Ease of doing Business rank crucial for Russia

Drawing by Dmitry Divin

Drawing by Dmitry Divin

The World Bank report and index of ease of doing business, in which Russia stands in 51st place, is seen as a key indicator for reform of the business environment.

The World Bank released its annual Doing Business rankings earlier this month, showing that Russia has risen to 51st place in the ease of doing business index. This ranking has a particular significance for Russia’s economy because the government chose it as a universal indicator to reform the business environment.

When Russian authorities set a goal for increasing foreign investment in the country, they realized it was important to show investors there was a significant change in the business environment. The Doing Business ranking was selected as a benchmark. 

In 2011, Russia was 120th on the list. Unlike other similar instruments, the World Bank rating is far removed from politics. It analyzes specific indicators, such as how many days it takes to obtain a construction permit or how many papers need to be submitted to connect a new shop to the power grid. The methodology used to calculate points is extremely transparent and makes it possible to assess the amount of red tape in the business environment of a particular country on the strength of specific examples.

Which is why in May 2012, President Vladimir Putin signed a special decree aiming to improve Russia’s ranking by 100 points; the “100 steps.” Under that decree, Russia should rise from the 120th place in 2011 to the 20th place in 2018, with the interim target being 50 in 2015. The interim target has been practically achieved.

To improve its standing in the Doing Business ranking, Russia undertook a broad range of activities. A new development institution, the Agency of Strategic Initiatives (the head of which was selected in an open competitive process from among over 1,000 candidates), has become fully operational. The agency has begun to carry out spot checks. Foreign investors visit different regions, to check how convenient it is to work with local authorities there.

Another key new development has been the National Entrepreneurial Initiative, a programme to develop roadmaps to reform specific sectors. As a part of this initiative, areas for reform were identified by business representatives, who later assessed how effective the reform was and evaluated the work of state institutions. In line with proposals from entrepreneurs, laws and regulations in Russia were adjusted, government resolutions and presidential decrees issued. This initiative has helped make it possible to simplify procedures of getting connected to a power grid and to reduce the associated costs to less than a quarter of what they used to be, from 9,500 rubles ($147) to 2,100 rubles ($32.5) per 1 kW. As a result, in the Getting Electricity indicator, Russia rose from 143 to 29th place, a record in the rankings’ history.

 Skeptics point out that Russia has managed to improve its ranking primarily due to methodological changes. In 2014, the World Bank introduced several changes to how it calculated the ranking. For 11 countries with a population of over 100 million, data began to include figures for the countries’ second biggest city also. In addition to Moscow, World Bank analysts used data for St. Petersburg, where the quality of the business environment has been traditionally higher than in the capital. Then, scope was expanded for three indicators: Resolving Insolvency, Protecting Minority Investors, and Getting Credit.

Despite a certain amount of skepticism, Russia’s improved ranking cannot be attributed to a change in methodology alone. In the Enforcing Contracts ranking, Russia is in 5th place and in 8th place for Registering Property. This is just one position away from the interim target set in President Putin’s decree. The Economic Development Ministry describes Russia’s improved ranking as a rare example of applying a project-management approach to addressing a task.

The Doing Business ranking also reveals the weakest areas in the Russian business environment: mainly, construction and export-import operations. In the Dealing with Construction Permits topic, Russia is in the 119th position (compared with the 156th a year ago), whereas in the Trading Across Borders rank in 2015, it slipped from 155th to the 170th place, the worst ever. Analysts attribute this to the need for a far-reaching and comprehensive reform of the country’s customs authority.

Russia’s positions also suffered because the scope of this indicator has been expanded to include transportation of goods not only by sea, but also by air and rail. Which means that Russia has problems in processing goods passing through all types of checkpoints. For instance, the Doing Business ranking takes into account how electronic systems are used, how long a cargo is kept at the border, how much the paperwork costs. In all these parameters, so far Russia has no progress to report. By way of comparison, in OECD countries, documentary compliance takes a maximum five hours and costs $36, whereas in Russia the figures are 43 hours and $500. According to World Bank calculations, border compliance costs Russian exporters $1,125, while in Kazakhstan, a fellow member of the Customs Union, the figure is $574.

To become one the top 20 countries with the best conditions for business by 2018, the Russian government still has a lot of work to do. However, a solid foundation for large-scale reforms has already been laid. In 2015, Russia became one of the world’s top five countries in terms of the number of reforms. They were conducted in five out of the 10 areas being assessed by the World Bank.

Alexei Lossan is the RIR Central Desk editor for business.

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