Russia’s small businesses despair in lockdown gloom

Moscow barber Denis had spent four weeks under a national lockdown that has paralysed his business when he took a call late last month from a potential customer, desperate for a trim.

After the man on the phone begged for an appointment despite the salon being closed, Denis relented. But he was in for a nasty surprise: once inside the man revealed himself as a city official, and slapped a penalty of as much as Rbs50,000 ($700) on the salon for breaking quarantine rules.

“If the government really cared, if they really wanted to help small businesses, they would give us financial support or let us work,” said Denis, 34, who declined to give his second name. “Now I have to go to court.”

The pandemic has frozen large chunks of Russia’s $1.7tn economy and compelled the Kremlin to demand two seemingly opposing outcomes: maintain restrictions to smother the world’s second-largest number of Covid-19 infections and lift a lockdown that could lead to gross domestic product shrinking by 6 per cent this year, according to forecasts by the country’s central bank.

Small and medium-sized businesses such as Denis’s are trapped in the space between. For the whole of April they were forced by President Vladimir Putin to pay salaries to employees while also suspending their operations. Now they are subject to almost daily changes to local rules governing how they can operate, while waiting for state financial grants that pale in comparison with those offered in western countries.

“We have got no loan vacations, no handouts,” Denis said, noting that Russia’s government has put companies such as McDonald’s on a list of entities which have been given permission to keep operating, but not enterprises such as his.

Russia’s economy is dominated by large industrial groups and natural resource exporters. But while small and medium enterprises account for only a fifth of GDP, they are a critical part of the service, hospitality and retail sectors, which are significant employers in larger cities such as Moscow.

Hit by both the fall in oil prices and the domestic lockdown, Russia’s GDP contracted by 28 per cent in April, government data indicated, and economic activity is down by almost a third compared with March.

Unemployment doubled last month and the labour minister has said he expects the number of people out of work to rise by another 60 per cent by the end of June. Real incomes will fall by 5 per cent this year, according to Alfa-Bank forecasts.

“April has been a very terrible month for Russia, just like other countries. Everything from midsized companies down saw a significant fall in output,” said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow.

“The negative economic pressure on the Russian economy from this situation will be felt much longer than most people think,” he said. “Consumer confidence and job security will continue to be an issue for some time.”

Roughly a third of Russian companies say they are threatened by bankruptcy, according to a survey conducted at the end of April by the Center for Strategic Research, a Russian think-tank.

A social media protest against the lockdown has spread across Russia © Yuri Kochetkov/EPA-EFE/Shutterstock

The fall in private consumption will account for almost two-thirds of the expected 6 per cent fall in Russia’s GDP this year, according to research by rating agency Moody’s.

“Household income will significantly decrease . . . and government support measures do not help much,” said Yaroslav Sovgyra, head of Russia and CIS banking at Moody’s. “Very little money is actually going to flow into SMEs.”

“In reality, unemployment is much higher than official statistics,” he added.

In the well-heeled Patriarch’s Ponds neighbourhood in central Moscow last week, pavements typically cluttered with restaurant tables, gossiping diners and harried waiters were empty, and the dozens of beauty salons and boutiques were dark.

A social media protest that began last week in southern Russia and has spread across much of the country under the hashtag #nakedrestaurants has seen restaurant workers pose naked wearing face masks, demanding the government lift restrictions and allow them to work.

Official guidance has been at times contradictory. On Tuesday, Moscow mayor Sergei Sobyanin used a television interview to both warn that the threat from Covid-19 remained high, and suggest that he would significantly ease restrictions in a few days.

“It would be utterly irresponsible to state that we have defeated coronavirus,” he told state-run news. “[But] we will probably take a decision to reopen multifunctional property centres from Monday.”

At the same time, the Kremlin’s fiscal response to the pandemic has been parsimonious. In April, with infection rates below other major economies, it effectively shifted the cost of the lockdown on to employers, forcing them to pay salaries to employees who had been ordered to stay at home — and draining their cash reserves while preserving the state’s.

In May, as Russia emerged as a global infection hotspot, the government began rolling out some financial stimulus. But it has been unwilling to tap a $165bn rainy day fund earned from past oil sales, instead earmarking that to fill a hole in the budget caused by the fall in current oil prices.

Analysts say the total amount promised is equivalent to 1.8 per cent of GDP, or an extra 10 per cent in national budget spending — a fraction of that pledged by countries such as Germany, France or the UK.

“For the Kremlin, political stability is much more important than a more effective economy,” said Mr Tikhomirov.

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