Tag Archives: russia

Overcoming the Collective Action Problem: How to Encourage Businesses to Fight Against Corruption

Without a strong compliance program, many smaller Russian firms could be locked out of lucrative contracts with big multinationals.

Without a strong compliance program, many smaller Russian firms could be locked out of lucrative contracts with big multinationals.

By Henry Nelson

In countries with weak rule of law, anti-corruption efforts suffer from a collective action problem: because bribery and corruption are endemic and occur frequently, individual small business owners hesitate to reform because they fear that doing so will reduce their competitiveness.

If a small or medium-sized enterpise (SME) begins to eschew bribery, it might be incapable of securing contracts that require paying a bribe, for example. The threat of short-term loss of business is serious for SMEs and can deter companies from pursuing anti-corruption compliance.

Furthermore, the collective action problem effects the general business environment. Without a strong, coordinated voice on the importance of compliance, corruption continues to be seen as “business as usual” and the consensus continues to be that bribery is a necessary component of conducting business.

This collective action problem is pervasive and continues to pose issues for CIPE and its many global partners. It is difficult to implement reforms when SMEs fear that the reforms will hurt their business.

Earlier this month, CIPE’s Washington office hosted a delegation of CIPE Russia officers and regional CIPE partners for a discussion on value-chain anti-corruption efforts in Russia. The discussion yielded plenty of interesting information on CIPE Russia’s plan to work with regional Russian chambers of commerce in order to educate local SMEs about international anti-corruption laws like the U.S. Foreign Corrupt Practices Act (FCPA) and UK Bribery Act.

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New Banditry, New Solutions

Kennan Institute event

Faced with a corrupt judicial system, what strategies do Russian businesses employ to resolve business disputes?  Lately, less murder and more litigation.

Faced with multinational firms who are liable under U.S. and U.K. laws for their Russian partners’ corrupt practices, how do Russian businesses gain access to international partners? Start putting in place anti-corruption compliance programs.

Those were some of the answers that came from experts from Russia and the U.S. had some answers at a recent panel discussion co-hosted by CIPE and the Kennan Institute, “Corruption and Business in Russian: National Problem, Regional Solutions.” Jordan Gans-Morse, an assistant professor of political science at Northwestern University, presented the results of his innovative research on how non-oligarchic firms are surviving in an atmosphere of endemic corruption. Against this backdrop, CIPE Moscow Program Officer Natalya L. Titova, joined by CIPE partners from St. Petersburg, Chelyabinsk, and Kaliningrad, spoke about a CIPE program in Russia that is helping regional businesses to meet international anti-corruption standards in order to join global value chains.

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The Advantage of Targeted Anti-Corruption Measures

Port_of_Kaliningrad

Thanks to its Special Economic Zone status, many foreign companies assemble cars and electronics in the Kaliningrad region for the broader Russian market. But corruption remains a major barrier.

At public events on corruption, no matter how sophisticated the participants and no matter how narrow the subject, the discussion invariably seems to wander off topic. Often the audience members want to speak about a high-profile case like the suburban Washington, DC, politician’s wife who stuffed $79,000 into her undergarments when federal agents came knocking. Sometimes, speakers wander off into digressions on how one nation or another is inherently corrupt because of cultural and historical factors. Frequently, attendees simply conflate different kinds of corruption – petty, political, commercial – into in insoluble morass.

This was the case at a recent CIPE-supported event held in November in Kazan, Russia. One of the 70 participants began to derail a technical discussion of Russian legislation with a series of questions about recent arrests of regional political leaders on bribery charges. Some of the audience perked up. Others looked uncomfortable, not expecting this at a conference on how to boost investment by improving firm-level compliance with anti-corruption laws.

Igor Belikov, the event’s moderator and head of the Russian Institute of Directors, deftly reined in the discussion and with a bit of humor brought it back to the subject at hand – how mid-sized firms can reap the benefits of globalization by putting in place anti-corruption compliance programs that give the firms better access to multi-national companies’ global value chains.

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Russian Businesses Learn Benefits of WTO Membership

russia-webcast

The World Trade Organization (WTO) welcomed Russia in August of last year as its 156th member — the last of the world’s large economies to join. The process, taking nearly two decades, had been steeped in anxiety and high expectations within Russia.

Now that Russian firms and their foreign counterparts can better grasp the practical consequences of WTO membership, corporate executives, entrepreneurs, and regional development officials are turning to the nuts and bolts of membership. Moscow-based CIPE partner the International Institute of Management for Business Associations (IIMBA) is at the forefront of these efforts, holding a raft of classes and webinars designed to help Russian businesses understand the promises and pitfalls of WTO membership. IIMBA is helping shape the discussion on the issue, taking a no-nonsense approach free of the sparring which grabs headlines having to do with U.S. agricultural imports and Russian rules benefitting the automobile industry.

betsy-headshotOn March 5, CIPE helped introduce a highly-informed U.S. point of view into IIMBA’s ongoing WTO series with a presentation by Elizabeth Hafner, Deputy Assistant U.S. Trade Representative for Russia and Eurasia at the Office of the U.S. Trade Representative. Hafner, based in Washington DC, first gave a presentation on  the benefits of WTO membership for Russian businesses via webcast from CIPE’s Washington office. She then took live questions from some of the 182 participants connected to the webinar from Kazakhstan, Uzbekistan, and a host of Russian cities including St. Petersburg, Volgograd, Moscow, and Ufa. Watch a webcast of the presentation.

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Keeping Score

The Hermitage, St. Petersburg, Russia. (Photo: Author)

I am 38,000 feet over Hartford, CT on my way home from St. Petersburg, Russia and the International Real Estate Federation (FIABCI) World Congress. This time of year everyone is asking, “Did you catch the game last night?” Depending on your city and allegiances this can be a tricky question. Are we talking about hockey, basketball, or baseball (soccer anyone)? At the many bars that rely on the income from sports fans during these times of year, everyone wants to know the score. Conversation, catching the bartender’s eye and other distractions can be resolved with a quick glance at one of the many screens to check the score.

Who’s ahead in stabilizing their real estate and capital markets after the global financial crisis? Who’s attracting more foreign investment as the European markets continue to struggle? Which countries will be the next BRICs? Who’s keeping score?

For the last several years CIPE and the International Real Property Foundation (IRPF) have been developing the International Property Market Scorecard – a methodology to measure the strength and effectiveness of property market support institutions. You have to know the score to know who’s winning the game. The global financial crisis proved there was no agreed upon regulation for global property markets. No one was keeping score. Rather than a regulated conference where everyone agrees to play by the same rules and the best players challenge each other to win the cup, we had a vast shadow gambling system where insiders chopped up risk and played the odds until finally the system was tapped out.

The Scorecard has proved to be a valuable tool as we come out of the great recession and capital and risk again start to flow across borders. Scorecard projects were completed last year in Armenia, China, Kenya, the Philippines and Russia. Among the key issues in dealing with property market risk in the countries evaluated thus far:

  • Often legal protection does not match implementation. While property rights may be protected in the constitution and laws and regulations may be in place, there is often a wide gap between the text of the law and what actually happens in property markets.
  • Tenants’ rights are of particular concern. Most people either rent their apartment or small commercial property. Standard commercial leases are rare and many people do not have an understanding of their rights to negotiate terms or demand compensation when their rights are violated.
  • Even in developed markets, there is a blurred line between formal and informal sectors. Profits go unreported and sales prices are distorted to avoid taxation.
  • Corruption remains prevalent in property transactions. Connected insiders continue to win bids and extra payments are demanded at every step in the transaction.
  • Even in systems where property rights are fairly strong, most people still have difficulty in accessing credit. In the developing countries interest rates remain high and distrust in the system prevents many people from participating in formal bank credit. Unfortunately, many end up paying more and still losing their property in informal lending schemes.
  • Finally, weak judiciary and dispute resolution procedures prevent the efficient transfer of property when conflicts arise. Properties sit vacant or tenants continue to occupy parcels without payment as blight sets in and the downward cycle exacerbates.

Work continues in these countries. In Russia I saw firsthand how the markets are functioning and the expectations of both local and international investors for the future of this BRIC country. Russian buyers are scooping up multi-million dollar New York apartments. What does this mean for markets in the developed world as real estate investment starts to flow not to, but from the BRIC countries?

And what does it mean when the developed world has lost touch with the ownership and risk associated with trillions of dollars worth of asset-less paper – derivatives once connected to a property asset, but now floating on various suspicious large bank and national balance sheets. As Hernando de Soto pointed out in the keynote at the FIABCI World Congress, there are also trillions of dollars of paper-less assets in the developing world – assets not yet formalized in the system.

The solution to our current crises lies in a rebalancing of the world’s property markets – a reconnection to the core elements that make property markets work, agreed upon standard rules of play, and the building and strengthening of a wide array of institutions that keep score and referee when a player steps out of bounds or takes unfair advantage.

The Scorecard can be a valuable tool in this process – first as an education tool. By completing a Scorecard, key stakeholders in a country can understand 54 interconnected indicators for property market strength. Once understood and benchmarked, transparency advocates can focus efforts on clear policy objectives that can make the greatest impact in the shortest time. Most importantly, as Scorecards are completed for more and more countries, patterns and best practices will emerge that can facilitate agreement on the crucial international rules of play.

On the last night in St. Petersburg, I had dinner with a new colleague from Beirut. The restaurant was in a hidden courtyard behind a music hall where the music flowed gratis out of the windows. We discussed impressions of the Congress and enjoyed the camaraderie of a shared vision for the future. On the walk back to the hotel, we stopped and took photos along Nevsky Prospect at night. Oh, and my friend used his smart phone to check a soccer score.

Bill Endsley is a principal at World Citizen Consulting and the Secretary-General of FIABCI-USA.

Realizations in Russia: 11 Sweater Buttons Later

When talking about governance, it is easy to forget that its impact is often experienced just as much through minor hold-ups and red tape as through the large-scale corruption, fraud, and abuse that usually makes headlines. In a recent pair of articles, The Guardian’s Moscow correspondent, Miriam Elder, has stirred up a surprisingly negative reaction by highlighting one such bureaucratic roadblock faced by everyday Russians.

The “The Hell of Russian Bureaucracy,”  a tongue-in-cheek expose on dry-cleaning in Russia, spotlights an everyday example of unnecessary red tape. In reviewing the details of the process, Elder sardonically laments the fact that the inspection of her clothing took more time than she spent actually wearing them.

Though perhaps overly dramatized, the article presents an amusing anecdote that will make anyone want to check the number of buttons on their sweaters. It also draws a clear link between bureaucratic practices by the state and the private sector. After examining five separate pieces of clothing, counting each button twice, filling out five separate forms, and stamping five separate forms, Elder had spent hours getting her clothing. The process took twice as long when she tried to retrieve it the next week.

This rant on bureaucracy was amusing for anyone with experience living life in Russia, but the dialogue it sparked opened the way to a deeper inspection, as just one day later, Dmitry Peskov, aide and spokesman to Vladimir Putin, responded to Elder’s article:

“I am sorry to hear about Miriam Elder’s experience at the dry cleaners, in which she lost her receipt and so had an hour of her time ‘stolen’ in providing the necessary personal details to retrieve her woollies. But I am also amazed that this anecdote can be passed off as any sort of insight into the state of Russia today.” He also wrote, according to Elder, that “cutting red tape was a high priority for the government,” but then, swerving the focus of the letter, concludes with: “Let me remind British readers of the thousands of hours that are ‘stolen’ from Russian citizens when they complete the UK’s visa application forms, which are a whopping 10 pages. The time, money, effort and inconvenience that Russians face in obtaining UK visas put Ms. Elder’s ordeal into perspective.”

In her response, Elder wonders why after having written about corruption, human rights abuses, the murder of journalists, and electoral fraud for the last five years it was this article that prompted the first and possibly only response from Putin’s office.

To understand this, let’s step back. Elder argues point blank that the Russian form of bureaucracy doesn’t work.

“Let’s say I stole some other woman’s clothes.” she writes, “Despite the forms and the stamps, the (double) passport check and notes, the woman would have no recourse. Court system? Busted. Police? Corrupt.” Elder goes further to point to this as the reason that so many in Moscow have turned against Putin – they are actually, she argues, turning against the system. That system, she says, began corroding in the Soviet era and continued to do so through the “flicker of hope that emerged with the fall of the Soviet Union,” which soon settled “back into a non-functioning corrupt bureaucratic nightmare that now has the added bonus of wheedling itself into the private sector.” As most connected to Russia in some way would acknowledge – “so much has changed – and so much has not.”

While Elder recognizes that her initial article was largely a “rant” meant mainly to express some of the frustration that comes from living in a culture where “even the most menial tasks are often infused with the paper-pushing, stamp-stamping and time-wasting so loved by Russia’s bureaucracy,” it instigated much more.

Though perhaps Eldar was overblown in describing it as “hell,” there is a clear link between bureaucracy and corruption that has been explored for a number of years. Stephan Dalziel, Executive director of the Russo-British Chamber of Commerce, writes that the “problem with such nonsensical rules is that they inevitably lead to corrupt practices.” The real danger of bureaucratic discretion, he says, is that, rather than going through an “exhaustive and possibly costly legal process to ensure that all rules have been followed to the letter, there will often be the temptation to bypass them by placing money in a brown envelope which benefits only the recipient.” Though many people put “bureaucracy” rather than “corruption” at the top of their list of problems doing business in Russia, these things are really “two sides of the same coin.”

This is an argument that has long since gained traction in the development community and is an idea that CIPE expands further in the conviction that democracies and market economies need to develop together and are deeply entwined. Dalziel concludes his article with the remark that “until it’s sorted out, any battle with corruption will be an uphill struggle.” CIPE recognizes this, too — the fact that the activities of a country’s business community through democratic representation are pivotal to monitoring and balancing bureaucratic agencies. Further, both oversight and public accountability should work in conjunction with each other. When they don’t, when there are informational deficiencies, a lack of technical skill, both representatives at the state level, and the public through the small and medium-sized businesses they exist within, adopt a haphazard method of oversight.

Currently, small- and medium-sized businesses, crossing sectors, creating a broad base of support and cohesion, are advocating together to hold elected officials to higher standards, and perhaps more importantly, coming together to recognize the need to redefine laws. This development – coming together to redefine laws, and – by and large – systems – is what is both becoming internationally recognized as key, and actually happening. So when Miriam Elder wonders why her post about dry-cleaning in Russia warranted a response from Putin’s office? Perhaps that’s why. The topic is simple, seemingly unimportant, but in reality, is a very clear reflection of the state and the system that is beginning to come undone.

It’s anecdotal and simple, but 11 sweater buttons later, I’m reminded in a very real and accessible way how the private sector, existing within the system, functions as a mirror for the state —counting each button down the front of a cheap sweater, not yet wholly able to view the sweater (or business process in general) holistically, but getting a lot closer, button by button.

Locking Out Small Businesses in Novorossiysk

A typical Russian cash vault. (Photo: Staff)

By Yulia Rostovikova and Natalia Titova.

For years, the small business owners and entrepreneurs of the Russian port city of Novorossiysk had been working to overturn an obscure but odious regulation from the Central Bank of Russia. The regulation, called Letter Number 18, required all businesses to maintain a vault for the storage of cash. The vault had to be the size of a walk-in closet, with reinforced walls and an alarm system. The regulation didn’t distinguish between a large factory or retail outlet and a shoe repair shop or convenience store. As a result, small shop owners faced construction and permitting costs that could exceed $3,000 and result in a loss of significant floor space. Failure to comply with Letter Number 18 could result in a fine of up to $1,600 – every month. The regulation had been in place since 1993. In Novorossiysk enforcement was especially intense. Some businesses closed. Others saw profit margins squeezed. Inspectors’ discretion in enforcing the regulation represented fertile ground for corruption.

Representing local businesses, the Novorossiysk Chamber of Commerce and Industry (CCI) began working in 2009 behind the scenes for some relief from Letter Number 18. The Central Bank said it was studying the matter. The Federal Tax Service maintained its right to fine those businesses out of compliance. The Finance Ministry said it had no jurisdiction. The Ministry of Economic Development threatened to make things worse by expanding Letter Number 18 to require all businesses, down to one-person kiosks, to maintain a walk-in vault.

The leaders of the Novorossiysk CCI, a long-time CIPE partner in Russia, had reached a dead-end. They decided in September 2011 to launch a public event on the city’s center square to draw attention to the absurdity of Letter Number 18’s requirements. Traditionally, Russian chambers and business associations are reluctant to take such a populist approach. But the leadership of the Novorossiysk CCI had a track record or representing their members’ interests with humor and creativity, by, for example, producing with CIPE support and USAID funds a comic book-style guide on coping with inspectors. For October 4, they planned to stage a 60-minute show complete with a full-scale mock-up of a vault, testimonials by shop owners who had suffered under Letter Number 18, a speech by a member of the regional legislative assembly and the performance of a lively song about how a store’s toilet is often the only suitable space to serve as a vault.

Victory came 10 days before the public event was scheduled to take place. Central Bank officials in Moscow learned of the Novorossiysk CCI’s plans through media accounts and issued an order rescinding Letter Number 18 throughout Russia as of January 1, 2012.

The triumph illustrates the effectiveness of a methodology developed over the course of the CIPE-administered SME Policy Advocacy Program funded by USAID between 2002 and 2011. The methodology is rooted in a painstaking member-based approach that identifies problems and seeks solutions through government institutions, public-private dialogue and, as in the case of Novorossiysk, public appeals. The successful campaign against Letter Number 18 took place after the USAID program ended but using the skills developed by CIPE staff and leaders of the 18 regional coalitions of business associations developed under the project. The Novorossiysk case was used by the authors in late 2011 as they trained nascent Ukrainian coalitions of business associations in one-day workshops in Donetsk and Crimea

Yulia Rostovikova is a vice president at the Novorossiysk Chamber of Commerce and Industry. Natalia Titova is a program officer in the Moscow office of CIPE.