March 24th, 2011

Russia’s “aspiration” issues and conspicuous corruption

Peter Pomerantsev’s look into Russia’s growing television industry reveals the challenges of doing business in Russia. Among the unique features of working in Russia include diversion tactics for tax collectors seeking bribes, strategies for avoid kickbacks or otkat for broadcasters and overcoming societal indifference to rules of the game.

Pomerantsev starts his diary with the production company Potemkim Productions itself, the elaboate set up of gruff security men and rooms behind rooms are a ruse to persuade tax collectors that the company was small and warranted smaller levies.

No entrepreneuer paid their taxes in full: it wouldn’t occur to them. Taxes, he said, were just a way for bureaucrats to buy themselves holidays in Thailand…Ivan haggled with the tax police to keep down the size of the pay-off…then Ivan would bring out the fake accounts from the front office to support his case and they would sit down together to negotiate, with tea and biscuits as if this were the most normal of business deals. And in Russia it was.

Pomerantsev was hired to produce reality tv shows like the ones in the West, but those mainly flopped. The Russian version of The Apprentice closely followed the aspirational themes of those in the West, with someone succeeding after hard work, perserverence and some panache. The problem was:

…no one in Russia believed in the rules. The usual way to get jobs in Russia is not by impressing at an interview, but buy what is known as blat – “connections”. Russian society isn’t much interested in the hard-working, brilliant young business mind. Everyone knows where that type ends up: in jail like Mikhail Khodorkovsky, or in exile like the mobile phone billionaire Yevgeny Chichvarkin. Today’s Russia rewards the man who operates from the shadows, the grey apparatchik, the master of the politique de couloir – the man like Putin…The shows that did work were based on a quite different set of principles. By far the biggest success was Posledny Geroi (“The Last Her0”), a version of Survivor, a show based on humiliation and hardship. this chimed in Russia – a country where being bullied by the authorities is the norm.

The structural and cultural obstacles to aspiration and innovation are reflected Russia’s low ranking in Transparency International’s Corruption Transparency Index where it is the most corrupt major economy. Bloomberg reported on a Freedom House report that

Russia risks turning into an autocracy that resembles authoritarian regimes in the Middle East if Prime Minister Vladimir Putin prolongs his rule in 2012 elections…As venal Middle Eastern authoritarians give way to popular pressure for democratic change, Russia’s systemic corruption is becoming especially conspicuous.

The political risk in Russia remains higher than other emerging markets and for that reason the US private equity firm Blackstone doesn’t invest there. Could concerns with complying with US Foreign Corrupt Practices Act be a resaon too?

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