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President of Russia Dmitry Medvedev: Colleagues,

About a week ago, I met with the Prosecutor General, who gave me the good news that the number of small business inspections and audits is decreasing as a result of the decisions that we nurtured and pushed through, which I then turned into legislative initiatives. In many cases, the Prosecutor General’s Office is guarding the interests of small businesses, medium-sized businesses, and ultimately, all businesses, and is refusing to authorise conduct of unnecessary and unjustified inspections.

Of course, this made me happy, but I wanted to see how things were going in the field, so I decided to meet with all of you, so that you can honestly tell me what is happening, and whether anything has progressed recently or not. Because on the outside, everything looks fairly good: we have passed a new law on auditing entrepreneurial activity (you and I discussed it multiple times); supervising agencies are now working within a special procedural framework; small and medium-sized businesses now have a greater access to the public procurement contracts; we have instated so-called priority rights for purchasing rented facilities; we have established preferential tariffs for connection to energy grids; federal constituent entities have been delegated the right to make decisions on lowering tax rates applicable under the simplified taxation procedure; and this year, we have increased financing for the federal programme to support businesses more than 2.5-fold.

Everything appears well, but there are some reservations related to things that I have been seeing and hearing. I have received quite a number of comments and complaints, both through direct personal contact and electronically, through my web page and my blog. People are writing very different things, and are often writing that nothing has changed at all, that everything is getting worse, that things take longer to get done, etc. I understand that in many of these cases, people are being emotional. Indeed, I think we actually have made progress. But the sheer number of complaints containing negative information about the state of business regulation, especially for small and medium-sized businesses in our country, is exceedingly high.

Clearly, adequate conditions for developing small businesses are formed locally. These conditions are formed on the basis of federal legislation, but the federal legislation is modified by regional legislation, and often, the regional laws either improve the federal laws or, on the contrary, make them more perplex by bringing in additional requirements. This is also something we should discuss. Incidentally, perhaps in many cases, our efforts are unsuccessful due to the actions of federal and local civil servants. This is not the case everywhere. No doubt, there are places where the smallest businesses receive a great deal of attention; in some territories, economic activity is entirely ensured by small businesses. We are meeting here in Zvenigorod, and I think local authorities will make their comments on the subject. There is certainly much to discuss.

Lowering administrative barriers remains our key goal. I already listed the measures taken, but we must not forget that the regulations in the law now taking effect, protecting the rights of entrepreneurs during inspections, can be changed or simply twisted by lower-level legislation, as well as departmental documents. For example, certain supervisory agencies believe that the regulation regarding the maximum permissible duration for inspections – 50 hours per year – does not apply overall, but rather, to each individual type of inspection. Thus, to break it down mathematically, let’s multiply forty types of inspections by 50 hours; clearly, these inspections can last all year long. This is simply profane and a mockery of the law’s intent.

I am certain that there are many similar examples. The Prosecutor General’s Office, present here at our meeting, and other law enforcement agencies must suppress this type of activity. In this regard, we need to pass inter-departmental regulations as quickly as possible and ensure that regional legislation in the federal constituent territories corresponds to the federal legislation. I am hereby instructing the Prosecutor General’s Office and other supervisory agencies involved in this process to accomplish the task.

Just a few words about enforcing the law on priority rights for purchasing rented facilities. For the moment, its implementation is progressing very slowly. Based on the information I have available, only about 500 corresponding agreements have been registered. Does this imply that we only have 500 small businesses that would like to purchase their facilities? Of course not. It means that they are being hindered by faulty rules and individual bureaucrats that simply do not want to give these facilities up to the private sector, and are using all possible loopholes in order to maintain control of those facilities, because they essentially see them as their own private assets that can be used to make money.

The implementation of this law will essentially be a test of our bureaucracy’s attitude toward small and medium-sized businesses. And this test will show whether or not we are really serious about changing.

Businesses face another complication: state services that are delegated by executive authorities to state unitary enterprises and state offices, the so-called authorities-linked commercial entities. We have discussed this a lot in similar meetings. Here, too, the situation has changed very little. Most of these services not only need to be paid for, but are also expensive and monopolised, and it is almost impossible to get around.

I began talking about this issue about two years ago. At the time, there were some truly repulsive examples related to waste treatment and something else, when enormous amounts of money were charged for merely drafting technical assignment for a business that only employed three to five people. This was done in a quasi-legal manner, as there was indeed a regulatory act and pertinent recommendations on making a service rendering contract with a particular company which is the only one to provide corresponding services, i.e., to draft documentation required. I think that there is no need for further explanation: without a doubt, such an authorised company subsequently gave “kick-backs” to the official who signed the corresponding regulatory document. I think law enforcement agencies, once they become aware of the cases like that, need to investigate into such practices.

Certain services are also parcelled out element by element, thereby demanding additional payments. At this rate, it would seem that soon, any move by a civil servant will need to be paid for. But I would like to note that our businesses are not rich enough to dole out money any time a civil servant sneezes. According to expert assessments, entrepreneurs’ expenditures for overcoming administrative barriers make up a significant share of their annual receipts – a very significant share. It varies, but it is quite high.

Furthermore, the usual kind of extortion remains, and is particularly appalling. Today, I specifically started by discussing negative examples, despite the fact that we have recently made a good deal of regulatory progress – in the last year, more has been done than in the previous five to seven years combined, because we are addressing this issue actively and because the economic crisis has compelled us to work harder.

Nonetheless, it is very important that all of the documents we’ve worked so hard to create can actually function, and not just fall apart. This is dependent on coordinated action by federal, regional, and municipal authorities, as well as businesses. This is what’s most important.

I hope that today, we will hear an honest assessment of how things stand from President of Opora Rossii [The Backbone of Russia, which is a national association of small and medium-sized businesses] Sergei Borisov and from other representatives of business community that I have specifically asked to come to this meeting. First, I would like to listen to you, and then hear out our colleagues from the Cabinet and other government institutions.

Let’s get down to business.

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Mayor of Zvenigorod Leonid Stavitsky: First of all, I would like to thank you for choosing Zvenigorod as the location for this meeting. It is a great honour for me and for the Moscow region. Zvenigorod is one of Russia’s small, historic towns, established in 1152. It has an area of 50 square kilometres. We have 12,700 registered citizens and about 55 thousand permanent residents living in our town, while the seasonal population exceeds 80 thousand. For decades, the town’s economy has evolved around its identity as a health resort, and felling surrounding forests has been forbidden as far back as pre-revolutionary tsarist times. Thanks to the tsars and later the Soviet authorities, we have preserved our clean environment and our forests, and we continue to do so today.

The city has never had any large companies, and businesses in our town were under 250 employees. Those businesses included health and retreat centres, vacation homes, and medical centres. During the post-Perestroika era, most of these businesses were ransacked and privatised, and went into bankruptcy. People lost their jobs and 85 percent of the population started commuting to work in other regions, to other towns near Zvenigorod, and to Moscow. Thus, we saw the onset of a great deal of migration, and the city began to lose its urban habitat. In 2003, when the city stopped receiving heat, water, and other municipal services, a programme was passed to rehabilitate our town, and we (I as the mayor, and the rest of our team) had to face the question of how to further rebuild our economy. It became absolutely clear that we could only rely on small and medium-sized businesses. Clearly, we cannot build factories and plants here, since we need to preserve the environment. We had this in mind when planning the town’s socio-economic development. Obviously, we needed to create a very favourable climate for investors and for entrepreneurs already working in Zvenigorod, and clearly, these included health resorts, tourism, and pilgrimage-related ventures. The main direction for developing our economy is the consumer market, small business, and the services sector. And over the course of these years, we have tried to do everything possible to create such business environment.

I am not going to list many figures, but I will say that the number of small businesses in our town has increased several-fold, as have budget contributions and revenues from small businesses and private entrepreneurs. The consolidated yearly budget over these years has increased from 149 million rubles in 2003 to 1.713 billion rubles in 2008, primarily due to small businesses and investors. These are statistics, and I want to emphasise again that these increases are due to investors, small businesses and individual entrepreneurs.

Certainly, I advocate a well-balanced approach, and I am not a fan of passing around blame, pointing fingers at law enforcement or supervisory agencies or entrepreneurs. I want to give you one figure: despite the fact that the number of companies and individual, private entrepreneurs has increased between 2.5 and 3.4-fold, revenues have increased 12-fold. But this is not because the volume of services or goods we offer has increased dozens of times. The thing is that we are working very actively with businesses. We have tried to pull them out of the darkness and into the light. There needs to be trust on both sides, from businesspeople toward the government and from the government toward the businesspeople. I think that we have succeeded in doing this. This trust is very valuable.

We certainly have all the same problems that exist in other regions. We live I the same country. I would like to say that prospects for the future development of Zvenigorod’s small and medium businesses are really great. In the first half of the year (I have the figures), our town’s total revenues made up 2.5 billion. Small and medium-sized businesses contributed 1.4 billion of that money, or half of the town’s revenues. These are very serious figures. For us, this is enormous. And we continue developing further.

But of course, we face many issues, including legal, objective, and subjective ones.

Our main problem now is developing infrastructure. We cannot develop each sector individually, whether it’s energy, water supply, or water disposal, separately from the town’s complex development programme. This would not be in the interest of either the town or the government. But we cannot explain our needs to the federal programmes; no one will understand if we ask for funding for a feeder [supply] centre, and so we will not be given the money. We need to be able to demonstrate concrete results, such that if we take the money, we will be able to give it back. This means that we need some sort of system for getting money. As the city’s mayor, I am ready to take on credit funds to develop infrastructure in order to develop small businesses in a cheap, cost-effective way. My colleagues are asking themselves how they will get gas or water, given how expensive it is. Unfortunately, it is true that these utilities are very expensive in Zvenigorod: one kilowatt of electric energy costs USD 2,000. Electricity [facilities] was bought out by private companies some eight years ago. So where can we get electricity? Nowhere. And yet, we have very interesting opportunities, very interesting businesses.

Let me give you some figures. We have passed a socio-economic development plan for the town of Zvenigorod, and can attract – and businessmen are ready to invest — 50 billion rubles in investments for our small town. For this, we need to allocate 5 billion rubles to developing infrastructure. The ratio of fifty to five is great. This is also our problem, so I feel that this balanced approach has given us good results. All of Zvenigorod’s history propels it to support small and medium-sized businesses – we simply couldn’t have it any other way – so that is what we will continue to do.

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Minister of The Interior Rashid Nurgaliyev: We are aware of all the blame and ugliness going around today in the consumer market; they have their place, and we look into every report we get. It has been mentioned here that our colleagues at the Ministry of the Interior are addressing these issues. Please believe me when I say that not only are we deeply involved, but we also have very serious, objective and concrete requirements for our officers. Recently, a few of our staff members were fired from the Ministry of the Interior for defamation and abuse of authority. This kind of work is constantly taking place. Thus, we need to understand that the decisions made in Smolensk play a very important role today, and that we are rigorously following those decisions.

At the Smolensk meeting, we had a very serious discussion with small and medium-sized business representatives about many problematic topics, and we ultimately came to the joint conclusion to draft a proposal to the Government of the Russian Federation on making changes to the Criminal Code regarding administrative violations. These changes would hold state control agencies and their staff responsible when conducting inspections or audits at companies and hold them responsible for any improper execution of their duties during inspections and any illegal action toward businesses.

The second issue we jointly addressed and agreed on is that we must conduct an analysis of law enforcement practices in regard to prosecuting those responsible for hindering legal business and other activities by the end of the year. We must subsequently develop corresponding recommendations on how to better expose and investigate crimes of this kind.

And finally, we also identified the problems that currently hinder us in conducting high-quality inspections. At this time, we do not have a mechanism of recordkeeping for inspections of small and medium-sized businesses. We also lack a standardised method for exchanging information. And this leads to questions regarding our ability to respond to infractions. Responding to cases when the lawful rights and interests of legal entities and individual entrepreneurs are violated represents another problem that we need to resolve together. We sometimes have cases when the same small and medium-sized businesses are inspected several times in a year. This brings up legal complaints and problems for our entrepreneurs.

We hope that the measures we are designing today will help to make the system more effective. This will, first and foremost, help to improve the situation and support the real economy.

I will say honestly, in the presence of small and medium-sized business executives, that this is the personal responsibility of every senior officer in the Ministry of the Interior and the Central Internal Affairs Directorate [GUVD], including myself. Thus, I would like for us to work together and resolve these issues in a reciprocal way. We have an E-reception office that welcomes comments, and in the last six months alone, we have received over six thousand messages. If you see any serious violations, please let us know – we check all the information we receive, taking concrete measures to respond to violations, including those committed by our staff.

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First Deputy Prime Minister Igor Shuvalov: Our work is based on one of the main initiatives by the President of the Russian Federation – the initiative to develop small and medium-sized businesses – which is why we met in Gagarin in July 2008. When we were preparing today’s meeting together with the Presidential Executive Office, we wanted to address the main issues brought up by entrepreneurs (the issues of privatisation, lease of property and inspections). At the same time, we understood that the privatisation of property will bring up the greatest difficulties. Initially, when we were preparing for today’s meeting, we took a look at the statistics on Russia’s federal constituent entities. Only a few of them appear to be actively working to have a regulatory framework in place and to make property available under certain conditions, either for rent or for purchase. Overall, this work is progressing slowly and with great difficulty.

Now I would like to say that we are very actively monitoring communications through the President’s blog. Just recently, about three months ago, we had a lot of information coming in through the blog, which was subsequently presented to the Government. In fact, we used those materials to prepare new legislative initiatives to raise the threshold [of proceeds generated by small business] from 60 million to 100 million [for a small business to be eligible to use the simplified taxation scheme] and to cancel the rule on obligatory use of cash registers. We held corresponding regional meetings, and this issue was addressed at the small business forum. But I would like to say that this really is something we are reading in the messages coming in through the Russian President’s website, and we are responding, reacting, and holding corresponding meetings with the Government.

But I can also say, from observing this blog, that the situation sometimes develops in funny ways. When we are making decisions and announce on the blog that cash registers should not be required, and that a corresponding law will be passed, we immediately receive lots of criticism through stating that this is not the most pressing issue and that small businesses are concerned about other matters as well.

Dmitry Medvedev: That’s normal.

Mr Shuvalov: My point is that this year, we passed a lot of laws. Following your orders and all the instructions you gave us, we passed many laws concerning regulation.

Furthermore, we even changed the law on privatisation of property this year, following requests from governors who insisted that the law be amended to include good leaseholders who had some minor inaccuracies with their lease payments, but did not fall into the category covered by the law. The Duma passed these amendments.

Thus, the most pressing matter we need to work on with Russian federal constituent entities and municipalities, as you rightly said, is focusing on how these laws will be applied. And indeed, we understand that what is written in the laws does not always reflect reality. This autumn, together with the Ministry of Economic Development and the economists in the Presidential Executive Office, we will be ready to present you with a new regulatory framework that will include regulations against hostile takeovers (raiding). This is only the beginning, since we have many more suggestions on this matter. We are currently working on these suggestions with the State Duma. We will report back to you on these new initiatives in autumn.

Dmitry Medvedev: Colleagues, I have just a couple of things I would like to say. First of all, I feel that this conversation is helpful not because it addresses all the issues (in any case, it would be impossible to touch on all the issues we face) but because these talks are becoming regular. And we are now making progress on some of the things we discussed last year, although unfortunately, there are also areas where little has been done to advance matters that are really important to small businesses. This should be a very serious signal to senior executives within federal institutions who are present here today. Have no doubt, I will be giving out instructions regarding all of these matters. The quality of their execution depends on us: it depends on the federal authorities, the regional authorities, and the local authorities, and it depends on you and Russia’s businesses. The more active you are, the stronger your position will be. It has been said that we are doing everything here because this was a presidential initiative. This is good, and indeed, a presidential initiative is the highest kind of initiative we have in our country. But we are not doing all this in order to fulfil some sort of initiative – rather, we have a deep conviction that without small and medium-sized businesses, our country has no future. This has been clearly demonstrated through the current financial crisis, because the crisis showed us our weak spots. We have major raw materials companies that nourish our economy. And now what? The crisis has put them in a very difficult position. However, this does not mean that life is now over. Oil prices will continue to fall, as will prices for other raw materials. But does this mean that we should bring the economic life of our country to a halt? Of course not.

And so, in order to maintain our economy, in order for small businesses to absorb the employees laid off from other companies, small business needs to exist. But it will exist only if there is a proper regulation in place. And this then becomes a government issue, in the wider sense of the word.

I will think about the many suggestions that were made here, including the one to give the Prosecutor General’s Office greater authority in this area. I will also think about an additional set of permits to carry out the inspections you talked about. I will think about lawsuits to defend small and medium-sized businesses. It is hard to put this into words; apparently, we might be talking about certain groups of suits so that the Prosecutor General’s Office can restore some of its authority here. At the very least, this needs to be thoroughly reviewed and assessed. Naturally, we cannot put the Prosecutor General’s Office in a position when it would find itself drowning in these sorts of inspections, but at the same time, this is a resource that is in demand, and overall, the decision made was the right one.

Now, a few remarks regarding many of the other suggestions. There was a suggestion to appoint a business ombudsperson. I will consider this too, but I think that it would be best to give these tasks to other institutions, because otherwise, we will need to create ombudspersons for nearly every category of issues in our lives – on general issues, on humanitarian issues, on children, and in several other areas where this is absolutely needed. But nevertheless, we could have some sort of specialised institution, so we should think about what kind of form it would take.

Many suggestions were presented in your speeches. There are several interesting ideas regarding appraisal of performance of municipal leaders. I think that this is good, and such appraisals should use the same kinds of indicators as those applicable to governors. After all, we have been giving governors marks in a range of areas, they must report to the Government and ultimately, to the President, and if a certain indicator is not up to par, a governor may be relieved of his or her post. But what about municipal leaders? They are not infallible. Thus, we need to think about evaluation criteria for them, as well as other ways to motivate them. Municipal leaders who want to work do a good job, as we can see in Zvenigorod. But we need to take action in places where they do not want to work.

Friends, I would like to say again that I think our work is very useful, because in the last year, we have been able to make some progress. Moreover, if we had not done this, then all of us, and you in particular, would be suffering much more during this crisis. Still, this does not mean that we should stop now. We will continue working on the draft legislation we have begun designing (amendments to the Criminal Code in regard to administrative offences, the second part of the anti-hostile takeover package, and measures to improve the taxation system and control activity procedures). There are several issues that were brought up today where, luckily for you, we will be conducting individual inspections. But even you should beware: on the one hand, you are lucky, but on the other hand, as you know for yourselves, this may cause some tension with local authorities. They may have the attitude that “if that’s how you’re going to be… the big authorities will leave, but you will stay.” So you also need to stay put, and do not be afraid.