Requirements for large companies to set a minimum purchase share from small businesses need to be developed more detailed

18 march 2016

The Analytical Center hosted a roundtable on “Determining requirements for a minimum purchase share by large companies from small businesses: risks and expected outcomes”.

In late 2015 a lot of controversy was caused by a draft law amending the Federal Law No 135-FZ “On the Protection of Competition” as of July 26, 2006 and the Code of the Russian Federation on Administrative Offenses that obligates companies whose sales exceed RUB 7 billion a year to source at least 10% of all their purchases of goods and services from small businesses. “The main goal here is to help small businesses, especially small businesses involved in manufacture. It is especially important in a highly monopolized economy like ours,” Vladislav Onischenko, First Deputy Head of the Analytical Center, said in his opening address.

On the one hand, the measure is expected to help Russian small businesses get more sales but, on the other, experts point out that it entails a lot of problems with law enforcement in the future.

According to the SPARK database, Russia’s got 2,395 companies with sales exceeding RUB 7 billion a year with the majority of them operating in wholesale and retail. “Small businesses must be the foundation of any economy, it is the right approach. However, this way of supporting small businesses is bound to meet with lots of resistance,” Nikita Polozov, an expert of the Association of Corporate Legal Lawyers, said. In his opinion, this initiative goes against the basic principles of market economy as they are stipulated in the Article 55 of the Constitution of the Russian Federation. It is also doubtful that this measure will help small businesses in any way, since big companies are going to find ways around it if they conclude they are going to lose money off such purchases. There is a risk that huge amounts of intermediaries may appear. Experts also point to the fact that small companies are less stable and harder to make predictions about than big companies, so some measures must be put in place to ensure the small ones perform their contractual obligations.

A separate issue in the discussion was the use of traditional tools of supporting small businesses such as low interest loans, loan guarantees and others. There is no data on how well the measures that have already been put in place are working and, if they are ineffective the causes must be investigated.

Elena Parshina, Leading Advisor at the Department for competition policy, talked about the proposals of the Analytical Center on how to minimize risks, such as law exemptions of a number of economic sectors, introducing a trial basis of legal requirements for a couple of sectors, and some others.

All the experts concurred that draft law cannot be adopted as it is today because it does not create any incentive for development nor for small businesses, nor the economy as a whole, and more work in this area is needed.

Experts also believe that at the present moment it is more important to ensure small businesses have access to cheap loans, to cancel snap audits and to stimulate purchases of domestically sourced technologies and equipment. These measures will offer real help to small businesses and to the Russian economy as a whole as they will promote the development of domestic production and innovations. A registry of products manufactured by small businesses is also needed so potential customers can look at them to see what choice they have.