Corruption and international business in Russia


Автор: Буданов Дмитрий (Сфера), (Dmitry Budanov)

Corruption in the modern Russia, just as the vast majority of other matters and trends, has deep historical roots, which require some explanation.

In ancient Russia corruption was divided into two types – obtaining unjust advantages for the lawful acts (“recompense”) or unlawful acts (“covetousness”). Corruption was an absolutely legal type of activity for the Russian officials until the 18th century: they did not receive any salary; therefore they lived on the so-called “feeding” or, in other words, they took bribes for living. In 1715, accepting any form of bribes was announced a grave offence, while the government started paying a salary to its officials. In the meantime, the reign of Peter the Great witnessed bureaucracy expanding incredibly. Salary was paid from time to time and the corrupt practices actually remained the only source of income for the low and mid-level officials. After death of Peter the Great the “feeding” system was re-established and only Catherine II returned official salaries. However, the switchover to paper money and a number of other political and economic factors still contributed to the growth of corruption.

After the revolution in the Soviet Russia, the criminal code of 1922 punished bribery by physical execution. Later in the 20th century, corruption issue was not open to public debate until the mid 80-s. There were two main reasons: firstly, political considerations, and secondly, because the level of bribery and other types of corruption practices in the Soviet times proved to be considerably smaller size than during “perestroika” and in the following years.

The early 80-s were marked by a handful of high-profile anti-corruption cases. This trend has been going on until now. The bottom line – we are currently in a situation when at least over 50% of the Russian population do not consider corruption a crime and have personal experience in giving forced briberies (a survey of the All-Russia Public Opinion Research Center, 2006). Many federal high-ranking officials, by using their political weight, system imperfection and absence of any real political will demonstrated by the Russian leadership in fighting corruption, do not even bother to comply with the drastic anti-corruption measures, which the Government announces on a regular basis.

Some “corruption stabilization” in the last decade in Russia as stated by the world ratings of Transparency International (corruption perception index – 2.4 in 1999 vs 2.2 in 2009) in fact led to the ever-growing amount of criminal cases against bribery and corruption. According to the estimates of the experts, the bribery turnover hit 179 bln. rubles in the Russian education system alone.

The world financial crisis contributed to the global growth of corruption by more than 9%. Furthermore, Russia still does not have any considerably efficient anti-bribery mechanisms and policies. It is obvious that corruption practices cannot be suppressed by punitive actions alone, while Russian “democracy” is not mature enough to have a “helicopter view” of the entire picture.

This is a brief summary of the corruption in Russia.

However the purpose of this article is not only to raise the “corruption outrage” matter once again. The ultimate objective is to briefly describe the dynamics of changes in the attitude of the large multinational business in Russia towards such corruption practices and try to find the reasons why they take place.

A representative of the US nonprofit TRACE International organization, which consults large multinationals on how to handle corruption, at the meeting held in Moscow couple of months ago, recommended the large foreign business to “reconsider their position in Russia” and added that she is “more optimistic about (the business climate in) Nigeria than Russia” (The Moscow Times, March 16, 2010, Corruption Too Much For Western Companies).

Before and after it, the business community made several similar statements, by having noted that the investment climate from the viewpoint of corruption in such countries as Nigeria, Brazil, China or India looked more appealing. Why?

My personal opinion, which is based on the 18-year working experience in commercial security and risk management in the best interests of large international companies in Russia and in other FSU countries (as an external advisor and a company employee), is that return on investment and competitive advantage of these companies have largely reduced lately compared to the business-related risks. That is the business rate of return has decreased due to several objective and subjective reasons, while business environment has become more structured and organized, while some business risks remain pretty much the same through years and cost of their mitigation is growing.

In other words, the times between late 80-s and early 90-s when the foreign business consciously chose to face very high risks, by investing into Russia and thus receiving excess revenues, have already gone by or are going by as we speak.

What has changed? I may call several reasons (not in priority order):

  • There is an increase in qualification and appreciation of the labor force virtually at all levels and across all industries. For example, the new generations of the low and mid-level managers, who are graduating from universities right now and/ or have already started their working careers, are absolutely competitive to their contemporaries in Europe and USA. The number of professional and highly paid top managers is growing exponentially. Similar processes take place in the production sphere. The competitive environment, growing trade union movement, general statistical improvement of the material wealth of the Russian urban population, gradual improvement of the legal framework, one and a half generations of the youth, which grew up in the new environment of the corporate relations, vast educational opportunities and many other factors have drastically altered the situation in the labor market in the last 15-20 years.
  • The competitive environment has changed significantly: the Russian business becomes more mature, diversified and competitive, which of course affected the cost of assets across virtually all the categories without any exception. Meanwhile, there is an obvious growth of some industrial giants, and above all in the energy sector, as well as natural resources development, banking activities and etc., the interests of which have long gone beyond the Russian borders. It is also necessary to mention that there are many “young” foreign businesses in the market, which due to their sizes and “appetite” react to any changes in the business environment more actively and promote their business solutions more aggressively and uncommonly compared to the large multinationals.
  • The growth of Russia’s political weight abroad is accompanied by the political stabilization in the domestic market. This and some other measures and events led to formation of a more organized business environment, which is substantially different from the chaos that reigned in Russia in the early 90-s.
  • At the same time, the structure and mitigation policies across virtually all the business risk categories become more complicated and expensive, while the list of risks have not suffered any particular changes over the years.

Most likely, this is not the full list of recent trends, nevertheless these are the most common.

It is also necessary to mention two things which I personally witnessed not once:

  • Some large multinationals tend to justify unprofessional business practices, ineffective talent retention policy, poorly adapted marketing solutions, lack of reliable financial forecasting, inability to understand the complexity of the local environment, unacceptable losses, etc., etc.,  by chaotic market trends, political instability, high percentage of the infringement production, etc., etc.  and …corruption.
  • There are many examples, when large international companies, some of which saying today that they are ready to leave the Russian market due to existing corruption issues, in the 90s ensured their “soft” breakthrough into the Russian market and receipt of the immediate competitive advantage, by having accepted “the rules of the game” or, put otherwise, contributed to the development of corruption and sometimes organized crime, by paying monthly rewards for the so-called “protection”. As a rule, such companies are sooner or later caught in the spotlight of corruption scandals.

But there are many other examples too. Typically, they concern those companies, which came to Russia to stay long and are involved in regular reinvestment of the money they earned. They are socially responsible not only in the annual reports for the external auditors but in practice spend much effort and money in search of the creative solutions, which nevertheless allow them to avoid traps of the Russian “corruption” for years on end.

Hence, we may see that the foreign business success in the modern Russia largely depends on understanding and accepting those changes, which have taken place in this country for the recent years, on how clearly the risk identification models are built, on employment of the qualified managers, who are ready and able to look for the legitimate solutions in difficult situations, which the business faces, and at last on how strictly the business not only declares observance of but observes the laws of this country in practice. We also cannot underestimate the importance of adequate internal control systems, which prevent internal corruption and contribute to healthy corporate structure and environment. Preventive measures aimed at increasing loyalty and corporate responsibility of the company’s personnel will be by no means unimportant in solving the latter tasks in Russia. The said measures will undoubtedly allow minimizing the risks considerably, including the one of corruption as well.

Роман В. Ромачев