The Russian economy is dominated by huge oil, gas, metals and other natural-resources corporations. Small businesses complain that it is almost impossible to find the funds to set up shop.

Alexei Ramin always wanted to start a small brewery. He had the education, the business plan, the team, the experience but no one to pitch his ideas to.

There was no venture capital fund in the country, no government support for starting ventures and no banks lending for projects of small size.

It took Alexei eight years and a series of failed business partnerships to get into a local brewery with the help of its state-appointed management. But by the time he could get money to realize his dreams, a foreign corporation moved in and took it under its wings. He is now a production manager in the company and the dream of owning the business seems further away than ever.

Russia is a long way behind the rest of the world when it comes to small entrepreneurs. For every 1,000 Russians, there are only six small businesses, and the sector accounts for no more than 12 percent of GDP. In the European Union, by contrast, there are at least 30 small businesses per 1,000 inhabitants; in Japan, 50 per 1,000 inhabitants; and in the United States 74 per 1,000.

About 12 million people, or 18.3 percent of the working population, are employed in the small-business sector in Russia – two to three times fewer than in Western Europe. And most of them, according to experts, work in trading business with little or no asset base.

Total investment in small businesses in the first three quarters of 2002 was only 32.8 billion rubles (about $1 billion) of which just 9.3 billion rubles were invested in the industrial sector.

Most small businesses are in the retail and service sectors, where small firms made up 47.9 percent of the total in 2002 and accounted for 25 percent (8.3 billion rubles) of total investment. Industry is next, with small businesses accounting for 28.4 percent (9.3 billion rubles) of investment, followed by construction, at 20.6 percent (6.8 billion rubles) of investment. Other sectors account for 4.7 billion rubles of investment.

Bankers, entrepreneurs and the authorities all have their own views of small business. Despite a series of optimistic pronouncements by President Vladimir Putin, such businesses continue to reel under bureaucraticrestrictions and lack of enterprise funding. Bankers continue to feel it is not advantageous to work with small businesses because of their inability to provide long-term financial-economic assessments and business plans or collateral for loans.

Entrepreneurs cite three key reasons for the difficulties involved with securing loans: no effective means of providing collateral, high interest rates and a byzantine application procedure. Russian banks lend at interest rates of 15 percent to up to 40-45 percent depending on the business and the region of the country. And even those rates require highly liquid collateral or cash-flow rich balance sheets, making it nearly impossible for a new or small business to gain financing.

Bankers say the problem is one of being able to provide financial guarantees. Central Bank regulations make things even more complicated -- only guarantees by the government are considered sufficient security for loans other than the obvious collateral provided by potential borrowers.

Andrei Khandruyev, chairman of Russia’s Greenfield Bank, said that under current regulations, the Central Bank accepts guarantee letters to support credits only from state structures. That, he said, forces banks to charge high interest rates to hedge their bets.

Khandruyev added that the difficulties in forecasting economic prospects three or five years down the line also push interest rates up. Banks say that if government would step in with guarantees of some kind, it could change the situation.

Garegin Tosunian, president of the Russian Banks Association — which embraces 576 financial organizations — said the banking community is raising the question of the need for the government to develop policy aimed at reducing the cost of credit and financial resources.

"This needs to be done in order to make it possible for the banks to credit small and medium businesses at affordable rates and at acceptable terms," Tosunian said. "It is not we who determine the procedure of issuing loans, while there are a lot of Central Bank’s instructions and regulations that deserve to be called ‘anti-crediting’ and which make it impossible for us to provide good services to our clients."

Bankers point to the Mandatory Reserve Fund as a way to boost lending in Russia. Banks are obliged to transfer 10 percent of individual and corporate deposits made in foreign currency and 7 percent of the individual deposits made in rubles to the fund.

The fund has accumulated about 200 billion rubles and, bankers argue, it would be better to put this money to work by lending it to small business, thus boosting the overall economy.

"We understand that the Mandatory Reserve Fund is an instrument of macroeconomic policy," said Vladimir Rashevsky, chairman of MDM-Bank. "But in the present situation, where inflation is under control and the Central Bank’s gold and hard currency reserves are approaching $50 billion, it is possible to reduce the Mandatory Reserve Fund a bit."

He said that by returning part of the fund’s money to the banks -- "for example, 10 percent of the 200 billion rubles, which is less than the Central Bank’s administrative expenses" — it would be possible to stimulate economic growth and make credit cheaper.

"Dozens of unsatisfied credit applications are lying in the banks, which indicates that the economy needs money," Rosbank Chairman Yevgeny Ivanov said.

Currently, Russian banks generally provide small-business loans through money from international financial organizations such as the World Bank and the European Bank for Reconstruction and Development (EBRD). Through its partner banks, the EBRD offers individual entrepreneurs and small businesses employing up to 30 people three-year micro-loans of up to $10,000 and loans of $10,000-$30,000 to companies employing up to 100 people.

Most of the EBRD loans currently are micro-loans, with about 81 percent for less than $10,000, and 47 percent for $1,000-$5,000. The average loan is $7,200, and the average term is 10 months. Some 64 percent of loans are to the retail sector, 19 percent for manufacturing and 17 percent for services. The non-repayment rate for the EBRD programs is less than 1 percent.

Small-business development programs have been started in 53 regions with a total budget of about 9 billion rubles. There are more than 1,350 different programs for small business in the Russian regions, including 75 regional and 150 municipal funds, 50 agencies, 80 business incubators, 50 techno-parks and 30 specialized leasing companies. All of them are still starved of money.

The city of Moscow allocates the most money to small business, about 4.4 billion rubles in 2002, followed by Tomsk Oblast (802.8 million rubles), Moscow Oblast (544 million rubles), Lipetsk Oblast (413 million rubles), the Republic of Sakha (308.3 million rubles) and the Khanty-Mansiisk Autonomous District (234.7 million rubles).

The government has proposed concentrating on several aspects of support for small- and medium-sized businesses in 2003. These priorities include micro-credits and developing a guarantee system that would divide up the risks in lending to small businesses between the state and commercial banks. The state is ready to help increase confidence in financial services, create a credit-history information database and pass much needed laws on deposit insurance and lending bureaus.

Also on the agenda is the issue of subsidizing interest rates, including for leasing operations. But a World Bank report says that subsidizing interest rates would not encourage more medium-term lending, nor would it solve the problems of loan security, small banks or the high cost of loans. The World Bank proposes not subsidizing interest rates, but extending the time allocated to repay loans.

Officials in various ministries are now suggesting that non-bank commercial organizations, such as lending cooperatives, mutual credit and insurance societies, could build up resources for small- and medium-sized businesses, thus providing an alternative lending network to the banking system. The draft legislation is nearly ready.

In the meantime, the mega-corporations of Russia are also beginning to reach out and lend a hand to smaller counterparts. Oil giants LUKoil and Yukos, for example, say they are considering allocation of funds to develop small businesses in the regions where they have operations.

Those plans, if they come to fruition, may someday give dreamers like Alexei and other budding Russian entrepreneurs atchance at self-employment and the opportunity to build up businesses of their own.