• Especially for web
• Brief news
• Main
• Law digest
• In our opinion
• From problem to solution
• Our nearest neighbors
• Market breakdown
• RS poll
• Q & A
• Oh, how spacious is my native country
• Culture & customs
• Winter Olympics in Sochi

The anti-tobacco law threatens small businesses

September 2012

Fotobank www.lori.ru

In principle the government is willing to support domestic business but they tend to think in very global terms. Thus at the Innoprom-2012 exhibition on July 12th, the Russian prime minister Dmitry Medvedev was quoted as saying that in its support of small, medium and large businesses the government should focus on ensuring the stability of macroeconomic indicators. “This has to be done so as to avoid a repeat of the situation we had in Russia in the 1990s,” he explained. In addition, the head of government said he was confident that if modern well-balanced methodologies are used to regulate the economy, more credit will soon be available to businesses: interest rates will fall while maximum repayment periods on loans will increase.

In the meantime, ordinary small business people, whom the government officials say they care so much about, are concerned with much more down-to-earth problems, one of them being high street retai.

“Most of the provisions in the Ministry for Health’s bill on Protecting the Population from the Consequences of Tobacco Consumption would in reality translate into huge losses for entrepreneurs, more corruption on the domestic level and an explosive growth of the black market for cigarettes in Russia,” conclude the experts of the Russian Academy of National Economy and the Higher School of Economics. These experts were commissioned by the Russian Union of Industrialists and Entrepreneurs to assess the impact that the new bill would have on the business climate in the country and its consequences for small businesses if it were to be passed. They published their findings in late July.

It should be noted that the Ministry for Health’s proposed anti-tobacco bill consists almost exclusively of bans: advertising of tobacco products is to be banned, displaying cigarettes in showcases is to be banned, smoking in public places and selling cigarettes in retail outlets with a floor area of less than 50 square metres are to be banned, tobacco companies are to be banned from donating money to charity as well as from sponsoring events. At the moment the bill is being reviewed in the ministries affected by it.

In the meantime the bit that worries entrepreneurs the most is the ban on selling cigarettes in small retail outlets with a floor area of less than 50 square metres. Experts believe there is no real justification for this ban. They are also criticising the proposed ban on showcasing cigarettes in retail outlets because similar bans in countries like Canada, Iceland and Ireland have proved ineffective.

“Banning small retail outlets from selling cigarettes is in effect nothing more than discrimination based on the floor area of the store,” is the opinion of the Russian Academy of National Economy researcher Natalia Kornienko, who was in charge of assessing the regulatory impact of the new bill. “There is no evidence whatsoever in any country in the world that there is any correlation between the size of a retail outlet and its sales of tobacco. It is glaringly obvious that the inclusion of this particular ban in the new bill aims to strengthen the positions of the major supermarket chains: we estimate that this ban will cause sales in small retail to fall by as much as 30%. Plus this measure is not in any way aligned with the declared goals of the bill.”

It should be mentioned, though, that representative of large retail chains deny these allegations. Thus, while the executive director of the Association of Retail Companies Ilya Belonovsky admits that large retail chains will benefit if the new bill is passed into law, he says they will not gain that much in the end. “Cigarette sails make up no more than 3-4% of our total sales,” he explains, “so maybe they will go up by 1%... there is no point to exaggerate future revenue. Moreover, I’ve already said several times we don’t need this ‘gift’ at all”.

In view of the fact that from January 1st 2013 street kiosks will also not be able to sell beer, the vast majority of them will simply have to close down. “If small retailers can no longer sell tobacco and alcohol, this basically wrecks the entire small retail business as such. It should be reminded here that among the things that killed Gorbachev’s regime in the late 1980s was a tobacco riot. Consequences have to be assessed before any action of this sort is taken, “notes the head of the Russian Union of Industrialists and Entrepreneurs Alexander Shokhin.

However, the head of the Ministry for Health Veronica Skvortsova is firm. “We’re not talking about infringing the rights of small and medium sized tobacco businesses,” she was quoted as saying in late May, “what we want for this kind of business is to simply disappear entirely in the future”.

In the meantime the problem with the development of small and medium sized businesses still has not been resolved and analysts say that something is going to be done about it.

Thus, the asset management director of the investment company Trade Portal Nikolai Solabuto points out that one of the main obstacles preventing small and medium businesses from taking off in Russia is overregulation, lack of office spaces and industrial real estate and high overheads of running a business.

“And the main obstacle that’s real holding back the development and investment in this otherwise quite promising sector is lack of primary business education,” he says, “when teaching people about business you don’t want to tell them that they need to come up with an exclusive product, instead you have to explain to them what sort of formalities an entrepreneur has to go through to properly set up his or her new business, what is the best way to deal with these formalities, what steps need to be taken to take care of them. You also need to teach them the basics about contracts, legal and taxation nuances of running a small business. You can’t find this kind of information even on the specialised websites of government agencies. It turns out this information is really hard to come by, like once you’ve decided to start a business, where you should go, what documents should you bring along, what fees you should pay etc.?”

In addition there is practically no available turn-key office and industrial premises in the country. «Suppose I wanted to open some kind of a repair shop, I would have to deal with the fire wardens, health and safety officials and a whole bunch of other regulators on my own,” Solabuto explains, “Ideally I would want to be able to lease some premises that already have all the necessary permits. If we take food production, small businesses simply cannot afford to enter that sector at all because of the prohibitive costs of getting all the permits for the premises.”

The analyst believes the first step should be to educate entrepreneurs. “At the very least some crash courses could be organised in prefectures, a small classroom and a teacher who can tell them everything,” he believes, “the next step would be building turn-key office spaces and industrial premises that small businesses could simply lease. If local authorities cannot provide their small businesses with certified premises for their operations, they should relax the restrictions and requirements of the supervisory agencies.”

Sergey Slavin,
Economic observer with the Russian Survey