Russia And The Corruption Perception Index

Russia and the Corruption Perception Index

Analysis: Committee for Russian Economic Freedom The Russian government’s contempt for the Rule of Law and the simultaneous proliferation of corruption is a huge impediment to direct foreign investment for this key player in the world economy. The point was driven home yet again with the release of Transparency International’s 2009 Corruption Perception Index. This year Russia ranked 146th out of 180 countries, falling behind the likes of Libya, and Pakistan and Honduras. According to reports and US State Department statistics, it is estimated that corrupt officials rob Russia of an estimated $300 billion annually, a sum equal to 18% of Russia's gross domestic product. The response to the newly-adopted package of anti-corruption legislation initiated and promoted by President Medvedev and passed by the Duma in December 2008, has been tepid at best. Medvedev recently admitted publicly that corruption is endemic in Russia. The excessive role of government in the economy and business sector, which spurs the supply side of corruption, aggravates the problem.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

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By comparison, the chart shows that in 2009 Georgia posted a score of 4.1 up from 3.9 in 2008, illustrating that that country’s corruption reform efforts continue to be highly effective in earning domestic and international confidence and improving the country’s image. Brazil, China and India, part of the BRIC emerging markets block, consistently score higher than Russia as well.

Russian Economic and Investment Issues • • • •

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Russia expects to see a worse fall in economic production this year than initial forecasts, with the country now preparing for a continuation of the economic crisis long into 2010. Russia suffers from minimal domestic financial intermediation because inept state banks dominate the financial market President Medvedev announced in May wide-ranging budget cuts previously put on hold, and conceded that Russia was far from out of the economic crisis. For the Russian government, investor perception of Russia as a high-risk country is a very serious issue. One of President Dmitry Medvedev's key programs is to create a diverse economy and to encourage a higher level of foreign investment. In July 2008, he urged the government to put an end to the bureaucratic practice of creating "nightmares" for businesspeople, such as needless inspections and various extortion schemes to force businesses to pay bribes to bureaucrats to stay in business. In October 2009, Carrefour, the world’s second largest retailer withdraws today from Russia, citing an absence of growth prospects in the short- and medium-term just months after opening its first store in June 2009. IKEA, in June 2009, declared a moratorium on investment in Russia after the CEO declared that he refused to be extorted.

Impact of the YUKOS Affair and the Khodorkovsky Trial on Russia’s Economy and Foreign Direct Investment • • • • •

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As the trial progresses it has become increasingly clear that the systemic corruption in Russia’s legal system is threatening the sustainability of every business in Russia and deterring the foreign investment so desperately needed. International investment and trust in Russia have been undermined as a result of the frenzied burst of tax terrorism and state-backed raiding of private property, the extent of which has been highlighted by the prosecution’s case against Khodorkovsky. The respect of property rights and international agreements which protect investors is needed if Russia wants to pull itself out of its downward economic spiral. The YUKOS Affair and the trial of Khodorkovsky is a symbol of Russia’s problems: Ordinary, widespread business practices have been labeled by prosecutors in the trial as “criminal”, demonstrating a willful disregard for the most fundamental aspects of the oil and gas industry and the operation of either a major Russian or an international vertically integrated oil and gas company. Spanish investors in July 2006 sought compensation from the Russian government for the forced bankruptcy of YUKOS. The former YUKOS investors are seeking damages of up to $100 billion, claiming that the Russian government violated the Russia-Spain Bilateral Investment Treaty Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

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In October 2005 a UK company, RosInvestCo, filed an arbitration case in Sweden under the UK-Russia Bilateral Investment Treaty, arguing that it lost some $75 Million due to the Russian authorities’ unlawful expropriation of YUKOS. The company won a jurisdictional ruling in October 2007 and the case is now at arbitration on its merits A guilty verdict will send a damaging message to foreign investors, governments and international tribunals that the country is not ready to change, leaving Russia’s political and economic stability open to question. Releasing Khodorkovsky will send a clear signal that Russia is changing. Anything less than a release does not meet the demands of a nation needing to bring itself out of political and economic crisis.

Committee for Russian Economic Freedom Twitter @RusEconFreedom http://russiafreedom.wordpress.com/

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