According to the Federal Tax Service (hereinafter “FTS”) on July 1, 2019, there are 3,9 million active companies in Russia.

Summary analysis helped to create a portrait of the Russian companies and obtain an overall picture of the structure and dynamics of the economy, functioning of business environment, identify disadvantages and benefits of the current level of business community.

Details

• Profit-making companies are in the majority of legal entities in Russia: 3,2 million or 84% of total active companies. Limited liability companies (LLC) reach 3,1 million or 97%. Due to quite simple registration procedure, minimal requirements to the authorized capital and financial accounts, this legal form is prevailing.

• Joint-stock companies are slightly spread: about 67 thousand or 2% of all active profit-making enterprises. Under the low attractiveness for foreign investors, lack of free financial resources and absence of conditions for private domestic investing, the entrepreneurs do not make companies public and borrow capital on the open stock market.

• The number of companies in Russia is decreasing: on July 1, 2016, the maximum number of legal entities (4,8 million) were registered, and since then the number of active companies decreased by 905 thousand or 20% as of July 1, 2019.

• Rapid reduction in the number of organizations is not due to the slowdown in economic growth, but is a consequence of the ongoing policy of cleaning the business environment from fictitious companies. For instance, in January-July 2019 in 87.6% of cases it was the decision of the registering authority (FTS) that was the basis for excluding the company from the Unified State Register of Legal Entities (hereinafter “EGRUL”). Only 1,1% of companies leave the market due to bankruptcy, and 1,5% - after reorganization. Voluntary decision on liquidation is made only in 9,2% of cases, and 0,6% of companies become inactive for other reasons.

• According to the FTS on July 2019, about 150 thousand firms with signs of a shell company are registered. A year ago, there were 310 thousand such companies, and before the campaign against companies launched in 2017 - about 1,6 million. These significant results in clearing EGRUL of shell companies were achieved by obtaining the right by tax authorities to verify the accuracy of information entered in the register.

• Currently, about 300 thousand of active companies, i.e. each 13th company is in the process of liquidation. In addition, 13 thousand legal entities entered into the process of reorganization with subsequent liquidation. The remaining 3,6 million firms continue their operations.

• There is a high concentration of business in the capital regions: 726 thousand legal entities or 19% of the total number of operating companies are registered in Moscow, and 298 thousand companies or 8% are registered in Saint Petersburg. The main tax revenues are formed in the mentioned regions, although the production base of many of the companies is located outside these subjects.

• A significant part of operating companies has overcome the period of formation: approximately 60% of organizations were established more than 5 years ago. Companies at the age of 1 to 3 years are at business risk - 17% of the total number of companies, and up to 1 year - 8% of firms.

• Mainly, shareholders of operating companies with a controlling stake in the authorized capital of 50% and above are citizens of Russia. There are 2,4 million of such companies. Citizens of other countries with a share in the capital of more than 50% have established 86 thousand organizations.

• Legal entities with a share of more than 50% participate in the capital of 178 thousand operating organizations, 151 thousand companies of which are with Russian shareholders. Major shareholders of 8 thousand companies are registered in the Republic of Cyprus, of 2 thousand - in the Seychelles. With a general minority of foreign owners, a number of large enterprises of systemic importance for the economy are controlled from foreign offshore or low tax jurisdictions.

• The success in diversifying the country's economy is becoming obvious: by the end of 2018, only 37% of all tax revenues to the consolidated budget of the Russian Federation were contributed by companies engaged in extraction of mineral resources. The remaining 63% of taxes fell on other segments, including manufacturing industry - 16%, wholesale and retail trade - 10%.

• The category of small and medium-sized businesses in Russia includes 2,8 million operating organizations, 2,5 million of which refer to micro-enterprises.

• Despite the large number of small enterprises, Russia is a country of large companies: 68% of total annual turnover for 2018 is accumulated by the major taxpayers. The share of medium-sized organizations in total revenue is 4%, and 28% accounts for small and micro enterprises.

• Major taxpayers demonstrate the largest increase in annual revenue: compared to 2017, in 2018 their turnover increased by 27%. Medium-sized companies increased the rate by 6%, small and micro enterprises by 7% and 14%, respectively.

• Most companies in Russia have a positive financial result: in 2018, there were 73% profitable and 27% loss-making companies.

• According to the Globas, 26% of total number of operating companies have Superior/High and Strong/Medium Solvency index Globas, 34% have Adequate/Weak index, and 31% - Unsatisfactory/Poor.

Table 1. Portrait of operating companies in numbers, 2019

Summary

One of the main risks of business in Russia is the forced exit to the shadow economy. High taxes and low profit margins force companies to artificially lower financial figures, use gray schemes, and attract shell companies.

Russian business, especially new established companies, suffer from a shortage of capital. Almost all profits go into turnover, which makes it impossible to expand. Loans are the only solution in this case, but interest rates for business are high, and loans are not available for start-ups.

An acute shortage of financing causes business instability. Lack of funds, competition, external negative factors can lead to losses and, ultimately, to the company's withdrawal from the market.

The undoubted advantage of Russian companies is their flexibility and adaptability. Domestic entrepreneurs quickly adapt to the external environment, which is obviously a positive effect from political and economic instability.

Light colors to the portrait are added by the idea of national projects that can stimulate economic growth and improve financial performance. The ambitious budget of national projects for 2019-2024 at total value of 25,7 trillion RUB will lead to a direct effect in the form of annual increase in GDP growth by 0,2% and up to 0,1% indirectly. At the same time, 60% of the expenditures are planned for updating the infrastructure.

In addition, there is hope for improvement in the investment climate due to the reduced threat of new sanctions, as well as strengthening of the ruble.

In our publication as of 27.05.2019 «Capital amnesty has been extended» it was informed that the third stage of «capital amnesty» was carried out.

Started from June 1, 2019 and until February 29, 2020 the citizens of Russia can declare foreign assets and accounts, get tax exemption on personal income and that one gained from controlled foreign companies, under the condition of legalization as tax residents of Russia. Relief from criminal liability is guaranteed by the amendments to the article 761 of the Criminal Code of the RF.

Addition to the note to the article 14.1 of the Administrative Offences Code of the RF (AOC) was made by the Federal Law as of July 18, 2019 №178-FL. According to the Law, persons that are applicants or those the information about can be found in special declarations filed on the third stage of «capital amnesty» are discharged from administrative liability.

It concerns declaration of actions or inactions related to:

• property;
• participation in controlled foreign organizations;
• conducting transactions with currency;
• crediting of monetary funds to accounts or investments.

During first and second phases of «capital amnesty» almost 19 thousand declarations were filed.