If You Can’t Stand the Heat, Get Out of the Kyxhя (Russian for “kitchen”)

When discussing business opportunities in Russia, the prevailing message seems to be, if you can’t stand the heat, get out of the kitchen. This take it or leave it attitude was certainly true in the past but recent events suggest that maybe, just maybe, the tables are turning. Armed with an awareness of the risk (heat), companies need not avoid Russia (the kitchen) at all costs. Instead, consider investing in a good pair of oven mitts (compliance procedures).

The Kitchen

So why go to the kitchen in the first place? The obvious answer: you’re hungry. Snack on this. In 2011, the Russian economy grew by 4.3%. The IMF projects the $1.8 billion economy will grow by 3.3% in 2012 and 3.5% in 2013. This is over twice the pace of growth compared with so called, “advanced economies.”

Russia is making a concerted effort to lure foreign investment into key industries. The Kremlin is likely to open these gates on favorable terms. Russian commitments carry greater weight considering S&P recently upgraded the country’s credit rating from “negative” to “stable.”

While much of the world suffers from little or no growth, Russia’s growing economy, served on terms favorable to foreign investors, presents a tempting business opportunity.  

 The Heat

But lets not play coy, business in Russia is no cakewalk. There are significant risks to consider from an anti-bribery/anti-corruption perspective.

The former Soviet Union ranks near the bottom of Transparency International’s (“TI”) 2011 Corruption Perception Index; score 2.4, rank 143 of 182. Some of the largest US enforcement actions involved payments to Russian officials including Daimler AG (nearly $200 million in fines and disgorgement and an independent monitor), Panalpina ($70 million fine), and who could forget the record setting $800 million enforcement against Siemens AG.

According to TI’s 2011 Bribe Payer Index, companies from Russia are more likely to pay a bribe than companies from any of the other 27 countries surveyed. This is a significant risk considering the global trend in criminalizing purely commercial bribery—think, UK Bribery Act.

Anti-bribery risks specific to Russia include:

• Long-accepted corrupt business practices
• Layered administrative burdens enabling corrupt gatekeepers to solicit bribes
• Expectation of grease payments for routine official action (facilitation payments)
• “Must have” third-party insiders
• High corruption-risks industries: oil & gas; mining, utilities, healthcare/ pharmaceuticals.

Are the Tables Turning on Russian Corruption?

In May 2011, Russia passed a comprehensive anti-bribery law. Some commentators used this headline to bake up frightening warnings about doing business in Russia. It is true that the law raises the risk of prosecution for Russian operations and may spur cross-border enforcement collaboration. But from our perspective, this should be viewed by compliance-committed companies as a step in the right direction.

The law criminalizes the giving and receiving of a bribe to domestic or foreign government officials. It also prohibits purely commercial bribery and creates a new crime of “bribery intermediation” (aiding and abetting bribery). The law enhances monetary and jail-time penalties and creates a four-tier system of fines based on the bribe amount. Extortion by an official or voluntary reporting, combined by cooperation with the investigation will release one from liability but, unfortunately, adequate procedures will not.

Russia is climbing the CPI too. Yes, its score of 2.4 and rank of 143 is abysmal, but that’s an improvement over Russia’s 2010 statistics; 2.1 and 154. If meaningful enforcement of the new law follows, and that’s a big if, Russia will continue to climb the CPI, making it even more tempting to foreign investment