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RUSSIA STILL MIRED IN CORRUPTION, RED TAPE

BY CURT HAZLETT

When the Finnish-Russian Chamber of Commerce published a guidebook for Finns doing business with their eastern neighbor, it minced no words. “If you have to give a bribe,” advised one chapter, “it has to be done discreetly, definitely without external witnesses, or rather by using a Russian frontman.” Brazen, da?

The Finnish government criticized the book for implying that bribery is a necessity in Russia, but this, apparently, was advice its readers could use. A survey of 158 foreign companies by Russia’s Consultative Council on Foreign Investment found that 71 percent say corruption is the country’s biggest obstacle to new investment. How big is the problem? Well, a 2002 study estimated that Russians paid an astonishing $36 billion in bribes — more than half of that year’s government spending.

Corruption has long been a part of Russian life, but it has never gotten more attention than now. With the country poised for a boom in foreign investment, particularly in the retail sector, the prospect of payoff demands and blackmail could have a chilling effect on economic development, sources say.

“It’s a significant problem,” said Ira Kalish, global director of consumer business at Deloitte Research in New York City. “On one hand, the formal rules governing retail investment in Russia are quite liberal. On the other hand, officials tend to be pretty arbitrary in interpreting the rules.” Since such leeway can become a breeding ground for bribery, a key part of the government’s anti-corruption effort is aimed at reducing the circumstances in which officials can make these kinds of subjective decisions.

Outright corruption is not the only hindrance to doing business in Russia. Sixty-six percent of the foreign companies in the council’s survey said administrative barriers were a big problem, 56 percent cited selective application of the laws, and 51 percent pointed to laws that conflicted with each other or were unrealistic.

In the case of Ikea, Russia’s largest Western retailer, bribery attempts on the part of government officials appear to have been common (story, Russia offers opportunity amid dangers). But Kalish says Ikea Russia CEO Lennart Dahlgren told him that the company’s biggest difficulty was getting goods through customs. And although concerns have been raised about the government’s respect for the rule of law (or its lack thereof), especially after the Putin administration renationalized Yukos, Russian’s largest oil producer, Kalish says that move stemmed from a desire to control natural resources. The government, he says, seems far less interested in controlling retail investment.

So corruption and red tape remain concerns, to be sure, but the positive aspects are considerable too, Kalish says. “There is a lot of low-hanging fruit in retailing, if you can operate with the same efficiency that you can in the West,” he said. “Western companies are confident that there’s a lot of money to be made.”