Risk Analysis: Russia

Russia has been heralded as an up-and-coming economy for a while now. With increasing GDP, inclusion in the BRIC alliance, and winning the draw to host both the Olympics and the World Cup, it’s no wonder that, on paper, Russia seems like a new economic super power. But is this the reality of the situation? Is Russia really business-friendly? The answer is a solid no. There are many risks involved in international business, but Russia, despite the good statistics, is a mess not ripe for foreign investment yet.

St. Petersburg, source: Ivan Smelov

The greatest risk in doing business in Russia is the corrupted socioeconomic environment that puts companies at a disadvantage as they are forced to pay out of their pockets. The more capital you have, or the more you expand, the more bribes your company will have to pay. Most of the affected firms are brick-and-mortars, who need to seek licenses and leases through corrupt bureaucratic agencies. Online businesses are, fortunately, less susceptible to this risk because they are harder to target, even if their servers are on Russian soil.

Corruption stems from political oppress
ion, orchestrated by the dominant political party, United Russia, which has utilized its power to separate businesses from their money. There is now a serious possibility of business owners having to surrender much of their control over their own businesses or risk being forced to shut down for a few hours, months, or forever. To add to the problem, the fact that bribes come straight from the business’ own pockets, it becomes increasingly hard to invest in research and development and innovation. Participating in this system is a double edged sword; while it may appease a pushy government, it may anger the increasing number of citizens participating in the opposition movement, which stands firmly against bribery, corruption, and political involvement in entrepreneurial ventures.

The real risk is boiled down to this: the government is so large that it is difficult for businesses to escape its influences. Firms must participate in the web of corruption laid out for them or risk losing competitive advantage, or, in extreme cases, the business itself. The government does not only have disproportionate power, but also exists entirely outside the law, which allows the system to thrive. There are no checks and balances, and those who stand up against the system are quickly struck down.

There are a myriad reasons why the government poses such a risk, most of them historical. However, it can be boiled down to greed – political and financial. The government clearly wants to gain some sort of advantage over its citizens in order to protect its power. Due to globalization pushing toward a convergence of ideals, a rise in westernization in the younger generation and general disillusionment with United Russia, the government is slowly losing power. The higher level government is currently aggressively trying to milk businesses for all they’re worth before the people denounce the system. For now, the opposition is suppressed, and victims of the crackdown are jailed and used as an “example” to deter speaking out. Thus, it is clear that lower level corruption is utilized for financial gain, whereas higher level bribery exists to establish and protect power and influence.

Virtually all governmental agencies are corrupted and all equally pose a risk to your business, from local to federal entities. In order to establish a businesses, an entrepreneur must go to different agencies to get licenses and permits and complete required paperwork. Bribery at the agencies that issue and accept the paperwork is unavoidable, and extra bribes can help reduce the length of the processing time. If a business opens a physical location, local fire departments, police officers, real estate agents and even doctors could come around and demand bribes in exchange for passing the businesses on an inspection. During election cycles, small-scale politicians and United Russia representatives can drop by requesting political contributions, which are unofficially mandatory.

Bribery and corruption is a system, and is an expected contributor to establishing and maintaining a business. Some people will expect bribery in exchange for an introduction to a power player you need to get in contact with. Business operations can be halted by regulatory agencies without warning. For example, individuals working in the fire department or the health inspection offices can literally close up a brick-and-mortar store unannounced, claiming they found a fire or health hazard, and will not budge unless paid. Sometimes, representatives of the same agency can come more than once, since bribery operates on a network that overlaps departments, meaning that agencies are not the nucleus of loyalty. Expansion of a business into new areas require contacts with the local officials and local branches of the bureaucracy – expect to pay them for their time.

Corruption is, as mentioned previously, found on all levels, and thus will pose as a roadblock at every single stage of business. Risk arises from the very start of expansion, from getting a business permit to a health inspection passing grade to a lease of a building. Government can set up roadblocks to halt any kind of business operations at any time. This would include long delays (up to five years, which could be reduced to a few hours with a bribe), failed health and fire inspections, and other related licences. Corruption also exists outside of business practices, so visitors must be able to adjust to bribing as an everyday occurrence, as opposed to solely a business tool. This corrupted system may also impact our social mobility such as eligibility for faster or better medical treatment.

Bribery is necessary where business deals needs to be expedited. This practice is everywhere and has evolved into a normal behavior in everyday life. It is nearly impossible to be unaffected or abstaining from bribery. Businesses are better off with the option of gaining advantages in exchange for money: not only does that offer protection from and the approval of the government, it also combats a loosely regulated legal system.

There is such a disconnect between the way society as a whole is moving and where the government is. It’s coming to the point where you, as a business, cannot be in the middle anymore. It’s like a sickness – it can only last so long. Eventually you either die or get better.

This was written for International Marketing class. Sources used were personal interviews conducted with people who have done business in both the US and Russia, and shall remain anonymous.

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