V. BARINOVA, S. ZEMTSOV: IMPLICATIONS OF A LOSS OF SMALL BUSINESS FOR THE RUSSIAN ECONOMY
The Forbes published a joint study by Vera Barinova, Head of the Innovation Economy Department, Gaidar Institute and Stepan Zemtsov, Senior Researcher of the Innovation Economy Department, in which they analyzed the impact of the crisis and the pandemic on the sector of small and mid-sized enterprises and the economy as a whole.
“The coronavirus pandemic has caused serious economic implications which affected Russia, as well. Moscow residents have already been in the lockdown for a month. Other large cities have introduced similar lockdown measures. On the back of it, demand in consumer goods and services has fallen dramatically and the services sector is suffering huge losses.
The small and mid-sized business sector (SMB) – restaurants, hotels, beauty parlor, barber's shops, entertainments, sports and tourism industry and retail nonfood shops -- is the worst hit. During the lockdown, the actual demand in services of these industries has fallen several-fold. Accordingly, their revenues have dropped, too, while mandatory costs remained unchanged: payments on loans, rentals, wages, taxes and social security contributions. The cash gap is likely to trigger large-scale bankruptcies. It is feasible now to make a preliminary estimation of the damage caused by the current crisis, including its impact on revenues, employment, debt financing and the number of companies of the SMB sector.
All those types of businesses which did not manage to switch over to online selling of goods and services or whose business model suggested exclusively personal provision of services face now the risk of bankruptcies. The Sberbank’s analysts registered in March-April huge growth in expenditures on telecommunications equipment (+50.37%), pharmaceuticals and medical-care products (+22.19%), household appliances and electronics (+21.2%) and spirits (+8.9%). Consumer demand fell across all other categories of spendings with a drop of over 90% observed in respect of travelling, jewelry, air tickets, garments, footwear and accessories, beauty parlors/ massage/SPA, sports and education.
During the first week of the lockdown, the volume of the Russian’s daily expenditures fell by nearly 50%. For this reason, within three weeks the weekly turnover of small and mid-sized businesses decreased by 21% as compared with the level of February-March. During the second part of March 2020, “Moe Delo” customer accounts received 31% less of funds than in the relevant period of 2019.
The introduction of the fully paid holidays in Russia from March 30, 2020 in the wake of the coronavirus pandemic increases the cash gap of enterprises. By estimate of FinEkspertiza , an audit and consulting company, wage disbursements will amount to over Rb 0.5 trillion. Not all companies have accumulated the required resources in the pre-crisis period”, Vera Barinova notes.
By seeking to reduce their costs “businessmen will try to withdraw into the shadows and switch over their employees into informal employment or the status of self-employed. The number of people employed in the informal sector and its share may grow by several million persons in 2020 by analogy with previous crises. At year end 2020, the rate of unemployment is expected at the level of 8% (10% in the worst case scenario) of the gainfully employed population, that is, in the range of 6-9 million people.”
It is expected that damage will be caused to the entire sectors which experienced a dramatic drop in demand. Such sectors include air carriage, leisure and entertainments, health and fitness, sports, tourism, hotel business, public catering, organization of additional education, consumer services to households: repairing, laundry, dry-cleaning, services of barber’s shops and beauty parlors, as well as trade in nonfood products.
As per calculations of Stepan Zemtsov “the share of the potentially worst hit sectors is equal to about 11 % of the total number of SMB entities or about 2.6 percent of the turnover of SMB, which value seems to be insignificant. But if the sectors affected by the shutdown of these enterprises are taken into account, it will turn out that additional 64.2% of small and mid-sized businesses, that is, about 3.4m companies may shut down because of the coronavirus pandemic.”
The reduction of the turnover of some sectors produces a multiplier effect on related industries. So, as per calculations by Stepan Semtsov and Yu. Tsareva, Researcher of the Business Studies Department, IAES RANEPA, “the optimistic scenario suggests a drop in the turnover of the SMB sector by the mere Rb 1.9 trillion or 2.6% of the turnover of the entire sector in the industries which were affected directly by the crisis. But the shutdown of enterprises with a turnover of Rb 1m in the worst hit industry may lead to a closure of enterprises in related industries for Rb 2.9m (on average), while the overall damage in this case exceeds Rb 5.7 trillion or 7.5% of the SMB sector. The industries which may be affected owing to the multiplier effect account for nearly 77% of the turnover of the SMB sector.” If lockdown measures remain in force for a few months, this sector may have catastrophic consequences.
“By the Rosstat’s estimates, in Russia about 20% of GDP is created by small and mid-sized businesses. So, the catastrophic scenario of a 50%-60% decrease in the turnover of the SMB sector may result in a 10% reduction of GDP in Q2 2020”, experts of the Gaidar Institute note.
As per the researchers’ earlier estimates, “a 1% reduction of the number of small and mid-sized companies may lead to a decrease of 0.06%–0.17% in GDP depending on other conditions. Then, in the most pessimistic scenario the shutdown of 50%–60% of companies in 2020 will lead to a decrease of 3%-10% in GDP within a year.”
The small and mid-sized business sector (SMB) – restaurants, hotels, beauty parlor, barber's shops, entertainments, sports and tourism industry and retail nonfood shops -- is the worst hit. During the lockdown, the actual demand in services of these industries has fallen several-fold. Accordingly, their revenues have dropped, too, while mandatory costs remained unchanged: payments on loans, rentals, wages, taxes and social security contributions. The cash gap is likely to trigger large-scale bankruptcies. It is feasible now to make a preliminary estimation of the damage caused by the current crisis, including its impact on revenues, employment, debt financing and the number of companies of the SMB sector.
All those types of businesses which did not manage to switch over to online selling of goods and services or whose business model suggested exclusively personal provision of services face now the risk of bankruptcies. The Sberbank’s analysts registered in March-April huge growth in expenditures on telecommunications equipment (+50.37%), pharmaceuticals and medical-care products (+22.19%), household appliances and electronics (+21.2%) and spirits (+8.9%). Consumer demand fell across all other categories of spendings with a drop of over 90% observed in respect of travelling, jewelry, air tickets, garments, footwear and accessories, beauty parlors/ massage/SPA, sports and education.
During the first week of the lockdown, the volume of the Russian’s daily expenditures fell by nearly 50%. For this reason, within three weeks the weekly turnover of small and mid-sized businesses decreased by 21% as compared with the level of February-March. During the second part of March 2020, “Moe Delo” customer accounts received 31% less of funds than in the relevant period of 2019.
The introduction of the fully paid holidays in Russia from March 30, 2020 in the wake of the coronavirus pandemic increases the cash gap of enterprises. By estimate of FinEkspertiza , an audit and consulting company, wage disbursements will amount to over Rb 0.5 trillion. Not all companies have accumulated the required resources in the pre-crisis period”, Vera Barinova notes.
By seeking to reduce their costs “businessmen will try to withdraw into the shadows and switch over their employees into informal employment or the status of self-employed. The number of people employed in the informal sector and its share may grow by several million persons in 2020 by analogy with previous crises. At year end 2020, the rate of unemployment is expected at the level of 8% (10% in the worst case scenario) of the gainfully employed population, that is, in the range of 6-9 million people.”
It is expected that damage will be caused to the entire sectors which experienced a dramatic drop in demand. Such sectors include air carriage, leisure and entertainments, health and fitness, sports, tourism, hotel business, public catering, organization of additional education, consumer services to households: repairing, laundry, dry-cleaning, services of barber’s shops and beauty parlors, as well as trade in nonfood products.
As per calculations of Stepan Zemtsov “the share of the potentially worst hit sectors is equal to about 11 % of the total number of SMB entities or about 2.6 percent of the turnover of SMB, which value seems to be insignificant. But if the sectors affected by the shutdown of these enterprises are taken into account, it will turn out that additional 64.2% of small and mid-sized businesses, that is, about 3.4m companies may shut down because of the coronavirus pandemic.”
The reduction of the turnover of some sectors produces a multiplier effect on related industries. So, as per calculations by Stepan Semtsov and Yu. Tsareva, Researcher of the Business Studies Department, IAES RANEPA, “the optimistic scenario suggests a drop in the turnover of the SMB sector by the mere Rb 1.9 trillion or 2.6% of the turnover of the entire sector in the industries which were affected directly by the crisis. But the shutdown of enterprises with a turnover of Rb 1m in the worst hit industry may lead to a closure of enterprises in related industries for Rb 2.9m (on average), while the overall damage in this case exceeds Rb 5.7 trillion or 7.5% of the SMB sector. The industries which may be affected owing to the multiplier effect account for nearly 77% of the turnover of the SMB sector.” If lockdown measures remain in force for a few months, this sector may have catastrophic consequences.
“By the Rosstat’s estimates, in Russia about 20% of GDP is created by small and mid-sized businesses. So, the catastrophic scenario of a 50%-60% decrease in the turnover of the SMB sector may result in a 10% reduction of GDP in Q2 2020”, experts of the Gaidar Institute note.
As per the researchers’ earlier estimates, “a 1% reduction of the number of small and mid-sized companies may lead to a decrease of 0.06%–0.17% in GDP depending on other conditions. Then, in the most pessimistic scenario the shutdown of 50%–60% of companies in 2020 will lead to a decrease of 3%-10% in GDP within a year.”
Sunday, 03.05.2020