Committee for Russian Economic Freedom

More than just a week at the Ritz Carlton in Moscow. The Russian Interior Ministry has reported that the average bribe paid to a corporate or government official in the first half of 2011 was 293,000 rubles, or about $10,500 – up from the previous year.

The reason the amount of the average bribe increased, according to the Ministry? The government’s anti-corruption drive, which, according to the state, has forced those seeking a kickback to reach deeper into their pockets. (The Ministry failed to give figures from previous years for comparison or the total number of bribes uncovered.)

This news comes as President Medvedev tries to clean up what Transparency International has called “the world’s most corrupt major economy.”

Bloomberg further cites an Economy Ministry report from June that states the amount spent on bribes has doubled in the last decade, from 84.8 billion rubles in 2001 to 164 billion rubles last year.

This culture of corruption has bred “a rise in anxiety, the desire to emigrate, as well as the export of capital,” according to Levada Center Director Lev Gudkov, in an interview with Novye Izvestia.

Levada Center Director Lev Gudkov

Gudkov continues:

Administrative tyranny is worsening. [...] We know from the media about the episodes of Khodorkovsky, Magnitsky, Chichvarkin. Lots of Russians have first-hand knowledge of extortion practiced by the powers-that-be, of vague laws and their selective application. Hence the atmosphere of vulnerability and insecurity.

The Guardian (UK) reports that Barclays is retreating from the retail banking business in Russia.

Jill Treanor writes that Britain’s third largest bank may recoup just 10 percent of the purchase price for Expobank, the Russian lender it bought for £373 million in March 2008. Barclays is now soliciting bids, at what would be a 90 percent loss, mostly from large Russian banks.

Barclays is one of a growing number of international firms pulling out of consumer banking in Russia. The company’s new CEO, Bob Diamond, made the decision to sell off unprofitable businesses shortly after taking over last year, and Expobank is one division he says needs to go.

Foreign banks have recently had great difficulty finding success in Russian consumer banking . You may recall that HSBC announced in April that it was pulling out of Russia (selling their retail arm to Citi) after just two years. Banco Santander of Spain sold its retail banking business to a firm based in southeastern Russia this past January. This follows the failure of the BP-Rosneft deal and many other failed international business partnerships of the last year. Kremlin observers have mused that as long as the state manipulates the rules of the game — whether by clamping down on entrepreneurs like Khodorkovsky or on the opposition like the People’s Freedom Party — foreign entities should be wary of active participation in Russia’s economy.

At the same time foreign banks are leaving, Russia itself is consolidating its power in the banking sector. State-owned VTB Bank is in the process of fully buying out the Bank of Moscow, though the bad debt on BofM’s balance sheet has forced the Central Bank to bail it out, to the tune of $14.2 billion. But, of course, VTB “does not expect any negative impact on its financial performance to result from this acquisition,” according to a company statement.

In reality, the BofM takeover shows how corrupt and well-connected managers, like those at VTB, can force a hostile takeover of the nation’s fifth largest bank – using state funds and in conflict with state interests. That the VTB takeover story has become a footnote on European financial pages shows, sadly, that we have all just come to expect this behavior from the state.

Time magazine’s Simon Shuster today posted an article about young Russian entrepreneurs fleeing the country. The piece features a 22-year-old tech guru named Alexei Terentev, whose web hosting company, NKVD.pro, is now valued in the millions of dollars. But thanks to a business climate marked by fraud and fear, the economic activity Terentev’s company is to produce will not be benefitting his homeland: Alexei left Moscow for the Czech Republic to develop his business and hasn’t looked back:

The reasons for his move, as well as his haste, are the typical worries of the young entrepreneurs […]: corruption and bureaucracy, the forces that are driving the biggest exodus since the fall of the Soviet Union. […] Now the country is stable and the cities are thriving. But small-business owners seem to feel less safe than ever.

Shuster cites data that shows Russians paid nearly $600 million in bribes to authorities for “security provisions,” in 2010 – 13 times more than in 2005 – and then describes the calamity that befalls business owners if bribes aren’t paid: visits from inspectors, auditors or the police until the company is overwhelmed. If that doesn’t work, expect a corporate or government raid to follow, as was the case in 2000 for NTV television or in 2003 for Yukos Oil.

Earlier this year, Agava, one of Russia’s leading web hosting companies was raided by police, its server farm raided just weeks later. And this is happening , Shuster writes, while the Russian government is trying to enlist businesses to move to Skolkovo, Russia’s notional version of Silicon Valley. But the businesses that have signed on for Skolkovo are, not surprisingly, having trouble recruiting talent.

To drive the point home, Shuster quotes a California venture capitalist, Alexandra Johnson, who advises Russian businesses. “You need an entire ecosystem to support innovation,” she says. “You need incubators, entrepreneurship, managers to run the businesses. You need the rule of law. Many elements of this ecosystem are still missing in Russia.”

Read Shuster’s full article here.

Neil Buckley, the Eastern Europe editor of the Financial Times, writes on the Valdai Club website today about the IPO shortfall in Russia, summarizing the dismal first half of 2011 for Russian companies looking to go public:

Analysts originally forecast private companies could raise more than $25bn in 2011 from so-called initial public offerings of their shares, up from only $5.5bn last year. In fact, only $3.9bn was raised in the first half of the year from a mere six deals.

Seven other planned Russian IPOs were postponed in the same period, he notes, prompting:

…more soul-searching about Russia’s lack of attractiveness to international investors, even as president Dmitry Medvedev has announced measures to try to improve the investment environment. It comes as domestic investors also seem reluctant to invest in Russia ahead of parliamentary elections in December and next March’s presidential poll – leading to billions of dollars of net capital outflows in recent months.

Mikhail Khodorkovsky

While IPOs the world over have underperformed, Russia’s case is especially gloomy, as investors have been burned by Russian IPOs not materializing and poor performance with those that did, at least in the traditional extracting industries like metals and mining. (Search engine Yandex is the successful exception mentioned here.)

Buckley concludes by citing the political discount, often called the “Khodorkovsky discount” after the imprisoned former chief of Yukos whose case represents many of the challenges faced by Russian entrepreneurs today, that keeps Russian markets undervalued:

It is difficult to achieve top valuations for Russian IPOs when its whole market remains undervalued largely because of the political “discount” investors apply to the country [due to] perennial concerns over corruption and weak rule of law, [which] seem to reflect uncertainty over the outcome of the presidential election, and whether Russia will be able to conduct reforms needed to boost its flagging economic growth.

Half  of all Russian businesspeople and students want to flee the country, according to the Levada Center, an independent, non-governmental Russian polling and research organization, and as reported in France’s daily financial newspaper, Les Echoes.

Almost a quarter of the entire Russian population would like to emigrate, according to the poll. The principal reasons: the high cost of living (67 percent); corruption (49 percent); and criminal activity (48 percent).  As it is, more than 100,000 Russian are leaving the country each year, according to a number of sources.

Meanwhile, Charles Clover writes in today’s Financial Times about “ascent and dissent,” how with rising wage disparity in Russia comes rising dissatisfaction with the economic status quo, where the children of civil servants are more likely to score high paying jobs than more qualified, less well-connected individuals. That inequality only feeds on itself, as those locked out of the upper echelon have little chance of breaking in:

While income distribution in Russia creeps towards Latin American levels of inequality, having widened notably since the turn of the millennium, the state has incubated an ever more entrenched and inaccessible elite that now controls government and business, and jealously guards its privileged domain.

The Kremlin’s human rights council earlier this week called for an amnesty for economic crimes in order to attract foreign investment and boost economic growth, according to Bloomberg News. 

Kremlin observers say that putting this proposal into action, which is unlikely, would improve President Medvedev’s standing ahead of the 2012 elections. According to a top Russian business lobbying group, one in six entrepreneurs has faced criminal charges.

Medvedev set up the human rights panel back in February.

Gidon Kremer

It’s often said that art and politics shouldn’t mix. But readers may get the opposite impression from an opinion piece written by accomplished violinist Gidon Kremer to coincide with a charity concert on behalf of Russia’s political prisoners.

The concert, held July 5 in Strasbourg, France, was dedicated to Mikhail Khodorkovsky and Platon Lebedev, who, according to the organziers, are “living symbols of the world’s failed hopes for rule of law and freedom of expression in Russia.”

“As artists,” Kremer writes, “it’s our duty to raise our voices in a chorus of opposition to drown out those who seek to humiliate and punish men like Khodorkovsky.”

Among those who supported the concert were Nobel laureate Elie Wiesel, who recorded a video message in French that played just before the curtain went up, calling on the Russian government to free Khodorkovsky and Lebedev: (Here’s a link to the English translation.)

Elie Wiesel

As long as Mikhail Khodorkovsky and Platon Lebedev are not free, I can assure you that we will keep on declaring that every day they spend in prison is an insult to universal conscience – an insult, an offense to the dreams of a fair and generous world. 

Giving them their freedom back, the new Russia would win respect from all mankind.