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Monday, 3 December, 2001, 11:37 GMT
Russia's small firms fight for recovery
Penza skyline
Penza is a home for 10,000 small and medium-sized firms
Two years of economic boom in Russia bring optimism to small and medium sized companies. But they still face huge problems. James Schofield gets to know a company in Penza, a city in Volga region.

When the first batch of alcopops rolled out of Stary Pivovar factory gates in July 1998, Vladimir Volkov, its general director, was a man confident of the future and proud of his achievements.

After two years of hard work and more than $4m investment spent on machinery, trucks and premises, his dream of setting up modern, successful factory had come true.

But less than one month later, that dream and his business lay in tatters. The Russian government had defaulted on domestic debt and the banking system was collapsing.

Foreign creditors quickly cancelled his financing. As the rouble plummeted, the aluminium cans that the company imported from Austria quadrupled in price, shoppers stopped spending and vital first orders were cancelled.

The disaster of 1998

"It was a disaster," said Mr Volkov during a tour of the plant, which had remained still for months in the wake of the crisis.

Many of the 200 workers were sent home and the company looked set to fold.

Cans
Cans were imported from Austria before 1998
Since then, things have slowly improved.

Last June the company made its first net profit since opening.

Two years of strong economic growth in Russia have finally stimulated new consumer spending in the shops and next year Volkov expects sales to almost double to seven million dollars.

The other side of the coin

For local companies like Stary Pivovar the disaster of 1998 brought some unexpected benefits rather than problems.

But despite the current mood of optimism and healthy growth, small and medium sized companies in Russia still face huge problems.

Though the Russian banking system is functioning once again, affordable credit remains almost impossible to come by without close connections to local administration officials.

Commercial rates of 25% make even short-term loan facilities enormously expensive.

And while the government has recently passed reforms aimed at streamlining the bureaucratic burden on business, small companies in particular are still weighed down by the need to secure hundreds of separate licences and permits to operate legally. Another problem is that many companies simply lack the commercial know-how to compete in the market place.

Fighting in a new world

"These struggling enterprises are eclipsed by the larger and international companies which have enormous clout and professional marketing systems," believes David LeSueur, an advisor from the UK who spent two weeks at the Stary Pivovar plant last year.

Stary Pivovar factory
The company borrowed heavily to invest in technology

"Ten years ago there wasn't even any advertising in Russia," says Mr LeSueur.

"So when it comes to sales a lot of these companies simply don't know what they are up against and lack the professional skills needed to compete."

This is bad news for Mr Volkov and his alcopops. Stary Pivovar needs to invest a further $8m-10m to upgrade facilities and expand production. If he gets it, sales could top $15m per year.

"The trouble is that they just don't have the skill to prepare a viable business plan," said Mr LeSueur, who believes that, given the right presentation to attract the funds, the company could be a success.

Catch-22

Mr Volkov's plant is in a Catch-22 situation. It needs capital to invest but will have to spend $80,000 in consultant fees to put together a comprehensive financial, marketing and operational plan necessary to win over investors.

But after a decade of economic and business turmoil, Stary Pivovar's investors are simply too wary of spending that much money. "They simply don't trust anyone enough to put that kind of money up front," says Mr LeSueur.

In the face of such hurdles, the indomitable Vladimir Volkov is yet hopeful about the future, which once again holds new promise for companies like Stary Pivovar.

It remains to be seen whether this time around he will prove luckier than last.

See also:

14 Nov 01 | Business
Russia's recovery in the spotlight
26 Nov 01 | Media reports
Press questions Russia's oil policy
19 Jun 01 | Business
Russia restores ties with IMF
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