'Corona will kill private entrepreneurship in Russia'

Ten days ago Jeroen Ketting, Dutch businessman in Moscow since 26 years, sent his 12 employees home. His staff didn’t see the need. Nobody in Russia was sent home to work on distance, so why should they? Ketting is sure his business will be hit hard by the corona-crisis, but he will survive, as he has all the former crises in Russia. For most small and medium Russian entrepreneurs, however, it’s a different story. ‘If this crisis will not kill small and medium business, it will definitively put them in intensive care’, he says.

by Hella Rottenberg

While Ketting is driving from his dacha on his way back to his apartment in Moscow, we talk by telephone about the economic effects of the coronavirus for Russia. Big business, statecorporations and essential industries, like food production and pharmaceuticals, will no doubt be supported and survive, he says.

However, restaurants, bars, cafés, beauty parlors, flower shops, sportcenters and other services are in severe danger. According to estimates of the Russian Chamber of Commerce this week, 3 million small companies will go bankrupt, employing up to 9 million people. ‘Some people even say that this corona-crisis will be the worst to happen to small companies after the 1917 bolshevik revolution’, remarks Ketting.

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Small and medium size business in Russia. Source Rosstat  

These small businesses are terribly vulnerable, he notes, because they provide the extras that people can miss when they have to economize. Russians will buy buckwheat, potatoes and chicken instead and forget about the rest. ‘Nobody cares what will happen to the small and medium size businessowners, who took out loans and mortgaged their houses ’, Ketting says gloomy. They have no financial reserves, they can survive for two or three months at most, he thinks.

Small and medium size business - officially defined as companies with fewer than 250 employees and annual revenues under 2 billion rubles (24 million euros) - make up only 20% of Russia's economy, according to the statistics agency Rosstat. In 2010 Rosstat reported their share in the economy as 30%. The firms have been hit hard already by falling consumer demand and a raise in VAT tariffs in 2018.  

‘Nobody cares what will happen to the small and medium size businessowners, who took out loans and mortgaged their houses ’

From the government they shouldn’t expect any support, believes Ketting, after having read the announcements and noticing the lack of empathy.  ‘There’s not one person in the government who worked in the real world and knows what it means to have a business, that you have to earn a ruble before you can spend it.’ The new prime minister Mikhail Mishustin lives in a huge mansion at the outskirts of Moscow and when the roads are packed he flies to his work with a helicopter, says Ketting. Besides, Russian society at large has always given entrepreneurs the evil eye, they are doubtful people, maybe not as bad as crooks or frauds, but still. ‘It’s how the whole tax system functions: to find the faults and mistakes of entrepreneurs.’

Lighthouse Group expects losing 70 to 90% of its turnover 

In 2014 Ketting and his co-owner Svetlana Shishkova felt the impact of the economic sanctions after the annexation of Crimea and the downing of the MH17. Their Lighthouse Group lost no less than 70% of its turnover. Now that the company is back to the level of 2013, a new and in their view much more serious crisis sets in.

jeroen kettin en sv shishakovaJeroen Ketting and Svetlana Shishakova. Photo: Hella Rottenberg

Lighthouse Technologies imports and distributes dry bulk handling equipment for factories which use dry powder, like milkpowder for milk, flour for bread, powders for the production of chemicals and pharmaceuticals, animal feed, etcetera. Ketting: ‘There still is demand. Our equipment is used in many different industries that are crucial. We provide silo’s, conveyors, rotary valves, grinders, pipes, among others. If our equipment fails, the production stops. The problem is that the supply chain in the West has collapsed. A project of hundreds of thousands of euro's cannot proceed, because the American producer needs parts from Europe that are not supplied. We see how business has become global and how Russia is integrated in the global community as well, whether they want it or not.’

A second part of the company, Lighthouse Management, does  consultancy for international companies in Russia and will suffer as well. Clients of their clients freeze their projects and delay their plans to next year. Ketting’s bookings for his training and seminar business are cancelled for the coming months because people are not allowed to gather in one room. ‘We are losing business in the range of 70, 80, 90 percent.’

Ketting is not intending to cut down or expects to go bankrupt. His costs are low – no machines, no stocks – he didn’t take loans, never gave his private assets as a collateral to the bank and he has got what he calls a ‘fuck you fund’ – money he has set aside - to survive yet another crisis. In the worst case he must scale down and start from scratch, like he did 22 years ago. ‘No problem, I’m more experienced now, I’m not afraid of it. I love a good challenge. It’s a journey, it’s an adventure.’  While 2014 was ‘the mother of all crises’, he says, we now have ‘the grandmother’. 

Joining the conversation, Svetlana Shishakova, his business-partner, has examined the plans for government support to the economy but couldn’t find anything that would be helpful for small and medium companies. Paying taxes can be postponed by six months, but they still have to be paid. Penalties on outstanding credits will be relieved, but that will not do the trick at all. She considers the measures as to be just a show of support, without doing anything in reality.  ‘Everybody understands that nobody is covering for private businesspeople and that they will have to pay their debts.’ All employees will be sent home from 28 March till 5 April keeping their salaries, Putin announced on March 25. Who shall pay the bill? Not the government.  Prime minister Mishustin even warned that the government will punish employers who use the crisis to reduce their staff and salaries.   

Government punishes instead of easing the rules

‘Mishustin was head of the tax administration,  so what do you expect?’, adds Ketting. ‘All he can say is: we will punish you!’  The burden, in brief, is put on the shoulders of the entrepreneurs. Let them just try to survive.

The funds created are meant to support the unemployed, not the companies. The government, says Shishakova, focusses on the broad electorate,the poor and unemployed will receive allowances and some extra money. Bureaucracy and customs will be alleviated for ‘essential producers’, like those in the food or medicine sector, but not for other companies.

Instead, Russia could act in support of private business, financially and otherwise, argues Shishakova. By easing the rules, for example, and allow companies to send employees home without salaries or reduce their salaries. There is no legal way to do this, so owners must pay the staff and eat their business until it goes bankrupt. Companies must sign all kind of documents to arrange working from home in accordance with the regulations. This takes legal advice, additional costs and a lot of hassle, which could be alleviated. The regulations, however, are not being eased, whether it concerns contracts with employees or import. It makes life difficult in this extraordinary situation, when nobody knows what next month will bring and traveling is out of the question.

Facing the crisis

In 2014 and 2015 the economic problems in Russia didn’t affect everybody. On the contrary, many Russian companies could develop because of the Western sanctions and substitution of imports by Russian producers. Those who were in the international trade got into trouble, but others didn’t. Shishakova notices that some media express the feeling that Russia has become much stronger and more independent since 2014 and so is ready to face this corona-crisis.

The Russians have forgotten their own joke, says Ketting, which goes like this: ‘We thought we hit rock bottom and then we heard knocking from below.’ Shishakova: ‘Russia will survive, that’s how it’s seen mainly, while our pillars are the government, the state-owned companies and the electorate who will be happy with a little increase in their salaries.’

‘History will forget about those men and women who owned cafes and fitnessclubs. They were just bad entrepreneurs, people will say.’

For the relatively small layer of employees in private companies who will lose their jobs, some additional jobs in state corporations will be created, they guess.  ‘And that’s it’, concludes Shishakova.‘History will forget about those men and women who owned cafes and fitnessclubs. They were just bad entrepreneurs, people will say.’

Ketting adds his sombre view: ‘If this crisis will not kill small and medium business in Russia, it will definitively put it in intensive care for a long time. Very sad. Entrepreneurship takes risks, gives the drive and innovation to an economy. That will be lost. I feel really sorry for the millions of business owners and employees who work for them. They will suffer.’

Businesspeople, with whom Ketting is acquainted, fear the near future, fear that their houses under mortgage will be sold by the bank and they will end up without housing or stack their kids with huge debts. ‘It may become a tragedy to many people.’

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