Wednesday, 05 Dec 2012
Business people in Russia
Overseas Business Risk - Russia
Information on key security and political risks which UK businesses may face when operating in Russia.
Political and Economic
The Russian Federation is internationally recognised as the legal successor to the Soviet Union (USSR), which was dissolved on 26 December 1991. Russia’s post-Soviet Constitution was approved by referendum on 12 December 1993. This declares Russia to be "a democratic federal law-based state with a republican form of government."
The Constitution establishes a bicameral legislature called the Federal Assembly. The lower house (State Duma) consists of 450 elected deputies while the 174-member upper house (Council of the Federation) is composed of representatives nominated by the 83 regions and republics that make up the federation. According to the Constitution, the presidency is Russia's strongest political institution. Elected by universal suffrage, the president is head of state and commander-in-chief of the armed forces.
Vladimir Putin won the Presidential elections on 4 March 2012 with 64% of the vote and was inaugurated as President on 7 May 2012. He has appointed the former President, Dmitry Medvedev, as his Prime Minister.
Russia’s economy remains in good short term health with consensus expectations for GDP growth this year of around 3.5 - 4%. The budget is close to balanced and unemployment and inflation are at historic lows. However, commentators continue to warn that economic and institutional reforms are needed for the economy to achieve its full potential and reduce its vulnerability to global commodity price changes.
These reforms include modernising and diversifying the economy; improving investment, innovation and the business environment, notably by tackling corruption and reducing the role of the state; and reorient spending towards healthcare, education and infrastructure. The makeup of the Government’s cabinet will give an indication of how Russia intends to tackle these issues.
Oil and gas are at the heart of the Russian economy, responsible for around 25% of GDP, 50% of Federal budget revenues and 80% of exports. The Russian real economy has recovered from the dramatic falls of 2009 and the IMF currently predict GDP growth at 4% and 3.9% in 2012 and 2013 respectively. The 2011 World Bank’s Ease of Doing Business survey ranks Russia 120th out of 183 countries, indicating significant bureaucratic challenges in the business environment.
2014 Sochi Winter Olympic games offer extensive commercial opportunities for British business. However, the site is close to the volatile North Caucasus region, where there are continuing reports of grave human rights violations. Amnesty International has reported that armed groups have carried out attacks in Chechnya, Dagestan, Ingushetia, North Ossetia and Kabardino-Balkaria. Amnesty also reports that the efforts of law enforcement agencies to tackle these groups are responsible for many of the human rights violations including enforced disappearances, extrajudicial executions, unlawful detentions, torture and other ill-treatment, with very limited access if any to judicial redress.
Corruption within Russia is widespread (see below). It is important to take note that the UK Bribery Act ensures British nationals involved in bribery will be prosecuted. However this is part of a more general problem concerning the rule of law, which includes conduct of law enforcement, access to justice and the gap between laws on paper and their implementation in practice. According to Freedom House, the right to property is protected in the Russian constitution, but the enforcement of contracts on property rights remains uneven. The International Property Rights Index, a composite measure comparing relative property rights among 70 countries, assigns Russia a score of 3.2 out of the best possible 10. In particular, Russia scores poorly on judicial independence, physical property rights protection, and intellectual property rights protection.
Access to justice and the use of the law for political means is a continuing concern. Politically active Russian businessman Mikhail Khodorkovsky was arrested and charged in 2005 for fraud and had his sentence increased in a further trial in 2010. Amnesty International considers Khodorkovsky a prisoner of conscience and the Foreign Secretary has stated that the second trial brought into question how the rule of law is applied in Russia.
Russia is a country of concern for human rights issues. See the FCO Annual Human Rights Report on Russia for more details.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Corruption is a major barrier to business in Russia. Business concerned that situation is deteriorating. Medvedev has made tackling corruption a major part of his modernisation agenda but most Russians are sceptical of short-term change.
Corruption is endemic in Russia. ranks Russia 143 out of 182 countries in its Corruption Perceptions Index in. Anti-corruption lobby group “Clean Hands” estimate that the level of bribes is as much as half of Russia’s GDP.
This damages Russia’s economic development. BNP Paribas estimate that perceptions of corruption costs Russia the equivalent of 4 per cent of GDP in lost foreign investment each year. The general public identified it as the biggest block to economic growth in a recent survey by independent pollsters Levada Centre. The Association of European Business agrees: “extras” can account for 20% of the cost of doing business in Russia.
Business representatives report that the situation is deteriorating. IKEA and Daimler have both been caught up in high profile corruption scandals, with IKEA having threatened to suspend further investment as a consequence. Even the Ministry of Interior estimates that the average size of a bribe has increased five-fold in the last two years.
President Medvedev has made the fight against corruption a key element of his Modernisation Agenda. Building on Putin’s Anti-Corruption Commission, established in 2004, he introduced a National Plan to Counteract Corruption only a month after taking office. New legislation came into force on 10 January 2009, requiring civil servants (and spouses) to disclose all income and assets, putting in place a framework for determining conflicts of interest, and simplifying the Criminal Code to hold corrupt judges to account.
Russia also has international commitments: to the Council of Europe’s Criminal Law Convention on Corruption since 1999 and the UN’s Counteraction to Corruption (UNCAC) since 2006. The OECD Working Group on Bribery is considering a phased approach to Russia’s bid for membership, contingent on tackling three issues: criminalising foreign bribery; clarifying the liability of legal persons; extending the statute of limitations.
Despite the flurry of activity, Medvedev’s initiatives have had little traction to date. Analysts argue that the problem is not with the legislation but with its implementation. Some officials apparently agree. Russian Prosecutor-General, Yuri Chaika, claimed that Russian law-enforcers were only rooting out minor cases of bribery, ignoring large-scale corruption, while many believe the corruption cases brought by the authorities are little more than a pretext to dismiss officials who have fallen out of favour.
In the absence of effective action by the State, some businesses have adopted their own approaches. In 2010 at least 40 German companies operating in Russia signed up to an Anti-Corruption Pact, governed by Swiss law. British companies are subject to the UK Anti-Bribery Act.
There is a high threat from terrorism. Attacks cannot be ruled out and could be indiscriminate, including in places frequented by expatriates and foreign travellers. Attacks have occurred most frequently in Moscow and in some regions of the North Caucasus – particularly Dagestan and Chechnya.
In Moscow, terrorist groups have carried out suicide attacks in public places, including the Metro system and airports. The risk of terrorism could rise quickly in relation to any escalation of violence in the North Caucasus.
The security situation in the North Caucasus remains unpredictable. Because of the threat from terrorism and kidnappings, the FCO advises against travel to certain regions of the North Caucasus. See the FCO Travel Advice for more information.
Protective Security Advice
There are protective security issues attached to doing business in Russia; business people need to be conscious of the following activities of the local security service (FSB):
IT attack against office computers, laptops, PDAs and other electronic devices.
Physical, audio and video surveillance.
Approaches to staff.
Interception of telephone calls (landline and mobile), texts, emails, fax and post.
Searches of offices, homes, vehicles and (especially) hotel rooms (including safes).
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, then you should consider registering your IP rights in your export markets.
See the section on corruption above.