More than half a year have passed since the authorities began to be concerned about the respiratory infectious disease known at present as the novel coronavirus infection (COVID-19) that was first officially registered in Wuhan, China, on December 31, 2019. The pandemic has already spread around the world and the number of people infected with the virus exceeded, as of June 30, 2020, 10 million cases with more than 500,000 deaths. An unprecedented emergency that embraced the countries of six continents forced people to follow the rules of social distancing and lock themselves in their homes. While scientists are racking their brains over the coronavirus vaccine, governments provide financial support both to people and to small and medium-sized enterprises (SMEs).
According to Johns Hopkins University (2020), Russia currently ranks third in the world for confirmed coronavirus cases. Over 200,000 infected people, nearly half of the country’s cases, are in Moscow and the pandemic is spreading across Russian regions. Despite the fact that Russia has an unusually low fatality rate of 0.9% in comparison with other European states, the Russian government was quick to respond to the outbreak of COVID-19. In a televised address to Russian citizens of March 25, 2020, President of Russia Vladimir Putin announced a paid non-working days period from March 28 to April 5 to reduce the spread of the virus [BBC, 2020]. In Russia, as in many other states, quarantine was introduced at an early stage, which allowed to protract the situation as long as possible to reduce the burden on the healthcare system and medical workers. The declared non-working days in the country were extended to April 30, 2020, and Russia began to lift restrictions from May 12, 2020 [Kommersant, 2020a]. Vladimir Putin emphasized that the lifting of restrictions would be gradual and the regional authorities would need to take their individual approaches in accordance with local epidemiological conditions. For instance, Moscow kept a lockdown until June 8, 2020. According to the Russian leader, it was necessary to restore the work of the main economic sectors, including energy, agriculture, and industry, and Russian citizens began returning to work wearing face masks and gloves in shops and on public transport.
The main reason for taking decisive actions for restoring normal life was the economic situation of the country. Restaurants and bars, shops and stores, fitness centers and pools, hairdressers, and many such enterprises turned out to be the most vulnerable part of the economy during the coronavirus outbreak. Small and medium-sized businesses play a critical role in providing goods and services, creating job opportunities, and developing regional economies of Russia. As reported by the Russian Federal State Statistics Service, SMEs contribute 20% to the Russian GDP [Moscow Times, 2020]. Therefore, the Russian government has developed a number of governmental programs for small and medium-sized enterprises to assist their survival during the pandemic.
As stated by Vladimir Putin in his televised address of March 25, 2020, SMEs received a deferral of all taxes, excluding VAT, for six months, as well as a six-month deferral of loans from Russian banks. In order to support the income of citizens employed in SMEs, the Russian president lowered insurance payments from 30% to 15% since a reduced rate of insurance affects the amount of salary [President of Russia, 2020a]. This measure was introduced for the long-term perspective, which will help Russia cope with the economic downturn. After holding an online meeting with members of the Russian government, Putin proposed to provide financial assistance to SMEs in the amount of 12,130 rubles ($174.37) per employee per month that would be paid from April 1, 2020 [President of Russia, 2020b]. Since the measure of deferring loans for six months was only partially effective, loans for employees’ salaries will be guaranteed by Vnesheconombank, the state corporation for the development of the Russian economy, at least to the amount of 75% of salaries. Moreover, Russian regions, in which SMEs experienced a decline in profits due to the pandemic, received 200 billion rubles ($2.8 billion) of support. More than 1.7 million SMEs affected by the spread of COVID-19 can apply for the state support program. Since the sectors of food and consumer services have suffered the most, public catering businesses will receive 11.8 billion rubles ($170 million) and consumer services – 7 billion rubles ($101 million). In total, the amount of two anti-coronavirus-crisis packages amounted to 2.1 trillion rubles ($30 billion) [RIA Novosti, 2020]. Moreover, the Bank of Russia provided financial support of 500 billion rubles ($7.2 billion) for loans of SMEs [Kommersant, 2020b].
Despite the Russian government’s support for SMEs, business activity in Russia fell to the lowest point in the last five years. The Russia Small Business Index (RSBI) demonstrates a decrease in revenues due to restrictions and a significant deterioration in business activity in the SME sector. According to TASS (2020), the record low level of SME sales was registered and 78% of respondents claimed that their revenues had fallen. The decline in revenues entailed a decrease in two other major indicators – personnel and investment. Although the Russian government provided financial assistance to enterprises to pay salaries for employees, employers have begun sending their employees on unpaid leaves or even firing them. According to the RSBI, the investment by entrepreneurs in their SMEs fell by 30%. Furthermore, the implementation of the governmental support programs revealed that their mechanisms are not efficient enough since only a certain number of enterprises that meet criteria and have a good credit rating could be provided with support. The government was late with loan deferral measures as the demand for goods and services has already declined with the outbreak of the pandemic. The ever-growing demand determined by the income of people is the main factor of SME business activity. Therefore, in the face of the falling demand, most enterprises do not have enough funds for paying salaries for their employees and repaying loans. Thus, under an unstable economic situation, the credit default risk increases, specifically in Russian regions, where the SME sector is not as developed as in big cities such as Moscow, Saint-Petersburg, Novosibirsk, etc. It is easier for enterprises to declare bankruptcy and reopen after the end of the crisis rather than to borrow money from a bank, or to keep a low profile, which also leads to the reduction of taxes to the state budget. Nevertheless, SMEs that have performed a digital transformation continue working in an online format. Consequently, the ongoing pandemic is a challenging time for small and medium-sized businesses of Russia notwithstanding the support of the government.
On the whole, the coronavirus pandemic has affected small businesses in many respects – from the decline of demand and revenues to the transfer to remote work, and businesses are being forced to adapt. In response to the related economic downturn, governments are implementing measures to minimize the negative impacts by supporting business activity, protecting the rights of workers, and providing financial assistance. Russia has been hit hard by COVID-19 and the Russian government focuses on implementing measures that could support citizens and enterprises, especially the SME sector, which contributes 1/5 to its GDP. The importance of the SME sector led the Russian government to provide financial assistance, credit deferrals, and tax incentives for SMEs that create jobs, produce goods, and provide consumer services. However, the inefficiency of the implementation mechanisms reduces the positive impact of measures taken by the Russian government.
References:
BBC (2020). Vacation Instead of Quarantine. The Main Thing from Putin’s Appeal to the People. Retrieved from https://www.bbc.com/russian/news-52036412. Accessed on 16.06.2020.
Johns Hopkins University (2020). COVID-19 Dashboard by the Center for Systems Science and Engineering (CSCE) at Johns Hopkins University (JHU). Retrieved from https://coronavirus.jhu.edu/map.html. Accessed on 16.06.2020.
Kommersant (2020a). Putin Instructed to Prepare Recommendations for Overcoming the Restriction Regime from May 12. Retrieved from https://www.kommersant.ru/doc/4333789. Accessed on 07.08.2020.
Kommersant (2020b). The Central Bank Will Provide 500 Billion Rubles to Support Business Lending. Retrieved from https://www.kommersant.ru/doc/4307212. Accessed on 07.08.2020.
Moscow Times (2020). Russia’s Small Businesses Contribute Just 20% of Economy. Retrieved from https://www.themoscowtimes.com/2020/01/28/russias-small-businesses-contribute-20-percent-russia-economy-a69063. Accessed on 16.06.2020.
President of Russia (2020a). Address to the Nation. Retrieved from http://en.kremlin.ru/events/president/news/63061. Accessed on 16.06.2020.
President of Russia (2020b). Meeting with Government members. Retrieved from http://en.kremlin.ru/events/president/news/63204. Accessed on 16.06.2020.
RIA Novosti (2020). Support for Small and Medium-Sized Enterprises due to Coronavirus in 2020. Retrieved from https://ria.ru/amp/20200428/1570683407.html. Accessed on 16.06.2020.
TASS (2020). Research: SME Business Activity Index in Russia Drops to a Minimum. Retrieved from https://tass.ru/msp/8506159. Accessed on 16.06.2020.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.