Russias Business Climates From the centrally planned Soviet system to a market-oriented economy: over the last 20 years

Russia has faced extensive modification of business and management. The dramatic changes have transformed Russia into an economic power with a GDP of $1 trillion. Being the biggest owner of global gas reserves and second biggest of oil reserves, todays Russia supplies 25% of Europes energy. Today its capital Moscow is considered the fourth most expensive city in the world (Krivobok, 2010). Despite its being a G8 member and a natural resource giant, Russia doesnt hold leading positions for its business environment (Puffer and McCarthy, 2011). In 2011 Russias Ease of Doing Business was ranked 120 out of 183 countries (World Bank, 2011). In this paper the author will present Russias overall business environment, its state of trade and foreign investments, as well as the level of corruption and political risks. It goes without saying that the easiness of starting a business is correlated with the countrys productiveness in corporate sector. Hence, the study will commence with the evaluation of startups in Russia. So, it takes 22 days to fulfill 13 formal procedures in order to start a business in Rostov-on-Don, and that is considered to be the shortest term among other Russian cities (World Bank, 2011). On the other hand, the country's capital and, by far, the most populous city Moscow has the most difficult conditions of entering into business sphere. In average, registering a startup business in Russian Federation involves 9 procedures that last for 30 days to fulfill them. According to the research carried out by the World Bank the easiness of opening a business in Russia was ranked 111th (World Bank, 2012). Registering a business is only the first step that an entrepreneur takes in any country. In fact, further development of business depends on other different conditions. What concerns Russia, the country has several unfavorable circumstances that hinder business growth there. Endemic corruption and low level of legitimacy of formal institutions are among the key factors that hamper the development of Russia's business environment. President Dmitry Medvedev stated

that fighting against corruption is a 'national priority project'. The fact is that malfeasance is a serious hazard to the country's prosperity. According to Transparency International Corruption Perceptions Index Russia is a highly corrupted country with a position of 154 out of 178 countries (Business Monitor International, 2012). Moreover, the results of the opinion poll showed that some 70 % of small business owners in Moscow stated that they pay bribes (Leon, 2011). Added to this, many private companies have rival businesses that belong to state or government officials, who easily can hamper the progress of their business (Leach, 2011). Along with high rates of corruption, foreign and domestic businesses suffer also from poor legal safeguards. According to BMIs Russia Business Forecast Report 2012, the juridical system in the country is far from being developed and dispute resolution mechanisms not properly established (Business Monitor International, 2012). Russia has a mass of contradictory, difficult and varying laws, decrees and regulations. Furthermore, political interventions can influence decisions in courts. Thus, all of the factors mentioned above have created an unpredictable business environment (Russia Country Review, 2011). Foreign investors who are cautious of these legal frameworks may address to corporate arbitration including the Arbitration Court of the Russian Federation and the International Commercial Arbitration Court. The latter can take hold of property before a trial to in order to stop premature disposal of assets. Besides, the International Commercial Arbitration Court is given enforcement authority in the banking sector which gives the power to achieve financial compensation. Besides the breakdowns in juridical system, Russia's intellectual property right protection is quite vulnerable as well. In other words, media piracy and the counterfeiting of copyright-protected and patented goods are among other unresolved concerns of the legal system. In spite of existing sentences for prosecutions, the verdicts are usually limited to fines or suspended prison sentences (Business Monitor International, 2012). Nevertheless, Kevin Willis, vice president of trade compliance for Tyco International, states that corruption, weak legal protection and bureaucratic inconveniencies shouldn't stop investors from

doing their business in such countries like Russia, since the rewards are worth all of that risks (Leach, 2011). In reality, there are undoubtedly lots of leverages that foreign entreprenuers can seriously benefit from. If there had been none, Russia would have been a country with solely domestic firms. The practice shows that the annual averaged 7% economic growth in the last decade, together with doubled real disposable incomes, have created favorable settings for entering into Russian markets. Moreover the appearance of a middle class in the country has proved the stability of Russian economy (CIA, 2012). Added to this the low personal and corporate income taxes are significant incentives for potential foreign direct investors (Business Monitor International, 2012). Indeed, the government has passed some reforms that have decreased the number and time of payments per year, as well as the total tax rate in the country (World Bank, 2012). However, it is widely acknowledged that the vast majority of Russian businesses in energy and natural resource sectors are ruled by oligarchs, who get a significant protection from the state (Frye, Timothy, Andrei Yakovlev, and Yevgeny Yasin, 2009). There have even been cases when international companies such as Royal Dutch Shell and Exxon were forced to take an action that was totally driven by Russia's national interest and favoritism (Business Monitor International, 2012). Thus the BMI report indicates that the activities of foreign investors can meet their opportunities in banking, retail, automobile and pharmaceutical spheres of the economy. Despite the fact that Russias foreign investment policy is generally favorable to attracting foreigners to do business in Russia, such factors like corruption, exchange rate instability and weakness of legal protection have created unfavorable conditions for foreign entrepreneurs. Nevertheless, it should be noted that unlike the drawbacks in Russias overall business climate, the government stays liberal and open to foreign investments, especially in manufacturing and service sectors (Business Monitor International, 2012). Unlike today's globalized world, where trading between countries is becoming more and more easy, trade barriers which are the significant part of Russia's protectionist policy, still challenge

other economies. The money, time and documents required for import and export are higher than those in OECD countries and in some cases even more complex than those in Eastern European and Central Asian economies (Euromonitor International, 2010). That is the basic reason why Russia's ease of trading across borders was ranked 160 out of 183 (World Bank, 2012). On the other hand, there is a big hope for future improvement of Russia's international trade sector which comes from the country's accession to WTO after a long-standing 18 years process (WTO, 2011). Researchers believe that foreign companies will benefit largely from easier access to Russia's growing economy. Specifically, the highest risk/reward rating is given to the retail sector, especially the food & drink market, as well as the autos industry. These sectors of economy are forecasted to attract foreign investors, which in the long-run will challenge Russian firms because of the intensified competition (Emerging Markets Monitor, 2011). Unlike lots of regulatory and formal inconviniences that exist for foreign business entities in Russia, which tend to slowly diminish, there are some cultural aspects of business management practices that do surprise oursiders. Many observers believe that Russian business culture and ethics are largely driven by informal cultural-cognitive institutions. Thus, the cultural imprints of Soviet and Tsarist past largely influence on modern business affairs. The old-boy network and personal connections are among those phenomena that Russian businessmen utilize quite often (Puffer and McCarthy, 2011). However some researchers have found notable differences in the informal rules of game between oligarch-dominated companies and non-oligarch ones. They found that the informal infrastructures were less collaborative in relationships between nonoligarch firms and the government. Moreover, they believe that the recent financial crisis will reshape the relations between businesses and the state making them more transparent (Frye, Timothy, Andrei Yakovlev, and Yevgeny Yasin, 2009). It is widely acknowledged that there are such businesses that are laborious and there are those that are capital-intensive. It has long been known that China used to attract investors due to its 'cheap' and vast workforce (Malcolm, 2011). However, the case is completely different in

Russia, where investors usually face shortages of skilled labor. Despite the 99.6% adult literacy rate, the country's information and communications technology (ICT), business management and medicine sectors are seriously affected from the lack of workforce with appropriate skills (Euromonitor International, 2010). Nevertheless, labor costs in Russia are considered to be low. 4,330 rubles, which is about US$ 139, is the minimum monthly wage in the country (Pitalev, 2009). Personal income tax is set to be 13% for residents and 30% for non-residents (Euromonitor International, 2010). In conclusion, summarizing all the sights of Russia's business climate covered by the author, it is evident that socio-political and economic performance risks are comparatively high in the country. Researches carried out by different authors and organizations indicate on high levels of corruption and bureaucracy and poor infrastructures that plague Russian business and society (Euromonitor International, 2011). Thus, Russia has gained a negative investment image in the West (Business Monitor International, 2012). Moreover, the IMF underscores the improvment of business climate and governance as the primary sources leading to Russia's economic diversification and growth (IMF, 2011). However the country's wealth in natural resources, the fast growing domestic market and economic growth perspectives are among those factors that attract potential foreign direct investors (Business Monitor International, 2012). Summing up, the author believes that the improvement of Russia's business environment lies in strengthening legitimate formal institutions and reducing endemic corruption and bribery.

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