Where is Russia going?

September 10, 2014 Maria Girald

Written by Konstantin Pishchik

Following this legislative update, in November 2013 the Russian Ministry of Labour and Social Protection published a set of anti-bribery and corruption guidelines for organisations in Russia. These guidelines are based on the Bribery Act 2010 – Guidance, issued by the United Kingdom Ministry of Justice in 2010, and A Resource Guide to the US Foreign Corrupt Practices Act, issued by the United States Department of Justice in November 2012. For now it is still unclear how the Russian guidelines will be implemented due to their non-mandatory nature.

Russian anti-corruption experts report that the law and guidelines have already had a significant impact on the attitude of Russian companies towards corruption risks, with many starting to implement internal compliance policies and codes of conduct.

A popular Russian saying, ‘One step forward – two steps back’, accurately describes the current situation in Russia. Despite these developments and implementations, in March 2014 the OECD suspended Russia’s accession talks at the request of its 34 member countries after Russia’s role in the Ukrainian crisis and its support of Crimea seceding from Ukraine.

Russia tries to fight back as sanctions continue to pile up

In July 2014 the Russian Commission for Regulatory Support for Development of High Technologies Strategic Information Systems published a project for import replacement (encouraging national production) that estimates a loss of RUB85 billion (US$2.42 billion) each year on purchasing foreign software. The commission cites the example of IT giants like Microsoft, SAP, Oracle, Hewlett-Packard, IBM and Cisco as ‘robbing’ the country. Furthermore, according to members of parliament working in the Commission, foreign IT companies gratify kickbacks and offshore schemes in the Russian IT market. The Commission doesn’t specify the measures and restrictions that may take place, but promises to stimulate domestic IT companies through legislation.

This project is part of the Russian aim to switch to domestic software following companies like Microsoft, Oracle and Hewlett-Packard joining the sanctions on Russia.

On 16 July 2014 the United States and European Union hit Russia with the heaviest package of sanctions handed down so far. This time the targets were energy, financial and defence companies, including Russia’s largest oil producer Rosneft, Russia’s second-largest gas producer Novatek, and state-owned bank Vnesheconombank.

In his reaction speech Russian president Vladimir Putin said that ‘a sanctions regime has a boomerang effect’ and that there is little doubt that projects like the one above will be nurtured and encouraged by the Russian officials.

On the other hand, Russian businesses have no interest in further escalation. For example, head of the Russian Union of Industrialists and Entrepreneurs Alexander Shokhin has called on the Russian Government to take a cautious approach towards Ministry of Finance initiatives dealing with the ‘de-offshorisation’ of economy.

Another example is an interview given by Russia’s former minister of finance and deputy prime-minister Alexei Kudrin to ITAR-TASS on 22 July 2014. Kudrin claimed that the Ukrainian events were only a trigger for forces within Russia, and their eventual aim is to disconnect from the Western countries and reach an economic independence resembling isolation. Kudrin was surprised and worried about the level of anti-West rhetoric in Russia. He estimated that the Russian economy will continue stagnating and, if the sanctions are increased, the Russian economy will go into a recession next year. According to Kudrin, Russian businesspeople are worried about escalation and political responses that will cause losses and prevent future investments.

So far this year the loss of foreign investments in Russia is estimated at US$75 billion. On 25 July the Russian Central Bank raised key interest rates for the third time in five months in an attempt to slow down investors’ runaway. Russia is having an internal conflict between pro-Western and anti-Western groups of interests and every new sanction now means new reactionary legislation within Russia.

Conclusion

Following the recent events in Eastern Ukraine, further deterioration of the relationship between Russia and the Western countries seems inevitable.

The sanctions that have been imposed so far have dealt mostly with Vladimir Putin’s close circle of friends and officials who are involved in the Ukrainian events; however, in the wake of the MH17 crash, the European public are pushing towards imposing additional sanctions on Russia, with the United Kingdom, France and Germany already declaring that they will push for further sanctions.

Within Russia, many are in favour of further disconnecting from the West and developing relationships with BRICS countries instead. The implementation of anti-corruption legislation has been put on hold, with Russian officials focusing instead on trying to introduce new laws to detach the Russian markets from Europe and the United States. New sanctions that will be imposed by the European Union and the United States, and the new Russian legislation that will emerge in response, will require a reassessment of compliance programmes for foreign companies working within Russia.

Companies dealing with Russian interests should think about the following.

  • Due to the constant addition of more sanctions companies should consider a sanctions and export-control programme. Russian sub-contractors should be checked against a sanctions list – not just as a once-off check, but every single day as an ongoing check.
  • Companies should be prepared that any of their sub-contractors may be included in a sanctions list at any moment. Contracts need to be changed to talk specifically about sanctions and the effect of a contracted party being included on a sanctions list.
  • Many Russian officials run their companies and assets through family members; hence, due diligence must go beyond just looking at the actual person on the sanctions list. Companies need to be thinking about the relationships that the sanctioned person has, their family members, relatives, investment vehicles, and all property owned by that person.
  • Companies must build a contingency for sanctions and include this as part of their risk-management programme. They need to be thinking about high-risk areas, the effect that it might have on their business-interruption programme, and how it might affect their customers.
  • Companies should prepare themselves for anti-Western legislation to be implemented within Russia as a reaction to the sanctions. Such legislation should be monitored carefully and integrated immediately into compliance programmes.
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