Recent economic shocks have opened a window of opportunity for Russian small and medium-sized businesses. Over the past year, the number of small and medium-sized enterprises has grown by almost 10% after seven years of stagnation. Their turnover has also increased by 11% in real terms over the year. The volume of loans issued to small and medium-sized enterprises has jumped by 40%, echoing the post-pandemic recovery figures seen in 2021. Business sentiment surveys demonstrate unprecedented optimism among entrepreneurs, noting growth in revenue, employment, and investments. The sudden boom has been driven primarily by two factors: the shock of sanctions, which necessitated a restructuring of supply logistics, and the growth in consumer demand. The situation somewhat resembles the 1990s, when the collapse of the Soviet economy led businesses to rapidly fill gaps and create missing links in supply chains. Today, small and medium-sized enterprises are filling the market with products from Western brands that have exited Russia. They are also participating in replenishing supplies of Western components and goods for large companies such as Russian Railways, Aeroflot, Rostelecom, and Rosseti, which cannot procure them directly. However, factors contributing to the growth of domestic demand are also at play, including the shift towards domestic leisure consumption of a significant portion of funds that Russians previously spent on foreign trips. Additionally, spurred by the frenzy of demand and military payments, there has been a rise in wages and incomes. The pressure of high interest rates is partly mitigated by incentives and the relatively low penetration of credit in this sector (at 9%). Although economists have long argued that the role of small and medium-sized businesses in the Russian economy is disproportionately small, the current turn of events is primarily driven by factors that are not entirely natural and is unlikely to be seen as a sign of positive structural dynamics.
Against the backdrop of war and sanctions, Russian small and medium-sized businesses are experiencing a veritable boom. In 2022, the turnover of small and medium-sized companies decreased slightly in real terms, but in 2023, it increased nominally by almost 20%, which is more than 11% in real terms. The number of small and medium-sized enterprises has sharply increased as well. The Unified Register of Small and Medium-sized Enterprises, maintained by the Federal Tax Service, as of April 2024, registered over 6.5 million small, medium, and microenterprises and individual entrepreneurs. It is worth noting that their numbers stagnated in the range of 5.8–6.2 million between 2016 and 2019. Following a pandemic decline, by the end of 2021, the count was back to 5.86 million, and in December 2022, it was 5.96 million. Thus, over the last 16 months, their number has increased by 9%, finally climbing out of the stagnation of the past seven years.
The volume of loans issued to small and medium-sized companies soared by 40% over the year (in 2022, growth was 8%, which is almost one and a half times lower than inflation). In total, they borrowed 15.9 trillion rubles, according to the rating agency 'Expert RA'. These rates are comparable to the post-pandemic recovery pace of small and medium-sized business lending in 2021. At that time, government-subsidised loans for companies in affected industries played a key role. Before the pandemic, the annual growth rate of lending to small and medium-sized enterprises did not exceed 15%. The aggregate loan portfolio of small and medium-sized businesses increased by 29% in 2023, reaching 12.4 trillion rubles. The volume of loans issued exceeds the amount of debt because a significant portion of loans are short-term. Consumer lending is growing noticeably slower. As a result, consumer loan portfolios (13.6 trillion rubles) and loans to small and medium-sized businesses are already comparable.
This euphoria is also captured in market surveys. For example, the RSBI index, calculated by Promsvyazbank, 'Russia's Backbone', and Magram Market Research based on a survey of 1800 companies, surged to historically high levels of 57–57.7 points in March-April (values above 50 points indicate increased activity). The main contributor to the composite value was the sales component (53.6 points). The highest proportion of companies ever recorded, 43%, anticipate revenue growth. Expansion of the workforce was reported by 18% of those surveyed. 25% of companies indicated increased investments, with only 8% forced to cut back. A survey conducted earlier this year by the Public Opinion Foundation (FOM) paints a similar picture. 38% of those surveyed said that 2023 was more successful for their business than 2022, while 28% considered it less successful (a decrease of 9 percentage points). Similar assessments were given by FOM survey participants during the post-COVID recovery phase in 2021. 20% of those surveyed believe that 2024 will be even more successful, while 39% expect it to be the same. Only 27% anticipate a worsening situation.
The boom in small and medium-sized businesses is attributed to several factors, the main ones being the growth in domestic consumer demand and sanctions. It is the latter that has opened up new growth opportunities for businesses by participating in the restructuring of logistics chains and replacing departed companies from the Russian market, explain analysts from 'Expert RA'. Parallel imports are effectively a new niche for small and medium-sized companies. With growing isolation and state intervention, some commentators (such as IMF head Kristalina Georgieva) have compared the current situation in the Russian economy to the late Soviet period. However, it more closely resembles the early 1990s when the collapse of communism left many gaps that businesses rushed to fill, as Bloomberg wrote last year. Additionally, consumers now have significantly more disposable income. Among other things, small and medium-sized enterprises are actively involved in supplying consumer goods from well-known brands that have exited Russia. All these products are present in the Russian consumer market, their prices have increased, and there is demand. The shuttle traders have been replaced by civilised firms that are increasing turnover and product range.
But there are larger niches to fill as well. For instance, in 2023, four out of five contracts from major clients were signed with suppliers from small and medium-sized companies, as reported by Alexander Isaevich, CEO of the Small and Medium Business Corporation. The total volume of purchases exceeded 8 trillion, which is 13.5% more than the previous year. The most active customers were Russian Railways, Aeroflot, Rostelecom, and Rosseti. This is not so much a circumvention of sanctions as it is a replacement for the supplies of components that companies previously purchased directly and now must obtain through intermediaries cooperating with firms in countries not participating in the sanctions. From an economic standpoint, these are redirected flows that were previously absorbed by large companies, logistics firms, and foreign companies that left Russia. The explosive growth in the number of small and medium business entities can be explained by filling this niche. Such assumptions are supported by statistics. In absolute terms, according to the National Rating Agency's estimate, the largest turnover growth in the small and medium-sized business sector occurred in wholesale trade (+432 billion rubles, +14% compared to 2022, excluding automobile trade).
Furthermore, factors contributing to this boom undoubtedly include the growth of internal demand. In particular, the shift to domestic leisure consumption of a significant portion of funds that were previously spent on foreign trips (according to expert estimates, in 2023, such trips were half as frequent as in 2021). For example, in 2023, the average revenue of travel agencies increased by 47%, and hotels by 14%. The average revenue of beauty salons and spas increased by 23%, barber shops by 21%, and nail salons by 16%. Fitness centres saw a 24% increase in turnover.
The strict monetary policy has not yet limited the development of small and medium-sized companies because they attract a significant portion of loans at reduced rates, and internal price growth rates have been high enough, note analysts from 'Expert RA'. According to their calculations, at the end of the year, the average interest rate on loans for up to one year was 14.6%, which is 1.4 percentage points lower than the key rate. Before the tightening of the monetary policy in August 2023, interest rates on loans for small and medium-sized companies were on average 1.5 percentage points higher than the key rate. The increase in borrowing costs is mitigated by government-financed subsidy schemes. For example, investment loans aimed at import substitution were available to small and medium-sized businesses at 4% and 2.5% per annum, respectively, in 2023. The limit for preferential investment lending to small and medium-sized companies compared to 2022 was doubled to 100 billion rubles. In total, in 2023, small and medium-sized businesses received over 1.7 trillion rubles in financial support through all the programmes provided by the 'Small and Medium Business' national project, which was 30% more than in 2022. Additionally, according to the 'Expert RA' analysts, in the second half of the year, lending accelerated because businesses anticipated a further tightening of monetary policy. Entrepreneurs became more willing to borrow for terms longer than one year. In June, the share of such loans exceeded 50%, and by the end of the year, it reached 64%. The potential for credit growth is far from exhausted, according to 'Expert RA'. The penetration rate of lending by the beginning of 2024 was only 9%, and in conditions of brisk consumer activity, it could grow to 20%.
Economists have long noted that the share of small and medium-sized businesses in the Russian economy is disproportionately small, partly due to the weak participation of companies in this sector in the supply chains of large companies. The shock of sanctions and the crisis-driven restructuring of logistics have suddenly created this niche for them, though they have also defined a specific role. It is difficult to label such stimuli for sectoral development as natural. The recent consumer boom is also linked to forced structural shifts and fiscal stimuli. Therefore, it is premature to discuss the prospects of the Russian small business sector in the long term, and it can only be noted that the logistics shock and the sanctions-related structural adjustment of the economy have opened a temporary window of opportunity for them.