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Doing Business in Russia. The main political risks and challenges for international companies

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Abstract

Over the last few decades, Russia has been attracting foreign companies from all over the world and it has become the third most attractive country for foreign direct investment (FDI) worldwide after the US and China. Moreover, Russia is currently the second-largest emerging economy after China. However, at the same time it is one of the most corrupt countries in the world. Political corruption remains one of the main problems for Russian political and economic development and the primary challenge to business activities there. In addition, unstable property rights and the Russian state's growing control over business activities and the business community has harmed Russia's business environment. Taking this as its starting point, this article examines the informal rules and practices that have developed since Vladimir Putin began his first presidential term in 2000. First, the paper investigates the specific characteristics of these rules and practices at the federal and regional level in Russia. It focuses on systematic corruption and favoritism as the main political risks. Next, the article assesses their impact on the domestic business environment. Then, it looks at the methods used by state officials to mitigate or minimize the negative consequences of corruption and favoritism. The article concludes with an evaluation of the political risks for the activity of international companies in Russia.
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Julia Kusznir
Doing Business in Russia. The Main Political Risks and Challenges
for International Companies.
Abstract
Over the last few decades, Russia has been attracting foreign companies from all over the
world and it has become the third most attractive country for foreign direct investment (FDI)
worldwide after the US and China. Moreover, Russia is currently the second-largest emerging
economy after China. However, at the same time it is one of the most corrupt countries in the
world. Political corruption remains one of the main problems for Russian political and
economic development and the primary challenge to business activities there. In addition,
unstable property rights and the Russian state’s growing control over business activities and
the business community has harmed Russia’s business environment. Taking this as its starting
point, this article examines the informal rules and practices that have developed since
Vladimir Putin began his first presidential term in 2000. First, the paper investigates the
specific characteristics of these rules and practices at the federal and regional level in Russia.
It focuses on systematic corruption and favoritism as the main political risks. Next, the article
assesses their impact on the domestic business environment. Then, it looks at the methods
used by state officials to mitigate or minimize the negative consequences of corruption and
favoritism. The article concludes with an evaluation of the political risks for the activity of
international companies in Russia.
I. Introduction
For several years, Russia as the second-largest emerging economy after China, has been seen
by the foreign investors as a country with good potential for economic growth and a great
business opportunity. In 2014, it was the tenth-largest economy by GDP worldwide (IMF,
2015). According to the Ernst and Young attractiveness survey’s 2013 figures, Russia has the
ninth-largest domestic consumer market and is the sixth-most attractive region to invest in the
world. It attracts foreign direct investment because of its huge reserves of natural resources
(e.g. natural gas, oil, metals), its educated, skilled labor force and the fast growth of its retail
market and middle class population, the main driver of consumption spending. (Ernst &
Young, 2013). In August 2012, Russia joined the World Trade Organization (WTO) after 18
years of negotiations. WTO membership was an additional incentive for greater trade between
Russia and other countries throughout the world (WTO, 2012). Western companies have a
large presence in a range of economic sectors, including the energy, automobiles,
telecommunications, finance and business services and consumer goods. Significant
opportunities for investment are growing, for example in the areas of transport and
infrastructure, machine tools and high-tech industry (Rostowska, 2013; UK Foreign
&Commonwealth Office, 2014). Looking at the main macroeconomic indies, Russia should
be an attractive country for foreign investors.
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However, foreign capital is fleeing Russia. According to the Central Bank of Russia, the
capital outflows reached US$ 151.5 billion in 2014, up from US$ 61 billion in 2013 (Reuters,
2015). For many country observers, the Russian business environment is mixed paradox. With
regards to the domestic investment climate, Russia has considerably improved its position in
the Ease of Doing Business ranking compiled by the World Bank and the International
Finance Corporation from 120th in 2012 to 62th of 189 countries in 2014. Despite this fact,
there is still a lack of favorable conditions for doing business, particularly for small and
medium-sized enterprises. Russia ranks 100 out of 189 countries in protecting minority
investors and is at position 155 for trading across borders (World Bank Group, 2014). This
raises the question of what barriers hinder business development in Russia in general and FDI
in particular.
The World Bank Enterprise Survey indicated that out of 15 areas of the Russian domestic
business environment the tax rates and fiscal policy are the biggest obstacles to its business
operations, followed by access to finance/credit and corruption. Russian firms complained
about the tax code complexity and the unpredictability of the implementation of tariffs and
fees. The major tax motivation in the attractive economic branches is still missing. The
Russian economy is over-administrated and Russian companies are expected to give gifts in
their meetings with tax and other public officials for “getting things done quickly”. This
happens in the case of government contracts, operating and import licenses, and construction
permits (IBRD/WB, 2012). Transparency International ranked Russia 136 out of 175
countries in its Transparency International Corruption Perception Index in 2014
(Transparency International, 2014).
The other key problem in the Russian economy is that it is based on a small number of large
and super large enterprises in which the state holds a major share. The state-owned enterprises
dominate above all the strategic sectors, such as energy, transport and banking, and account
for about half of GDP. They enjoy privileged access to the state financial sources and benefits.
The dominant position of the state companies impedes market entry for other non-state
enterprises. This hinders internal competition on the market. As the OECD Economic Surveys
2009 indicated “there is pervasive blurring of the line between the public and private sectors,
arising not only from the extensive role of state-owned enterprises but also by close ties
between government (at all levels) and major private firms“ (OECD, 2009, p. 17).
Consequently, intimate relations between business and politicians and political corruption
remain the main problems for Russian political and economic development and a serious
impediment to foreign investment there. In addition, weak property rights, a lack of
transparency and the state’s growing control over business activities have negatively
influenced Russia’s business environment (Orttung 2006, Frye 2010, Orttung 2014, Yakovlev
2014).
Many scholars see Russia’s weak economic and political performance resulting from the
failure of economic and political reforms introduced during the 1990s. Alena Ledeneva, a
leading expert on informal rules and practices in Russia, concluded that the state has failed in
its responsibility to enforce legislation and to provide the necessary conditions for a transition
to a market economy. Besides this, the government was not efficient enough in providing
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services to the private sector. This led to the establishment of alternative institutions which
often operated by using not fully legitimate methods. Additionally, the strong regional
dimension and dominance of regional governors in federal-regional relations led to an uneven
implementation of federal laws and regulations in the regions. As a result, many of problems
and disputes between business groups and state officials were resolved outside the legal
domain in accordance with competing commercial, political or personal interests (Ledeneva,
2006, p. 24-25). One group of beneficiaries from unfinished economic reforms is made up of
the so-called “oligarchs”: large-scale entrepreneurs who through financial speculations and
successful participation in privatization auctions created industrial holding companies, the so-
called FIGs (Financial Industrial Groups). The small group of successful “oligarchs”
cultivated close relations with President Boris Yeltsin and with the Russian government. In
this way, they achieved considerable influence on Russian politics in the mid-1990s (Guriev,
Rachinsky, 2005).
When Vladimir Putin took over the office of president in 2000, a number of significant
economic reforms were launched that reduced and simplified tax regulations and tax rates,
custom regulations as well as improved civil services. These economic reforms have had a
positive impact on Russia’s GDP growth, capital flight and foreign investment. In 2002, the
Financial Action Task Force on Money Laundering (FATF) removed Russia from its blacklist.
At the same time, EU and Russia strengthened their trade cooperation and EU officials
restated their support for Russia’s membership of the World Trade Organization (Ledeneva,
2006, p. 10-11).
During his first presidency, president Putin also set out with the declared aim of reducing the
political influence of the oligarchs and strengthening the political power of the centre. In the
following years, entrepreneurs who represented a political threat to Putin were systematically
placed under pressure by the tax authorities and organs of criminal investigation. As a result, a
number of Russian financial magnates, including Boris Berezovsky and Vladimir Gusinsky
lost control of their business and were forced to flee abroad (Goldman, 2004). The owner of
the Russian leading oil company Yukos Mikhail Khodorkovsky suffered the same fate and
eventually was convicted to 11 years in prison. Even those economic leaders who came to an
arrangement with the Putin administration only had very limited access to political decision-
making processes. In response to this, they increased their efforts toward influencing politics
at the regional level. Between 1999 and 2003, many oligarchs became involved in regional
gubernatorial elections. Some of them entered into close alliances with the governors and
financed their elections. Others were able to take on the office of governor themselves. A
number supported their own candidates in the parliamentary elections and positioned their
representatives in the regional parliaments. In this way, the oligarchs achieved political
influence in several key economic regions and began to play an important role in the
relationship between the federal center and the regions (Kusznir, 2007).
In 2004, at the initiative of president Putin direct elections of regional governors were
abolished and a new system of direct appointment by the President was implemented.
Additionally, in 2007 new changes to the electoral system of the lower house of Russian
parliament State Duma were enforced that abolished the single-mandate constituencies. Since
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then all members of the State Duma are elected according to the proportional representation
model on the basis of party lists. Critics claim that the new legislation has strengthened
Kremlin’s control over the regional executives and secured the pro-Kremlin party United
Russia an absolute majority of seats in the regional legislatures. In this way, they say, it has
helped president Putin consolidated political power in Russia into the so-called power vertical
(Monaghan, 2011; Kara-Murza, 2012).
Although the Russian leadership had been successful in implementing a number of reforms,
business in Russia is still struggling with a range of challenges, including corruption, state
capture and incomplete institutional transformation. In addition, the Yukos affair and growing
centralization of political power have not only damaged the dialogue between business and
states, but also led to FDI flight and a worsening in the investment climate and Russia’s
positions in international rankings.
Taking this as a starting point, this article examines the informal rules and practices that have
developed since Vladimir Putin began his first presidential term in 2000. The paper first
investigates the specific characteristics of these rules and practices at the federal and regional
level in Russia. It focuses on corruption and favoritism as the main political risks. Next, the
article assesses their impact on the domestic business environment. Then, it gives an overview
of the anti-corruption efforts and methods undertaken by the Russian leadership in 2008-2014
to mitigate or minimize the negative consequences of corruption and favoritism. The article
concludes with an evaluation of the political risks for international companies in Russia.
II. The country characteristics of political risk (specific characteristics)
The problems of Russian economic and business development have attracted the attentions of
many scholars for a long time. The conclusions that can be drawn from these analyses are that
reforms did not work as expected because the Russian economy is not transparent. The
reasons for this include corruption (Schmidt, 2006; Ledeneva, 2006; Gorenburg, 2013;
Orttung, 2014), state capture (Hellman, Kaufman, 2001), incomplete institutional
transformation and the incomplete implementation of reforms, alongside the lack of a
functional legal framework and the high dependence of the Russian economy on unwritten
rules and practices that mean that formal rules have only a limited effect (Ledeneva 2006, van
Zon 2013). Ledeneva explained the prevalence of informal practices in Russia as follow “We
should consider two fundamental sets of factors [...]. One set derives from the future-oriented
formal rules – that is, the legislation designed to improve the political and economic order in
Russia, and the loopholes in its formulation and enforcement. The other is related to the
nature of informal norms as well as legacies of the past that continue to shape today’s
practices” (Ledeneva, 2006, p. 23).
There are a number of works on informal rules and practices in Russia that identify corruption
a major problem for economic development. The study on corruption processes in Russia
conducted by Olimpieva (2008) concluded that organizational embodiment of formal
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institutions in Russia is poor due to the fact that there is not enough money for the
organizational implementation of formal rules. As result, many formal laws fail in their
implementation because of a lack of highly qualified specialists and the inefficiency of the
state bureaucracy. Furthermore, the new economic laws in Russia have been developing in a
way that does not correspond completely to business realities and the real socio-economic
situation in the country. In other words, the formal rules developed by the state are not in line
with the economic interests of certain groups of economic actors. This makes the gap between
formal rules and real practices even wider. Corruption has been characterized as ‘a flexible
and constantly changing phenomenon [..]. Corruption is changing in its forms, mechanisms
and content, and in the emergence of new informal actors and even institutions’ (Olimpieva,
2010, p. 63).
As Rozov stated in his study on corruption in Russia, “Besides the formal written rules
pertaining to each of the three tiers (politicians, bureaucrats and supplicants – that is, citizens,
and business), each tier has its own informal but relatively stable and highly respected
corporate rules. For example, families have the rules of mutual assistance – not to ‘let down’
one’s close relatives; communities bound together by corruption have ideas about who should
“share” with whom and to what extent, and among politicians there are rules about who has
what powers over the rules pertaining to various spheres and over the revenue accruing from
their violation” (Rozov, 2013, p. 92).
Many informal practices and rules interpreted as criminal are absolutely regular in Russia.
According to the opinion survey conducted by Levada Center in 2013 on why bribery and
corruption are so widespread in Russia, 30 percent of respondents think that ‘it is unavoidable
in the current power structure in which businessmen as well as normal citizens can solve
problems in many cases only by bribery and corruption’. In the opinion of another 18 percent
of respondents it happens because ‘the present authorities cannot be removed from power and
therefore are neither accountable for the people nor control by the society’. In contrary, only
three percent of respondents believe that ‘the extent of the bribery and corruption in Russia is
greatly exaggerated’ (see the figure 2.1).
[insert Figure 2.1 here]
Figure 2.1. In your opinion, why are bribery and corruption so widespread in the Russian
Federation?
Source: Representative polls conducted by Levada Center 2010–2013, quoted after: Russian
Analytical Digest No. 144, http://www.css.ethz.ch/publications/RAD_EN, p.13.
Several studies on Russian corruption indicate that for many ordinary Russians paying bribes
does not mean supporting the system of corruption due to the fact that they do not understand
what an act of corruption actually means. This legitimizing logic of corruption has developed
a specific type of behavior in Russian society that justifies corrupt practices as a social norm
(Tulaeva, 2011; Rozov, 2013). The corrupt mechanisms mitigate the transition costs from a
planned economy to market relations and help one survive in daily life. In some situations, the
use of informal mechanisms is more efficient then the use of formal rules because they help to
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save money and time. Due to the fact that official rules are constantly changing, the informal
mechanisms play the role of an insurance that reduces unpredictable risks. Moreover, they
help businessmen or officials in some cases defend themselves against expulsion by other
corrupt players on the markets (Tulaeva, 2011, p. 11).
The informal practices that Russian and international companies face in their daily business
activities are well summarized in a study on economic corruption by Ledeneva and Shekshnia
(Ledeneva, Shekshnia, 2011). In their study, the authors asked representatives of Russian and
international companies in 49 regions to describe the extent to which their business face
informal practices at the regional level. Based on the results, the authors organised the
informal practices into five groups: 1) Never or rarely used practices tagged as “dinosaur”
practices, such as extorting favors from job candidates or leasing company facilities for
personal income. 2) The most systematically used practices described as “predator” practices.
These include payments extorted by state inspectors, such in connection with fire inspections,
customs tax or companies’ financial engagement in the regional government’s projects and
programs. The authors have noted that the traditional practices of “black cash” paid to
prosecutors, courts or police have decreased while the practices such as financing of
“important” regional projects or selling companies’ shares for the prices enforced by the
regional officials have been used more systematically. 3) Internal corporate informal practices
tagged as “rat” practices, for example using a company’s resources for kickbacks and
informal rewards as an additional source of personal gain. “Rat” practices were widely used in
the period of “crony” capitalism in Russia in the 1990s and they are still a huge challenge for
Russian business. 4) There are also still in circulation informal practices tagged as “Penguin”
practices. They include practices based on life-long informal ties and networks used by the
companies to ensure state funds and services, including government contracts and loans from
state-owned banks. 5) Informal practices of using “informal hooks” such as kompromat or
other materials to exert pressure on business counterparts (Ledeneva, Shekshnia, 2011, p. 4-5).
The latest studies on corruption in Russia have identified new trends in business relations,
namely a blurred line between state officials and organized crime. In the 1990s, Russian
organized crime was very active in numerous areas such as financial fraud, protection rackets
and money laundering, to name but a few areas. They often payed bribes to senior
government officials and law enforcement personnel to prevent interference in their criminal
activities. Over time, the former mafia leaders of the 1990s have became an integral part of
the political ruling elite and the level of direct extortion attempts has significantly decreased.
Frequently, it is not apparent whether there is a case of government capture by criminal
groups or the criminal groups are working for the state officials. The lump sum corruption has
transformed into a more legalized and long-term form of income such as shares in business
(Ledeneva, Shekshnia, 2011, p. 3).
Another key political risk, which strengthens informal practices in Russia, is the fact that
domestic business is dominated by the state-owned enterprises which are located in a number
of strategic sectors such as energy, transport and banking (Radziwill, Vaziakova, 2010).
Senior state officials at the federal and regional levels occupy the key positions in companies’
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structures, for example by serving or chairing the boards of directors of the companies where
the state holds a controlling share. The government explained placing senior state officials on
the boards of corporations as being necessary to defend the state’s interests and to improve
company management more effectively. Russian critics, however, argued that by rewarding
its most loyal officials, the political leadership has developed a lucrative patronage system
that ensures necessary political support for it (Orttung, 2006). The nominal presence on the
boards enable the state officials to receive high bonuses, much more than they are paid for
their work as senior state officials. As result, a new generation of oligarchs appeared that
manages state-owned companies and uses government as a business tool. As result, in Russia
the political and economic power in the country is shared between different groups, including
‘old’ oligarchs (people who bought assets from the state in the 1990s), the ‘new oligarchs’
(people who manage state companies), the ‘siloviki’ (i.e. people who made their carriers in
the Ministry of Internal Affairs (MVD), the Committee of State Security (KGB) or Ministry
of Defence) and the ‘nomenklatura oligarchs’ (Schröder, 2010; Burger, Gitau 2010).
An additional remarkable characteristic of these patronage relations is a strong network
structure which is usually based on family relations or personal connections and friendships
established at school or university. As the opinion polls conducted by Levada Center in 2011
and 2013 show, when asked the question whether there is more theft and corruption at the
higher or the lower levels of government, about 50 percent of respondents answered that they
are equal at both levels (see figure 2.2).
[insert Figure 2.2 here]
Figure 2.2. Is there more thieving and corruption at the higher or at the lower levels of
government?
Source: Representative polls conducted by Levada Center 2010–2013, quoted after: Russian
Analytical Digest No. 144, http://www.css.ethz.ch/publications/RAD_EN, p.14.
The patronage relations complicate market entry and impede competition. Business people
who are not able to buy administrative services are forced out of the business by state officials.
The global financial crisis in 2008 led to net capital outflows of US$ 133.6 billion and had a
hugely damaging effect on Russian economy. In response, the Russian government took a
number of decisions to fight off financial implosion. For example, they adopted a law that
restricted foreign investment in 42 strategically significant economic sectors and implemented
a number of regulations on protection mechanisms for domestic industries (Federal Law 57-
FZ). This policy has strengthened the position of Russian hardliners, including representatives
of the ‘siloviki’, who wanted more state control over Russian economy.
Apart from this, another key problem is the attractiveness of the large investment in fixed
assets. As Kortunov noted, one of the main characteristics of business in Russia is that it
operates within a narrow time frame, because there is no guarantee that investors will have
this business in the five or ten years’ time. Big business is usually connected to the
government administration and depends on state contracts and administrative resources. To
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raise the attractiveness of large investment in fixed assets, the government should create
conditions in which business will voluntarily invest in it (Kortunov, 2011).
III. Combating informal rules and practices
Over the last decade, the Russian leadership has issued a number of normative regulations,
rule and procedures to fight against corruption. Moreover, Russia has signed and ratified
numerous international conventions, including the United Nation Convention against
International Organized Crime in 2004, the UN Convention Against Corruption and CoE
Criminal Law Convention on Corruption in 2006 and it became a member of many
international anti-corruption structures and implemented a number of initiatives introduced by
the OECD and WTO (Schmidt, 2006; Pavlova, 2014; Shekshnia, Ledeneva, Denisova-
Schmidt, 2014). In 2011, the Russian leadership set a target for Russia to reach 20th place in
the World Bank’s doing business rating by 2020. It has also undertaken to implement several
of the World Bank’s policy recommendations to improve its rating on the ease of doing
business (Gruzinova, Sterkin 2013). I will outline some of the main measures implemented by
the Russian government under the leadership of Dmitri Medvedev and Vladimir Putin during
2008-2014. Remarkably, both presidents declared corruption to be the main obstacle for
economic development and proclaimed that combating was a priority of their presidencies
(www.kremlin.ru). However, the implemented initiatives under their respective leadership
have not significantly improved the situation in Russia with regard to corruption but rather de
facto worsened it.
When Dmitri Medvedev became president in March 2008, he raised the issue of corruption on
many occasions and gave the impression that his government will be less tolerant of
corruption. He initiated a National Anti-Corruption Plan which contained an inter-related set
of tasks, including the preparation of the federal law “On countering corruption”, regular
presentations on the state of the implementation of anti-corruption efforts and the
establishment of a state system to compensate persons harmed by corruption
(www.kremlin.ru). Different state officials, research institutions and NGOs helped prepare
recommendations on anti-corruption legislation and the creation of the new anti-corruption
system. Additionally, two state bodies were established: (1) the Council of the President of
Russian Federation to Counter Corruption for the Implementation of the Plan and (2) the
National Anti-Corruption Committee. Their tasks included legal assistance and social support
for the people and NGOs engaged in anti-corruption activities, the development of anti-
corruption measures and the establishment of public institutions responsible for anti-
corruption policy.
Medvedev’s Anti-Corruption Plan culminated with the Federal Law “On Counteracting
Corruption”, passed by the State Duma in December 2008. The Law defines corruption as “(а)
the abuse of an official position, giving a bribe, the acceptance of a bribe, the abuse of power,
commercial bribery or other illegal use by a physical person of his/her official position in
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defiance of the legitimate interests of the society and the State for the purpose of profit in the
form of money, valuables, other property or services of material nature, other rights of
property for oneself or for third parties, or illegal provision of such benefits to the said person
by other physical persons or (b) the commitment of acts, specified in subparagraph "a" of the
present paragraph, on behalf of or in the interests of a legal entity.” (Article 1, Federal Law
273-FZ). It also requires that companies operating in Russia implement specific anti-
corruption measures, such as designating responsibility for preventing bribery, creating
policies for dealing with conflict of interests and establishing prevention mechanisms against
the use of false documents.
In 2011, a special Agency for Strategic Initiatives (ASI) was established to promote
innovative ideas and support business by overcoming bureaucratic barriers. It includes state
officials and representatives of small, medium and big businesses (RT.com, 2011). It is to
some extent a unique institution created during the years of Putin’s government that
succeeded in involving business representatives in political decision-making processes.
In February 2012, in order to make it easier to do business in Russia, Russian leadership also
encouraged a National Entrepreneurial Initiative (NEI). The main goals of the Initiative are to
modify the business-related regulations and enhance Russia’s position in the World Bank
Doing Business ranking. The NEI introduced 10 roadmaps, i.e. projects within the framework
of the NEI prepared by the Agency for Strategic Initiatives (ASI). The roadmaps focused on
improving tax administration, optimizing property and enterprises registration, developing
competition, improving antimonopoly policy and business regulations, establishing
operational control mechanisms over the implementation of the roadmaps. The business
community has closely cooperated with the ASI on the preparation of the NEI and it has
succeeded on many issues, including the elaboration of relevant regulatory business
procedures and best practices, the development of new criteria for the state to evaluate
bureaucracy effectiveness and the introduction of business ombudsmen for entrepreneurs at
federal and regional levels to protect businesses from administrative and legal abuse by the
government. The implementation of the NEI has already started to show results: Russia has
improved its overall rank in Doing Business ranking from 120th in 2011 to 92nd in 2014
(Radziwill, Vaziakova, 2015, p. 16).
However, when we take a detailed look at Russian companies’ perception of these changes,
this picture is different. According to a study of measures for improving the investment
climate of 2012-2014 completed by Yakovlev, Levina and Kazun from the Higher School of
Economics in Moscow, large companies (500 + employees) are more likely to estimate
changes in the business environment positively. The authors’ explanation for this is that the
large companies have better access to President Putin and other top politicians, enabling them
to influence government policy more effectively. By contrast, small enterprises (10-100
employees) are more likely to estimate that the business environment in their regions has
worsened. Moreover, the results of the study show that other factors, such as membership of
business associations and state or foreign ownership do not affect how enterprises estimated
the change in the business environment. Companies which invested in 2011-2013 do not
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differ in their estimation of the change in the business environment from those which did not
invest in that period (Yakovlev, Levina, Kazun, 2015).
The fight against corruption has gained momentum during the third presidency of Vladimir
Putin. In March 2012, the government introduced the National Anti-Corruption Plan for the
next years. This included a number of important regulations, for example amendments
combating corruption in the Criminal Code of Russia and the Code on Administrative
Violations. Pursuant to the presidential decrees of 2013, state officials must close their bank
accounts abroad and repatriate financial assets to Russia. State officials also have to report all
the gifts they received during their work. To increase the quality of public governance, a
catalogue of government positions associated with higher corruption risks was created.
Additionally, a new obligatory rotation of civil servants was introduced to counter close
relationships between officials and supervised entities (Radzivill, Vaziakova, 2015, p. 7).
As result, for example, in 2012 Russian investigators prosecuted 889 state officials, including
244 city mayors and 1,159 law enforcement officials on corruption charges (RAPSI, 2013).
The Investigative Committee announced in winter 2013 that, to give just two examples, more
than 33 million USD state funds were misused by high-ranking officials in the Federal Prison
Services and about 32 million USD of state funds were stolen by the officials of the
Agriculture Ministry. A criminal investigation was opened against officials of the Russian
Space System, who were accused of stealing more than 6 million USD. One extraordinary
case presents the organization of the 51 billion USD Sochi Olympics 2014 – the most
expensive Olympics in history (Kravtsova, 2013). According to the Interior Ministry, around
145 thousand USD of the budget was misused during the construction of Olympic facilities
(Kravtsova, 2013). The Russian opposition, however estimated that up to 30 billion USD of
Olympic’s budget may have been stolen by officials for “embezzlement and kickbacks”
(Gibson, 2013). President Putin has dismissed a number of high ranking officials involved in
these criminal cases, including the deputy head of Russia’s Olympic Committee and Deputy
Agriculture Minister.
Although there have been cases of successful anti-corruption campaigns, the anti-corruption
legislation seems to be implemented fragmentarily. Some examples also indicated that the
campaign was primarily used by state officials to remove offenders at the lower level of the
administrative hierarchy. The top politicians involved in the corruption scandals stayed
mostly untouched by the state investigators. An interesting example here is the investigation
of the ex-minister of defence Anatoly Serdyukov, one of president’s loyal courtiers. In 2012,
he was publicly implicated in a criminal investigation at Oboronservis, a company fully
owned by Russian defence ministry. He was suspected of using fraud in a sale of ministry
property to insiders involving government funds. In response to this, President Putin
personally relieved Serdyukov of his responsibility (The Guardian, 2012). In 2013, the
Investigative Committee launched a criminal investigation against him and his affiliates. They
were accused of causing damage to the state worth 185 million USD (Sputnik, 2014). After
nearly one year of investigation, he has been granted amnesty (Reuters, 2014). Thus, the anti-
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corruption measures can also be seen as an additional political instrument designed by the
Kremlin to control and discipline political elites.
Furthermore, in the opinion of some experts, the Kremlin’s anti-corruption campaign can be
interpreted as a means of counteracting initiatives from opposition activists and bloggers who
have uncovered corruption cases in the state structures (Rogoża, 2013; Pavlova, 2014). One
remarkable example here is the case of the anti-corruption blogger and protest leader Alexei
Navalny. For several years, he has been actively engaged in anti-corruption activities,
including posting online documents about the fraudulent activities of the president’s political
allies involving public resources. Navalny claimed that ‘the principal problem of Russia is not
the corruption in its pure form, but the corrupt officials, and the fact that “the party of power”
has become a “party of swindlers and thieves”. In this way, corruption led to the demand to
replace the officials’ (Pavlova, 2014, p. 10). The state officials remained mostly indifferent to
his allegations and no criminal charges against state officials involved in the fraudulent
schemes were filed on the basis of his accusations. Instead of this, the state officials have
mounted a number of criminal investigations of corruption against Alexei Navalny himself
and his brother Oleg, accusing them of stealing and laundering money in business deals
between 2008 and 2011. Navalny described the cases against him and his brother as falsified
and politically motivated (Kramer, 2012). In December 2014, a Russian court sentenced Oleg
Navalny to three and half years in prison while Alexei Navalny was convincted but his
sentence was suspended. In the words of many observers, the Kremlin punished Alexei
Navalny by imprisoning his brother (Fischer, 2014; The Guardian, 2014).
According to the Levada Center’s opinion poll conducted in March 2012, 35 percent of
respondents thought that “Putin will try to fight corruption but he will be hardly successful
because corruption is ineradicable”. The other 27 percent believed that “Putin will be
successful in fighting corruption if he decisively removes high-ranking politicians and
toughens punishment measures against corrupted bureaucrats”. In the opinion of 15 percent of
respondents, “Putin will find it hard to fight corruption because for many issues he
dependends on corrupt bureaucrats”. By contrast, the other 15 percent of respondents stated
that “Putin will not take any serious measures against corruption because he is in one or
another way interested in preserving corruption or is himself a part of corrupt network” (see
figure 3.1).
[insert Figure 3.1 here]
Figure 3.1 What statement about corruption in Russia do you agree with most?
Source: Representative polls conducted by Levada Center 2010–2013, quoted after: Russian
Analytical Digest No. 144, http://www.css.ethz.ch/publications/RAD_EN, p.16.
The same survey conducted a year later showed that the number of the respondents who
believed in Putin’s success in fighting corruption had dropped from 27 to 20 percent. But the
number of the respondents who though that it would be hard for president to fight corruption
had gone up from 15 to 21 percent (see figure 3.1).
12
Notably, the implementation of the anti-corruption measures has increased Putin’s popularity,
but the whole campaign proceeded without any significant success. Some experts maintain
that the ongoing anti-corruption discourse in Russia is in reality often unconnected to the
practical fight against corruption. In the opinion of Ledeneva and Shekshnia, anti-corruption
strategies are unsuccessful in their implementation because informal practices are to some
degree functional for the Russian economy. “They perform the function of “shock-absorbers”
for the system – always in flux and context-bound, they adjust and readjust past-oriented
informal codes and integrate them with future-oriented formal rules. They are functional for
solving problems posed by defects of the legal system, and they compensate for the
imperfections of Russian corporate culture” (Ledeneva, Shekshnia, 2011, p. 5). Some
researches also maintained that the new regulations do not always abolish corrupt practices as
the people who are responsible for their development and implementation remain the same.
They rewrite the regulations in a way that they change the form of corrupt practices, but do
not eliminate them. Hence, when analyzing the reasons for corruption, it is necessary to take
into consideration the regulation environment and the participants themselves (Tulaeva, 2011).
Apart from this, the Russian government has taken steps to improve the FDI climate in the
country. It has implemented a number of incentives for foreign investment, including
financial support. In 2011, it established, for example, the Russian Investment Fund that
secures co-investment in long-term partnerships projects with foreign investors. The state-
owned bank Vnesheconombank has also offered financial support in the form of loans, credits
and guarantees for co-investment projects. Despite these measures, the regulatory regime for
FDI in Russia remains one of the most restrictive among the OCDE countries, particularly in
the financial sectors, mining and transport (Radzivill, Vaziakova, 2015, p. 21).
In order to strengthen transparency and trust in public institutions the government has also
implemented numerous initiatives which aim to reinforce the participation of civil society in
the decision-making processes. In spring 2013, for example, a federal state system of E-
democracy was established – an internet portal for public discussions of new laws and
regulations. Moreover, the government has developed mechanisms of National
Entrepreneurial Initiative that allow business representatives to take part on the legislature
processes in a more structured way. A number of regulations on NGOs were implemented that,
for example, ease registration and improve taxation. The government has also created a
Coordination Council on State Support of Charity in the Ministry of Economic Development
which distributes grants to NGOs (Radzivill, Vaziakova, 2015). At the same time, however,
new legal restrictions on participation in public protests were put into effect by the
government with a new law on NGOs in November 2012. It requires NGOs which engage in
political activity and receive donations from abroad to be registered as a “foreign agent”, and
thus associated with the negative connotation of spying. The law and its enforcement have
been criticised by international organizations and numerous human right groups as
representing a violation of human rights and a new mechanism to counter political opposition
(Elder, 2013; Winning, 2013).
13
Another important feature is the lack of effective mechanisms that allow business to influence
state legislative policy and improve the business environment. Although there is a growing
tendency in the development of a professional community of lobbyists, the demand for ethical
lobbing is weak and professional lobbying is still underdeveloped (Olimpieva, 2010; Denisov,
2010). The dominance of “informal rules” in the relationship with state officials, the lack of
effective formal mechanisms that help business to lobby their interest at different
administrative levels and the absence of strong and representative civil society institutions
have hindered the adoption of civil ways of solving problems with authorities. Businessmen
have considered informal means of acting as more effective and successful in their
relationship with the state. All things considered, a stable business environment with well-
functioning corruption-free lobbying campaigns and transparent, effective and practical
decision-making processes has not yet been established.
In addition to this array of contradictions, there is no consensus among leading foreign
investors in Russia about the political risks of doing business there. In the opinion of some
business people who have been doing business with Russian national companies in the
strategic sectors such as oil and mining ‘it is very risky, but it is very profitable, especially if
the Kremlin likes you’ (The Economist, 2008). However, it would be wrong to believe that
the alliance between Western companies and Russian national companies under the Kremlin’s
patronage could guarantee protection for those doing business there. When analyzing the
political risks for foreign investors, it is necessary to keep in mind that political risks do not
only arise from the results of the personal motivations of the Russian ruling elite. The political
risks are often related to the socio-economic risks, including inequitable income distribution
and growing economic and social differences between the Russian regions. Over 60 of 83
Russian regions are economically underdeveloped. Administrative and structural reforms
started in 2001, one year after Vladimir Putin became President. The main goals of these
reforms were the centralization of state power and the strengthening of the federal
government. However, the reforms’ implementation led to results that are quite different from
what was initially planned. The reforms have added more political and economic inequality
than existed before (Kusznir, 2007; Heinemann-Grüder, 2014; Deuber, 2014). It became
evident, for example in the distribution of fiscal revenues between the federal center and the
regions, so that the regions which are rich in natural resources receive less income from the
exploration of these resources. The major part of this income is under the control of federal
officials. The economically weaker regions get fewer subventions from Moscow, so that a
number of the regional social programs cannot be implemented. Since 2012, we have been
able to observe an increase in local protests in the regions against, for example, rising prices
for communal services and the closure of schools and hospitals. The growing regional
economic inequality has also a significant impact on regional markets and employment. The
number of strikes has been rising, particularly at the local level. In many regions, especially
those located in the North Caucasus, unemployment has reached a risky level, affecting above
all young people. Some have joined Islamist groups due to the lack of job perspectives. It
could turn this region into politically unstable center for of Islamic fundamentalism.
14
As Andreas Heinemann-Grüder noted in his study on regional discrepancies in Russia, the
concentration of executive power by the Kremlin and the return to the Soviet model of
regional planning have significantly hindered the modernization of the economically weaker
regions in Russia, especially with regard to innovation, the mobilization of new forces and the
incorporation of new social groups (Heinemann-Grüder, 2014, p. 8). The combination of
rising economic inequality and regional unemployment could reinforce social tensions and
lead to political disputes between the Kremlin and the regions. Consequently, it could
destabilize the country’s political stability and lead to a fall in domestic and foreign
investment.
Western sanctions against designated Russian officials, financial institutions and companies
imposed in 2014 as a result of Russia’s annexation of Crimea and the political upheaval in
Ukraine have considerably contributed to a collapse in foreign direct investment in Russia. As
the Central Bank of Russia stated, 151.5 billion USD of the capital outflows from Russia in
2014 surpassed the previous record of 133.6 billion USD set in 2008 during the global
financial crisis. (Reuters, 2015). Discussions about additional sanctions against Russian
financial institutions or companies are ongoing. Their implementation is highly dependent on
how the situation in Ukraine continues to develop. Russia has already responded with certain
sanctions against named Western politicians and a ban on food and agriculture imports from
Western countries. The actions taken on the both sides have harmed the Russian business
environment and increased the risk of political violence by the Russian government. This has
also made Russian business environment less stable and predictable for foreign investors
(Rouse 2015). The international community has been looking for the mechanisms that can
sufficiently persuade the Russian president to change his policy, but without any success so
far. Therefore, it is impossible to make prognoses about the potential impact of existing and
future sanctions on Russia’s trade operations and economic development. The foreign
companies have to look for alternative suppliers or markets in order to avoid this risk.
IV. Conclusion
Over the last decade, the Russian government has done a lot to attract FDI. However, there is
a huge gap between the regulations welcoming foreign investors and their practical
implementation. For many foreign investors, Russia is still an authoritarian state with corrupt
state officials, a weak judiciary and unclear economic strategy. The Russian government still
has problems obtaining strategic economic goals and diversifying or redirecting its resource-
based economy towards a knowledge-based economy with free and fair competition. Russia
needs to create a favorable business climate for small and midsize businesses, including
simplifying regulatory procedures and tax stimulations. The packages of measures
implemented by the government has little influence on the development of these businesses so
far. The business operations of foreign companies, particularly in strategic sectors such as
energy and telecommunication are still vulnerable to the government’s intervention. The
examples given in the article have shown a shift in the methods used by Russian officials
towards foreign investors: From taking control over foreign assets in Russian businesses to
changing legal regulations and foreign ownership rules.
15
Western sanctions against Russia over Ukrainian crisis imposed in 2014 and Russia’s reaction
to them have shown that for Russian officials the geopolitics matters more than economic
stability. Political strains have already considerably weakened the business environment in
Russia and increased the exchange transfer risks. It is difficult to predict how the political
situation will develop in the medium- and long-term. Russia needs foreign investment, foreign
technologies and knowledge to implement their large economic projects. The country is in
fierce competition with dynamically developing emerging markets such as China and India
for foreign investment. The foreign companies are also important political tools for Russian
government in the developing Russian relations with Western countries. Therefore, Russia
will stay dependent on the help of foreign investors. In cooperating with the Russian
government and Russian companies, foreign companies need to find way to deal with this
Russian willingness on the one hand and political uncertainty on the other. The further
development will undoubtedly increase the financial and political costs of doing business in
Russia.
According to Ernst and Young’s attractiveness survey of 2013, most of foreign investors are
of the opinion that Russia’s attractiveness will improve in the future and that Russia’s
membership in the WTO will have a positive impact on the further development of
investment regulations. In order to improve the business environment, the Russian
government needs to show its willingness to change its attitude to business by implementing a
number of reforms that reduce bureaucracy at the federal and regional level, improve the
effectiveness of the rule of law and legislative regulations, including the investment law
which set up better guarantee mechanisms and increase the transparency in the business
procedures. This will reduce the economic risks for foreign investors. Moreover, the
accelerated integration of Russia’s economy in the WTO and OECD will provide better
conditions for the protection of the foreign investors’ rights and improve the domestic
investment climate.
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... The influence of cross-cultural differences on the ethics perception has received great attention in the current empirical literature. Many studies have supported the notion that national culture influences an individual's ethical perception and ethical decision-making (Bageac, Furrer, & Reynaud, 2011;Ermasova, Wagner, & Nguyen, 2017;Kusznir, 2016;Kuzmichev, 2001;Ledeneva, 2006;Nguyen, Ermasova, & Ermasov, 2016b;Nguyen, Tran, & Pham, 2016a;Orttung, 2006Orttung, , 2014Svensson, 2005;Van Zon, 2008). There is a need for an additional rigorous empirical studies of ethical perceptions in public sector that influenced by national context. ...
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... Ethical perceptions are influenced by national context. Many studies have supported the notion that national culture influences an individual's ethical perception and ethical decision-making ( Bageac et al., 2011;Ermasova et al., 2017aErmasova et al., , 2017bKusznir, 2016;Ledeneva, 2006;van Zon, 2008). ...
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