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Risks of doing business in Russia

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Erlend Holen

on 21 January 2014

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Transcript of Risks of doing business in Russia

Relatively small in international comparison and country size
Unable to fulfill its tasks
Increasing proportion of bureaucrats relative to the population => In the last days of the Soviet Union: one bureaucrat for every 75.6 citizens; in 2004 there was one for every 49.6
The regulatory obstacles are improving
The Russian court system - companies report lower usage of courts
Likely to be unfair rulings - Bertelsmann Foundation 2012

72% of citizens consider education system to be affected by corruption
75% of citizens consider health and medical services to be affected by corruption
Citizens give public officials a score of 4.6 on a 5-point scale (1 'not at all corrupt' and 5 'extremely corrupt')

Inefficient bureaucracy
Russia = very inefficient
Why? 1991 the country missed out on the opportunity presented by the collapse of the Soviet Union to dismantle the structures of the “ultra-bureaucratic state”
Today: country spends months to take and implement important decisions, emasculate regulatory acts and amend laws

127/176 (2013) - Transparency International
Daimler AG (2010) - Brought up on corruption charges
Sochi Winter Olympics (2014) - Worth nearly USD 7.5 billion
92% of citizens consider public officials to be 'extremely corrupt'

The Risk of Doing Business in Russia

A lot of forms and long processes (Customs) = corruption
These obstacles inject uncertainty into entrepreneurial decision-making

Bureaucracy in Russia
Overview of Russia's business environment
Bureaucratic Inefficiency
Property Rights
Questionable independence of judiciary
Future Trends and recommendations
Time required to start a business in Russia
(in days)
Inefficiency of bureaucracy
Questionable independence of judiciary

More than 12% of companies expect to give gifts to get an operating license
26% of companies expect to give gifts to get a construction permit
Over 25% of companies expect to give gifts to get an electrical connection
Over 12% of companies expect to give gifts to get a water connection

Future Trends and Recommendations
The World Bank & IFC: Enterprise Surveys 2012
The judiciary is among the most corrupt institutions in Russia
A history of corruption
19th century, Soviet Union:
Low wages, poor education
"Socialist law"

Better pay
Less subject to officials pressure
Still ambiguous
Property Rights
Russians think...
Corruption at every level
Presented by
Fernanda Benítez, Eduard Chekhov, Erlend Holen, Marine Laval, Victor Nahas and Carl Weedman

Future Trends
Why Russia matters in Global Business?
World's Largest Country
Global Power
Growing and Developing
Uncertainty = Risk Association
11th largest economy by nominal GDP, 6th largest by PPP and has the highest per capita GDP ($13,236) of the BRIC countries
Middle class constitutes over 50% of the population
The minimum authorized share capital required for Russia company registration is relatively low
Unique geographic position
World's 123rd easiest place to do business
A physical office premise is requiered prior to Russia company formation. A registered office address will not suffice
Russia restricts foreign investment in various lucrative industries
Russia is negatively ranked as the 127th least corrupt country
We suggest...
1. Find a good middle agency in Russia to help you know and understand the procedures of doing business
2. Keep a good relationship with the Russian government
3. Bribery still exists in Russia, but is improving

4. Always keep the quality of your products genuinely good, since Russian people prefer quality over price
5. Do not rush to do business with Russian people; they like to get business done gradually getting to know the people they are working with. They want to know you well before they sign the final contract
We suggest...
Companies that Have Dealt with the Difficulty of Doing Business in Russia

Carrefour and Wal-Mart
– Could not achieve necessary acquisition for competition

IKEA, Daimler, and News Corp
– Succumbed to bribery

Nestle, Motorola, and Telenor
– Faced suspicious claims of violations of regulations

– Stopped by regional segmentation

— failed to enter and exit smoothly

The most common threats to property rights
Seizing firms’ assets
Illegal corporate raiding
Illicit fines
Unlawful arrests of business people
William Browder, the largest foreign portfolio investor in Russia
"Property rights no longer exist, people who are supposed to enforce the law are breaking it, innocent people are victimized and courts have turned into political tools ... With the spectacular recent decline in the rule of law, anything is possible in Russia now”
Yuko's affair: Khodorkovsky's controversial trial
"Corruption, to some extend, protects you from competition"
IPRI measures the degree to which a countrys laws protects private property rights, and the degree to which its government enforces those laws
Full transcript