GOVERNING BUSINESS: THE STATE AND BUSINESS IN RUSSIA - RUSSIA POLITICAL ECONOMY PROJECT - Foreign Policy Research Institute
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G OV E R N I N G B U S I N E S S :
THE STATE AND BUSINESS IN RUSSIA
RUSSIA POLITICAL ECONOMY PROJECT
Foreign Policy Research Institute
January 2018
The Foreign Policy Research Institute thanks the Carnegie Corporation for its support of the Russia Political Economy Project. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. © 2018 by the Foreign Policy Research Institute COVER: Vladimir Putin and Shavkat Mirziyoev, April 2017, Kremlin.ru
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ABOUT THE AUTHOR
David Szakonyi is an assistant professor of political science
at George Washington University, a research fellow at
the International Center for the Study of Institutions and
Development at the Higher School of Economics in Moscow
and, for the 2017-2018 academic year, an academy scholar at
the Weatherhead Center for International Affairs at Harvard
University. His research focuses on business-government
relations and corruption in post-Communist countries, with
work published or forthcoming in the American Political
Science Review, World Politics, and Journal of Politics.
Governing Business: The State and Business in Russia Executive Summary David Szakonyi This paper argues that understanding the business environment in Russia requires putting the government front and center. In response to economic crisis and falling oil prices, the Russian government has gone on the offensive. Through the use of targeted subsidies, protectionist policies, and procedural reforms, it has worked to stem economic collapse and prop up economic production. Some of these efforts have had a tangible impact on the way business is conducted in Russia, though the list of obstacles private firms still must maneuver is sizable. However, the most important development over the last decade has been the state’s direct takeover of valuable economic assets and the creation of massive state-owned enterprises (SOEs). This (re)nationalization jeopardizes the economic viability of many private firms by concentrating wealth and opportunities in a small group of well- connected SOEs. Private companies have adapted to this reality by devising a set of political strategies to ensure favorable treatment from the government. From mobilizing their workers during elections to running their directors for political office, these companies understand that remaining on good terms with the government is key to survival. Urgent structural reforms are needed to unwind the government’s role in the economy. Without changes, political connections will remain paramount to generating profits in Russia. 1 Foreign Policy Research Institute
Russia Political Economy Project
Introduction
The idea of doing business in Russia still how private firms could survive in this
environment.
conjures frightful images of rapacious
corruption, unreliable suppliers, and But amid these systemic problems, the
roads littered with potholes. Recent high-Russian economy—though stagnant—
profile events have done little to change has not collapsed under the weight of
these perceptions. Infrastructure projectsfalling oil prices and targeted sanctions.
such as the Sochi Olympics and the FIFA International investment (both portfolio
World Cup run way over budget and and direct) continues to seep in. Though
fail to provide the resources necessary millions of people still straddle the
for businesses to later thrive. Activists poverty line, unemployment is still
combatting graft are arrested and relatively low by international standards,
persecuted. Foreign meat, cheese, and and promising start-ups across several
produce are banned under an escalating sectors spur hope of an economic
tit-for-tat sanctions war. future less dependent on oil and gas.
Finally, international rankings provide
Russia is often viewed as inhospitable
evidence that the government is reducing
to business, a place where the power of
obstacles to running a business. When
the federal authorities runs unchecked
elected to another six year term in
and little technological progress has
2012, Vladimir Putin declared he would
been made since the fall of the Soviet
increase Russia’s ranking on the World
Union. Per official data, the Russian
Bank’s Doing Business index from a
government is now responsible for 70%
pitiful 120th out of 183 countries in 2012
of the country’s gross domestic product
to the top 20 by 2020.2 Five years later,
(GDP), a sharp contrast to the 1990s when
its ranking improved to 40th, with the
the government reduced its role in the
World Bank noting the adoption of
economy.1 One could rightfully wonder
2
many best practices concerning land The most detrimental development
registration and contract enforcement.3 though over the last decade has been
International observers have also noted the dramatic increase in state ownership
Russia’s progress in implementing its of key assets. The unfair advantages
commitments to global anti-corruption enjoyed by state-owned enterprises
campaigns.4 (SOEs) jeopardize the economic viability
of many private firms. Section 2 examines
Which narrative is correct? Are there real
the Russian government’s recent
opportunities for business to prosper in
nationalization drive and outlines what
Russia, or has the state stacked the deck
can be expected from the promises being
against the private sector? As is often
made to undo some of this expansion.
the case, the truth lies somewhere in
Finally, Section 3 investigates how firms
between. The challenges that firms face
have responded to the enlarged role
are numerous, but recent government
the government has begun taking in the
initiatives to simplify procedures, to
economy. Businesses can survive and
provide targeted support for promising
even thrive in contemporary Russia, but
sectors, and to promote effective
only with good relations with government
regulation have all had a meaningful
officials at all levels.
impact on the way business is conducted
in the country. Section 1 uses recent firm
surveys to illustrate how the business
environment has changed over the last
several years, sometimes for better and
sometimes for worse.
Endnotes
1 Ekaterina Mereminskaya, “Konkurentstiya ne stala bolshe [Competition has not become greater],”
Vedomosti, April 16, 2017.
2 Ellen Barry and Sophia Kishkovsky, “Putin Takes Helm as Police Punish Moscow Dissent,” New York
Times, May 7, 2012.
3 “Russia Advances in Doing Business Rankings: World Bank,” Reuters, October 25, 2016.
4 Knowledge@Wharton, “Investing in Russia: Is the Risk Still Too High?” Wharton School, University of
Pennsylvania, February 27, 2017.
3 Foreign Policy Research InstituteRussia Political Economy Project
The Business Climate
in Russia
For many firms, doing business in Russia the exchange rate have had significant
negative effects on the Russian economy.
is far from easy. In 2012, the World Bank
These two factors have added another
Enterprise Survey asked 4,220 managers
layer of problems for firms across the
to list the biggest obstacle they face in the
country.1 This section explores why
business environment. Figure 1 plots the
Russian firms complain about these
top six responses. High tax rates lead the
issues and what the government has
way, followed by problems concerning
done to address them. Improving the
loans, corruption and weak investment
business environment requires sustained
in infrastructure, and human capital.
and effective government intervention,
Furthermore, since 2012, a dramatic drop
which to date has often been absent,
in oil prices and severe fluctuations in
4slow, or even detrimental. The Russian fluctuates widely, both from year to year
government has passed up numerous and from region to region, complicating
opportunities to carry out meaningful firms’ attempts to plan. An essential tax
structural reforms, opting instead for incentive today can disappear tomorrow,
a state-centric and few expect that government budgets
Russian approach to at all levels can survive prolonged
government
economic concessions to the business sector.
officials have
development that
also recognized Russian government officials have also
has held back
that businesses recognized that businesses are struggling
are struggling economic growth.
under the weight of high taxes and an
under the weight That said, some overbearing regulatory environment.
of high taxes and progress has A two-year tax holiday introduced
an overbearing been made—at
for SMEs in 2014 promised to spur
regulator least on paper—
entrepreneurship, and preliminary figures
enviornment. to improve the
from the first half of 2017 suggest that
business climate.
smaller firms are increasing their fixed
Perhaps surprisingly to those who capital investments more than larger
associate doing business in Russia first ones. In addition, federal authorities have
and foremost with corruption, 35.9% of taken steps to incentivize regions to pass
firms in 2012 reported that the biggest reforms favorable to investors of all kinds.
obstacle they face involves taxation. The Agency for Strategic Initiatives (ASI),
Reforms during Putin’s first term in office a nongovernment organization (NGO)
helped simplify and slightly lower the established by the federal government,
corporate tax rate, bringing it much has taken the lead. ASI has worked to
more in line with international standards. disseminate best practices from several
This move helped to usher many firms high-performing regions such as Kaluga
out from the shadow economy. But for and Tatarstan by creating road maps (i.e.
small- and medium-sized enterprises general recommendations to increase
(SMEs), the burdens are still officially investment) and inducing competition
quite high, particularly regarding the between regions through rankings and
contributions they must make to social grant programs. Regions now vie for
funds. Therefore, a significant portion investors by lowering their property
of SMEs still hide from tax collectors in taxes and streamlining their business
the informal sector. Tax legislation also registration procedures, hoping to attract
5 Foreign Policy Research InstituteRussia Political Economy Project
smaller firms to come out from the are viewed as only marginally profitable
black market and access government and very risky.
programs. More and more services
Through this malaise, Russian firms have
are being offered electronically, which
come to look towards the state for anti-
could theoretically reduce bribe-taking
crisis relief. Multiple initiatives by the
by officials. The diffusion of investor-
federal government have targeted several
friendly policies across the country
difficulties faced by the private sector.
has helped to reduce disparities in
The government has directed subsidies
regional development and claw back
to big firms at Firms now expect
administrative barriers.
risk Fof laying off the Russian
In 2008 and 2012, Russia’s economy workers, import government
was rocked by back-to-back economic substitution to intervene in
crises that have caused havoc for many regulations markets on their
companies. The country’s dependence help restrict behalf, fostering
on commodity exports, such as oil competition from a degree of
and metals, created an acute set of foreign firms dependence
vulnerabilities when prices for these (see Table 1),
that may prove
unsustainable over
resources fell. Currency rate volatility and preferential
the long run.
raised the prices of imports while also lending rates
exposing many companies that had to key sectors
borrowed significantly on international such as agriculture cushion the blow
markets to default risks. These shocks of being cut off from previous lines of
rippled through to other service credit. Russia has become the world’s
industries, causing aggregate demand largest exporter of wheat, fueled in large
to drop and bankruptcies to skyrocket. part by generous financial treatment
Inflationary prices have also strained from the state. Firms now expect
firms’ ability to afford inputs, both the Russian government to intervene
domestic and foreign. One consequence in markets on their behalf, fostering
is the extremely limited pool of capital a degree of dependence that may
available SMEs. Figure 1 lists “Access prove unsustainable over the long run
to Finance” as a key obstacle prior to (especially if economic conditions do not
the 2014 events, and the situation has improve).
only worsened since then. Banks see no
Unfortunately, the government has also
reason to work with smaller firms which
6looked to cut spending in many areas while sacrificing long-term investment,
vital for long-term economic growth, where the true scale of the damage might
including health, education, social not become apparent for years.
services, and transportation.2 Since 2007,
Finally, the scourge of corruption haunts
thousands of rural schools and hospitals
Russian business. Officially registering a
have been shuttered, with residents of
business can still be an arduous process,
many rural areas deprived of access to
even as the nominal number of days
kindergartens.3 Partnerships between
to start a business has fallen from 43
firms and universities to train workers
days in 2003 to 10 days in 2016.4 Once
are taking root in some regions, but these
registered, arbitrary, unannounced
efforts are not sufficient to close the gap
inspections can pile up, resulting in
between the supply of and demand for
burdensome fines or the extortion of
skilled workers. The Russian government
bribes. Regulations change unexpectedly,
faces the unenviable trade-off of
and often it is unclear which set of
subsidizing near-term economic stability
7 Foreign Policy Research InstituteRussia Political Economy Project
rules is being enforced. Moving goods in reforming other areas connected to
across borders and navigating licensing the ease of doing business. First, the
requirements can require substantial bureaucracy opened itself up to feedback.
off-the-books transfers. Winning state The public can now deliberate over and
procurement contracts, a vital source provide input on key regulations under
of revenue for SMEs, often requires the Regulatory Impact Assessment (RIA)
substantial kickbacks to bureaucrats. program. In addition, the government
A multipronged approach to many of has invested much effort in releasing
these problems has been underway incredible amounts of open data about its
since 2008: officials are now required activities. For a regime whose decision-
to publicly declare their income, civil making at the top of the hierarchy is
servants rotate between positions every so closed and often mysterious, the
3-5 years, and procurement procedures realms of quantitative data offered on
have been revamped to increase procurement, budget expenditures, and
transparency and weed out collusion. responsiveness to citizenry is striking.
But trust is low that these procedures Arbitration courts are also increasingly
and tougher rhetoric from leaders viewed as impartial guarantors of
against corruption will actually result in contracts, while new land registry
prosecutions, especially given the alleged procedures have clarified ownership after
scandals in the president’s own inner years of ambiguity. There is good reason
circle. to believe that along several dimensions,
starting and operating a business has
Even if many of the anti-corruption
become considerably easier due to
initiatives have failed to take root, Russia
concrete steps taken by the government.
has still achieved measurable success
Endnotes
1 Note that this survey was conducted five years ago. A more recent survey in 2016 confirms that
corruption, road quality, and tax rates still rank highly. “Leaders are the Same, but competition is
still high: investment rating of Russian regions- 2016,” TASS. June 17, 2016. http://tass.ru/pmef-2016/
article/3377120.
2 Kathryn Hille, “Russia Prepares for Deep Budget Cuts that May Even Hit Defence,” Financial Times,
October 30, 2016.
3 Marina Gristuk, “Shyotnaya Palata poshitala chislo skol y detsadov [Audit Chamber counted the
number of schools and Kindergartens],” Rossisskaya Gazeta, April 14, 2015.
4 World Bank Doing Business Project, “Time required to start a business (days),” https://data.
worldbank.org/indicator/IC.REG.DURS.
8The Nationalization of
the Private Sector
But perhaps the most troubling recent catapulted itself into a market economy.
Thousands of SOEs were privatized
development for Russian business
in just a few short years, some falling
sector is the renewed push government
into the hands of their communist-era
officials have made to take over valuable
managers and workers, while others
parts of the private sector. If during the
were controversially snapped up during
1990s business feared hostile takeovers
loans-for-shares1 auctions by oligarchs.
from rivals and rackets, the new threat
Very quickly, many of the country’s
to their business is the state itself. The
most prized assets, including valuable
private sector is not just reliant on the
oil and metal resources, were owned
state for subsidies and regulation, but
not by the average Russian citizen, but
also actively competing with it for profits.
instead by a small group of businessmen
The heightened level of state ownership
(oligarchs) who wielded immense
is due to two factors: an official policy
political and economic power. By 2000,
shift towards nationalizing large private
70% of Russian GDP was generated by
enterprises and unchecked corporate
the private sector, and the manner by
raiding by state officials.
which these assets were transferred still
Since 2004, the Russian government, stoked anger among the population. The
in one form or another, has overtly oligarchs that benefitted most from the
taken over many of the crown jewels chaotic market of the 1990s faced public
of the private sector. This recent turn scorn over the dubious means by which
to nationalization partially undoes they built their fortunes, which often
the monumental efforts undertaken involved large-scale corruption and even
in the 1990s to privatize the Russian overt violence. Many of these oligarchs
economy. Led by an intrepid set of took up charitable causes and did good
Western-inspired reformers after the works to try to erase the “original sin” of
fall of the Soviet Union, Russia rapidly their illegitimately acquired assets.2
9 Foreign Policy Research InstituteRussia Political Economy Project
Upon assuming the presidency in 2000, vis-à-vis the Russian government:
Vladimir Putin clearly understood the from supporting political parties that
popular support he would enjoy by challenged Putin’s consolidation of power
pushing back against the oligarchs and and threatening to sell his company to
reasserting the state. The government foreign investors to having personal
he inherited from his predecessor Boris conflicts with Putin. Ultimately, he paid
Yeltsin was widely viewed as weak a steep price: a nine-year jail sentence
and fragmented, plagued by oligarchic (later extended) and the expropriation of
infighting and prone to indefensible his assets, which later were acquired by
insider corruption. During his first years the behemoth state-owned enterprise
in office, Putin presented Russia’s richest Rosneft.
with simple terms: stay out of politics and
The Yukos affair was the turning point in
your fortunes will be secure. Those who
the Russian government’s approach to
dared violate this handshake agreement
big business. Other oligarchs, such as
quickly fell afoul of the justice system,
Boris Berezovsky and Vladimir Gusinsky,
as most prominently exemplified by the
had fallen out of favor several years
case of Mikhail Khodorkovsky and his oil
prior, losing many of their assets to
company Yukos, at that time the largest
individuals and entities closely connected
in Russia. Accounts differ over the exact
with the new Putin government. But
transgressions Khodorkovsky committed
Khodorkovsky’s arrest in 2004 signaled
not only that private
ownership acquired
during the 1990s was
no longer sacrosanct,
but also that the
federal government
would take an interest
in running these
companies. So began
the period of intense
nationalization when
many pillars of the
President Putin with Mikhail Khodorkovsky, chairman of the board of Russian economy
the Yukos oil company, December 2002. Source: Kremlin.ru returned to state
10hands and new SOEs took center stage. resources and manufacturing, which the
Table 2 (below) lists some of the key government was fearful of ceding control
moves the Russian government made to to private investors. Prime examples
take over private companies. include oil firm Sibneft, gas trader Itera,
car manufacturer AvtoVAZ, and United
Which private firms were targeted
Heavy Machinery. Moreover, the financial
during this nationalizing push? Scholars
health of the firms prior to their takeover
who have examined the determinants of
wasn’t an overarching factor: the most
some of the largest takeovers have found
profitable, highest grossing, and fastest
that political considerations dominate
growing firms didn’t get taken over.
economic ones.3 Firms nationalized
Instead, the Russian government went
by the federal government during the
after domestically owned firms (which
2000s tended to operate in “strategically
had been first privatized during the 1990s)
important” sectors, such as natural
that it viewed as essential to protecting
11 Foreign Policy Research InstituteRussia Political Economy Project
the country’s national interest. and loss-making many of the nationalized
companies had become. Privatization
Not only were private firms taken over
of the most While notionally
during this period, but many of the
attractive promising to step
state-owned giants that now dominate
SOEs would back from the
the Russian industrial landscape found
alleviate some private sector,
their footing. Upon acquiring Yukos-held
of the pressures the Russian
energy assets as well as other smaller government took
building on
firms, the moderately sized Rosneft measures that
government
metamorphosed into the country’s instead bail out
finances.
largest oil exporter. The government state-owned
Instead, the
also upped its stake from a minority enterprises and
opposite
to a majority share in Gazprom, while promoted further
seems to have
keeping in place a Soviet-era monopoly consolidation.
occurred.
on gas exports for its sole benefit.4 Forced
While notionally promising to step back
consolidations of smaller state-owned
from the private sector, the Russian
enterprises created a new behemoth,
government took measures that instead
the state corporation, as evidenced by
bailed out state-owned enterprises
United Aircraft Corporation and Rostec
and promoted further consolidation.
(which operates in the defense and
According to a report by the Federal
civil sector). Lastly, even one of the
Anti-Monopoly Service, the Russian
success stories of late-era privatization,
government and state-owned enterprises
the electricity sector, lost some luster.
are together currently responsible for
For all the time and resources spent on
70% of GDP.6
privatizing the electricity sector in the
early 2000s, regional producers, state- Besides nationalization, the government
owned enterprises, and even the federal has also turned a blind eye to the
government have crept back in, now escalation of pressure on private firms
controlling at least 40% of electricity coming from predatory state officials.
production. Corporate raiding (reiderstvo) has
plagued firm directors since the transition
Many observers believed that economic
from communism, but as of late, the
crisis might halt the nationalizing
raiders themselves appear to come
tendency.5 Both the 2008 and 2014
increasingly from the bureaucracy and
downturns exposed just how inefficient
the security apparatus. Entrepreneurs are
12advised to keep their businesses under intervention by state officials into a
the radar because once officials notice purported market economy imposes
lucrative assets, there are few defenses significant costs on the remaining private
against the devious tools they can employ (and foreign-owned) firms. First, weak
to expropriate property rights impede investment.
Access to
subsidies and funds. Trumped Because substantial time is often required
loan guarantee up bankruptcy for investments to generate profits,
programs often proceedings, firm owners must be sure that their
depends on tax inspections, stakes are secure and not vulnerable
knowing the and criminal to expropriation. Both nationalization
right bureaucrats prosecutions and politically connected raiding upend
in charge and either corner that certainty about the future of one’s
making the case directors to ownership claims, causing private firms
that one’s firms is negotiate an to huddle and protect what they already
working for both exit from their own, instead of expanding.
the public and own firms or
private interest. Next, SOEs enjoy unparalleled
lead to a state-
advantages in maneuvering within the
ordered transfer
Russian bureaucracy. As access to state
of assets. The problem has become
7
officials has become paramount to
so severe that in 2014 President Putin
earning profits and staying alive during
publicly cited statistics that 200,000
crises, no firms are better placed than
business-related economic crimes had
those with active officials working
been committed.8 The majority of those
as managers or populating boards of
accused (83%) lost their businesses as
directors. State-owned enterprises
a result, even though only 15% were
benefit from regulations that erect
ultimately convicted. Alliances with
barriers to entry into their sector,
the media and non-governmental
such as Russia’s protectionist law that
organizations, membership in business
restricts foreign investment into strategic
associations, and appeals to the judicial
industries. Access to subsidies and loan
system may help protect assets against
guarantee programs often depends
other private sector rivals, but quickly
on knowing the right bureaucrats in
lose their fangs in battles with politically
charge and making the case that one’s
connected raiders.
firm is working for both the public
This unprecedented degree of and the private interest. In 2016, the
13 Foreign Policy Research InstituteRussia Political Economy Project
government demanded that half of the are protected and have the dominant
profits of all state-owned companies go market share?
back into government coffers (prior to
Every so often, Russian officials from
that, companies paid no less than 25%,
various ministries announce a new
negotiated on an individual basis).9 These
commitment to privatizing some of the
financial contributions then bolster the
largest SOEs, such as VTB and Russian
SOEs’ arguments that they should be first
Railways. Timetables and even specific
line to receive assistance and preferential
companies are put forward, stirring
treatment. Firms such as Gazprom and
interest from international funds looking
Rosneft have tried to push back against
to win access to some of the prized
the order to share profits, so far with
varying success.
By taking over large firms in the
most vital sectors of the economy,
nationalization has also decreased
the level of competition within the
market by creating only a handful of
winners in each industry, all backed
by the state. In some instances, SOEs
enjoy complete monopoly power.
This leads to potentially destructive
market consolidation. Consumers are
forced to pay higher prices; innovation
is stymied; and income inequality
increases. Finally, the monopolization
of the economy by state corporations
prevents the emergence of small- and
medium-sized enterprises. As drivers
of innovation and employment growth,
SMEs are vital to stimulating economic At the opening ceremony of the new
growth and keeping an economy deep-water terminal at the Rosneft’s Tuapse
Oil Refinery. Vladimir Putin, Rosneft Chairman
competitive internationally. How can
Igor Sechin (left) and a Rosneft employee
new firms compete with well-connected, pressed the symbolic start button for loading
subsidized SOEs whose property rights the first tanker. Source: Kremlin.ru
14companies. The reasons given behind the plans are shelved, promises are walked
change in policy run the gamut. For one, back, and privatization stutters. Table
privatization could help fill government 3 (below) lists the privatization plans
coffers at a time of low energy prices and put forth in 2013 and documents the
export revenues. Reports of waste and relatively few sales that have occurred
overemployment in SOEs fill domestic since then. First, officials argue that
media, leading to an inefficient allocation the government should sell the
of resources and slowing growth rates. companies after crises have passed and
Moreover, egregious corruption scandals assets command higher prices on the
pull back the curtain on how irresponsibly international market. But disagreements
many of these enterprises are managed. also erupt over the procedures by
Currently, the more liberal technocrats which shares in SOEs should be sold
in the Russian government appear to off, such as who would be allowed to
have won the upper hand, promising buy stakes and how much management
to reverse many of the destructive control the government would yield. The
economic policies of the post-Yukos era. perception of privatization in the 1990s
as unjust and potentially damaging to
However, time and time again, these
15 Foreign Policy Research InstituteRussia Political Economy Project
the Russian national interest colors the managers and building partnerships
government’s approach. While some in (without selling stakes) with foreign
the government want to see Western firms. Individual ministries lobby hard to
investors bring management know-how prevent the presidential administration
and technological innovation to privatized from putting their main properties up for
firms, others see the potential for foreign auction, fearing that the loss of revenue
actors to undermine state sovereignty will curb their power and influence
and control over revenue streams. Some within the federal government. Both
officials worry, for instance, that they are the Transportation and the Agriculture
getting a raw deal by cozying up to China, Ministry have worked to protect their
which in their view has taken advantage key assets.10 It is also unclear whether
of Russia’s weak economic position. sufficient foreign demand exists to buy
up minority shares given concerns over
These distinct sources of resistance
future threats of expropriation and the
do not bode well for the prospects of
risk of violating international sanctions.
further privatization. The government
Most of the attractive companies are
claims to be fixing the problems from
currently prevented from accessing
within by replacing underperforming
Western credit markets, which, for
16international investors, presents a clear have come to dominate a variety of roadblock to meaningful expansion (see critical sectors, with the government Table 4 for a list of some of the most time and again declining to privatize prominent firms currently targeted by or step back from this high degree of U.S. sanctions). Russian officials claim economic intervention. The competitors that they are waiting for the price of oil for the remaining private and foreign to rebound and the budgetary gains firms are often entities connected to from selling stakes to increase. But even the government. This increases the under that scenario, privatization is still importance of political connections and unlikely: why would officials part with the shapes the strategies these companies enormous revenue streams earned from use to survive and get ahead in such a $100 barrels of oil? tilted marketplace. The past decade has seen a significant expansion of the government’s role in the economy. When the Putin first came to power in 2000, most of the economy was in private hands. Since then, SOEs Endnotes 1 Alessandra Stanley, “Russian Banking Scandal Poses Threat to Future of Privatization,” New York Times, January 28, 1996. 2 Timothy Frye, “Original Sin, Good Works, and Property Rights in Russia,” World Politics 58:4, 2006, pp. 479–504. 3 Lucy Chernykh, “Profit or Politics? Understanding Renationalizations in Russia,” Journal of Corporate Finance, 17, 2011, pp. 1237-1253. 4 Gazprom lacks, however, a monopoly on the export of liquefied natural gas. 5 Ivana Kottasova and Alanna Petroff, “Putin prepares Russia for massive privatization drive,” CNN, February 2, 2016. 6 Ekaterina Mereminskaya, “Konkurentstiya ne stala bolshe [Competition has not become greater],” Vedomosti, April 16, 2017. 7 Sarah Lain, “Russia’s Corporate Raiders Add to Threat from Sanctions,” Financial Times, August 9, 2017. 8 Mikhail Fishman, “Business Under Pressure: Putin Meets With Entrepreneurs, Law Enforcement,” Moscow Times, March 23, 2016. 9 Ben Aris, “Russian companies seen paying some of highest dividends in emerging market world in 2017,” BNE Intellinew, January 5, 2017. 10 Konstantin Gaaze, “How the Battle for Russian Privatization Was Fought and Lost,” Moscow Times, October 3, 2016. 17 Foreign Policy Research Institute
Russia Political Economy Project
Strategies for Acquiring Political
Influence
Given the many obstacles to doing in the hope that their preferred
candidate returns favors while in office.
business in Russia, the most successful
Contributions can take the form of money,
private companies have been forced to
votes, or even helpful information,
adapt to a new reality of state capitalism.
helping to create a dependence of the
Whereas the late 1990s and early 2000s
candidate on business interests for their
were marked by roughly on par exchange
success in office. After elections have
between the business sector and the
passed, firms lobby politicians on specific
state, the power balance between the
issues either individually or under the
two sides tipped after the Yukos affair.
aegis of a business association. Lobbying
Even a prolonged economic crisis has not
is a perfectly legal way for firms to get
shaken this hierarchy. Governments at all
their interests heard by legislators and
levels in Russia have undue influence to
regulators. Acknowledging the necessity
shape the profitability and expansion of
and usefulness of allowing special interest
firms. Private firms must not only remain
influence, many governments in the West
on good terms with state officials, but
regulate how campaign contributions
also learn how to coax needed assistance
and lobbying are conducted, demanding
and preferential treatment. Effective
transparency and documentation to
corporate political activity is vital to
prevent conflicts of interest.
survive (and hopefully thrive) in a state-
centered business environment. Russian elections are expensive, and
much of the money used to fund them
In most developed countries, business
comes from private and corporate
interests adopt one of two political
donations. Although campaign
strategies to gain the benefits they
contributions by firms are documented
need from the government. First, firms
and monitored by the Central Election
can contribute to electoral campaigns
Commission, the official receipts of
18political parties pale in comparison to power.
the sums actually spent. This heightens
Beyond dark money, recent work on
suspicions that Russian electoral
Russian elections has also investigated
campaigns rely predominantly on
another channel through which firms
dark money. It is simply impossible
develop relations with government
to calculate the full extent of illegal
authorities: mobilizing their workers to
campaign financing in the country, but
vote for certain candidates. Winning
Through their both anecdotal
elections in Russia requires getting
ability to offer evidence and
citizens to the polls, an often times
rewards and academic
arduous task when ballot options are
punishments, research paint
limited and people prefer to stay out of
employers a grim picture.
politics. Thus, leaders of the ruling United
command Analyzing
considerable Russia party have resorted to other
transactions to
influence over the fly-by-night firms tactics to generate turnout. Through their
political behavior around elections, ability to offer rewards and punishments
of their workers. (bonuses, promotions, firings, etc.),
academics
employers command considerable
Maxim Mironov
influence over the political behavior
and Ekaterina Zhuravskaya document
of their workers. Getting employees
enormous sums of money flowing to
to turn out helps firms demonstrate
gubernatorial candidates from private
their commitment to the survival of
firms; in return, these firms receive state
the regime and puts them in line for
contracts after their preferred candidates
preferential treatment down the line.
win.1 Golos, a prominent NGO in Russia,
Surveys conducted after the most recent
also uncovered that firms officially
national elections in 2011 and 2016
donating to the United Russia party
suggest that close to 25% of all employed
(Putin’s political party) were rewarded
individuals have encountered politics
with procurement streams after the
at their workplace, from candidates
elections.2 Analysts still don’t have a full
being allowed to hold rallies there to
grasp on the extent of corporate money
employers explicitly endorsing specific
fueling Russian politics, but seeing the
parties and providing transportation to
enormous pressure authorities place
the polls.3 Officials often inform firms that
on companies that try to donate to the
their ability to access subsidies and state
opposition, these funds appear important
contracts depends on employee turnout.
for maintaining the government’s hold on
19 Foreign Policy Research InstituteRussia Political Economy Project
However, the weakness of political a contribution Firms often
institutions in Russia, such as political or lobbying heavily invest
parties and absence of independent overture, a their resources
media, complicates firms’ decisions to politician will not and funds into
donate to campaigns and lobby officials. simply renege both politicians’
First, Russia has not yet passed an on the deal and campaigns and
official lobbying law that would both offer nothing in lobbyists, only to
sanction and regulate the practice. return. Interviews see little return on
Firms attempting to lobby lawmakers with Russian their investments
are technically operating in a legal businesspeople
and continued
isolation from the
grey zone, where they run the risk of suggest a
political sphere.
an aggressive prosecution (potentially marked degree
spurred by a helpful tip from their rivals). of skepticism
Some business associations, such as about the utility of adopting either of
Delovaya Rossiya and the Russian Union these strategies. Firms often heavily
of Industrialists and Entrepreneurs (RUIE), invest their resources and funds into both
purportedly claim to represent business politicians’ campaigns and lobbyists, only
interests in high-level dealings with the to see little return on their investments
government. In fact, the former head and continued isolation from the political
of Delovaya Rossiya, Boris Titov, was sphere. When pressured by officials
appointed business ombudsman in 2012, to contribute, private firms oblige, but
receiving greater authority to advocate working through intermediaries may be
for the rights of business owners. But the most cost-effective ways to gain
several years later, the achievements access to politicians.
have been piecemeal: thousands of
So what options do firms then have
entrepreneurs still sit in jail, accused of
beyond offering campaign contributions
having committed economic crimes, and
and lobbying? The most effective ways of
RUIE still works within fiercely defined
achieving access to government involve
limits set by the state.
what are termed “direct strategies,”
But even when lobbying avenues are when companies engage state officials
available, firms need to trust that the without the use of intermediaries.4
politicians they support, financially or One of the most prominent examples
otherwise, will follow through on their involves bringing in officials to serve on
side of the bargain. That is, after receiving the board of directors. This practice was
20commonplace during Putin’s first two Acquiring political connections has also terms as government entities insisted on become a family affair. Putin’s team has having personal representation within now been in power at the federal level companies after taking minority stakes. In for nearly 18 years, and many central 2011, former President Dmitry Medvedev figures are pondering their next steps signed a law to outlaw state officials from after serving in office. To insure against serving on the boards of SOEs, but it was future reprisals as well as to perpetuate subsequently reversed by Putin in 2014. the system they have developed, many of Bureaucrats now populate boards of these officials have assisted their relatives directors in sectors across the economy, into reaching high-level positions in providing some degree of assurance both the government and the private to ownership that the government sector. Table 5 displays several of these will be looking after their interests. connections, drawing on journalistic That protection comes at the cost of accounts that have tracked the careers prioritizing the state’s political interests in of these well-connected kin.5 The sons addition to pure profit-making ones. of former and current government 21 Foreign Policy Research Institute
Russia Political Economy Project
bureaucrats manage Russia’s largest but only must declare potential conflicts
diamond company (Alrosa) as well as of interest if they become a member
high profile oil exploitation endeavors of lower level legislatures. As a result,
(a partnership between Rosneft and roughly 40% of all regional legislators in
Lukoil) and Russia’s electricity grid Russia arrive into elected office straight
operator. Moreover, even completely from the private sector (see Figure 2
private companies that hire the relatives below for a map about how that figure
of ranking federal officials benefit from varies across regions). Serving in office
improved access to state procurement.6 opens up innumerable opportunities to
These relationships, so vital between help one’s firm, from drafting legislation
business and government, will literally be and regulations to protect their market
inherited by the next generation. share from competitors to pressuring
bureaucrats to tailor procurement tenders
The other important avenue for firm
for their firm’s benefit. Research has
directors to access policymakers is to
uncovered that winning a parliamentary
become one themselves. In Russia,
seat at the regional level can result in
businesspeople must stop operating
increases in firm revenue by roughly 60%
their firms personally when winning a
and profitability by 15% over the course of
parliamentary seat in the State Duma,
22a term in office. to exploit natural resources), while also
helping to protect property rights and
The line between public official and
ensure fairer treatment by inspectors and
private businessperson is exceptionally
regulators. Success in the business world
blurry in Russia, especially when
above a certain size threshold basically
extended family members are
requires that firms engage politically to
considered. The sophisticated methods
some degree, lest they become exposed
firms are using to ingratiate themselves
to a rainstorm without a roof.
with authorities help to bind the two
sides even more closely. Developing
effective political connections opens
doors to firm managers (such as access
to government largess and concessions
Endnotes
1 Maxim Mironov and Ekaterina Zhuravskaya, “Corruption in Procurement and the Political Cycle in
Tunneling: Evidence from Financial Transactions Data,” American Economic Journal: Economic Policy
2016, 8(2), pp. 287-321.
2 Organized Crime and Corruption Reporting Project, “Russia: Report Says Top Ruling Party Funders
Get State Contracts,” August 4, 2016.
3 Timothy Frye, Ora John Reuter, and David Szakonyi, “Political Machines at Work Voter Mobilization
and Electoral Subversion in the Workplace,” World Politics 2014, 66(2), pp. 195-228.
4 David Szakonyi, “Businesspeople in Elected Office: Identifying Private Benefits from Firm-Level
Returns,” SSRN Working Paper, 2017.
5 RBK “Kak sklyadyvaetsya kar’era detey rossisskyih chinovnikov [How the careers of the children of
Russian officials have been built],” June 6, 2017; and Dmitry Travin, “Putinskiy Sinecures” Rosbalt, March
21, 2016.
6 David Szakonyi, “Princelings and Political Rents: The Value of Nepotism,” Working Paper, 2017.
23 Foreign Policy Research InstituteRussia Political Economy Project
Looking to the 2018
Presidential Election
Given all these challenges, the Russian economy must go to the specific
measures taken by the government at the
expectation of a prolonged and severe
margins of the business environment. Not
downturn for the Russian economy would
every initiative has worked as intended,
not be unwarranted. However, instead
with wasteful subsidies and opportunistic
of economic collapse, the new norm has
cheating of regulations apparent on
been stagnation: a low, but steady rate of
multiple accounts. Moreover, many of
economic growth and little demonstrable
the most impactful structural reforms are
improvement in the wellbeing of the
still off the table, especially privatization,
average Russian citizen. Part of the credit
breaking up monopolies, and definitively
for the unpredicted durability of the
Vladimir Putin visiting the Yamal LNG plant, which accounts for a major share of Russian
Arctic shipping in December 2017. Source: Kremlin.ru
24rooting out corruption. But Russian show no signs of abating, and the
authorities have been able to stem some government will have to reform in order
of the economic bleeding by empowering to survive.
technocrats to identify and resolve some
These pressures raise significant
of the lower level blockages while also
complications for the next presidential
protecting promising sectors, such as
election and beyond. In March 2018,
agriculture and pharmaceuticals.
Vladimir Putin will presumably contest
The real question remains whether his fourth term (non-consecutive) in
these partial measures can prop up the office. In bailing out and protecting key
economy against a sustained dip in oil oligarchs that otherwise might have
prices and the long-term consequences financed a real challenger, Putin has
of international sanctions. The Russian bought himself and the regime some
government is already feeling the additional time. The financial incentives
squeeze of reduced revenue, and more for most of Russia’s richest individuals
and more, it is looking to borrow from to maintain the status quo are simply
abroad to cover its widening deficits. To too substantial to risk one’s empire
maintain even the current measly growth and face down a ruling party bent
rates, significant public investments are on prolonging its power. However,
needed in infrastructure and human convincing economic elites not to jump
capital. Where those resources will ship and mobilizing voters to turnout to
come from is an open question if the the polls are two separate endeavors.
country cannot find sources of private Russian citizens have tolerated a deep
investment and diversified exports soon. downturn in their livelihoods since 2014,
The sanctions imposed on Russia by the and fewer and fewer believe that the
international community in 2014 will have current government (outside of the Putin)
their greatest impact five to ten years is adequately addressing their needs.
from now. Without access to loans and
The 2018 election thus presents a tough
technology, Russia’s oil companies will
test of Putin’s personal popularity and the
struggle to exploit their more isolated and
economic reality of life on the ground.
perilous reserves. Revenue from energy
We should expect the authorities to not
exports will fall, with aftershocks for
take any chances in ensuring victory
the host of other industries dependent
for Putin. This will involve even greater
on the natural resources sector. In all,
pressure on SOEs, private firms, and
the headwinds on the Russian economy
25 Foreign Policy Research InstituteRussia Political Economy Project
budget institutions to deliver the vote.
However, we know from the 2011-2012
election cycle that the more steps the
regime takes to manipulate their way
to electoral success, the greater the
potential backlash will be on the streets.
Moreover, get-out-the-vote efforts will
also strain budgets as expenditures will
rise and officials will look to pump the
economy to ensure citizens vote with
optimism, rather than disappointment. As
we have seen in years past, when money
gets tight, business-government relations
become extremely strained. With fewer
budgetary resources to siphon off
rents from, officials revert to predatory
behavior towards firms. The next year will
herald even more jockeying among firms
for political protection and a chance get a
piece of the ever-shrinking pie.
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