Another Russian Shortage: Loans For The Little Guy

When Andrei Yanshevsky wasn't busy heading a high-tech materials institute in the 1980s, he was gaining recognition as a Russian sports fisherman. So, when the country turned capitalist, Yanshevsky decided to give his passion a whirl and set up a company in Moscow to make fishing rods from lightweight composites. Then came the snag: He couldn't get a bank loan for the startup. Says Yanshevsky: "It was horrible. Banker after banker showed us the door."

Across Russia, nearly every entrepreneur faces the same problem. Even though Russia now has 3,000 commercial banks, only a handful are daring enough to make small-business loans. The rest either don't know how to, or Russia's soaring inflation holds them back. And while Western aid programs target entrepreneurs, their lending resources--an estimated $72 million this year--are tiny compared with Russia's immense needs.

UNDERWORLD SHARKS. The dearth of financing remains a big obstacle to economic progress. Russia needs to create a broad small-business sector to cushion the blow of mass unemployment as Russia's larger enterprises restructure. While the credit shortage keeps many would-be entrepreneurs out of business, the more determined biznesmen are scraping by.

Thousands must, like Yanshevsky, reach into their own pockets or finance their companies by borrowing from family and friends. "I have many friends in business, and not a single one has managed to get a loan from a bank," says Valentin Boiko, a Moscow-based entrepreneur who sells industrial equipment.

Banks complain that many entrepreneurs have few assets to pledge as collateral and no credit history. "We consider it very risky" to lend to new small businesses, says Yelena Bulichova, a director at Moscow's Most Bank, "so we don't do it." Instead, Most and other banks prefer to finance mainline commercial transactions, where the returns are quick and lucrative. Russian retailers, for example, now pay banks 50% interest in dollar terms for a 30-day dollar loan to finance imported goods. For ruble financings, banks charge rates of 160% to 200% to cover inflation.

Spurned by banks, some entrepreneurs turn to mafia sharks for emergency loans. But even the mafia favors fast returns over longer-term credit, preferring to lend at high rates to retailers or trading companies. Some businesses solve the money crunch by seeking sponsorship from larger corporations or by banding together in cooperatives. One such Moscow cooperative helped entrepreneur Anastasia Filippova launch a printing business that now employs 20 people.

To be sure, businesses lucky enough to have assets to use as collateral have an easier time. When Igor Kuseltan, a scientist, wanted to start a bakery, Moscow's Inter-Progress Bank gave him a one-year, 8% loan. The collateral: Kuseltan's patent for an herb bread that supposedly improves men's sexual performance. And some banks have figured out that they can make money lending to small businesses if they charge high enough rates. After months of pounding on banks' doors, Yanshevsky persuaded Effect Bank and Yalosbank in Moscow to give him a series of three-month loans at 50% rates.

CREDIT TRAINING. Western aid organizations are trying to push the banks further. The European Bank for Reconstruction & Development has given $31 million to Russian banks for small-business loans and plans to double that figure. The Russian-American Enterprise Fund, sponsored by the U.S. Agency for International Development, has put up $865,000 for small-business loans and hopes to be lending $1 million a month starting in March. Both organizations train Russian credit officers to handle small-business loans.

These Western efforts, however, aren't enough. Bankers and entrepreneurs won't feel comfortable lending or borrowing long-term until the government controls inflation for a sustained period of time. In the meantime, Yanshevsky is counting his blessings. He recently secured a $100,000 loan from the Russian-American Enterprise Fund at just 12% interest. His fishing rod company already employs more than 100 workers. With the new loan he'll be able to expand and hire more.

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