small and medium entrepreneurship in russia...small and medium entrepreneurship in russia slide 4 eu...

Small and Medium Entrepreneurship in Russia

Sergei Safonov Partner, EY

Roundtable discussion SME financing in ENCA Luxembourg, 12 March 2014

Small and Medium Entrepreneurship in Russia Slide 2

Contents

►The role of SME sector in the Russian economy and the government attention to SME sector development

►The Russian SME sector structure, financing instruments and growth potential

►Financing needs of the SME sector and the role of development institutions – both Russian and international – in financing

markets development


Summary

► Development institutions can make a considerable impact on the Russian SME sector as SME financing markets are still in developing or emerging stage

► The SME sector in Russia has been steadily growing in recent years, both in terms of SME number and turnover

► Despite high growth rates, an international comparison shows strong potential for further growth of SME sector in Russia

► Low availability of banking and nonbanking financing for SMEs is among main constraints for the development of the sector

► SME financing markets demonstrate sustainable growth with emerging markets (factoring and microfinance) showing the highest growth rates

► The Russian government is active in shaping the business environment for SMEs – both through legislative improvements and by providing direct financial support,

e.g. from state-owned SME Bank (VEB Group)

► The government support for SMEs is primarily focused non-trade and non-resource sectors as well as on emerging SME activities across all industries

► SME financing markets attract various players including commercial and development banks – key strength of development banks is funding tenor, while funding

rates at commercial banks are still quite competitive


EU

3743

616

Key components of SME classification in Russia are similar to those used in EU

Revenue (eur mln)

Number of employees

10-25

1.5-10

<1.5

101-250

15-100

<15

10-50

2-10

<2

50-250

10-50

<10

44

Registered SMEs (thousands) Revenue (eur mln)

Number of employees

SME employment (mln)

Micro

Small

Medium

1

2

3

4.6

8.5

3

For the purposes of state support, legal entities, individual entrepreneurs and agricultural producers are considered as small or medium businesses if they meet three criteria,

according to Law 209-FZ:

Russia

SME Segmentation Russian SME statistics

Ownership structure: SME’s stake held by one or several legal entities, which are not small or medium businesses, should not exceed 25%

Workforce: Number of employees should not exceed 250 people

Volume of revenue: Annual turnover should not exceed 25 euro mln.

∑ = 4 403 ∑ = 16.1


84

IE

= 17* per 1000 of

population

= 22% of GDP

= 23% 13.7 13.3 13.4 13.5 13.2

3.0 3.1 3.1 3.0 2.9

16.7 16.4 16.5 16.6 16.1

2008 2009 2010 2011 2012

546 487 641 694 685

175 183

112 196 200

721 669

753

890 885

2008 2009 2010 2011 2012

SME sector in Russia has been steadily growing both in terms of SME number and turnover

Starting from 2008 the total number of small and medium enterprises has

grown by 7% and reached 4.4 mln.

Turnover of small and medium enterprises has steadily grown during after-

crisis period (starting from 2009) and in 2012 reached EUR 885 bln.

Total employment in Russian SMEs remained stable since 2008 and in

2012 is 16.1 mln. people.

Number of registered SMEs, in thousands

SME turnover, EUR bln

Employment in SME, millions of people

Legal entities (LE)

Individual entrepreneurs (IE)

of total employ-

ment

1.362 1.594 1.669 1.852 2.013

2.742 2.653 2.600 2.490 2.390

4.104 4.248 4.269 4.342 4.403

2008 2009 2010 2011 2012

Average turnover per SME,

EUR thousand, 2012

340

LE

Average employees per SME, 2012

1.2

IE

6.6

LE

* Number of active SMEs


52 51 51 49 49 49 48 47 47 45 44 44 43 43 42 40 40 40 39 38 37 35 35 32 30 29

25 23

Mal

ta

Esto

nia

Portu

gal

Latv

ia

Italy

Spai

n

Cyp

rus

Gre

ece

Cze

ch R

epub

lic

Den

mar

k

Slov

enia

Hun

gary

Lith

uani

a

Austr

ia

Bulg

aria

Irelan

d

Swed

en

Net

herla

nds

Euro

pe

Ger

man

y

Belg

ium

Finl

and

Poland

Fran

ce UK

Rom

ania

Slov

akia

Russ

ia

88

71 70 70 63 59 59 58 58 54 53

45 42 41 40 40 38 38 37 36 35 35 34 32 27 26 25 17

12

Cze

ch R

epub

lic

Mal

ta

Portu

gal

Gre

ece

Italy

Cyp

rus

Swed

en

Hun

gary

Luxe

mbo

urg

Spai

n

Slov

enia

Belg

ium

Euro

pe

Bulg

aria

Esto

nia

Finl

and

Fran

ce

Net

herla

nds

Poland

Den

mar

k

Austr

ia

Latv

ia

Irelan

d

Lith

uani

a

UK

Ger

man

y

Rom

ania

Russ

ia

Slov

akia

80% 79%

60% 60% 50% 50%

25% 22%

Italy Germany China Brazil USA UK Russia 2015 Russia 2012

Despite recent growth, in international comparison there is still considerable potential for further growth in SME sector in Russia

Employment in SME segment is 1.7 times lower than on average in

EU

Share of SME in GDP

In 2015 SME will produce quarter of Russian GDP which is still

significantly lower than in other developed and developing countries

Employment in SME (% of total employment, 2011*)

Number of active SMEs per 1 000 of population (2011*)

The number of SMEs per unit of population is 2 times lower than

on average in EU

* Russian figures are for 2012


State support to SME sector takes different forms (financial support, special tax regime etc.) with the focus on innovative SMEs

DESCRIPTION LEGISLATION

Sets the framework for state support to small business, objectives, forms and methods of state stimulation and

regulation of small business activity, definition and criteria for enterprises to be considered small-sized companies. 1 ► Law No. 88-FZ on State Support for Small Business in the Russian Federation (adopted in 1995)

Replaced the previous 88-FZ. Introduced the terms “medium entrepreneurship”, “microenterprises” and “infrastructure

for support to SME”. Defined methods of support for various forms of SME. 2 ► Federal Law No. 209-FZ on Developing Small and Medium Scale Entrepreneurship in the Russian

Federation (2008)

Sets measures and directions for improvement of entrepreneurship conditions, in particular through creation of

mechanism of state’s guarantees to secure medium-sized companies investment projects.

1

► President’s Decree No. 956 on “Long-term state economic policy” (2012, May)

Defines objectives and functions of the development bank, in particular states SME support as one of the main

functions. 3 ► Federal Law No. 82-FZ on “Development Bank” (2007)

Sets criterias for mid-sized entities (investment projects) selection for VEB guarantee support.

2

► The Ministry of Economic development - decree No. 143 on “Selection criteria for Russian medium entities and their investment projects” (2013)

► State’s finance program on SME support – Russian Government (2005) Declares the goals such as the increase of the volume of support of the innovative SMEs, medium enterprises, leasing

development, grant support of the beginner entrepreneurs, creation of SME support centers etc.

3

Fede

ral L

aws

Gov

ernm

ent m

easu

res

► State support of SME sector is focused on manufacturing sector with particular emphasis on innovative and technology intensive SMEs ►According to the definition, innovations include modernization and energy efficiency


Leaders of the rating 2014 (top-20)

Country 2013 2014 Improvement

Philippines 138 108 ▲30

Ukraine 137 112 ▲25

Russian Federation 112 92 ▲20

Rwanda 52 32 ▲20

Kosovo 98 86 ▲12

Top-5 economies improving the most*

1. Singapore

2. Hong Kong SAR, China

3. New Zealand

4. United States

5. Denmark

6. Malaysia

7. Korea, Rep.

8. Georgia

9. Norway

10. United Kingdom

11. Australia

12. Finland

13. Iceland

14. Sweden

15. Ireland

16. Taiwan, China

17. Lithuania

18. Thailand

19. Canada

20. Mauritius

Components 2013 2014

Starting a Business 100 88 (▲12)

Dealing with Construction Permits 180 178(▲2)

Getting Electricity 188 117(▲71)

Registering Property 46 17 (▲29)

Getting Credit 105 109 (▼4)

Protecting Investors 113 115 (▼2)

Paying Taxes 63 56 (▲7)

Trading Across Borders 162 157 (▲5)

Enforcing Contracts 10 10 (0)

Resolving Insolvency 53 55 (▼2)

Russian Federation rating components*

The Russian government is actively involved in shaping the business environment to intensify SME development

►Doing business report was chosen by the government as an indicator of SME sector development

►Government measures implemented in 2012-2013 helped Russian Federation to move up 20 positions being amongst the top-5 countries improving the most in the year 2013. The goal set by the

government is to reach top-20 by the year 2018.

► “Getting credit” is one of the key areas for improvement in the medium-term perspective

Source: World Bank Doing Business Report


27%

19%

17%

12%

11%

4%

30%

13%

32%

36%

40%

13%

Bank loan

Borrowings from relatives, friends orother companies

Trade credit

Leasing, factoring

Credit line, overdraft or credit card withoverdraft

Grants or subsidized bank loans RussiaEurope

More than 20% of Russian SMEs outline low availability of finance as a constraint for SME sector development

Key constraints for SME

development

47%

Shortage of qualified personnel

36%

High taxes

22%

Low availability of finance

18%

Decrease in demand

Sources of finance

The most popular source of SME financing,

according to the analysis, is bank loan (27%).

Second and third by popularity are borrowings from

relatives and friends (19%) and trade credit (17%).

Leasing, factoring and credit lines are not popular.

There is substantial unmet demand for financing in

SME sector in Russia.

EU

(also for investment purposes)


81

96

112

171

2010 2011 2012 2015F

The markets of SME financing demonstrate sustainable growth with emerging markets (factoring and microfinance) showing the highest growth rates

0.4 0.5 0.7

2.3

2010 2011 2012 2015F

CAGR + 15% 10.3

13.3 15.4

25.3

2010 2011 2012 2015F

CAGR +18%

SME lending market, EUR bln SME leasing market, EUR bln

1.1 1.8

3.2

12.1

2010 2011 2012 2015F

CAGR + 56%

SME factoring market, EUR bln SME microfinance market, EUR bln

CAGR + 52%

In 2012 the loan portfolio of Russian

banks in the SME segment is RUB4.5

trln (EUR112.4 bln). The growth rate in

2012 (17%) is lower than in 2011 (19%)

and in 2010 (22%).

The SME segment accounts for about 35%

of the total leasing market in Russia. In

2012 the SME share of total leasing market

grew by more than 6%, reflecting the desire

of leasing companies to diversify their

portfolios.

The factoring market is the fastest

growing financial market in Russia. In

2012 its share of GDP grew to 2.3%

(from 1.6% in 2011). The share of the

SME segment in new deals (2012) is

approximately 40%.

In 2012 the total portfolio of

microfinance organizations (MFOs)

was about RUB48 bln (EUR1.2 bln)

with annual growth of 30%. The share

of SME segment in portfolio is 54%

with RUB26 bln (EUR0.65 bln) in

absolute terms.

CAGR +18% CAGR +22%

CAGR +71% CAGR +32%


Actually there are six main groups of players on Russian banking market

State-owned commercial banks – country wide market

dominants headed by Sberbank.

Foreign banks – service and efficiency leaders with average

regional coverage.

Second tier private commercial banks – below average

commercial coverage seeking for product or channel

differentiation.

А

B

C

D

Major banking clusters on Russian market

Large private commercial banks – above average regional

coverage with growing service and efficiency.

E Local players – invisible on country level but may be

leaders in some regions.

F State owned development institutions – specific segments or

products. Price leaders in search of golden mean between

profitability and development.

Banks that are not in top-100 in terms of

assets

Development institution Local niche player

Local universal player Market-dominant multilateral player

Large

Small Large

Client segment coverage

Small

Regional coverage

А

B

C

D

E

F

Sberbank

VTB 24

Gazprombank

Alfa-bank

Ularsib

Russkiy Standart

MDM Bank

Citibank

Raiffeisen

Unicredit

Rosbank

Vnesheconombank

Rosselkhozbank

SME Bank

AHML

Binbank

Ural R&D Bank

RosEvroBank

Probusinessbank


Government and International Development Banks (IDB) are active in the market of SME financing

451

mln eur

1

2

3

Top3 government sources

Planned In 2013

2.3

bln eur

By June 2013

1.8

bln eur

0.5

bln eur

0.1

bln eur

134 bank-partners

140 non-banking organizations

Infrastructure projects

SME Bank

Lending: Provides loans through banks, leasing,

factoring, microfinance companies

Guarantees: 50% of a loan, 2-10 yrs, max 1.8%

per yr

Regional guarantee funds

79 funds assist SME in obtaining financing by

providing guarantees in regions

Federal Budget/

Regional Budget

Subsidies to regional programs for SME

support

475

mln eur

Spent In 2012 1

2

3

Top3 IDB players in Russia

Provides medium-term finance for SMEs, stimulates

entrepreneurship in the regions and supports banks

that grant credits to SMEs

SME financing is provided through a range of

instruments, including debt, credit lines and equity.

RSBF: Provides financing to SME and assists

institutional development of banking sector for

SME lending since 1994 (total EUR6.8 bln.)

Supports SME in Russia with financing and

advisory services

1.7

bln eur

Current investment portfolio in

Russia

900

mln eur

In 2012 invested in Russia

9.7

bln eur

Current investment portfolio in

Russia

2.6

bln eur

In 2012 67 projects worth

1.1

bln eur

2.4

bln eur

Capitalization

Guarantees portfolio

Loans given under guarantees

200

mln eur

Loans to Russian commercial

banks

82.5

mln eur

In 2012 environmental protection,

innovations and modernization

While government pays attention to SME segment, SME supporting policies and laws and funding sources are not unified and synchronous. Which leaves a lot of space for IDBs which are already

consistently expanding their presence in SME financing market.

0.8

bln eur


Most recent Russian government initiative in SME support is to create Federal Guarantee Agency

Commission for Distribution of

Subsidies Regions Regional funds

SME Bank Bank-partners

SMEs

State SME support mechanism through SME Bank (loans and guarantees)

State SME support through federal / regional budgets funds (subsidies, guarantees)

Russian Government Ministry of Economic Development

Ministry of Finance

Vnesheconombank

Federal Guarantee

Agency – to be

Key functions Key figures

Vnesheconombank

(focused approach)

Regional guarantee funds

Ministry of Economic

Development Bank-partners

SME Bank

Federal Guarantee Agency

(wider support approach)

SMEs

Possible positioning of Federal Guarantee Agency

► Guarantees to medium

enterprises

► Guarantees to regional funds

► Global management and control

for regional guarantee fund

system

► Reporting to the Ministry of

Economic Development

Capital size will be EUR

200 m to EUR 1 bn

Will manage ~80 regional

guarantee funds

Agency is expected to be

created in 2014

Current situation


High borrowing costs are cited as the main obstacle for availability of SME financing

48%

22%

2%

1%

2%

11%

14%

20%

22%

6%

3%

10%

34%

5%

High borrowing costs

Inability to provide necessarycollateral or guarantees

Financing is inavailable inprinciple

Decrease of control overcompany

Other

No obstacles

Reject to answer RussiaEurope

Key obstacles for SMEs financing Obstacles from SME’s side Obstacles from Bank’s side

► high interest rates on loans

► inability to provide collateral or

guarantee

► inability to provide necessary package

of documents

► financial position is not sound

► non-transparency of borrower

► shortage of potential borrowers with

sound financial position

► bad quality or absence of collateral

► higher loan reserves

► insufficient economical and legal

literacy of most small entrepreneurs

► shortage of qualified personnel

► insufficient experience in the area of

SME risk management

SME financing

High borrowing costs is the major obstacle for obtaining financing in the

SME segment (48%).The next significant obstacle is the inability to

provide collateral (22%)

Bank loan is the main source of financing but there is a room for growth due to considerable share of financing received from relatives and friends

EU


Key reason for high borrowing costs on SME financing market is high level of non-performing loans

7.6%

8.8% 8.2% 8.4%

6.8%

6.9%

5.2%

4.1% 5.7%

4.2% 3.7% 3.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2009 2010 2011 2012

SME Retail Large

Non-performing loans in different segments

Total

716

Loan portfolios of banks, EUR bln*

411

193

112

2012

SME Retail Large


Local development institutions have about 10 times higher average funding tenor than commercial banks, while funding rates of commercial banks are significantly lower

3

6

9

9

9

9

10

16

47

98

110

Alfa Bank

Unicredit

Uniastrum

Raiffeisen

Vozrojdenie

VTB

Promsvyazbank

Sberbank

SME Bank

VEB

AHML

Average funding rate (“blended”), % Average funding tenor,months

Development institutions

State-owned commercial banks

Private commercial banks

Foreign banks

Development institutions don’t have access to funding sources available to Commercial banks (e.g. deposit portfolio, current accounts), which affects both average funding rate and funding

tenor.

* Rates are based on the average bond coupon rate. Source: cbonds.ru

10.3%

8.2%

7.9%

6.7%

4.6%

4.0%

3.6%

3.5%

3.3%

3.1%

2.9%

SME Bank

AHML

VEB

Uniastrum

Promsvyazbank

Vozrojdenie

Unicredit

Alfa Bank

VTB

Raiffeisen

Sberbank


According to our estimations, about 1 million SMEs currently require external financing

~ 15

Economically active SMEs, thousands

~ 2 000

∑ = ~2 500

~ 450-500

Major SME segments requiring external financing from

institutions, thousands (%)

~150

~600 ~150

~90

~10

∑ = ~750 (~38%)

∑ = ~240 (~50%)

∑ = ~10 (~67%)

2

1

Major industries

Manufacturing,

Agriculture,

Construction

Services,

Manufacturing,

Construction

Trade, Services,

Transport and Communications

Share of non-trade entities, %

65%

50%

69%

Com

petit

ion

and

pene

trat

ion

of b

ank

serv

ices

and

ext

erna

l fin

ancing

∑ = ~1 000

~ 2 000

1 Matured industrial SMEs 2 Emerging / developing SMEs of all sectors

SME segment (turnover, EUR mln)

Mid-sized

(10 – 25)

Small

(1.5 – 10)

Micro

(<1.5)


Client segments

Fina

ncin

g in

stru

men

ts

Each group of SME requiring financial support should be addressed with proper instruments of financing (either long-term or short-term)

Matured industrial SMEs – Boostering long-term financing

KEY DEVELOPMENT OPPORTUNITIES:

Bank lending

Factoring

Microfinance

Shor

t-ter

m

Long

-term

Leasing

1

2

3

4

1 2

Emerging/ developing SME (all sectors) – Providing short-term financing opportunities

1 2


The majority of SME financing markets in Russia is in the developing or emerging stage, and there is potential for EIB to make a considerable impact on the SME sector

Scenario = (1) product + (2) appropriate distribution technology

Impact assessment

(1) Product for ultimate

clients (SMEs)

(2) Distribution technology

Three-level

financing*

Two-level financing** Guarantee Securitiza-

tion

Market maturity

level

Potential market

size

Potential impact

Short term loans n/a Developed Very large Low

Long term loans Developing Very large High

Long term loans to non-

trade segment Emerging Large Very High

Long term loans to

innovative segment n/a Emerging Large Very High

Leasing to SMEs n/a n/a Developing Medium High

Leasing w/o railway and

passenger cars n/a n/a Emerging Medium Very High

Factoring n/a n/a n/a Emerging Small Moderate

Microfinancing n/a n/a Emerging Small Moderate

Equity n/a n/a Developing Large Moderate

Level of technology

complexity and risk

exposure Low Moderate High High

Technology capacity Very High High Low Low

*Three-level financing implies work with local

development institutions (e.g., VEB and its

subsidiary SME Bank) which will supply financing

to commercial banks (2nd level) and after that

commercial banks provide loans to SMEs (3rd

level). This option will give EIB the access to a

broad client network without establishing direct

relations with commercial banks and will

significantly reduce cost and risk. This option,

however, will lead to lower level of control and will

limit the ability for direct SME market impact.

** Two-level financing implies work with Russian

commercial banks (including State-owned,

privately- owned and international banks) which

will provide loans to their ultimate clients (SMEs).


Conclusions

► The development of the SME sector is very important for the Russian economy

► Diversification from the current concentration on large companies and on natural resources

► Creation of new workplaces while one-quarter of the employable population already works in SME sector

► SME sector potentially is a considerable taxpayer – a diversified income base for state budget

► SMEs output demonstrated high growth rates in recent years, about 19% p.a., and is expected to remain double digit in mid-term perspective

► The Russian government is making efforts on providing support to SME sector by improving business environment and financing activities but the system of state

support is still fragmented and not fully transparent

► Many SME financing markets and financing instruments in Russia are in developing or emerging stage, e.g. long-term financing, financing of emerging businesses,

securitization, etc.

► There is potential for development institutions to make a considerable impact on the Russian economy through enhancement of financial services for the SME

sector


Appendix


Decrease of the growth rates, consolidation, and focus on retail sector – are the main trends in Russian banking sector

Expected changes in Russian banking sector:

• In 2013 the volume of total banking assets in Russia is expected to reach

• EUR 1 250 bln (at current exchange rate at year end)

• Market will continue to grow but with decreased growth rates of about 10 - 12%

• Retail banking sector growth rates are expected to slow down

• Market consolidation will continue, the total number of banks will continue to decrease

• A tendency of the growing pressure of the large state-owned banks will preserve

• Privately owned banks will focus mainly on retail, SME and MidCap segments as local LargeCap is predominantly covered

by state-owned banks

• Business scale, capital size and funding

• Innovative and technological business-models

• Network efficiency, right choice of product line and speed of entry in new market segments

Small players without a clear focus will be squeezing out of the market

Market size and growth

Market structure

Future success factors


700 735

845

1,040

1,238

1,693

2008 2009 2010 2011 2012 2015f

Bank assets growth rate will substantially slowdown, the volume of banking assets will reach 1 693 EUR bln by 2015

Assets, EUR bln.

47%

80%

80%

85%

94%

119%

309%

397%

Kazakhstan

Ukraine

Russia 2012

Russia 2015

Poland

Czech Republic

Germany

France

Comments Assets % of GDP, 2012 г.

Total bank assets in Russia:

• In the next years it is expected that the

current trend of GDP growth rate slowdown

will preserve

• The bank assets to GDP ratio will continue

to grow, however it’s growth rate will

slowdown

• Bank assets to GDP ratio is expected to be

85% by 2015

• Average growth rate of Bank assets in

Russia will amount to 11% by 2015

67.5% 74.7% 73.4% 75.3% 79.9% 85.0%

% of GDP

Sources: EY, Bank of Russia

+5% p.a.

+20% p.a.

+11% p.a.


Bank assets share in banking sector by types, %

For many small banks without distinct positioning a survival question arises

► The structure dynamics of the banking sector indicate that

state-owned banks are strengthening

► In particular it is connected with state-owned banks being

preferred by consumers as their financial services providers

► This trend will increase in case of economic decline

► Foreign bank’s share in Russian banking assets decreased

due to the problems at their domestic markets

► A substantial decrease of Russian small banks share is

observed

Sources: EY, CEE Banking Sector Report

32%

44% 53%

15%

17%

20%

5%

11%

8% 45%

28% 19%

2003 2008 2012

Small and medium privately-

owned banks

Foreign banks

State-owned banks

Large private banks

(top-30)

Comments

137

EUR bln

1 237

EUR bln 700

EUR bln


Forecasted population income increase will assure the growth of retail sector share in credit portfolio

► Traditionally corporate lending significantly exceeded retail lending in Russia

► In the past years a significant growth of retail lending is observed, whereupon credit portfolio

changes gradually approaching the indicators of the developed markets

► A further increase of retail credits share of 33.3% is expected by the end of 2015

363

255

193

138 103

2015f2013e201220112010

Credits to legal entities, EUR bln

Credits to individuals, EUR bln Share of retail loan portfolio in total loan portfolio, %

725

594 523

460 363

2015f2013e201220112010

31.4% 33.0%

% of GDP

33.4% 36.4%

8.9% 9.9%

% of GDP

12.3% 18.2%

28.2% 33.3%

44.3% 50.7%

56.0%

65.8%

Russia 2012 Russia 2015 Czech Republic France Germany Poland

Comments

Sources: EY, CEE Banking Sector Report, European Central Bank

35.2%

15.1%

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