Out of all the recent articles, Eurasia Daily Monitor summed up the current Russian situation best: Medvedev’s Euro-Modernization Hits the Corruption Wall. The European Union is keen on establishing a more normalized business relationship with Russia and proposed a “Partnership for Modernization.” This partnership empasizes the rule of law and corporate governance as European businesses are wary of the Russian commerical climate. The crucial issue in the EU-Russia business relationship is corruption.
widespread throughout the executive, legislative, and judicial branches at all levels, and officials often engaged in corrupt policies with impunity.
Additionally, TRACE International’s Alexandra Wrage mentioned in a Reuters interview that corruption extracts a high tax on development in emerging market economies. And in comparison to other BRIC countries, the corruption in Russia is especially pervasive,
Corruption in China is an inverted pyramid with most bribery at the top while India is the opposite with corruption rampant at lower levels but tapering off higher up. Russia is a solid block. There is bribery at all levels. There appears to be sense of near-complete impunity, a sense of entitlement.
To underscore the endemic corruption, Russian bloggers have found plans by the Interior Ministry to buy a $800,000 golden bed. With only government-sponsored news available to Russians, bloggers have taken on the role of whistleblowers in a country with few outlets for political discourse. But with only 30% of Russian households with access to the internet, the impact of the bloggers remain muted.
The Economist argues in the recent article, “Modernising Russia: Another great leap forward?” that President Medvedev’s efforts to modernize Russia by creating a Russian version of Silicon Valley without strengthening institutional weaknesses is the result of an authoritarian regime that trumpets the state as the “only force capable of making Russia great and respected again.”
As the article points out, changes to the existing system threatens not only the power and legitimacy of the existing ruling elite, but their immense wealth as well
Russia’s ruling elite, which consists of a corrupt bureaucracy, the security services and a few oligarchs, lives off the rent from natural resources or administrative interference in the market. Competition and the rule of law undermine this arrangement. Corruption holds it together, and ensures the loyalty of the bureaucracy.
The conflict between real modernization and the vested interests of this bureaucracy is summed up in the fate of Mikhail Khodorkovsky, once Russia’s richest man and now its most famous political prisoner.
Russia’s institutional weaknesses are well known, weak rule of law, endemic corruption, no respect for property rights and governmental favortism in dealing with the private sector and weaken Russia from within. Without political competition and property rights protection, capital investment in Russia will remain anemic.
Despite a recent article linking Russian Medvedev’s liberalization efforts as gloss on Putin’s authoritarianism, there remains a way for political outsiders, Russians and foreign investors to effect change in Russia, and that is through company ownership. With no political opposition and cronies heading up the country’s largest companies, the current political structure is in place to maintain Russia as an ATM for the political elite. According to Transparency International Russia,
Since Putin came to office in 2000, Russian officials are estimated to have skimmed some $200 to $300 billion a year from the economy.
The most important job of the Russian government is to ensure that all the stolen money remains hidden and that the system aiding and abetting the pilfering of national assets remains in place. So, even though 93% of Russians believe that the government is not doing enough to combat corruption, Medvedev will not enact meaningful reform and rock the boat he helped build with Putin.
One of the only ways to make Russian political and business elite to take notice, is shareholder activism. By using his minority ownership of state-run companies, Alexei Navalny has shone the spotlight on the mismanagement and embezzlement by government officials. Foreign investors in Russia can do the same by demanding a greater percentage of ownership and management input from Russian companies that seek to tap into international capital markets. From this ownership position, accountability and transparency can start to take root in the Russian economy.
Yukos Oil Company v. Russian Federation – Case in European Court of Human Rights
Tomorrow, the European Court of Human Rights (ECtHR) is holding a hearing on the merits of the complaint against the Russian Federation by the former management of YUKOS. This case is separate from any action being taken specifically on behalf of majority shareholders.
The Strausburg hearing will start at 2:30pm (Central European time) / 8:30am (New York time) and last for approximately 30 minutes. A live webstream of the hearing will be available at the YUKOS claims website.
Recently Bill Browder, CEO of Hermitage Capital Management was on CNBC with Maria Bartiromo discussing the risks and rewards of investing in Russia. In this segment he describes the reality of investing in Russia and lengths authorities there go to expropriate private property for personal gain.
According for former deputy prime minister Boris Nemtsov,
Sochi is the warmest place in Russia, with no infrastructure, no experience in winter sports – it doesn’t even have a hockey team – and many other problems.
With a budget of $17 billion and over 200 buildings and infrastructure Russia needs to build, the scramble has begun for construction contracts. Additionally, the road linking the mountain top sports venue with the seaside Olympic center will be the world’s most expensive at $130 million per kilometer, 50 times higher than the average cost of a kilometer of highway in the United States.
Moscow Times reports today that even though Russia is one of the top five places for foreign direct investment (FDI) it is not expected to return to pre-crisis levels until 2013. Russia’s economy shrink by 7.9 percent in 2009 and is expected to grow to 3.1 percent in 2010, according to analysts reports.
According to Capital Economics analysts:
[Russia] may not return to its pre-crisis levels until 2012. By contrast, the Chinese and Indian economies are expected to grow by more than 25 percent over the same period. So for now at least, Russia seems destined to remain the fourth BRIC.
