Government oratory outbalanced down the system (insights in company creation in Russia)

(inspired by Mark Twain and Russian Agency of Strategic Initiatives)

One of my favourite stories is «How I Edited An Agricultural Paper» by Mark Twain, a satirical novel on people who advocate things they know nothing about. The story is good for all ages and times. When you read «Turnips should never be pulled, it injures them. It is much better to send a boy up and let him shake the tree.» you, quite naturally, feel an urge to say «Shake your grandmother!...».

 The Strategic Initiatives Agency (SIA, or rus АСИ - Агенство Стратегических Инициатив) was founded by Russian Government in August 2011 in order to promote and implement measures improving business environment in Russia and other peaceable things. Vladimir Putin chairs their Supervisory Board. SIA cost to state budget is in hundreds of millions of roubles per annum.

In GreenLane we follow governmental initiatives in the areas of our specialisation - Immigration law, Equity/Corporate Registrations, Tax Accounting and some of related fields. One day in March 2013, I came across SIA press-release that heralded «road map» on simplification of registration procedures for small businesses. I didn’t follow them closely before that, but registrations of new companies (charter development, equity financing, directors, etc) is one of our core areas of expertise, and I read the article. Upon reading it I felt a bit like Mark Twain’s character who thought he was crazy after reading that «…now, as the warm weather approaches, and the ganders begin to spawn..."

2,5 years on, in November 2015, it’s still timely, even more so - we can (and will) benchmark real changes that occurred in the field. I want to present you with brief line-by-line analysis of the press-release that demonstrates how high-level rhetoric is translated by the system into BS and how it is different from the «trench truth» (the real state of things). The following is about utter absence of knowledge of laws, by-laws and practical procedures in dummy government agencies.

I’m going to jump a bit ahead and say that I clearly visualise a trainee-level girl at SIA who was given that task «to make some calls and gather information from the market». So she did (consider the below) by making a few phone calls and checking a few webpages.

But the girl is not to blame - she was, probably, an entry-level staff who was given job that was viewed as inferior by her superiors. The girl’s, probably, long moved on and her CV carries these lines about her position in SIA and «gathering and analysis of information». The point is that nobody competent ever checked her work and it went all the way up into the official «road map» and press-release (i.e. program with budget and stuff). Because there is nobody competent in business there at SIA, and there is nobody who cares.

So SIA is led by 15-minute BS market research effort done by a novice in her/his tender years… Apparently the priority of the Government Agency is not to know the market environment they are meant to improve, but to get the money, spend the money, produce rousing report (no matter what BS it is), get more money…, repeat cycle. I have little but think that the probability is high that other SIA initiatives are of similar quality.

Legend for the below: (a) quotation from «road map» (b) my comment

(а) the road map promised that by 2018 company registration time will be reduced from current 30 days to 5 days, and expenses at registration will be reduced from 6000 rub to 4100 rub.

(b) registration takes 5-6 working days (both in 2013 and today). The state fee is 4000 rub for LTD type company and 800 rub for sole proprietorship (ИП) registration. Other kinds of costs may be involved, but there was nothing on it (may be for the better) in the road map. What parallel universe SIA was going to improve?

(а) the road map envisioned that in 2018 company registration will consist of 3 (three) stages, not 9 (nine) as of now…

(b) company registration consists of (1) registration by Tax Authority, (2) registration in Federal Statistics Agency and (3) Pension Fund and (4) Social Security Fund registrations. By stretching a point this is 4 (four) stages, not 9 (nine). But without stretching a point this is only 1 (one) stage because (2), (3) and (4) happen automatically - without business-founder’s need to go anywhere or do anything (apart from picking the registration papers from 2-4). Again, what parallel universe SIA was going to improve?

(а) the road map envisioned that it will be allowed to pay company charter capital during 2 (two) months after company registration (now you have to pay not less than half at the registration.

(b) in March 2013 the law didn’t require to pay the charter capital «on the spot», and nobody was ever checking at registration if you made any contributions.

…and to finish off these revelations - business founder could fully pay company charter capital by contributing (purely on paper) some accounting and business machinery, or his/her iPhone or netbook. You could do the valuation of the contributed item yourself (one more A4 piece of paper + your signature). The only point to remember was - in your item valuation you had to stay under 20 000 rub (now ~€290) otherwise external valuator service would be required by law, which was perfectly Ok because minimal amount of the charter capital required by law for the LTD type was only 10 000 rub (~€145 acc to today’s exchange rate). This opportunity was taken away in 2014 series of changes to Russian civil code.

NOTE: Here I invite you to pay attention to something pretty new - liberal nature of Russian business registration laws.

(a) the road map promised that 'standard' articles of association will be legally enacted (Editor’s note: that is - in case your situation more or less 'standard' you will not have to think about your business’s 'articles of constitution' before registering it, and simply use the ‘standard’ template of articles of association).

(b) such thing as «standard Articles of Association» of the company may become a painful hallucination if you go for it. The thing is - Russian legislature changes frequently, the changes are small but many and difficult to keep track of. Who is going to check compliance of the «golden standard» to current legislature? I doubt that government can do it (in fact, I guarantee you - they can’t and they won’t). Also, such documents (Standard Articles of Association) were available from professional consulting companies since the year dot. Even more so, they were timely adjusted to vagaries of the legislature.

The only thing you had to think about, as sole founder, was (and still is) - types of activity your business is going to engage. The rest is irrelevant if you are sole founder of the company.

In case you are two or more founders, the Constitution of your business is worth some consideration and no standard document will satisfy you in this case - it has to be explained, made clear, transparent and satisfy all founders.

(a) the road map envisioned that there will be no need for a company seal/stamp.

(b) there was no need ever for a stamp at the registration stage. The stamp had to be produced after company was registered. No stamp was/is required before or during the process of registration. Stamps are produced in one business day (or just few hours) and cost starting about ~€5 per piece. Sole proprietorships could have operated without a stamp long before that.

(a) the road map promised that state non-budgetary funds (e.g. Penson Fund, Social Security Fund) and registration Authority will reduce communication lead-times…

(b) it was automated back in zero years. The communication takes 2-3 days max and didn’t generally slow down the business registration process.

POST ANALYSIS QUESTIONS & ANSWERS:

(1) Why SIA was going to fight their own shadow? Answer: Because you are incompetent.

(2) Are Russian business registration rules that liberal indeed? Answer: Yes they are. In fact, Russian rules are head&shoulders above many EU countries’. Especially, in financial requirements for starting business, which is very important.

(3) Do registration difficulties impede improvement of business climate in Russia or reduce number of companies registered? Answer: No. Thousands of businesses are registered and de-registered each month. Thousands of companies are ‘dormant’ (abandoned and will never work unless purchased), hundreds and LTDs are on for sale. Many companies are used as shells for money laundering and tax debt hiding. It’s a two-way traffic. Businesses are conceived in thousands each day, but only few get off the ground, even fewer grow. Reasons for failure are too many. This is normal.

(4) Will further liberalisation of business registration laws and procedures critically improve business environment? Answer: No. See (3) above.

(5) Are there any problems left in this field? Answer: Yes, company registration may be a huge pain if you are a first-timer and you do it on your own. Some people get heart attacks when they confront a host of unfamiliar registration procedures after 4th or 5th rejection. Tax Authority earns millions of rubles by rejecting registration applications on formal grounds (state registration fees are non-refundable).

Also, this may look cynical and hypocritical, but at exactly the same time (in 2013) the government with it’s other hand made life more difficult for small business. They doubled minimal instalments for the sole proprietors (rus ИП) in 2013 that drove thousands of small businesses back to the shadow (Russian small business is quick to retaliate with 'fuck you and your taxes' attitude). They also enacted compulsory accounting for those who use simplified system of taxation (more cost to business).

I will write a separate review on recent legislative changes in the field.

(6) If SIA was professional about it - what they would have mapped?

Information Technology (IT) is the answer. Federally enforce Electronic Digital Signatures (EDS) that allow to identify people on-line (no more need to turn up in person anywhere) and enable them to apply from anywhere. Replace paper based forms with webforms that minimise the probability of mistakes. Forget about ancient paper-based postal services (Russian Post loses letters and it’s geologically slow). All meaningful communications must be 100% digital over the internet. Russian government is, slowly, coming that way. Projects like gosuslugi.ru, pgu.mos.ru encourage optimism, but they lack massive federal support. I would re-allocate the SIA millions to these infrastructural projects.

You remember I wrote that we will benchmark real changes that occurred in the field? That part is coming in the next publication. To be continued.

P.S. Special treat for those who have read this far - more Mark Twain to enjoy:

«Concerning the pumpkin. This berry is a favourite with the natives of the interior of New England,who prefer it to the gooseberry for the making off fruit-cake, and who likewise give it the preference over the raspberry for feeding cows, as being more filling and fully as satisfying. The pumpkin is the only esculent of the orange family that will thrive in the North, except the gourd and one or two varieties of the squash. But the custom of planting it in the front yard with the shrubbery is fast going out of vogue, for it is now generally conceded that, the pumpkin as a shade tree is a failure.

The guano is a fine bird, but great care is necessary in rearing it. It should not be imported earlier than June or later than September. In the winter it should be kept in a warm place, where it can hatch out its young.

It is evident that we are to have a backward season for grain. Therefore it will be well for the farmer to begin setting out his corn-stalks and planting his buckwheat cakes in July instead of August»

GreenLane is a team of professionals dedicated to Immigration, Corporate Registration and Accounting services. We sustain diverse communications of our clients with state authorities and banks in a time and cost effective way.

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