doing business rating, is just 8th in terms of ease of getting a loan while the US is 4th (it should be noted that South Africa shares first place with the UK). In the meantime Russia and Brazil share 98th place.

Russia has the weakest investor protection among the BRICS nations. The criteria used to assess investor protection include transparency of related-party transactions, liability for self-dealing (index of director liability index) and shareholders’ ability to sue officers and directors for misconduct.

To sweeten this bitter pill a bit, we could add that Russia is strong on contract enforcement, i.e. Russia’s judicial system is fairly effective at resolving commercial disputes. Russia is 13th on this position in the entire rating, right after Singapore with both Brazil (118) and India (182) being far behind.

According to the Global Economic Forum, Russia is losing its positions

Another rating worth mentioning is the Global Competitiveness Index 2011-2012 prepared by the Global Economic Forum. In this rating Russia is 66th among a total of 142 countries and, unfortunately, last among the BRICS nations. Since the previous rating Russia has lost 3 spots (Figure 5).

Global Competitiveness Index 2011-2012 rankings
Fig. 5. Global Competitiveness Index 2011-2012 rankings

According to The Global Competitiveness Report 2011-2012 Russia is one of the 18 economies that are transitioning from the 2nd to the 3rd development stage (the economies on the 3rd development stage include the US, Germany, the UK, France, Japan). This transitional stage means that per capita GDP is between US$ 9,000-17,000, the weight of key indicators in the economy is 20-40% (institutions, infrastructure, macroeconomic environment, health care and primary education), efficiency enhancers are at 50 %, and innovation and sophistication factors are at 10%. It should be noted that the last time this report came out Russia was grouped with countries at the 2nd development stage.

According to the data cited in the report, Russia’s economy still remains one of the largest in the world, despite all the difficulties it has been facing recently. At the moment Russia has the 11th largest economy with a GDP exceeding USD 1,465.1 billion. This is 4 times less than China, 1.4 times less than Brazil and 1.05 times less than India. China has the world’s 2nd largest economy at the moment, but is still 2.5 times less than the US.

Russia’s GDP as a share of the global GDP is 3.00% (Fig. 6); GDP per capita is USD 10,437 (Fig. 7). Populous countries such as China and India, which have the world’s two largest populations, are naturally lagging far behind on per capital income even though their economies are among the largest in the world. Even if China’s annual GDP was the same as that of the US, with a population of 1,354.1 million people China would still be in 51st place in terms of GDP per capita, somewhere between Lithuania (79th GDP with a population of 3.3 million) and Brazil.

GDP as a share of world GDP
Fig. 6. GDP as a share of world GDP

GDP per capita
Fig. 7. GDP per capita

  1. in China - high level of inflation (11.6%)
  2. in South Africa - inefficient government bureaucracy (19.6%)
  3. in Brazil - high tax rates (19.3%)
  4. in India - inadequate supply of infrastructure (17%)
  5. in Russia - corruption (22.8%).