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. Last Updated: 07/27/2016

Improving Business Standards in Russia

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As the Russian business community converged on London this weekend for the 10th Russian Economic Forum, there was cause for celebration. In the decade since the first forum, Russia has been transformed from a "transition economy" receiving support and aid from the West to an "energy superpower." At the same time, there will be plenty of discussion about the challenges of the next 10 years -- especially those faced by Russian multinationals looking to find their place in international business and the country. More generally, the country will have to try to integrate into the global economy.

With annual growth at more than 7 percent, Russia has one of the fastest rising economies in the world. According to Ernst & Young, mergers and acquisitions increased by 41 percent to a record level of $71 billion from 2005 to 2006. Russian international IPOs exceeded $18 billion. Direct investment by foreign companies reached more than $13.7 billion, almost doubling the figure for the previous year. More astonishing still, Russian companies have acquired almost as much abroad. Evraz's acquisition of Oregon Steel Mills, the RusAl, SUAL and Glencore aluminium merger, and acquisitions by telecoms, steel and oil companies in Africa and the former Soviet republics reached $13 billion last year. Russia is now the third largest foreign investor among developing countries.

The country's business reputation, however, doesn't match its economic success.

World Bank governance indicators place Russia near the bottom of the pile when it is compared with countries with similar credit ratings. Russian companies are the least trusted in the world, according to the Edelman Trust Barometer 2007. In a survey by the Economist Intelligence Unit commissioned by RusAl, the main concerns on the part of Western executives were the lack of corporate governance, lack of transparency and poor business ethics. Only 10 percent of respondents felt that Russian companies were world-class competitors.

Although it is difficult to estimate the precise cost to Russian business of such perceptions, there is evidence that mega-deals go awry in part because of this poor reputation. The attempted acquisition of Belgian steel giant Arcelor by Severstal and British energy supply company Centrica by Gazprom raised concerns in Western business and political circles about the impact of a Russian presence and might have contributed to their failure. Furthermore, the blurring of business and government interests, heavy-handed and unequally applied bureaucracy, weak legal institutions and accountability and uncertainty surrounding the presidential election in March 2008 all have a detrimental effect on the country's risk profile. This is no help for businesses seeking to compete on international markets.

While the West may welcome Russia's new export of petrodollars, there is distaste for some of the business practices that threaten to accompany them. Regardless of whether they are justified, Western perceptions of Russia, combined with the perpetuation of certain stereotypes (well-worn headlines such as "The Russians are Coming" spring to mind), have a potentially adverse effect on companies' ability to maximize or maintain their value during and after mergers or acquisitions or when listing on an international stock exchange. They can also contribute to the blocking or delaying of access to international markets.

Although it is not often reported publicly, some leading companies really do seem to have gotten the message about the importance of adhering to international standards. Standard & Poor's reports that 76 percent of the 75 largest companies have an audit committee, 77 percent are publishing financials under international financial reporting standards, independent directors account for 20 percent of the places on their Boards, and disclosure of ownership structures is becoming more widespread.

During a series of roundtables in Moscow titled "Corporate Governance in Practice" organized by the International Business Leaders Forum, and supported by Baker & McKenzie, Ernst & Young and KPMG, there was evidence that good business practices have gone further and deeper within companies than might have been expected. For example, mining giant SUEK has created a comprehensive internal audit management structure. Russia's third-largest oil major, TNK-BP -- 50 percent owned by BP -- is introducing an anti-corruption program at all levels of the company. Electricity utility Unified Energy Systems is going after corruption in the supply chain by developing an open and transparent procurement system to manage its 15 billion euros ($20.4 billion) of annual purchases. Alfa Bank, Russia's largest privately owned bank, and Troika Dialog, the largest private investment bank, have developed clear ethics standards, human resources management systems and internal communication networks with the aim of reducing fraud.

The approach of multinational companies working in Russia is also instructive. The uncompromising position of Alcoa-Russia's president, William O'Rourke (who is the corporation's former head of internal audit and environment, health and safety) on how and why he runs his subsidiaries in the Samara and Rostov regions according to international standards and not according to local customs shows clearly that multinationals can work honestly in Russia, even in an environment that is so much at odds with international legislation.

International business standards are beginning to have an impact locally through other channels. Companies are appointing international executives to senior posts. There is also a new generation of young Russian business leaders who are returning from the world's business schools, and a clear migration of executives from Big Four international financial services companies in Moscow to positions of responsibility in domestic companies, where the new professional class of executives is beginning to influence the management here. Although still a minority, their numbers in these companies are increasing and, for the first time, they are working on the understanding that the long-term benefits of creating a professionally run company with a clear commitment to corporate governance outweighs the costs.

It will take time, of course -- the process of introducing international business standards is still in its infancy. But the leading companies, foreign and Russian, have a vested interest in creating a level playing field for competition. By operating according to the highest standards in Russia, they can use their example, influence and purchasing power to insist that their employees, suppliers and customers adopt similar principles.

On the condition that emerging Russian multinationals play by these rules, Western business leaders and opinion makers should encourage them to engage more, not less, in the global economy. Indeed, by listing in London or making foreign acquisitions, companies are far more likely to import international business standards than export Russian corruption abroad. On the assumption that this process will continue and in the hope that future governments will be committed to implementing the rule of law, we can look with cautious optimism toward a 20th Russian Economic Forum, at which Russian companies will be celebrated as fully "emerged" and equal competitors in the global economy.

Brook Horowitz is executive director of the International Business Leaders Forum in Russia.