Duma Deputy Ivan Grachyov speaks with Ekaterina Larina about fostering small- and medium-business development in Russia.

Duma Deputy Ivan Grachyov is leader of the Entrepreneurs' Support movement, which he is in the process of registering as a political party. He believes that Russia will not be able to build a stable political and economic system unless it develops small- and medium-sized businesses.

Grachyov spoke to The Russia Journal about some of the problems affecting budding businesses and outlined his hope that forming a political party could force other politicians to take the issue seriously.

THE RUSSIA JOURNAL: You have been involved with issues affecting small business since the early 1990s. What's the situation like today?

IVAN GRACHYOV: I began back then by proposing a law on state support for small business. At that time, the downward trend had only just begun. The State Statistics Committee counted 960,000 small businesses in the country then, while now it counts 679,000. The decline really got under way in 1995-96. A steadily worsening tax environment is the main reason. Small businesses have lost their tax breaks concerning VAT and profits tax. Small businesses just starting out used to be exempt from profit tax, while now they pay a 24 percent rate. Imputation tax has been introduced for 90 percent of small businesses, but it makes things harder for them and increases their accounting work five-fold.

RJ: But does this decrease really reflect reality? A lot of businesses have probably gone underground after all, and there were always a lot of one-day firms.

IG: The trend is confirmed by other indicators, too. Employment in the sector has dropped from 14 million down to 7 million or 8 million people. It's hard to assess how much business is underground, but the number of businesses paying taxes has definitely decreased.

There are four main reasons for this: The first is the tax system. The Gref-Shatalov reforms have only worsened the tax situation of small businesses. The second is relations between business and power – everything connected to the "bureaucratic mafia." The plans to reduce bureaucracy are a good start, but they don't concern the main inspection officials – tax services, police and fire services. And they don't provide for any possibility for entrepreneurs to get compensation from the state for damage caused by officials' illegal actions.

The third problem is property relations. For businesses to work, there has to be order in property relations. Entrepreneurs don't have the right incentives today. It's more profitable to join someone else's business and grab a big slice of the assets today than to start your own business from scratch.

The fourth problem is lack of access to money. Any new business needs access to money to help it get going, but our banking system isn't designed to work with small businesses. Proposed banking reforms designed for the biggest banks will only make the situation worse. If small- and medium-sized banks won't work with small businesses, big banks are even less likely to.

RJ: Why is there so much talk about the need to develop small business, but so few results?

IG: First, because small businesses don't have political protection; they don't have lobbyists on their side. We are trying to resolve this by creating the Entrepreneurship Development Party. Winning voters is always an argument for officials and deputies, after all. If voters are organized, politicians will react, if not, they'll turn their backs on small businesses, no matter what they may say otherwise.

Second, our Gaidars and Grefs have a distorted view of what liberalism means. They've made a dogma of the idea that all should be taxed equally. But in America, for example, individual entrepreneurs pay only income tax, not VAT or corporate taxes. We have 3 million private entrepreneurs who could all be declaring their incomes and paying income tax.

RJ: But you said there were fewer small businesses than that.

IG: Yes, but there are also individual private entrepreneurs, many of whom aren't registered. If conditions improved, they would be only too happy to come out into the open. In Poland, for example, which is a much smaller country, they have 5 million entrepreneurs. I think that if we created the right conditions, we could have 8 million within four to five years.

I read recently that [former Prime Minister Yegor] Gaidar admitted that it was a mistake to take the South Korean road and create huge chaebols. We should have taken the Taiwanese road and created a mass of small- and medium-sized businesses. We didn't even end up with a South Korean-style regime because we're nowhere near as law-abiding as they are. Instead, we've got an unstable South American type of system with large transnational companies exporting mostly raw materials and very few small businesses.

RJ: Why haven't your own political efforts to influence the reformers worked so far?

IG: At first I thought that the right-wing parties like Yabloko and Gaidar's Russia's Democratic Choice would support small businesses. I tried to work within Yabloko, for example, to get support for entrepreneurs, but I realized it was futile. Entrepreneurs are an active bunch and therefore a threat to the old "Bolshevik" party bosses, who began turning their parties into sects closed to anyone who was too active. This led me in 1997 to decide to set up a pro-business party. The criteria is simple – how you vote on tax. If SPS (Union of Right Forces) voted to end tax breaks for small businesses, then they're not right-wing and they're not business-friendly.

RJ: What's the situation with your party now?

IG: We had a congress in September to transform our movement into a party. We now have 11,000 members and 50 regional branches. We will take part in parliamentary elections independently – we've got a chance of breaking the 5 percent barrier, and then we'll have our own representatives in the Duma and will be able to influence the tax system.

RJ: What are the most promising avenues for growth in the sector?

IG: Small scientific and technology businesses have huge potential. Labor costs abroad are high, and foreign companies are always looking to keep costs down. There are Western businessmen of Russian origin who know Western business well and have come to the conclusion that it's more profitable to buy here. But these companies have to have the same kinds of conditions as, say, Gazprom.

Scientific centers like Oxford and Cambridge in Britain benefit from private business investment because investors who keep their money in a project for three to five years are exempt from income tax. Companies get a 50 percent corporate tax discount. The world has already tried all this. We don't need to invent new solutions, we just need to look around and borrow what will work for us.

Of our own small businesses, construction is doing all right because it still benefits from some tax breaks. There are interesting businesses in crafts such as jewelry. Services and food are both depressed sectors. I know of two examples when good businesses – a hairdressing and a knitwear business – were forced to close because of the imputation tax. The hairdressers all went to work illegally from home, and the knitwear manufacturers also began working from home, passing their goods off as Turkish or Chinese imports.

RJ: But you still think there's potential for small business?

IG: Huge potential. I'm absolutely convinced that there's nothing in our mentality to stop us from living and working normally like people do in other countries. Just give us normal conditions and things here will develop as they have elsewhere.