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#5 - JRL 7041
Wharton School
January 15, 2003
Russias Struggle for Competitiveness

Is it safe to go back in the water for would-be investors in Russia? How far has Russia come? How far does it have to go? And what models will it follow?

Linked by video from the World Bank office in Moscow, the Wharton School in Philadelphia, and World Bank headquarters in Washington, D.C., two dozen educators and researchers attempted to answer those questions last month during a conference on Corporate Responsibility and Sustainable Competitiveness in Russia. The conference was sponsored by Whartons Zicklin Center for Business Ethics Research and the World Bank Institute.

Clearly, Russia is still struggling:

Its per capita GDP fell from 37th place in the world in 1970 to 56th place in 2000. Industrial productivity, 55% of the U.S. level in 1985, had fallen to 12% of the U.S. in 2001. Its income disparity is among the highest in the world. As recently as two years ago, it ranked last of 25 emerging countries on responsible corporate governance criteria.

At the same time, speakers at the conference agreed that Russia has made significant progress, particularly during the last year.

For example, Russias Code of Corporate Conduct, issued by the Federal Securities Commission in February 2002, creates a framework for corporate governance with an emphasis on transparency. Private business associations, including the Russian Institute of Directors, Club 2015 and the Investor Protector Association, also are increasing pressure for change. Buoyed by rising oil prices, Russia has reduced its debt and the Moscow stock market has been the worlds top performer over the past two years.

In addition, 43 arbitrators were recently selected to initiate an alternative dispute resolution program as a way to reduce lawsuits. ADR wasnt possible before because the laws werent developed enough, said Wharton professor Philip Nichols.

Sergey Sementsov, principal, director of business development for KPMG in Moscow, suggested that we are now witnessing a dramatic change from the so-called entrepreneurial economies to something else to [something] that more or less resembles the economies in European countries.

Daniel J. McCarthy, professor of business administration at Northeastern University, agreed. The Russians have been dealing with both the auditing side and the managerial side in having people behave as they should, he stated.

Nichols credited Russian President Vladimir V. Putin for pushing through a number of regulations and rules to boost Russias chances of joining the World Trade Organization. Nichols noted that it took northern Italy 200 years to transform its economy. Russia in 10 years [has made] amazing progress, he said. But 10 years is not 200 years.

The conference continued the debate about whether Russia will or should follow an Anglo-American corporate governance model, a hybrid of the European or Japanese forms, or something in between. The Anglo-American model puts shareholders interests first. The continental European model recognizes the interests of additional stakeholders, including workers, banks and other companies or partner firms.

Anne Simpson, program manager for the World Banks global corporate governance forum, predicted Russia will become more like the Anglo-American model over the next decade. The forces for convergence include the need for capital and the drive for competitiveness, Simpson said, adding that the business community is looking for functional reform board oversight of managers, protection for minority shareholders. Russia has been innovative. Issues like takeovers are being discussed, which are quite revolutionary in continental Europe.

But McCarthy and Sheila M. Puffer, professor of international business at Northeastern University, predict that although Russia will continue to absorb international influences, it will evolve into a uniquely Russian form, reflecting the countrys traditions, values and culture. In upcoming papers in the European Management Journal and the Journal of World Business, Puffer and McCarthy predict that Russias mistrust of outsiders could lead to continued reliance on networks, perhaps resulting in webs of institutions similar to the Japanese kieretsus or the Korean chaebols. Social networks can be helpful in building trust, Puffer noted, but they can also lead to cronyism. This can cause a lot of problems with too many insiders helping each other out.

The role of worker collectives in enterprise decisions during the communist and perestroika periods, the professors add, could lead to worker representation on boards, as in Germany and some other countries.

Meanwhile, Russians and Americans have different attitudes on what constitutes ethical behavior, noted Puffer, who is also a fellow at Harvard Universitys Davis Center for Russian and Eurasian Studies. Layoffs, maximizing profits and large salary differentials between senior management and the lowest paid workers, all common in the U.S., are unacceptable in Russia. Conversely, Puffer said, Russians see no problem with favoritism, price fixing, ignoring senseless laws and regulations and manipulating data a legacy of the old Soviet system, when managers won bonuses by inflating their production numbers.

Puffer added that Russias high rate of tax evasion runs counter to the demands for transparency and accurate accounting of profits. The tendency to minimize the reporting of profits to pay fewer taxes is one of the stumbling blocks for disclosure, she said.

Yet Russia has also taken steps to reduce its red tape and the opportunities for government officials to demand bribes decreasing the number of fire and health inspections and cutting the number of business activities that need a state license to about 90 from several hundred. At the same time, however, Russian businesspeople dont see the Mafia and organized crime as major problems; major problems are the bureaucrats and the tax police, said McCarthy. Furthermore, public access to the voting records of legislators an important check on government corruption in the U.S. does not exist in Russia.

Ultimately, several speakers agreed, it is the force of the market that will encourage reforms. Svetlana Ivchenko, a member of the Institute of Urban Economics in Moscow, said she would like to see more research on the relationship between the business and social benefits of corporate social responsibility. There is a belief that companies that practice corporate social responsibility will be more successful in commercial terms, she said. But we cannot [yet] provide any evidence that this is true.

Two recent studies have linked corporate governance to market value, the cost of capital and size and vibrancy of a countrys capital markets. Puffer and McCarthy note that cellular provider Vimpelkom, the first Russian company listed on the New York Stock Exchange, had price-earnings ratio of 20 in early 2002, effectively quadrupling its market capitalization. Most Russian companies have P/Es of four or five.

Russian managers are quite pragmatic, said KPMGs Sementsov. If corporate governance provides a way to be listed on the New York or London Stock exchange, it will be [adopted] without a doubt.

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