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Moscow Times
February 28, 2005
Cost of Transparency Scares Away Business
By Maria Levitov
Staff Writer

The merits of transparent financial practices may be well known, but for many Russian entrepreneurs, cleaning up the books still makes little business sense.

Although investors and banks are more likely to finance a transparent company, the expense involved in switching to more open accounting can be daunting, Natalya Polishchuk, vice president of Delta Private Equity Partners, told a forum of small-business owners on Friday.

"There are industries, where [a company's] 15 percent profitability can turn into negative five," Polishchuk said, speaking at a quarterly meeting sponsored by the U.S.-Russia Center for Entrepreneurship -- which is funded by Delta -- and Svoi Biznes magazine.

Not only does paying consultancies to eliminate shady schemes cost thousands of dollars and cut into profits, becoming transparent when other market players are not may erode business competitiveness, she said.

Banking is the country's most opaque sector, while telecommunications is the most transparent, according to Standard & Poor's, which found that the ownership of 76 percent of privately owned shares -- worth some $114 billion -- is not publicly disclosed.

Konstantin Gubin, partner at RB Partnership consultancy, said that restructuring costs often scare off entrepreneurs.

"'Are you crazy? How can I work like that?'" Gubin recalled a client exclaiming after being told that cleaning up his books would decrease profitability from 30 percent to 8 percent.

"If your business is dependent on illegal acts, then transparency is not for you," David Gray, head of audit at PricewaterhouseCooper's, said in a phone interview. But without transparency, companies would not get access to cheap financing, he said.

"Western investors are ready to invest in Russian companies," said Delta's Polishchuk. "But very often, they cannot find an object for investment."

Albert Gusev said he didn't have a choice but to shed light on the books of his company, Nizhny Novgorod-based Sladkaya Zhizn.

"Transparency was not our end goal ... [but] we wanted to grow," he said. To stay competitive and develop, Sladkaya Zhizn formalized relationships with shareholders, hired auditors and attracted investors. Sladkaya Zhizn was then able to purchase Spar's master franchise and develop supermarkets under the Spar brand.

Although transparency may have helped Gusev's business grow, entrepreneurs at the forum asked why a company not in the market for extra financing would make the extra investment.

"Even if a company doesn't have any immediate plans to seek debt financing, it may want to do so in the future," Gray said. "Hopefully, you can see interesting opportunities for development in the future."

Nevertheless, most small entrepreneurs are not interested in legalizing their financials, Sergei Borisov, president of Opora, which supports small and mid-size business development, said in an e-mail.

What will really spur small companies to become more transparent is a simplified tax system, he said.