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Europe & Central Asia

Russia risk report

Updated:

Corruption significantly impedes businesses operating or planning to invest in Russia. High-level and petty corruption are common, especially in the judicial system and public procurement. The business environment suffers from inconsistent application of laws and a lack of transparency and accountability in the public administration. Russiaโ€™s regulatory inefficiency substantially increases the cost of doing business and has a negative effect on market competition. The Russian Federal Anti-Corruption Law (in Russian) requires companies to actively implement anti-corruption compliance programs. However, compliance with these provisions in practice is lagging behind. Russian law criminalizes active and passive bribery, facilitation payments, gifts and other benefits. However, effective enforcement of anti-corruption legislation is hindered by a politicized and corrupt judicial system.

Legislation Summary
Russia Compliance Guide

Judicial system Very high risk

Companies dealing with the Russian judicial system contend with high corruption risks. Corruption in the courts takes many forms, including bribery and the fabrication of evidence (ICS 2016). Bribes and irregular payments are widely exchanged in return for favorable court decisions (GCR 2015-2016). Even though the law provides for an independent judiciary, judges are subject to undue influence from politicians, the executive branch, the military and other security forces (HRR 2016); this is particularly true for the lower-courts (BTI 2016). Corruption is prevalent in high profile or politically sensitive cases, furthermore, local courts often favor local politicians when settling disputes to the disadvantage of civil rights (HRR 2016, BTI 2016). Independent dispute resolutions can be difficult to obtain (ICS 2016). Business executive do not perceive the courts as independent and describe the legal framework as inefficient in settling disputes and challenging government regulations (ICS 2016). Other obstacles to effective dispute settlement are frequently changing laws, decrees and regulations, often leading to an overlap or conflict in practice (ICS 2016). While court rulings in inter-firm cases are perceived as fair, those against state agencies are not (BTI 2016). Thus, companies are advised to include foreign arbitration clauses in their contracts to minimize the role of the Russian legal system (Export.gov, Jun. 2016).

Commercial disputes previously fell under the purview of the Court of Arbitration, however, following an amendment to the Constitution, the court was merged with the Supreme Court, broadening the jurisdiction of the latter to rule in criminal, civil and commercial cases (Russian News Agency, Feb. 2014). The merger excluded most former Supreme Arbitrage Court judges (Export.gov, Jun. 2016). Russia has signed and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and is also signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

In a recent retrial, and perhaps one of the most illustrative cases of political influence over the courts, the prominent opposition leader and potential 2018 presidential candidate, Alexei Navalny, was handed down a five-year suspended prison sentence for embezzlement by a provincial court in Kirov. The conviction effectively bars Navalvy from running in the 2018 presidential election. Navalvy was initially sentenced in 2013 in connection with allegations that he had embezzled USD 502,700 worth of timber from the state-owned company Kirovles. However, Navalny appealed the sentence, and following a ruling issued by the European Court of Human Rights describing Navalnyโ€™s trial as unfair, the Russianโ€™s Supreme Court overturned the conviction in 2016 and sent it back to Kirov for retrial (OCCRP, Feb. 2017, Russia News Agency, Feb. 2017).

Police Very high risk

Corruption is endemic in Russia's law enforcement (OECD 2014). Credible evidence suggests that police officers arbitrarily imposed heavy fines or extorted bribes from unregistered persons (HRR 2016). The Russian police are considered unreliable in protecting companies from crime (GCR 2015-2016).

Public services Very high risk

Corruption is a high risk in the public services sector. Bureaucracy, corruption and a lack of funds, render the operations of the public administration erratic (BTI 2016). In effect, companies consider corruption as the biggest obstacle to doing business in Russia, and very often encounter irregular payments and bribes when applying for public utilities (GCR 2015-2016). Reportedly, nine out of ten entrepreneurs have encountered bribery at least once, with the average bribe for all purposes reaching USD 9,810 (OECD 2015, HRR 2016). In fact, companies reported that bribery was so widespread in some regions of the country that it was considered as a convenient alternative to administration compliance (OECD 2015). Compliance with regulations can prove to be a daunting task for companies as rules frequently change, are inconsistently interpreted and applied by different officials and jurisdictions, and can contain conflicting provisions (ICS 2016). The decision of one official or jurisdiction may be contested or overruled by another (ICS 2016). Hence, companies are advised to seek local counsel when setting up commercial operations in Russia (ICS 2016).

Starting a business in Russia takes around 11 days and is less costly than the regional average (DB 2017).

Land administration Moderate risk

Except for the annexed region of Crimea, there are few reported risks of corruption in Russia's land administration sectors. However, considering the problems of bribery and corruption in other public services, companies should be aware that corruption might occur in this sector as well. Property rights are adequately defined in the legislation, but effective enforcement remains a challenge (BTI 2016). The provisions are not consistently implemented or adequately safeguarded (BTI 2016). In strategic sectors, such as the oil industry, the state systematically reduces the share of private owners through administrative pressures, leading to confiscations or negotiated sales (BTI 2016). Foreign investors cannot own real property located in border areas or specifically assigned territories (ICS 2016). Likewise, only 50% of a plot of agricultural land can be purchased by foreigners or foreign legal entities (ICS 2016).

Investors should beware of expropriation risks, as these are particularly common at the sub-federal level, where authorities have failed to protect investorsโ€™ rights due to local government interference and poor enforcement of court decisions. In one case, taking place in Moscow in early 2016, the government demolished almost 100 businesses within less than three months' notice on charges of violation of municipal regulations on building codes and land use (ICS 2016). Many of the businesses had been in operation for more than 20 years (ICS 2016). In several other cases, the property of successful competitors was expropriated by well-connected business people or civil servants through the abuse of law enforcement agencies, tax authorities or inspections (BTI 2016).

Since Russia annexed the previously Ukrainian peninsula Crimea, the region has suffered from worsened corruption and land grabs (AlJazeera, Sept. 2015). As properties of the Ukrainian institutions and oligarchs are nationalized, and Russians rush to buy land, ownership rights are scrutinized and disputed, and local businessmen report difficulties when registering their companies under the new Russian jurisdiction (AlJazeera, Sept. 2015).

Tax administration Very high risk

The tax administration carries high corruption risks for companies. Tax rates and regulations are among the most problematic factors to doing business and companies report that bribes and irregular payments are often exchanged when meeting with tax officials (GCR 2015-2016). Police officers and prosecutors can legally initiate tax cases, even if the State Tax Authority has not determined a tax violation, leading to concerns, particularly among SMEs, over potential abuses and corruption (ICS 2016). Having aligned the tax administration with OECD standards, Russia has simplified paying taxes for businesses (ICS 2016). Nevertheless, multiple audits and requests for documentation continue to hamper businesses (ICS 2016).

Dealing with tax payments in Russia is less time-consuming compared to the regional average (DB 2017). Furthermore, most tax payments are filed online, decreasing the possibilities of bribery through physical encounters (DB 2017).

Customs administration Very high risk

Companies operating at the Russian border face high corruption risks when importing and exporting (GETR 2016). Companies report that the border administration is inefficient and non-transparent, with irregular payments and bribes being commonly exchanged (GETR 2016). When exporting and importing, border compliance is much more costly and time-consuming in Russia compared to other neighboring countries (DB 2017).

Public procurement Very high risk

The public procurement sector in Russia carries high corruption risks for investors. Bribes, kickbacks and other irregular payments are often exchanged to obtain public contracts and licenses (GCR 2015-2016, HRR 2016). Companies report favoritism in decisions of government officials, and public funds are frequently diverted due to corruption (GCR 2015-2016). The government introduced mandatory tenders, which have improved procurement regulations and the transparency of the process; however, the latter still remains complex and protracted and may be subject to manipulation (BTI 2016, ICS 2016). Businesses are likely to experience approval for investments depending on their relationships with government officials and demonstration of commitment to the Russian market (ICS 2016). Tenders are organized and published online on five official electronic trading platforms (OECD 2015). Bidders are vetted and unfair bidders are blacklisted, however, companies previously involved in corruption are not barred from bidding on tenders in Russia (OECD 2015). In certain sectors, the government has implemented local content requirements (LCR), a measure that requires businesses to source a certain percentage of intermediate goods from domestic manufacturers (ICS 2015). LCRs are especially prevalent in government procurement (ICS 2016). Information regarding public procurement regulations are available on the official public procurement website (in Russian). Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in the procurement process.

In mid-2015, Vladimir Yakunin resigned as head of the state-owned company, Russian Railway, reportedly under pressure from the president, as it was revealed that Yakuninโ€™s son had used Russian Railways' resources to further his own business interests (NiT 2016). Yakunin was not charged with a crime, however, the case sheds light on the extent to which heads of state-controlled companies have access to abuse public funds with impunity (NiT 2016). Both Yakunin and Igor, heaf of state-owned company Rosneft had resisted disclosing their income until President Putin pressured to do so (NiT 2016).

Natural resources Very high risk

High-levels of political influence in the energy sector creates a risk for businesses in Russia. Russia is among the largest oil producer but due to deficient government reporting, ambiguous laws and a weak judicial system, there is a lack of contract and revenue transparency in the extractive sector (RGI 2013). The economy suffers from graft and a misuse of billions of dollars in public revenue from energy sales; however, the government shows little intention of fighting the issue and is oftentimes a beneficiary (NiT 2015). The oil and petrochemicals sectors are dominated by the interests of government and oligarchs members (Reuters, Aug. 2015). As of recently, senior government officials are allowed to serve on boards of state-owned energy companies, and Rosneft, Gazprom, and Transneft now have Ministers and Deputy Prime Ministers on their boards (ICS 2016).

Legislation

Despite Russia's comprehensive anti-corruption legal framework, enforcement is inconsistent (HRR 2016). Government officials often engaged in corruption with impunity (HRR 2016). The Federal Anti-Corruption Law criminalizes active and passive bribery, abuse of office, conflict of interest, commercial bribery, trading in influence in the public and private sector, as well as corruption by agents. The law also prohibits facilitation payments and restricts gifts worth more than RUB 3,000 (CMS Legal, 2014). In 2015, the government reduced penalties for bribery; decreasing the fine for passive bribery to ten times the size of the bribe (down from 25 times) and to five times the size of the bribe for active bribery (down from 15 times) (HRR 2016). Money laundering is criminalized according to the Federal Law On Combating the Legislation of the Proceeds of Crime (Money Laundering) and Terrorist Financing. Further, provisions in the Federal Anti-Corruption Law stipulate that companies must affirmatively develop anti-corruption compliance measures, such as mechanisms for cooperation with law enforcement authorities, means for identifying, preventing and resolving conflicts of interest, and adopting a code of professional conduct for all employees. In a Transparency International (TI) Russia 2014 report, the NGO revealed, however, that only six out of the 50 companies included in the research had established codes of conduct, many of which did not even cover the basic elements of a compliance program (Norton Rose Fulbright, Mar. 2016). The companies included in Transparency International's 2014 report count among the Forbes 2013 list of the 'Largest Businesses in Russia' (TI 2014). There is no evidence suggesting that the Russian government has undertaken serious efforts to curtail bribery committed by Russian companies abroad (Norton Rose Fulbright, Mar. 2016). Companies are advised to use the Russian Law Compliance Guide.

State and municipal officials, heads of state corporations, and law enforcement officials are required to report any suspected corruption and are required to declare their own and their spouse's and children's income and property (HRR 2016). Nevertheless, financial disclosure laws were inconsistently enforced and violations were rarely acted upon (HRR 2016). Senior government officials are not prohibited from serving on the boards of state-owned enterprises, and several, including deputy prime ministers and ministers, have seats on the boards of the major state-owned enterprises in Russia (ICS 2016). Russia is a signatory to the United Nations Convention against Corruption and the Council of Europe Criminal Law Convention on Corruption, and has ratified the OECD Anti-Bribery Convention. Russia is also a member to the Council of Europe Group of States Against Corruption (GRECO).

Civil society

The media is heavily restricted and controlled by the state, and incorporated into the Kremlin's policy efforts (FotP 2016). The corrupt and biased courts are frequently used by officials and the government to harass and silence journalists trying to highlight abuse of office and corruption (FotP 2016). The few independent media outlets in the country face pressure from authorities and struggle to maintain operations (FotP 2016). This particularly applies to outlets exposing government abuses (HRR 2016). The government actively censored and restricted media content through the application of various laws and decrees (HRR 2016). Both foreign and national journalists face physical intimidation when working on sight; 70 attacks on journalists and bloggers have been reported during 2015, none of these included deaths (FotP 2016). In mid-2015, owner of the news website My Derbent, Vyacheslav Starodubets, was abducted, beaten and then released by four unknown men, following a work he had published on official corruption in the city of Dagestani (FotP 2016). According to law, citizens may request access to government information unless classified as confidential; nevertheless, in practice, courts oftentimes denied citizens such requests (HRR 2016). Access to the internet was heavily restricted by the government (HRR 2016). The media environment in Russia is described as 'not free' (FotP 2016).

A culture of participation in public life has not yet developed and views opposing the government are usually labeled as 'foreign agents' (FotP 2016). The law provides for freedom of assembly, yet these rights are restricted in practice (HRR 2016). Civil society organizations are too weak to have a substantial impact on the fight against corruption in Russia, while NGOs are systematically discouraged from actively engaging in any anti-corruption effort or public integrity issues (BTI 2016).

Sources