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2011

Philip Hanson
Risks in Russia – is the environment changing?

Electronic Publications of Pan-European Institute 6/2011

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Abstaract

Since the global crisis of 2008-09 Russian government policy statements have become more favourable to foreign business. At the same time measures of the business environment in Russia continue to depict it as poor. In 2010 and early 2011 the net outflows of private capital from Russia, observed in 2008-09, continued. Is the institutional setting for inward foreign direct investment in Russia being improved in line with policy objectives?

The questions addressed in this paper are the following. Has the new priority for ‘modernization’ in Russian policy led to an improvement in the business environment for foreign direct investors? If it has not already had this effect, is it likely to generate some improvement in business conditions in the near future? To answer these questions we will look first at the background to the new priority and at some recent policy developments, then at the contribution that technology transfer from abroad could make, and then at evidence of changes in business conditions and foreign direct investment flows.

Conclusions

To illustrate the weakness of the rule of law and the large bureaucratic impediments to business in Russia is one thing. To establish whether those circumstances are changing for the better, or can be expected to change for the better, is another.

It is often argued that Russia’s consistently low and often deteriorating ranking in international measures such as the EoDB assessments is enough to demonstrate that conditions are getting no better or are in fact getting worse. One might, in that vein, cite the fall from 116th to 123rd place between the 2010 and 2011 EoDB overall rankings.

The fall is certainly not encouraging, but it is not conclusive. If other countries are reducing the numbers of bureaucratic procedures and the length of time involved in getting a construction permit or arranging export or import documentation, and are doing so faster than Russia, then Russia’s ranking on those indicators falls; yet it is entirely possible that Russian arrangements may be getting no worse or even improving, but comparatively slowly.

The importance of bureaucratic impediments is two-fold: the larger they are, the more the damage to economic performance even if no corruption is involved; and the larger they are, the
more scope they offer for the extraction of bribes.

Russian bureaucratic impediments have not been getting worse. Second, there has been some improvement between 2006 and 2011 in four of the nine areas. Third, only one area, dealing with construction permits, shows an improvement between the 2010 and 2011 rankings. The likelihood therefore is that Russia’s failure to improve its overall ranking reflects a slow and patchy reduction in bureaucratic impediments, compared with other countries, rather than an absolute deterioration. At the same time there is little evidence – over an admittedly very short period – of improvement since the banner of modernization was hoisted. Certainly the likes of

Telenor and BP have not seen an improvement in their partners’ behavior. Should we expect such an improvement, nonetheless? The main ground for optimism is simple: the defects of a system that favors incumbent firms with good political connections and which thrives on bribery, are being discussed more openly than before, and one of the people talking in this way is President Medvedev.

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