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THE COMPETITIVE ADVANTAGE OF RUSSIA
It is foolish for people in the West to deny that Russia is a great power and that, in some ways, its influence has increased. ⎯ “Putin’s People,” The Economist, August 23, 2007
INTRODUCTION The Russian Federation (Russia) was the largest of the 15 geopolitical entities that emerged in 1991 from the Soviet Union. Despite a series of reforms initiated in 1992 to help the country transition from its centrally planned economy, Russia plunged into a deep recession that was exacerbated by a financial crisis in 1998. Tens of millions of people were thrust into poverty and a severe fall in the standard of living triggered an outbreak of corruption and organized crime. By 1998, Russia’s GDP had fallen nearly 40 percent from its 1991 level.1 It was not until 1999, following eight years of turmoil, macroeconomic stabilization and economic restructuring, that the economy slowly began to grow again. When Vladimir Vladimirovich Putin became president on December 31, 1999, Russia was the world’s tenthlargest economy and its foreign reserves stood at $8.5 billion. By 2007, the country’s economy had become the world’s eighth-biggest, with reserves of $407.5 billion.2 Russia’s GDP reached $1,290 billion in 2007, and grew at approximately 8.1 percent.3 With its improved economic performance, vast natural resources, a highly educated population of approximately 142 million people, and a position of increasing political influence in the world, Russia’s potential was great. Yet, supporters and critics alike remained cautious regarding the country’s burgeoning economic power. For one thing, Russia’s economy was heavily dependent on high prices for oil, gas, and other commodities that might not last. It was relatively weak in manufacturing, services, and high-technology industries. And both foreign and domestic investments were low, particularly compared with nations such as China. Furthermore, there were growing concerns regarding the government’s perceived reversal in attitude toward private investment in the country, increased media censorship, a general roll-back of political freedoms, and the progressively divisive role that Russia was playing in its relations with the United States and the European Union.
Katya Reuk, Victoria Chang, and Lyn Denend prepared this case under the supervision of Professor Bruce McKern as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some material was drawn from an earlier work by Sweta Sarnot. Copyright © 2008 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: email@example.com or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.
The Competitive Advantage of Russia IB-73
In May 2008, when Russia’s new president, Dmitry Medvedev, was inaugurated and Putin assumed the role of prime minister, western companies with interests in Russia faced great uncertainty. Would Putin’s hand-picked successor, under Putin’s powerful and watchful eye, continue to enact policies and take actions that would make the business environment increasingly unfavorable to foreign investment? Or, would the new regime chart a more liberal and democratic course for Russia that would enable the country to improve its global competitiveness and allow outside investors to participate in its prosperity? Russia had made great strides to improve its position in the world since the dissolution of the Soviet Union. Nevertheless, it remained to be seen whether the country, particularly under its current circumstances, could create and sustain lasting international competitive advantage, which many western critics believed would require a more democratic political regime. COUNTRY OVERVIEW Russia’s Post-Soviet History After the December 1991 dissolution of the Soviet Union, the Russian Federation became its largest successor state, inheriting its permanent seat on the United Nations Security Council, as well as the bulk of its nuclear weapons, foreign assets, and debt. Boris Yeltsin was elected president of Russia by popular vote in June 1991. However, by the fall of 1993, politics in Russia had reached a stalemate between Yeltsin and the parliament. In a dramatic speech in September of that year, Yeltsin dissolved the Russian parliament and called for new national elections and a new constitution. The standoff turned violent in October, with President Yeltsin ordering the army to respond with force to capture the parliament building. In December, voters elected a new parliament and approved a new constitution, which had been drafted by the Yeltsin government. The December 1995 parliamentary election produced an opposition-dominated State Duma (the lower house of the legislature), but six months later, Yeltsin—with financial help and media support from the country’s business elite (the oligarchs4)—won re-election in a second-round run-off against the leader of the communist party, Gennady Zyuganov. Widely criticized for presiding over a seemingly unstoppable increase in corruption and poverty, Yeltsin’s economic reform policies nevertheless laid some of the foundations for the increased prosperity Russia would enjoy in the 2000s. However, when a financial crisis in August 1998 undermined Yeltsin’s credibility, he resigned on December 31, 1999. In doing so, he designated Vladimir Putin, his prime minister at the time, as the acting president. This appointment was perceived as controversial by some, since Putin was a former KGB officer, head of the FSB (the KGB’s postSoviet secret police/intelligence agency), and relatively unknown before becoming prime minister.5 Putin achieved widespread popularity by stabilizing the government, in marked contrast to what many Russians saw as the chaos of the latter Yeltsin years. At the same time, the consolidation of state authority following Putin’s election as president prompted concerns as to whether Russia’s nascent democracy was being undermined. However, Putin’s strong-man tactics in the bitter Chechnya insurrection were electorally popular and, in March 2000, he won election in his own right as Russia’s second president (with 53 percent of the vote).6 Under his leadership the economy grew both because of rising oil prices and because Putin followed a reformist path,
The Competitive Advantage of Russia IB-73
further liberalizing the economy, stopping a spiral of hyperinflation, and cracking down on corruption and crime (including the power of the oligarchs). He also maintained Russia’s democratic institutions and moved closer to the West, particularly following the attacks of September 11, 2001 in the U.S., which allowed him to portray Russia’s war in Chechnya as part of a wider struggle against Islamist terrorism. In 2004, Putin was re-elected with nearly three-fourths of the vote.7 In September of that year, early in Putin’s second presidential term, a group of terrorists attacked a school in Beslan, a small town in the Caucasus region of Russia. More than 330 hostages, including scores of school children, were killed. Putin then proposed sweeping changes for consolidating presidential authority to fight terrorism, which raised a blitzkrieg of condemnatory reactions from the West. Some critics blamed the Russian military’s tactics for the heavy loss of life. Many of Putin’s subsequent actions reinforced western worries, such as the government’s closure of a prominent independent TV station, placement of extensive restrictions on the activities of non-governmental organizations, the abolition of elections for regional governorships, and the allegedly politically motivated arrest and trial of a former oligarch, which led to the destruction of the country’s largest private oil company. As one 2008 article stated in describing the raids and takeovers carried out by the Russian government against private firms, “The practice is so widespread, it’s impossible to list all the cases.”8 Critics further asserted that Putin was undermining Russia’s evolution as a liberal state and reversing the progress made on private ownership and media freedom under his predecessor and mentor, Boris Yeltsin.9 In parallel with these changing domestic policies, Russia began playing a more controversial role abroad, taking an increasingly confrontational position toward the U.S. and a more divisive approach to its relations with the EU. As one 2008 article described: Putin’s foreign policy—and, by extension, [new president] Medvedev’s—rests on two key assumptions and one strategic calculation. It assumes the United States is facing a collapse that is not much different from the collapse of Soviet power. It also assumes that the EU—despite being, in Russia’s view, a temporary phenomenon—is a threat to the Russian regime by its very existence as a postmodern empire. The calculation is that the next decade presents a strategic window of opportunity for Russia to position itself as a great power in the emerging multipolar world, while also securing the legitimacy of the regime, even if that means following a more assertive and confrontational foreign policy.10 While many were hopeful that Medvedev would take the country in a more liberal, democratic, and diplomatic direction, others feared that his regime, particularly with Putin exercising unprecedented levels of influence in the role of prime minister, would offer more of the same. While Russia’s promise (and its vulnerability) were widely recognized in the international community, the country was again, for the first time since the Soviet era, perceived as a growing threat: The paradox is that, faced with new Russian revisionism, the West is becoming nostalgic for the old Soviet Union…. In the words of one senior French diplomat, ‘The Soviet Union was easier to deal with than Russia is today. Sometimes the
The Competitive Advantage of Russia IB-73
Soviets were difficult, but you knew they were being obstructive in order to achieve an objective. Now, Russia seeks to block the West systematically on every subject, apparently without purpose.’ In other words, Russia is not simply a revisionist power—it is something potentially more dangerous: a spoiler at large. The Kremlin’s recent actions easily fit this threatening image.11 Political System In the political system established by the 1993 constitution, Russia was a democratic, federal republic. The government was structured into three branches: the executive, legislature, and judiciary.12 Russia was a federation, but the precise distribution of powers between the central government and the regional and local authorities was still evolving. The Russian Federation consisted of 89 components, including regions, autonomous republics, territories, and the two federal cities, Moscow and St. Petersburg. The constitution explicitly defined the federal government’s exclusive powers, but it also described most key regional issues as the joint responsibility of the federal government and the components of the Federation. The federal government, in the course of the 1990s, signed power-sharing agreements with many of these entities. However, Yeltsin’s encouragement of greater regional autonomy in the early to mid-1990s resulted in many regional leaders exercising disproportionate levels of power. As a result, Putin made reforming Russian federalism a priority. In 2000, he grouped the regions into seven federal districts, with presidential appointees established in Moscow and six provincial capitals. At his initiative, the Federal Assembly passed legislation making regional leaders subject to removal from office for failing to comply with federal law or the constitution. In March 2004, the constitution was amended to permit the merger of some regional administrative units. Another law, enacted in December 2004, took these policies further by eliminating the direct election of the country’s regional leaders.13 Instead, senators were nominated by the president and subject to confirmation by the regional legislatures. These and other initiatives were designed to strengthen the power of the center and to rein in regional leaders, some of whom had come to exercise almost unlimited authority in their own realms. Executive Branch Under the Russian constitution, the president and prime minister (chairman of the government) represented the executive branch.14 The president wielded considerable executive power and there was no vice president. The president nominated the highest state officials, including the prime minister, subject to the approval of the Duma (part of the much weaker legislative branch). The president could pass decrees without the assent of the Duma and was also head of the armed forces and the National Security Council. The president was elected for a four-year term and could serve a maximum of two terms. Legislative Branch The legislative branch, or Federal Assembly, was a bicameral body consisting of the Federation Council and the State Duma. The State Duma, the lower house, consisted of 450 deputies. Until 2005, half of these deputies were elected from single-mandate geographic districts and half on the basis of party lists. In the election of 2003, 100 of these seats had been won by independents or minor party candidates.15 However, these single-member constituencies were abolished in
16 In terms of their responsibilities. including a new Code of Criminal Procedure. there were 176 senators. budgets. authorized the president to pick these representatives. representatives of the Duma confirmed candidates for prime minister. adopted the federal budget.18 Unlike the State Duma. Despite these reforms. and between Moscow and the regional and local governments.The Competitive Advantage of Russia IB-73 p. and ratified treaties. customs regulations. Historically. the Federation Council. 2007). with its multiple political parties. 2002. remained subject to political influence in Russia. maintained that the policy shift toward a pure majoritarian system would exaggerate representation of larger political parties.20 By the late 1990s. Deputies were elected to four-year terms (the next election was scheduled for December 2. including the reintroduction of jury trials in certain criminal cases. and to participate in impeachment proceedings against the president.21 and judges were only beginning to assert their . and reduce incentives for development of new political parties. Senators were able to retain membership of their respective parties. which came into force on July 1. passed federal laws. undermine the representation of political and social minorities.19 Judicial Branch The 1993 constitution empowered the Constitutional Court to arbitrate disputes between the executive and legislative branches. however. Since the reforms of the early 2000s. and direct public attention and political resources outside of Moscow. although the constitution allowed the president to dismiss the Duma and call early elections in rare circumstances. which in other European countries were dealt with by administrative authority. on the other hand. and the ratification of international treaties). Russia’s upper house. was composed of senators elected by components of the Federation. to examine appeals from various bodies. Critics. the Council had enjoyed a relatively close relationship with the Kremlin and was criticized at times for easily passing laws according to the president’s wishes. which did away with party politics. As a result. they were instructed not to directly represent these views on the floor of the upper house. the Russian government had begun to reform the criminal justice system and judicial institutions. the Council relied on consensus politics to perform its work (cooperating with the State Duma to complete and vote on draft laws. The court was also authorized to rule on violations of constitutional rights. Russia’s judiciary and justice system were relatively weak. subject to the confirmation of the regional legislatures. Numerous matters. Russia’s capital city. Supporters argued that the new approach would simplify the Duma system. strengthen local representation. The new Constitutional Court Act of July 1994 prohibited the Constitutional Court from examining cases on its own initiative and limited the scope of issues it could hear. under the guidance of the chairman and the various committee and commission chairs.17 As noted. the Federation Council had a specific rule that political factions were not to exist in the upper house. In 2007. a new law adopted in 2004. President Putin had made judicial and other legal reforms one of his top priorities and had secured the passage of several key judicial reform bills. credit monitoring. 5 early 2005 as a result of a presidential measure adopted by the Duma.
”23 According to one article: ‘There was no election.’ said a young.25 another sign that Russia’s democracy was seriously weakened. including oversight of regional governors. Political Environment 2008 was an important year for Russia politically due to the country’s presidential election. and a Kremlin clone. For now. it was described as a “mere ritual. “Moscow has been rife with speculation about who will really be in charge ever since Mr. Medvedev is the first Russian leader since the tsars to have come from neither the security services nor the old Communist Party. while still president. However.22 When Russian voters cast their ballots on March 2. or that it will still be Mr. while also promising to become the country’s prime minister. while some feared that Medvedev would be little more than Putin’s puppet. Andrei Bogdanov. though. middle-class Muscovite. often with policy programs that were defined more by loyalty to key political players than by ideology. Those candidates allowed to compete by the Kremlin included the Communist Gennady Zyuganov. because there was no choice. the CEO of Yukos Oil. In spite of the general tendency to increase judicial independence (for example. who had been a vocal critic of the Kremlin. 6 constitutionally mandated independence from other branches of government. Putin. Putin chose his long-time protégé and lawyer as his successor. the situation looked somewhat different. In preparation for his move to the position of prime minister. “Mr. And judging by what he says. the clownish nationalist Vladimir Zhirinovsky. he announced that Dmitry Medvedev would become his successor. as each one carefully guarded its own powers and privileges.24 Critics further asserted that the Kremlin fixed the election in favor of its candidate by turning some voters away from the polls and massaging both the results of the vote and the turnout figures.”29 He also . others perceived him as more of a liberal. giving himself time to concentrate on strategic tasks. ‘I voted for Medvedev. the answer appears to be either that nobody knows.28 In 2008. he has some liberal instincts and an understanding of why the rule of law matters. The political system was also characterized by a plethora of parties. There were rising concerns that prosecutors selectively targeted individuals for political reasons.The Competitive Advantage of Russia IB-73 p. Putin. as in the prosecution of Mikhail Khodorkovsky. and transferred more mundane tasks to some ministries.’ Opposition candidates who might have proven more of a challenge to the Kremlin. such as Mikhail Kasyanov [Russia’s prime minister from 2000 to 2004 and a vocal opponent of Putin] were banned from running.”27 During Putin’s time in office. 2008. but as government officials protecting state interests. In December 2007. the role of the president increased in strength. including in his inaugural speech. who had served for two four-year terms. by raising the salaries of judges). As a result. On the one hand.”26 On the other hand. “gave himself extra powers. many judges still saw their role not as impartial and independent arbiters. the relationship between the president and the Duma was strained and often fractious. Putin. was banned from running for re-election under the constitution (although he would be eligible again in 2012).
Moreover. this underlines our core view that the transition to a new president will not signal a major shift in Russian government ideology. Even more crucial is that with a two-thirds vote of the Duma. although Russia’s relations with the EU were also poor. Relations between Russia and the U. the largest Russian company and biggest extractor of natural gas in the world.”32 This signalled that many citizens welcomed the continuation of Putin’s policies.30 Moreover. The EU asked Russia to agree to international rules on investment and trade in energy as part of an attempt to enter into a strategic partnership with the country. As one article put it: Becoming the chairman of United Russia will significantly enhance Putin’s political power beyond the authorities of the prime minister’s office. he will be able to initiate impeachment proceedings against the president and amend the constitution. that is the last thing Russia needs. it remained to be seen how this new political scenario would play out following Medvedev’s inauguration in May 2008: Maybe Mr. many EU countries (unlike the U. Putin's strength. Medvedev to lead alone. These strained relations reflected deep differences in the Putin era on issues such as national security and nuclear armaments. From a policy perspective.S. Medvedev will be a figurehead atop a strong Putin government. Importantly. More likely.31 According to at least one poll. Yet. “as many Russians want the two men to share power as say they would like Mr. Putin will continue to exert influence over matters of sub-national policy. building up Mr. yet Russia seemed reluctant to relax state control over the sector. continued to be a source of contention.The Competitive Advantage of Russia IB-73 p. or he (and those around him) will set about using the president's immense powers to try to sap Mr.33 Political Outlook at the End of 2008 As noted.S. Russia’s temporary suspension of gas supplies through Ukraine in 2006 and oil supplies through Belarus in 2007 exacerbated European doubts about Russia’s reliability as a source of energy. Either way.) were closely tied to Russia due to their close trade and energy links with the country: the EU satisfied approximately onefifth of its energy needs from the Russian Federation. as United Russia controls most of the country’s regional legislatures. While being prime minister will accord Putin authority over the government's administrative apparatus … he will now also have effective control of the country’s legislative branch. Putin returns as president. perhaps an interim leader before Mr. Putin remained at the peak of his popularity.34 One article summarized Russia’s foreign policy this way: . which Putin will easily be able to command. the increasing role in EU energy markets of Gazprom. 7 accepted the position of leader for the largest political party in Russia⎯the United Russia Party. At a time when the challenges for the next president are harder than ever. Putin will slowly fade out. Medvedev as a strong successor. which held 70 percent of the seats in the Duma in 2008. This includes key constitutional prerogatives such as veto powers over new legislation and certain presidential appointments such as the central bank chairman. a double-headed government promises to be a source of extra instability. Furthermore. either Mr. however. with an approval rating above 70 percent. were particularly contentious. a measurable cooling in Russia’s relations with the West was among the political challenges Russia’s leadership faced.
Moscow has orchestrated a noisy and confrontational return to the international scene. 8 In recent years. Lower prices for Russia’s major exports⎯oil. The death of the central figure within the Chechen resistance in July 2006. Meanwhile. The . metals. for example. For example. a government decision resulted in the elimination of the last major nonstate television network in 2003. Medvedev appeared “well aware of Russia’s colossal corruption. government pressure continued to weaken freedom of expression and the independence of some media. and a loss of investor confidence due to the Asian financial crisis (which began in 1997) all exacerbated the country’s financial problems.37 critics remained concerned about the direction of the Russian government in this arena. however. The Estonian parliament introduced a reference to Soviet occupation into its border treaty with Russia before parliamentary ratification. the Kremlin unilaterally suspended the Treaty on Conventional Armed Forces in Europe. Moscow’s intelligence network is creeping into all corners of Europe. Not since the hottest days of the Cold War have so many wondered just what was going on behind the Kremlin’s closed doors. natural gas. Russian planes are patrolling the Atlantic.36 The national press was increasingly under government control. In 2007. Last year. caused mounting international concern and pressure on journalists to avoid subjects considered sensitive. following the collapse of the Soviet Union in 1991. The country’s military budget has increased sixfold since 2000.35 Russia also had to deal with its post-Soviet relationship with former republics. including the killing of respected investigative reporter Anna Politkovskaya in October 2006. narrowing the range of expressed opinions and provoking self-censorship. lawlessness and inefficiency … but he also believes that the system needs only upgrading. To observers. and timber accounted for more than 80 percent of Russian exports at the time39⎯as well as the non-payment of taxes by the energy and manufacturing industries.38 Economic Environment As described. relations between Russia and Estonia took a negative turn. aggressively tries to control the energy supply throughout the region. Unsolved murders of journalists. Russia’s gas monopoly. in mid-2005. For example. In parallel. Chechnya continued to be a major concern at the core of Putin’s fight against terrorism. Difficulties in implementing fiscal reforms aimed at raising government revenues. While Russia’s highest court ruled in favor of a media-training group in May 2008 in a case that was seen as an example of the Kremlin’s pressure on civil society and freedom of the press. was seen as a coup for the government. combined with a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998.The Competitive Advantage of Russia IB-73 p. not replacing. Gazprom. particularly major national television networks and regional media outlets. Russia launched reforms with the goal of transforming the centrally planned economy into a free-market system. It decided not to cooperate with the West in taming Iran’s nuclear ambitions or in settling the final status of Kosovo. Russia responded by withdrawing from the agreement. serious tensions remained with Ukraine and Belarus over the pricing and terms of payment for natural gas. It blocked the work of the Organization for Security and Cooperation in Europe.
causing unemployment to drop and consumer demand to rise. although it was not clear how sustainable: Even Mr. And the outlook is bleaker: a slowing world economy means that oil prices may not rise further. delayed payments on sovereign and private debt.000 today at current rates of exchange. Some of the country’s domestic industries. as well as the creation of special economic zones (SEZs) and technology parks to boost the manufacturing and IT sectors. economists feared the Russian economy was overheating. and could even fall.41 Signs of Russia’s recovery included an average annual gain of 10 percent in real fixed capital investments between 2003 and 2007. Unable to digest the money generated by the oil-and-gas boom and the resultant sizable capital .The Competitive Advantage of Russia IB-73 p. To bolster exports. the country began to experience a financial turnaround.3 trillion economy. The country also reduced its foreign debt from 90 percent of GDP to approximately 28 percent by 2006. attract and retain additional foreign investment. By 1999. also benefited from the currency devaluation. the economy was helped by an infusion of cash (from financial assistance packages provided by the International Monetary Fund and World Bank). The economy is now more dependent on oil than ever. which caused a steep increase in the prices of imported goods. driven in part by rising world oil prices. while real personal incomes increased in excess of 12 percent within the same period. 9 result was a rapid and steep decline in the value of the ruble by more than 80 percent. the economy as a whole rebounded remarkably quickly from the crisis. Despite these moves.42 By nearly all accounts. As companies were able to pay off their debts and other obligations. oil prices that have risen fourfold during his presidency and macroeconomic stability. Behind it lie three factors: a revival of private initiative. Putin. Putin’s critics are impressed by Russia's transformation in the past few years. and the threat of runaway inflation. they were encouraged to hire and expand.000 in 1998 to $9. a move that was necessary because Russia “had largely failed to convert the oil stimulus into domestic production. GDP per head has risen from less than $2.43 The need to diversify the economy and reduce the overarching dependence on high prices in the energy and raw material sectors was explicitly recognized by the government and was reflected in a number of subsequent measures.”44 the government also proposed subsidized credits for exporters. While life for Russia’s people was economically difficult during this period. Russia’s turnaround under Putin was remarkable. including changes in tax rules coupled with tax breaks to promote innovation-related activities. It further sought to accelerate the implementation of the numerous recently enacted economic reforms. A country that almost went bust ten years ago now boasts a $1. a breakdown of commercial transactions through the banking system. and stimulate the development of small and medium-sized enterprises. Additionally. which created a large trade surplus in 1999 and 2000.40 the flight of foreign investment. Only the third can be credited to Mr. foreign-currency reserves of nearly $480 billion and a $144 billion stabilization fund [created from the taxation of] oil and gas revenue. Annual growth of real incomes has been in double digits. such as food processing. Yet the truth is that Russia's economy began its rebound 18 months before he became president.
Khodorkovsky was presented as a crackdown on the oligarchs. The destruction of Yukos and the redistribution of its assets to Rosneft.The Competitive Advantage of Russia IB-73 p. ‘The problem is that it does not exist. It dictated the country’s entire economic and political course. Russia experienced double-digit inflation in late 200745 despite appreciation of the ruble. The article further asserted: The significance of the Yukos affair went beyond the destruction of Russia’s largest [private] oil company and the imprisonment of its boss. but under Mr. ‘The problem is not that the Russian legal system is weak. Putin promised.’ says the owner of a factory making kitchen shelves in Kaluga. In response. Putin’s deputy chief of staff. however. 10 inflows. Despite this slowdown. more powerful and less visible caste that began to play a dominant role in the economy. progress slowed. showed that property rights count for little. Instead of cultivating the rule of law.’ says Vitaly Naishul. Illarionov. there had been significant policy changes in the areas of fiscal policy. foreign investment. who watches Russian institutions. judges have again turned into bureaucrats who rubberstamp dubious administrative decisions. with the enactment of a range of sweeping legislation. an unprecedented increase in the current account surplus exacerbated inflationary and exchange rate pressures. a quasi-state oil company chaired by Mr. Under Mr. Fiscal Policy The economic upturn due to improved competitiveness and higher oil prices had led to more buoyant fiscal revenues. ‘After Yukos nobody can feel safe. Russia’s economic stability was considered all the more fragile when one viewed it in the context of the country’s current political environment. Putin. slowed to just 1 percent by the end of 2007. The share of crude-oil production controlled by state and semi-state companies doubled. banking. the Central Bank introduced more flexibility in the exchange rate policy. and currency policies. Mikhail Khodorkovsky. As the focus began to shift toward implementation. however corrupt. Russia’s reforms went off course in mid-2003 when the government initiated its attacks on oil company Yukos. which before the Yukos affair had been running at about 9 percent a year. says Mr.46 Economic Reforms The process of economic reform in Russia accelerated significantly in late 2000 through early 2002. Growth in oil output. Yet it created a new. The attack on Mr. Worse. the destruction of Yukos negated any efforts to strengthen the rule of law. particularly from the energy sector.’ That problem is as old as Russia. trade. allowing the ruble to appreciate in nominal terms (in the first 10 months of 2006. Yeltsin the courts. According to an interview with Andrei Illarionov. the ruble appreciated 7. as Mr. a former economic advisor to Putin during the early years of his presidency. Russia was subjected to the rule of thugs. taxation. The Russian justice system has as much to do with justice as the Soviet system of trade with trade. were at least independent of the Kremlin. However.6 . tariff and non-tariff barriers.
the government loosened its spending gradually.5 percent in 2008.51 Trade Exports represented $355 billion in 2007. resulting in a trade surplus of $132 billion. 11 percent against the US dollar). as the economy was running at near capacity and there were dangers of continued inflation and rapid exchange rate appreciation. while its trade links with the former Eastern Bloc countries and other parts of the former Soviet Union had become relatively less significant. as the government had taxed and saved much of the rapidly increasing oil revenues. increased spending efficiency.49 The Russian federal budget had run growing surpluses since 2001. this concerned the decisions to increase the salaries of government employees. Russian GDP growth and the surplus in the federal budget were closely linked to world oil prices.50 Although there were strong pressures to relax spending ahead of elections. predictability. metals. Spending increases were mostly for increased salaries of government employees and pensions. Primary exports included petroleum and petroleum products. as well as pensions and benefits) in order to improve stability. the budget was developed on the basis of a prospective three-year financial plan. The 2007 budget surplus was more than 5 percent of GDP. Consumer price inflation was 9. but these policy choices complicated the government’s efforts to lower inflation to the single digits.47 The extent of real effective appreciation in recent years was considerable and had by 2007 nullified the gains in competitiveness arising from the 1998 devaluation. Russia’s federal budget policy was aimed at ensuring balanced government finance.2 percent in 2007. having steadily decreased from more than 20 percent in 2000.52 Since the collapse of communism. Despite these measures. while the government attempted to offset the impact of the capital inflows by running large budget surpluses. and transparency in government spending. refinement of inter-budgetary mechanisms. worrisome. wood and wood products.The Competitive Advantage of Russia IB-73 p. and modernization of the budget sphere. pumping additional ruble liquidity into the system. Further strengthening of the ruble appeared inevitable.48 Concerns over inflation were expected to lead the Central Bank to accept more ruble appreciation. with imports at $223 billion. The rising demand for money due to the growth of the economy softened the inflationary impact. the Ministry of Finance pursued a policy of separating existing and new government obligations (in particular. Russia’s trade with the West had grown significantly. Starting in 2006. The Central Bank followed a policy of “managed” appreciation in an attempt to ease the impact on domestic producers. since commodities comprised such a high percentage of Russian exports. and chemicals. natural gas. owing to continued foreign-exchange inflows and the dearth of sterilization instruments at the Central Bank’s disposal. . However. the Central Bank had to buy dollars generated by the export surplus. inflation was becoming increasingly Large balance of payments surpluses complicated monetary policy for Russia. This project was expected to create a more flexible and efficient incentive system for government employees and to raise the appeal of government service on the employment market. Despite this move. which boosted domestic demand. risk reduction. In 2006. inflation was forecast to climb to 13. The EU emerged as Russia’s largest trading partner.
electrical equipment.1 percent) were other important sources.4 percent).57 Russian domestic funds were also flowing back into the country. receiving around 5. Japan (6 percent).54 Foreign Investment Despite Russia’s size and economic potential. included machinery. In general. which lacked the resources. Germany and Italy accounted for another 8. foreign direct investment (FDI) inflows were meager throughout the 1990s.S. Among the CIS countries. and the Czech Republic. natural gas.S. as foreign investors sought opportunities in line with those in China. compared with some other developing economies.4 percent) were also key markets. up from almost $13 billion in 2005.The Competitive Advantage of Russia IB-73 p.9 percent respectively. Russia’s poor business climate. India. On the export side. Ukraine was the biggest export destination. and precious metals sectors. In the 2000s. and high-technology products. and credibility needed to attract substantial savings and direct these toward productive investments. particularly through structural reforms.7 percent) were the most important suppliers. while many regions also developed laws and programs to attract FDI. as corruption remained a serious issue. Russia’s cumulative FDI per capita still lagged far behind such countries as Hungary. However. Poland. as much of the foreign investment coming into Russia from locations such as Cyprus and Gibraltar was actually repatriated Russian capital. Germany was Russia’s largest supplier.6 percent of total imports.3 percent of total Russian exports. lack of transparency. and widespread corruption partly negated the country’s solid macroeconomic fundamentals and its consumer and retail booms. some foreign investors bought shares of privatized enterprises in . the 1995-1996 “loans-for-shares” privatization policy banned foreign investors from investing in the oil. the Netherlands was the biggest destination. While efforts were made to reform tax law and administration. the energy sector was an exception.2 percent of total Russian exports. Ukraine (8 percent) and Belarus (4. the U. In the CIS. which contributed another 14 percent. Direct investment could be particularly tricky in the country’s regions. (4. the government focused strongly on attracting FDI.58 Russia’s approach to FDI was relatively subdued. During Putin’s tenure as president. Turkey (4. accounting for 13. foreign firms sometimes struggled to interpret rules. followed by the countries of the Commonwealth of Independent States (CIS). foreign investors had limited access to the privatization process. For instance. On the import side. 12 accounting for more than 50 percent of the country’s total trade.5 percent).3 percent and 7. However. and Brazil. FDI again increased significantly and was estimated to have reached $52 billion.55 Russia attracted nearly $29 billion in FDI in 2006. meat (mostly poultry). which had already disposed of the country’s most attractive assets. and South Korea (4. which were providing double-digit returns to investors and attracting some new inflows. (Subsequently. capability. FDI inflows increased. China (5. However. Another significant drawback to investors was the Russian banking sector.5 percent).53 Primary imports to Russia from the U. the tax reforms instituted in 2001 effectively limited the amount of incentives that regions could offer.7 percent). and the treatment of foreign investors in Russia’s privatization program was far from consistent.56 In 2007. and Switzerland (4. China (7. with some large oil and gas projects distorting the overall investment picture. accounting for 10.
the oil division of state-controlled Gazprom in . prior approval was still required in the following sectors: (1) new enterprises using assets of existing Russian enterprises. In response. until that time. mining. tight controls in its energy sector restrained foreign companies from anything more than minority stakes (and often only 20-25 percent) in larger projects.63 In 2006. which had been diminished during the privatization process of the early 1990s. the only other bidder. with an eye on the Chinese gas market. a trend that had earlier prompted Russia’s largest privately owned company. at auction in March 2007. TNK-BP asserted that it was unable to develop the field because the authorities had refused to grant the jointventure access to important gas pipelines. electric power. In sectors where licensing was needed. 13 secondary transactions. and telecommunications.The Competitive Advantage of Russia IB-73 p. including oil and gas). Approval was also required for all investment ventures in which the foreign share exceeded 50 percent. or which took over incomplete housing and construction projects. and (3) the exploitation of natural resources. natural resources.6 billion. in May 2007. TKN-BP had estimated proven petroleum reserves of 4. After Russia’s largest private oil company.2 billion barrels were developed). remained subject to official or de facto restrictions. Yukos. and large-scale construction projects. insurance.59 Investment in other key sectors. However. it formed a joint venture with a Russian company TNK. FDI in Russia was also limited to specific sectors. defense. such as aerospace. This move also continued efforts by the Russian government to strengthen its control of the country’s oil and gas sectors. natural gas. BP quickly conceded defeat to Rosneft.1 billion barrels (of which 3. In 2003. such as banking. For example. in 2007 the Russian government threatened to revoke its license on the grounds that the firm was not producing gas quickly enough from the Siberian development.61 TNK-BP decided to bid for Yukos’ 9. Many considered this an attempt by TNK-BP to build strategic ties with the state-run company. Despite some opening up of government policies toward foreign investment. making it the third-largest oil company in Russia by some accounts. enabling the company to overtake the privately owned Lukoil in terms of oil production capacity and become Russia's largest oil company. (2) defense industries. British oil giant BP was one company which had realized the importance of close relationships with state-controlled enterprises in order to do business in Russia.8 billion for a 50 percent stake. Rosneft reclaimed ownership of its assets for $7.4 percent stake in state oil producer Rosneft. investing some $6. Until 2002. was thrust into bankruptcy by the Russian government’s claims that the company owed as much as $32 billion in back taxes. However. Lukoil. a 10 percent discount to market value.62 Two months later. lengthy and nontransparent procedures created another deterrent to FDI.60 According to the SEC. The move highlighted growing state control of upstream assets. Rosneft purchased additional Yukos assets in Siberia. Foreign investors participating in Russian privatization sales often were confined to limited positions and faced problems with minority shareholder rights and corporate governance. to form a joint venture with GazpromNeft. As a result. causing some critics to question the government’s commitment to foreign investment. TNK-BP invested a large amount of money and prestige in a plan to develop a giant natural gas deposit in Siberia.
in exchange for an agreement to join with Gazprom in unspecified foreign ventures. 14 order to counter Rosneft’s rising dominance. Another theory was that BP’s partners in the venture. being fined.69 Yet some suspected the Kremlin of seeking more assets for state-owned Gazprom and Rosneft. and Brussels to quietly convey the message to Russian officials that Western capitals are watching the fight as a key test of newly elected President Dmitry Medvedev. if the Kremlin would approve the transaction and agree to let BP. were maneuvering for more control and a stronger financial position. Publicly. Concurrently under investigation for tax-evasion at a subsidiary. and other labor-related issues that resulted in the company and its CEO. BP PLC is struggling with two big unknowns: What does the Kremlin want and what are BP’s Russian-billionaire partners really after? Lacking clear answers to those questions. and saw it as another example of the Kremlin forcing out Western energy firms. were evidence of mounting concerns regarding the Russian government’s diminishing commitment to market norms in the energy sector. the firms agreed to sell controlling stakes in the relevant projects to Gazprom. Washington. “industrial espionage” activities by one of its employees. the TNK-BP joint venture agreed to sell Gazprom its majority interest in the Siberian field for some $900 million.64 In June 2007. it reportedly provided more transparent and permanent “rules of the game” for foreign investors68⎯a change that was sorely needed. In both cases. according to many established and potential investors.The Competitive Advantage of Russia IB-73 p.65 BP’s problems.71 As one article described: As it fights to preserve its TNK-BP Ltd. a group of Russian billionaires. although it was unclear in this case whether the government or its Russian partners were the source of the difficulty. Analysts considered the agreed-upon price to be considerably less than what TNK-BP’s stake was worth. in turn.72 BP offered to exchange the Russian shareholders’ stock in TNK-BP for shares in BP. ventures such as TNK-BP’s still faced pressure in Russia. Although the bill further restricted foreign access to the Russian economy. however. Russia’s state-owned gas giant. for failing to meet its production quotas from Kovykta. Robert Dudley. Russian joint venture. the Russian .66 As one article described: Last year [in 2007] the authorities began investigating TNK-BP. BP has also marshaled support from London. Royal Dutch Shell and its partners fell foul of environmental inspectors. Before that. BP professed to see no connection between these events. BP has been fighting trench warfare to keep its partners from gaining control inside TNK-BP even as it continues high-level talks with them. sell 50 percent or more of the venture to a company such as Gazprom or Rosneft. a huge gas field. together with the earlier forced withdrawal of Royal Dutch Shell from a major energy project in 2006 in Sakhalin. and their problems magically disappeared.70 This conflict became public in mid-2008 when the Russian owners demanded Dudley’s resignation and announced that they were planning legal action to defend their interests. the Duma introduced a new bill restricting foreign investment in 39 industry segments linked with state monopolies.67 In July 2007. a joint venture between Britain’s BP and private Russian investors. In 2008.
Areas for further reform included improved on-site supervision of financial institutions. Sberbank also accounted for more than one-half of total bank deposits. As a result. A large number of foreign banks had established a presence in the market. including proper requirements for both managers and shareholders. Further. the absence of formalized procedures for the registration and enforcement of collateral. tax legislation more closely matched the needs of a growing market economy and eliminated many of the distortions of previous legislation.The Competitive Advantage of Russia IB-73 p. the lack of well-developed bankruptcy laws. which accounted for approximately one-fourth of the country’s total banking assets. a number of large Russian companies. and more stringent licensing requirements. Some organizations in the sector had begun to provide the foundation for capital markets. Meanwhile. and low levels of capitalization and profitability meant that many were at risk. It had been adversely affected by the currency fluctuations and the economic conditions following the 1998 financial crisis. and other legal and fiscal impediments contributed to the challenging environment for banks. Although consolidation might have produced scale efficiencies and improved the health of the financial sector. Most turnover taxes were abolished. Within this group. the smallest 800 banks each had an average asset level of around $1 million. Russian investment banks emerged. sales tax was eliminated. which were reduced from 35 percent to 24 percent. At one extreme was the leading bank. designed primarily to ease the tax burden on individuals and companies. Taxation In 2001. Petersburg. successfully turned to international capital markets. and more than three-fourths of total household deposits in the banking sector. while some others listed on foreign stock exchanges. Sberbank (in which the Central Bank had a controlling stake). which had kept many businesses in the shadow economy. but their activities were largely restricted to Moscow and St. this possibility was hampered by a lack of transparency over ownership structures and balance sheets. more consolidated supervision of large banking groups. such as the highly regarded Troika Dialog Bank. the tax system in Russia underwent a comprehensive reform. The Central Bank regulated all activities of the banking industry and state-owned banks dominated the industry. With oil production declining at alarming rates. and simplification of corporate taxes. with a low level of liquidity in the public and private debt and equity markets. Domestic capital markets were still in a developmental stage. the government provided $4. At the other end of the spectrum were almost 1.5 billion . Russia’s banking sector was a source of concern for foreign investors as well as those with domestic and government interests. and taxation of the oil sector was simplified. constrained by the fledgling domestic capital market. 15 shareholders indicated that they would not consider such an exchange for at least 12 to 18 months. Insiders speculated that this could have been because they believed TNK-BP’s estimated market capitalization—of approximately $40 billion—to be substantially undervalued at the time the offer was made. primarily for debt.400 active commercial banks. Highlights of the new program included a reduction in personal income tax to a flat rate of 13 percent.73 Banking As noted. The structure of the banking sector suffered from the dual difficulties of excessive concentration at one end and inadequate concentration at the other.
in principle. However. only a limited number of currency operations could be performed without a Central Bank license (which sometimes took more than six months to obtain).77 The new law also aimed to replace the permission-based system with a free-hand regime. Putin proclaimed that taxes on the industry would have to be further reduced. meaning that any currency transaction not specifically prohibited under the law was permissable. this was barely enough to keep production stable. Transactions involving currencies were liberalized under the December 2003 law “On Currency Regulation and Currency Control. Yet. Together. the use of punitive taxes as an instrument in settling disputes continued.79 However. the two entities were to manage residents’ investments into foreign companies. and though rules governing tax inspections had been revised. except as provided by the law itself. profit generated in foreign currency could. transactions with securities. registration. and discriminatory licensing. 16 in tax breaks to the industry in 2007. be repatriated. The CBR was given responsibility for currency operations related to loans and financing. and divided responsibility for managing currency regulation functions between the CBR and the government. works and services. discriminatory and prohibitive charges and fees. Under the old system. intellectual property. and banking operations. according to the oil companies. However. The government was chartered to regulate currency operations relating to foreign trade. and other property. Three primary forms of restrictions on currency operations that remained were mandatory reserving (to help manage currency reserves and protect against ruble exchange-rate fluctuations and capital flight). In his inaugural speech to the Duma as prime minister in May 2008.The Competitive Advantage of Russia IB-73 p. preliminary registration (to allow for monitoring). Central Bank amendments in 2001 extended this to dividends on equities.78 The new law also prohibited the Central Bank and Russian government from introducing new requirements to the currency regime. as well as corporate and sovereign bond repatriations.74 The recent buoyancy in tax revenues suggested that the overall program to reform taxation was positive (although surging oil revenues deserved at least part of the credit). the new rules left the tax authorities with much the same arbitrary power as before. .” Notably. and the establishment of special accounts (for settlements associated with certain operations).76 Currency Policies Under the Foreign Investment Law. tariff and non-tariff barriers were frequently used to restrict foreign access to Russian markets. some of these restrictions were earmarked for further relaxation in 2007. after exchange regulations were satisfied and taxes paid. the new law limited the authority of the Central Bank to restrict currency operations in Russia. Discussions were under way to eliminate these measures or modify them to be consistent with internationally accepted trade policy practices. including tariffs and tariff-rate quotas. and certification regimes.75 Tariffs and Non-Tariff Barriers Russia continued to maintain a number of barriers with respect to imports. and the participation of residents in the charter capital of foreign companies other than joint-stock companies. such as export and import of goods. partnerships.
Efforts throughout the late 1990s and early 2000s to convert defense industries to civilian use had met with varying levels of success. and the EU granted Russia the status of a market economy. the Russian labor force was undergoing a transformation. which was secured prior to the U. Labor Force Driven by these changes. engineers. Its latest difficulties had been raised by the Ukraine. Foreign investors were beginning to harness these inexpensive skills by opening enterprises such as engineering design bureaus and offshore software development shops in Russia.81 Economists argued that supportive policies would encourage entrepreneurship by reducing the bureaucratic requirements for starting businesses. because any single member was empowered to block another country from joining the group. The replacement or modernization of equipment and production processes was deemed essential if this sector was to contribute to economic growth. Georgia had also become increasingly vocal about blocking the country’s membership. and technicians in the business environment. much of Russia's existing large pool of scientific and engineering talent remained under-utilized. and unproductive according to global standards.S. an important milestone was reached when both the U. Tensions between Georgia and Russia had intensified over Russia’s wooing of two separatist regions to cede from Georgia. after just four years of negotiations. growth and profitability of private companies. The future of capitalism in Russia depended on whether its economic policies maintained a supportive environment. Russia also inherited most of the defense industry of the former Soviet Union. This country sought to engage in bilateral talks to resolve long-standing trade disputes with Russia before endorsing the country’s accession to the WTO. agreement). One positive consequence of this conversion was the availability of highly skilled scientists. 17 WTO Accession Prospects Russia had been engaged in negotiations to join the World Trade Organization (WTO) for more than 15 years. The signing of a trade pact between Russia and the U. Business Environment In 2008.80 Small business. despite the prevalence of a large manufacturing sector. the country’s workers were largely mismatched to the rapidly changing needs of the Russian economy. which became a member of the WTO in May 2008. However. it would not achieve its goal of becoming a WTO member. Until Russia could bring these issues under control.S. or continued to impede the creativity.The Competitive Advantage of Russia IB-73 p. However. As a result. employed only 20 percent of Russia’s economically active population. Russia was one of the most industrialized of the former Soviet republics. and also reduce opportunities for bribery and corruption. the economic engine of most developed economies. Russia continued to face challenges (and delays) in gaining membership. This former-Soviet country joined the WTO in June 2000. one of the most crucial policy issues facing the country was the extent of state intervention in business and the economy.S. Projects of this type were proving to be . In mid-2002. in November 2006 lifted perhaps one of the biggest obstacles to the country’s inclusion (along with the endorsement of the EU. much of the industry was antiquated. and its efforts to block Georgia’s membership in NATO. highly inefficient. Although well educated and highly skilled. versus more than 50 percent in Europe and 80 percent in Japan.
18 particularly successful. for example. In the financial sector. and benefited from the buoyant climate for natural resources prevailing in the early years of the century. Low salaries and morale within the public sector were major contributors to the problem. with limited domestic competition. Both damage the country. permeating and distorting many market mechanisms.83 The growing government involvement with oligarchy in business led to a condition that economist Marshall Goldman termed “siloviki” capitalism. For instance. The complex central planning system of the communists left a legacy of patronage. Most of these financial-industrial empires were owned by a small number of extremely wealthy and powerful individuals. This culture had survived. ‘If everyone followed every rule and instruction in Russia. [Vitaly] Naishul [who watches Russian institutions]. and were embraced by Russian authorities who were worried by a brain drain overseas of Russia's best talent. and the sums involved are getting larger…. It is easier to get a competitor into a jail than to compete with him. the country would grind to a halt. Oligarchic capitalism dominated the Russian economy in the second half of the 1990s and early 2000s. bank employees. These firms operated globally. The other kind of corruption emanates directly from the Kremlin and benefits state officials and their friends who double up as businessmen. One sort is driven by private firms and individuals who bribe officials to turn a blind eye to the rules. According to a 2008 article: Andrei Sharonov. not those who work better. one estimate suggested that annual bribes paid to police officers approached $400 million.The Competitive Advantage of Russia IB-73 p. This allows businesses to get around a net of conflicting and outdated laws. Corruption is of two kinds. is now more entrenched.82 Russia’s Oligarchy and Siloviki Capitalism “Oligarchic capitalism” in Russia referred to the economic activities of a small number of very large and powerful financial-industrial groups operating in highly concentrated industries in the private sector. crony capitalism manifested itself in direct lending on favorable terms to large. and remained an important but less dominant component of the economy in 2007.’ Businessmen complain that corruption. since the transition to capitalism.’ says Mr. already rampant in the 1990s. The term siloviki referred to . a liberal reformer who left the economics ministry last year. predominantly in natural resources. Corruption One of the most significant problems in Russia’s business environment was the continued impact of corruption in both the public and private sectors. The system rewards those who are closer to the centre of power. and cronyism among government officials. but the second is more insidious. ‘We have turned our back on healthy competition. says he underestimated the impact of arbitrary bureaucratic decisions. kickbacks. politically influential firms and the withholding of financing from more dynamic small and medium-sized enterprises. and productive sector managers. the oligarchs⎯many of whom were included on Fortune’s annual list of billionaires. and in many cases flourished. with even higher levels of kickbacks and unofficial payments made to health and education sector officials.
89 Obstacles to Foreign Investment Despite Russia’s continued growth.The Competitive Advantage of Russia IB-73 p. Petersburg) was weak. as well as top Putin aides Alexei Miller and former KGB officer Viktor Ivanov. 19 politicians or bureaucrats. unofficial barriers imposed by regional authorities. often with ties to the old regime. Putin’s liking. it took 29 separate procedures and an average of 330 days to . demoting or sidelining many of the men he previously had put into power (including Ivanov and others like him). “A tsar does not have colleagues. as one of his first acts as prime minister. Economic minister German Gref announced in February 2006 that the government intended to gain majority control of Alrosa. weak enforcement of the rule of law.88 In early 2006. In 2008. however.”86 According to Olga Kryshtanovskaya. for instance. These included regulating and restricting entry of firms. Highest on the list of concerns raised by foreign business people in periodic surveys were issues such as the pervasive influence of government bureaucracy in every area of business operations. Putin’s siloviki appointments included administration deputy head Igor Sechin. often under duress.87 Additionally. or confiscated by emerging firms in state-declared strategic industries (as in the Yukos case). Putin was cleansing the siloviki clan and getting rid of those who were equal or even senior to him in the KGB. taxing businesses to suit its own ends. the state used many other methods to exert its influence on the economy. According to World Bank data. A growing number of representatives from the siloviki had been appointed to key positions in major corporations with majority government ownership. Their power was demonstrated by the sales of valuable natural resource assets by several oligarchs to state-owned companies.85 Oligarchs who did not cooperate could find their holdings threatened with tax assessments. and legal enforcement of private business agreements (especially outside Moscow and St. inspecting firms and sometimes closing them at will. as chairmen of the boards of Gazprom and Aeroflot respectively. as chairman of the board of stateowned Rosneft. government policies remained in place to prevent investors and business people from owning land in Moscow. a sociologist who studies the Russian elite. structural economic problems and well-publicized problems in the business environment made many individuals and groups wary of making major investments in the country. as well as its vast potential. and lack of respect for property rights. many of them with links to the former KGB or its successor. the Russian diamond monopoly. Putin initiated somewhat of a shakeup within the siloviki. and some to essentially private companies. Some analysts considered these activities a vivid example of how members of Putin's inner circle. This form of capitalism characterized the various ways in which the government exerted influence over the economy to favor national interests. controlling the use of land and real estate that private businesses occupied.84 were using their network to take over private companies and amass personal wealth in the process. even though federal law had legalized private land ownership in 2001. he has subjects. and the major corporations in which it had a majority stake (or significant ownership). Taxation and business regulations were still not wholly predictable. who exercised power with government support. One explanation for this behavior was that “they had become too powerful for Mr. and exercising control over international trade and foreign exchange transactions. whose chairman was Finance Minister Alexei Kudrin.” she said.
Andrei Kozlov. One additional problem that served as a barrier to foreign investment in Russia was the quality of the country’s physical infrastructure. in terms of both its quality and geographical coverage.90 Investors were further dissuaded by the high costs of complying with the Russian tax code.4 was lower than the average score of 3. Outside the major cities. was shot to death. The Russian Mindset94 When doing business in Russia. Russia was sorely behind other developed and developing nations. while the telecommunications infrastructure was also substandard. the energy infrastructure was in need of renewal. 20 enforce a contract (compared to 19 procedures and 229 days in high-income. and its score of 2. On Transparency International’s Corruption Perceptions Index in 2005. Huge investment in the electricity industry was vital in order to eliminate the gap between energy production and consumption. The killing of Kozlov sent a warning that such efforts were likely to be resisted with deadly force. without significant institutional reform Russia was unlikely to improve on its past record in attracting inward investment. and outdated equipment resulted in frequent blackouts. Due to lack of infrastructure investment through the 1980s and 1990s. As of mid-2000. The absence of a functioning framework for production-sharing agreements. limited ability to obtain redress through the legal system.92 These systemic problems were compounded by lack of available financing. His decision had likely been intended to deter corruption in a country seeking to build better transparency. Fuel shortages. and power stations were about 40 years old. developed nations).91 The most common forms of corruption were bribe demands from officials with responsibility for licensing and other investment-related activity. and weak protection of minority shareholder rights. Russia was ranked 126th (out of 159). and corruption. .93 Before the end of his second term. particularly regional senators. Though investment levels had improved recently.25 for emerging countries in Europe (the average score for developed countries in Western Europe was 8. nonpayment. Planned measures to reduce the size and role of the state in the economy included reducing the number of activities that required a state license from 500 to 90. and that past attempts to reduce its influence had failed. Older generations were conditioned to secrecy. Many large U. and courts influenced by vested domestic business interests. and concerns about long-term economic and political stability. the majority of Russia's ports. along with weak corporate governance practices in Russia’s oil majors. Prosecutors surmised that Kozlov may have been killed because of his leadership in the decision to revoke the licenses of several banks believed to be guilty of money laundering. extortion of foreign firms by central and local tax authorities. inadequate bankruptcy procedures. companies remained cautious about acquisitions in Russia because of fears of unknown liabilities associated with past operations (especially environmental cleanup obligations).The Competitive Advantage of Russia IB-73 p. and the quality of fixed assets in factories was generally poor.S. organized crime. hidden financial liabilities. In September 2006. foreign companies often discover that the older and younger generations have quite different mindsets. President Putin admitted that the government was too large and intrusive. airports. railways. the first deputy chairman of the Russian Central Bank. inconsistent government regulation.2). and the outright abolition of some ministries. deterred FDI in the lucrative natural resources sector.
and natural resources. a Russian would often opt for lower cost (despite the expenditure of more time). endurance. as well as Exhibit 6 for additional information about the characteristics of Russian society.The Competitive Advantage of Russia IB-73 p. Hours might be spent discussing a problem with no real plan to develop a solution. working with Russians could be both frustrating and rewarding. As Michael Porter of Harvard University. There was conformity within a loose hierarchical structure and a tendency to follow a leader rather than the rules. was generally more open and relaxed. (See Exhibits 1 through 5 for additional background materials and economic data. The Competitive Advantage of Nations. in contrast. Russians took duality to greater extremes than other nationalities. reckless yet cautious. They could be emotional and irresponsible and yet haunted by conscience. Money was a much more precious commodity than time.97 According to Porter: • Productivity defines the standard of living (wages.96 In this book. He asserted that competitiveness was determined by the productivity that a nation achieves in using its human. and their sense of personal responsibility. and this philosophy was reflected in their business behavior. 21 distrust. selfworth. the increasing role of government in the business environment of Russia was unfavorable for the development of a broad range of internationally competitive companies. When time could be saved at the expense of money. recently noted. in turn. a top-down approach by government must be complemented by a bottom-up (or microeconomic) approach that stimulates individual firm performance.95 This paper now shifts its focus to explore Russia’s current international competitive position in the light of its resources and government policies. and mutual support.) RUSSIA’S INTERNATIONAL COMPETITIVENESS The Competitiveness of Nations Although there is a role for government in creating a macroeconomic and microeconomic environment in which business can flourish. honor and pride. drives national prosperity. independent yet needing a sense of belonging to a family group or team. Russians could take a laid-back attitude to getting things done. Meetings could go on for hours and stray far from their original agenda. security and stability. Apart from the new business-oriented class. and personal security were affected. an authority on the subject of national competitiveness. As a result. Schedules could change constantly. A common attitude was that one should work to live and not vice versa. loyalty. Porter published the results of a major research project in his book. Negotiations could be protracted and contracts easily broken. and fear during the Communist era. capital. motivation. patience. . Getting an appointment could be difficult. return on natural resources) for a country and. making planning almost impossible. Core Russian values across generations included the family. Porter defined international competitiveness in terms not of static trade performance but of the raising of incomes over time through trade and the attraction of foreign investment. Porter’s Competitive Advantage of Nations Framework In early 1990. return on capital. The younger generation.
The Competitive Advantage of Russia IB-73 p. better information. Through the GCI.g. (3) Macroeconomic stability. and Rivalry. developed by Michael Porter. Demand Conditions. (9) Technological readiness.98 Porter believed the capacity of a nation to innovate was the cornerstone of productivity. (5) Higher education and training. quality) as well as the efficiency with which they are delivered. (2) Infrastructure.101 In its 2007-2008 version. the World Economic Forum produced an annual Global Competitiveness Report (GCR) with the objective of evaluating the economic competitiveness of countries. better . In an economic development context. (6) Goods market efficiency. not only that of industries in the traded sector. and the Context for Firm Strategy. improved infrastructure. whether they are domestic firms or subsidiaries of foreign companies. his definition of innovation went far beyond the traditional concept of scientific discovery. Related and Supporting Industries. However. It is not in what industries a nation competes that determines prosperity. More productive company strategies require more highly skilled people. uniqueness. (7) Labor market efficiency. (8) Financial market sophistication. The second approach used to evaluate national competitiveness in the Global Competitiveness Report was called the Business Competitiveness Index (BCI). The BCI took a microeconomic approach toward assessing a nation’s competitiveness.99 However. Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. (4) Health and primary education. the GCR presented two complementary approaches for assessing national competitiveness. the GCI examined 131 countries and rated them by providing a weighted average of the many different components that made up the 12 pillars of competitiveness. 22 • • • • Productivity depends on the value of products and services a nation provides (e. developed by Professor Xavier Sala-i-Martin of Columbia University. (10) Market size.. The first was the Growth Competitiveness Index (GCI). (11) Business sophistication. but how firms compete in those industries. The productivity of “local” industries is of fundamental importance to competitiveness. The location of ownership is secondary for national prosperity. more efficient government processes. Porter’s framework maintained that a nation could build and sustain increasing levels of competitiveness by managing these four determinants. innovation referred to a country’s ability to upgrade its business environment continually to support and encourage more sophisticated ways of competing. In this edition. The Global Competitiveness Report Each year. and (12) Innovation. Structure. the sophistication and productivity of companies are inextricably intertwined with the quality of the national business environment. the report assessed a nation’s ability to sustain economic growth over a medium to long-term period by evaluating twelve ‘pillars’ of competitiveness: (1) Institutions. According to a previous report: The productivity of a country is ultimately set by the productivity of its companies. An economy cannot be competitive unless companies operating there are competitive.100 Economic upgrading occurred through the interaction of four key variables referred to as the “Diamond of National Advantage”⎯Factor Conditions.
Of major concern is a perceived lack of government efficiency (118th). and specialization of the underlying inputs that companies draw on when competing. in its entirety. climbing to 71 in 2007-2008. and technological infrastructure. While the Global Competitiveness Report. Accordingly.The Competitive Advantage of Russia IB-73 p. the environment for the protection of property rights is extremely poor and worsening (122nd this year). mainly attributable to weaknesses in its institutional environment and business standards. as well as qualitative information collected via an Executive Opinion Survey conducted annually by the World Economic Forum. factor conditions refer to the efficiency. Porter calculated two primary subindices focused on (1) company operations and strategy. capital resources. In the 2007–2008 Global Competitiveness Report. they were considered complementary. To assess Russia’s challenges for improvement. quality. Demand Conditions. Related and Supporting Industries. and more intense competitive pressure. this paper turns to a more detailed evaluation of Russia’s performance in the four key areas of the Porter “diamond”—Factor Conditions. the BCI included 127 countries. 23 supplies. the country’s physical. Russia’s Competitive Position Russia’s overall ranking on the Global Competitiveness Index fell from 53 in 2005-2006 to 62 in 2006-2007 and then climbed to 58 in 2007-2008. and its natural resources. This is what the BCI tries to capture. Private institutions also get poor marks. scientific. Russia places below the other large European countries. information.102 For the BCI. To calculate the GCI and the BCI. Factor Conditions Within the microeconomic environment.104 Important factors include human resources.103 On the Business Competitive Index (BCI). extended beyond the microeconomic boundaries of Porter’s Competitive Advantage of Nations framework. and the Context for Firm Strategy. and Rivalry. and more general concerns about government favoritism in its dealings with the private sector. Russia improved its overall ranking by six points.105 . the GCR drew on publicly available statistical data. the lack of independence of the judiciary (106th). and (2) the national business environment. all of which affected its overall ranking (see Exhibits 7 and 8): Despite the country’s large market size and improving macroeconomic management. The report pointed to a number of problems related to the country’s business environment. Based on a country’s score in these two areas. an overall ranking was then determined. Structure. among other things. Further. this paper references data and rankings from the GCR as it evaluates Russia’s competitive position in the worldwide economy. more advanced research institutions. with corporate ethics in the country placing Russia 120th overall on this indicator.
an internal government report indicated that “the country’s workforce is shrinking at twice the rate of the general population due to a decrepit healthcare system and dangerous working conditions that have remained unchanged for the past century. the Russian workforce was relatively highly educated. Desai and Goldberg asserted that productivity in sectors such as manufacturing was substandard. such as meager salaries. 110 Such workforce reductions were caused by workplace-related illnesses. were listed among the world’s top 500 universities. spent 10.107 Quality was just barely above average in terms of ranking in the 2007-2008 GCR. according to an article in the Moscow Times in 2004. and the United Kingdom in terms of education.111 Russia was rated 39th in terms of the medium-term impact of HIV/AIDS on business. Germany.”109 Other studies by the Federal Statistics Agency echoed these concerns. limiting the international competitiveness of the Russian manufacturing sector. usually in the manufacturing industry. Real wages in . it has not kept pace with rising real wages in recent years. However. The quality of the workforce was also declining. and the country’s life expectancy was on the low end in the 96th position. where Russia ranked 46th in terms of quality of the educational system and 38th in terms of math and science education quality. This statistic placed Russia ahead of Brazil. The average Russian citizen (25 and older). The system was beset by familiar problems. South Africa. Moscow State and St.106 In recent years. stating that the population was shrinking by 1 million per year. In terms of the productivity of Russia’s labor force. The World Bank warned that HIV/AIDS could decrease Russia’s annual growth by half a percentage point starting in 2010. Almost half of the firms hired workers with lower quality skills. while only 10 percent of firms improved workforce quality by hiring more skilled workers. 24 Human Resources Relative to many other countries. according to Raj M.The Competitive Advantage of Russia IB-73 p. Japan. They argued that: Although productivity in the manufacturing sector has been rising.108 In addition to deterioration in workforce skills. including Putin himself. Moreover. More than a third of all managers reported deterioration in the quality of their workforce between 1996 and 2005. corruption. the quality of higher education in Russia had attracted the attention of the government.5 years of his/her life in school. but in tertiary (university) enrollment. the Moscow Times reported that only two Russian colleges. Russia also ranked among the highest in terms of the proportion of its population with a tertiary education (more than 50 percent). Russia ranked 47th in secondary education enrollment. In the 2007-2008 GCR. Russia spent far less of its GDP on higher education than Europe or America. Petersburg State. India. outdated materials. Desai of the Wolfensohn Center for Development and Itzhak Goldberg of the World Bank: The Russian workforce lacks the requisite skills for firms to compete on the global market. Health-related issues such as the rapid spread of tuberculosis and HIV/AIDS also caused workforce-related problems and general health issues. and a lack of proper oversight. injuries. it ranked much higher at 14th. and deaths. China.
The structure of the telecom fund is fundamentally flawed. with 51 percent being raised by private investors. had begun to address these barriers. Thus. The idea was to create approximately 10 funds with $50 million of government money in each. In 2005. Putin’s goal was to jumpstart the hightech industry and move beyond oil-related growth. standardized hiring procedures.112 Compounding these challenges was the fact that employer-employee relations had traditionally been heavily regulated by the Russian Labor Code. which came into effect in 2002. The monthly manufacturing wage in 2005 was approximately $300. and 81st in terms of financing through the local equity market. As a Western banker stated. the Russian government developed a state-backed venture capital program. and excessive working periods. However. began accepting applications in 2006. by definition. the worst people to make this sort of decision. new labor legislation. 108th in terms of the soundness of its banks. And low labor costs in these two countries give Russia a competitive disadvantage: for each dollar of wages. the Moscow Venture Fund. which included provisions to protect employees against wrongful dismissal. spearheaded by then President Putin (and announced in early 2006). Russian manufacturing productivity is now about 40 percent of Brazil’s and only one-third of South Africa’s. Productivity in Poland is twice as high as in Russia. the government’s telecommunications fund. Although labor productivity in Russia is slightly higher than that of India and China. and longer probationary periods (six months) for more categories of employees were all helping make the labor environment in Russia more business-friendly. The government’s money constituted 49 percent of ownership. Russia ranked 60th in terms of venture capital availability. was not a “fund of funds” structure like the RVC. 25 manufacturing in Russia (deflated by the producer price index) have increased 72 percent since 1999. and a 369 percent increase over the 1999 level of $64 per month. “The point of the RVC’s fund of funds structure is to remove bureaucrats from the investment decision process.The Competitive Advantage of Russia IB-73 p. which received $300 million to invest directly in the telecom sector. because the government would be in a minority position. an increase of 65 percent in just two years. it would play no role in the investment decisionmaking process. Importantly.”113 . a harmful working environment. The government earmarked $800 million in funds and the first of these. Under these conditions. Policies to make it easier for employers to hire and fire employees. Putin also created the Russian Venture Company (RVC). Russia’s financial markets also ranked poorly on the financial market sophistication scale (88th). international competition with countries whose labor costs are cheaper may be increasingly difficult for Russian manufacturers. Chinese wages in manufacturing are 30 percent lower than in Russia. In contrast. Capital Resources According to the 2006-2007 GCR. you also lay yourself open to the problems of vested interests and corruption. Not only are they. it received criticism related to potential bureaucracy and corruption issues. an organization that used oil money to finance various venture capital funds. a Russian worker produces about half the output of an Indian or Chinese worker.
Although the infrastructure remained government-controlled. the overall quality of Russia’s infrastructure ranked towards the bottom of the list (81st). but rather from big domestic companies investing in new technologies in their respective industries. Wi-Fi connections served as potential cost-effective .5 percent in 2007. Russia needed to double the length of its roads in order to meet its economic and social needs.119 Physical infrastructure for information and communications technology remained a challenge in Russia. 60 percent of the rolling stock (railroad vehicles) would eventually be under private control. Similarly.S. investors raised $30. with 80 percent of the country’s freight traffic traveling by rail compared to only 20 percent in the West. Although the government was aware of necessary modernization. However. in 2006 U. The program was funded with $170 billion from federal and local budgets. and mobile telephone subscribers. 26 Prior to these efforts. To raise the money.The Competitive Advantage of Russia IB-73 p.120 Internet usage in Russia remained on the low side. with the idea of wresting control of the system from the Railways Ministry. The broadband Internet market was nearly nonexistent with just under 2 percent of the population subscribing to services121 (although the country rated 60th on this measure).118 The government announced the “Modernization of Transportation Infrastructure in Russia” program in May 2004.8 billion in venture capital. electricity supply was 76th. Under Putin’s rule it had received significant funding for modernization. railways.114 By comparison. and roads were lowest at 106th. air transport infrastructure was 79th. The railway system ranked highest at 29th while all other measures ranked lower—the quality of the port infrastructure was 72nd. as well as the private sector. as demonstrated by the country’s Internet users. personal computer users. private equity firms were not very developed. With Internet penetration rates at only 19. financial aspects hindered airport development projects. The government’s focus on venture capital has led some to estimate that the industry could reach $3 billion before 2010.115 Physical and Information Infrastructure In the 2007-2008 GCR. it was small (estimated at $200 million in assets in 2006). The country’s airport infrastructure was inherited from the former Soviet Union. Because of Russia’s size. which included the improvement and development of highways. the government transferred the country’s rail assets in 2004 to a new government-controlled company called Russian Railways Co. which ranked in the middle of the 2007-2008 GCR at 56th. seaports. and 36th respectively. it estimated that 58 percent of railway equipment was worn out and that it would cost $20 billion to upgrade the system. a venture capital industry did exist in Russia. with most of their money coming from business people who decided to back certain projects.117 According to Business Monitor International. Russia’s railway system was the most important mode of transport. which traditionally owned and operated the country’s railways. The Russian government planned to retain 60 of the 350 airports under federal supervision and the remaining airports would go under the control of regional authorities. and urban transportation systems.116 When the government decided to initiate these upgrades. Most venture capital money in Russia did not typically come from venture capital funds. 47th. airports.
tungsten. and mercury. Uncontrolled growth along with limited environmental protection resulted in pollution problems in many of its largest cities. in general. titanium.124 The emphasis on growth throughout Russia’s Stalinist history led to significant environmental degradation and. In the past. and companies such as Cisco Systems were betting on future growth. the latter being a legacy of the country’s Soviet past.125 Although the government was gradually beginning to respond to environmental issues. and gold were abundant. bauxite. France. in the 1990s.122 Scientific and Technological Infrastructure Russia’s science and technology infrastructure was still in the process of being developed. making the country self-sufficient in energy. The few natural minerals imported into Russia were tin. the Russian government did not respond as quickly to incidents such as bursting of oil pipelines. copper. and its service could be inefficient and unreliable. the country had up to 40 percent more scientists per capita than Germany. and 20 percent more than India. the damage would take decades and trillions of dollars to remedy. The country ranked 61st on research collaboration between its industries and universities. due to the country’s abundant resources and the belief that the land could absorb pollution. Rostelecom had a strong monopoly in the long distance and international phone service markets. and 50th on company spending on research and development in the 2007-2008 GCR. lead. Cisco announced a venture capital initiative in which the company would invest in technology-related startups and in local venture capital firms that invested in technology. too. as well as an exporter of the fuels. In fact. 27 alternatives to fixed networks. Russia was a major contributor to global ozone depletion. nickel. Both pollution and environmental incidents have led to health problems such as respiratory and endocrine diseases. In 84 of Russia’s largest cities. Its first investment was in a leading Russian e-commerce site similar to Amazon.The Competitive Advantage of Russia IB-73 p. diamonds. In terms of landline phone service. the air pollution was 10 times the accepted safety levels.123 Natural Resources As noted. The country ranked 46th in terms of the availability of scientists and engineers and 37th in the quality of scientific research institutions. However.K. the government identified 40 percent of Russia’s territory as under high or moderately high ecological stress. Russia ranked 44th. and the U. chromium. In April 2007. the country’s environmental record has been dismal.126 . platinum. Other non-fuel minerals such as iron ore.. Local phone companies were only partially privatized under the government’s holding company Svyazinvest. despite the high quality of Russian science. The country accounted for 20 percent of the world’s production of oil and natural gas and Russia had large reserves of both. manganese. Russia was one of the world’s richest countries in terms of raw materials. called Ozon. Russia also had one-fifth of the world’s timber within the forests of Siberia. It had been the world’s largest producer and consumer of Ozone Depleting Substances until several Russian enterprises ceased production of chlorofluorocarbons (CFCs) and halons.
28 Demand Conditions According to Porter’s framework. Petersburg.9 percent increase in the sales of services to the population. and was expected to continue. Russian automotive companies. Loans to individuals recorded unprecedented growth. private consumption rose by 12. The Central Bank reported a 53. despite improved conditions and increasing consumer optimism. Household consumption was buoyant. with many growing Russian companies and an increasing number of foreign competitors.The Competitive Advantage of Russia IB-73 p. especially as average disposable incomes were on the rise. slightly above the median. Since that period. “People who could never afford to buy quality goods now can. which are then able to compete in world markets. “Russia has one of the fastest-growing income and consumption [growth] rates in the world. meaning that its consumers tended to be reasonably knowledgeable and demanding and looked for superior performance attributes rather than the lowest price. The Russian culture of spending rather than saving helped the consumer sector.6 percent increase in domestic demand recorded year-onyear in the first quarter of 2007.4 percent year-over-year in 2006. Part of what was driving increasing consumer sophistication was the improved economy.132 The rapid rise in lending to individuals came from a low base. and continued to expand in the first quarter of 2007. according to the economic development ministry's estimates.131 The consumer sector fundamentally operated in a market-oriented.3 percent.7 percent year-over-year in January through March 2007. Russian buyer sophistication ranked 58th. Gillette. particularly as the government’s emphasis on housing pushed up the traditionally low demand for mortgages. in particular. Danone. following a seven-year decline in the early 1990s. Improving access to consumer credit also helped to fuel demand.6 percent rise in retail sales and a 7. Caterpillar. demand conditions refer to the sophistication of domestic consumption and the pressure that local consumers exert on a country’s firms to create and improve products and services. . Russia had experienced eight straight years of economic growth and consumers had benefited measurably.”128 All the data pointed to an emerging middle class.7 percent rise in the value of ruble credit in 2006.8 percent in 2005. Real disposable incomes grew by 8. particularly in major cities such as Moscow and St.6 percent increase in corporate credit within the same timeframe). Indesit and General Motors. a consumer analyst at Moscow’s Troika Dialog investment bank. Estimates of the middle class segment usually ranged from 20 percent to 40 percent of the population. Domestic credit rose by 46. competitive fashion.129 The proportion of the population living below the poverty line (defined as a subsistence wage of $94 per month) also fell to less than 8 percent. spurring considerable growth in private consumption. it played a stronger role than investment in the 11.127 According to the 2007-2008 GCR. This helped to fuel a 13. in contrast to 38 percent in 1998. such as Coca-Cola. millions of Russians still lived in poverty.130 However.” said Mikhail Terentiev. With real disposable incomes up by 13 percent. particularly in more rural areas. increasing 75 percent in 2006 (more than twice the 38. faced increasingly severe competition from imported and foreign vehicles assembled in Russia. with foreign-currency loans up by a more modest 29.
meaning that government officials tended to favor well-connected firms and individuals.000 by 2011. more firms complain of bribe payments to acquire business licenses. resources. In 2005. bringing high tech’s share of GDP to 5 percent. corruption remained a significant part of the culture. and partnerships needed for innovation to occur more rapidly and easily. to tax collectors. Lipetsk. A federal budget of $75 million was set aside by the government and it expected the parks to employ 19. ranking 92nd. problems with real estate transactions and land privatization. the Russian government began making technology a higher national priority. The initial plan was to establish seven technology parks in seven regions across the country which would be open to technology companies. These clusters bring together the environment. this problem has become less acute in the Commonwealth of Independent States (CIS) and in Central Europe and the Baltic region. and Intel expressed interest in becoming a part of these technoparks. The seven zones were in St. with companies that held monopoly positions or political connections receiving tax breaks. and Rivalry Despite Russia’s successes in the late 1990s and the early twenty-first century. Cisco. As noted. IBM. ranking 86th and 79th respectively. subsidies. and Kaliningrad. According to the 2007-2008 GCR. During the same period. Elabuga. although several of them already had projects in Russia. indicating that crime imposed significant costs on businesses. the quality of local suppliers and the sophistication of production processes were both low.134 .” This initiative aimed to raise the volume of Russia’s IT market to $40 billion. In the twenty-first century. and in dealings with courts in 2005 than in 2002. and 118th in terms of burden of government regulation. Over one-third of the firms trying to purchase premises had to spend over half a year on that procedure. 29 Related and Supporting Industries Within Porter’s framework. Context for Firm Strategy. According to Desai and Goldberg: While there has been some improvement over the past few years. the concept of related and supporting industries refers to the presence of interconnected companies and institutions in a particular field.4 billion by 2011. as they are neither transparent nor fair. additionally. including nanotechnology and biotechnology companies. The government also established special economic zones which provided companies with longterm favorable tax breaks and adherence to private-property laws. The Russian IT Minister predicted that the output of the technoparks would be $749 million by 2008 and $4. Boeing. investment credits. Petersburg. Zelenograd. The intensity of local competition was also low.000 people by 2008 and 75. about 90 percent of the firms trying to purchase land failed to finish the procedure in half a year. Russia’s business environment still posed significant challenges.The Competitive Advantage of Russia IB-73 p.133 In Russia. On organized crime it ranked 103rd. There are. Dubna. Structure. and guaranteed loans. Russia ranked 107th on the scale of favoritism in the decisions of government officials. Putin announced the plan to create a network of “technoparks. to inspectors. Tomsk. It was also 118th on the transparency of government policymaking.
which was weak or nonexistent. Russia’s companies were disproportionately involved in resource extraction and production instead of higher value functions which would serve as a long-term source of competitive advantage. or to the state that may have paid R&D costs.135 Another important issue affecting Russia’s competitiveness was its companies’ lack of breadth in the global value chain. and after-sales services. With a rank of 120th on this measure. implying that relative to other countries its rights were poorly defined and not protected by law. The country’s vast petroleum wealth had freed Russia from foreign debt and enabled it to put aside funds for investment. specifically if they should belong to the inventor. while at the same time allowing the government to reassert Russia’s importance and power as a force to be reckoned with on the world stage. registered IPRs are weakly protected due to inability of public authorities to police producers or importers of pirated goods. there’s so much we can’t know about the direction Russia is heading. Despite Russia’s undoubted strength in the sciences and the high standard of its education system. inhibit technology transfer. others had not yet seen great improvements to their living standards and were impatient for change. a market economy but not genuine democracy. but would international corporations be able to find the right balance between opportunity and risk. while many Russians were benefiting from the country’s increased prosperity. First. at once.The Competitive Advantage of Russia IB-73 p. 30 According to the 2007-2008 GCR. It is both a rising global power and a weak state with corrupt and inefficient institutions. Russia ranked 115th in intellectual property protection. to contribute towards meeting the growing needs of this great country? As one article concluded:136 …. The Kremlin’s regime seems both rock solid and . state sovereignty but not individual autonomy. logistics. These uncertainties complicate collaboration between private firms and public institutes. Russia ranked 122nd in terms of property rights. Second. The great experiment in democracy which began with Gorbachev was compromised by the growing concentration of political power. The opportunities for foreign investors in Russia were undeniably attractive and extensive. the assignment of IPRs remains unclear. Desai and Goldberg commented on the challenging intellectual property rights environment: With regard to innovation. marketing. and impair the development of spin-off companies into independent and growing businesses. the intellectual property rights (IPRs) regime remains one of the primary weaknesses. and the intrusion of the state into the economy was inhibiting the spontaneous development of entrepreneurial business. Yet. a regime that offers its citizens consumer rights but not political freedoms. great challenges remained to bring the country's infrastructure and services up to acceptable standards. sales. such as product design. CONCLUSION As Medvedev took office in 2008. It is. the inventor’s employer. Russians looked to the future with a mixture of optimism and concern.
Although Russia’s economy has performed well in the past 10 years. The more successful Russia’s foreign policy looks. Russia may be more democratic today. 31 extremely vulnerable. simultaneously authoritarian and wildly popular. The more capitalist and westernized Russia becomes. it is more dependent on the production and export of natural resources today than it was during Soviet times. the more unclear its goals appear. Its foreign policy is no less puzzling.The Competitive Advantage of Russia IB-73 p. the more antiwestern its policies seem. but it is less predictable and reliable as a world player than was the Soviet Union. .
3 million).1%.7%. • Terrain: Broad plain with low hills west of Urals.9 million workers: agriculture 10.The Competitive Advantage of Russia IB-73 p.8%.4 million).8%.4%. approx.2%.6 million).075. female 99. • Climate: Ranges from steppes in the south through humid continental in much of European Russia. other or unspecified 15.) • Workforce: Total of 73. Bashkir 1. winters vary from cool along Black Sea coast to frigid in Siberia. Petersburg (4. Tatar 3. industry 29.) • Ethnic groups: Russian 79. People • Nationality: Russian • Population: 141 million (July 2007 est. Novosibirsk (1.8%. Ukrainian 2%.5% (2007 est. uplands and mountains along southern border regions.1%.) • Languages: Russian and local languages • Literacy: Age 15 and over who could read and write: total population 99. 1991 (from Soviet Union) • Constitution: Adopted December 12.) Government • Type: Federation • Independence: August 24.200 sq. km. 1. Yekaterinburg (1. 1993 . male 99. Chuvash 1. Other cities – St. Nizhny Novgorod (1..8 times the size of the U. • Cities: Capital – Moscow (population 10.4 million).2% (2002 est.1% (2006 est. 32 Exhibit 1 Russia: Country Profile Geography • Area: 17.) • Annual population growth rate: -0.S. services 60.9% (2002 census) • Religions: Russian Orthodox 15-20%. other Christian 2% (2006 est. subarctic in Siberia to tundra climate in the polar north. Muslim 10-15%. summers vary from warm in the steppes to cool along Arctic coast. vast coniferous forest and tundra in Siberia.3 million).
medicines. Major suppliers: Germany 13. sugar. and metals account for approx.5%. Superior Court of Arbitration Administrative divisions: 48 oblasts.3%.9%. Japan 6%. wood and wood products.7% (2006 est. Belarus 4.4%. .) Major markets: Netherlands 10. China 7. China 5. Italy 7. U. 7 autonomous okrugs. and many strategic minerals.) • Currency: Russian ruble (post-January 1998 ruble is equal to 1.5%. coal.The Competitive Advantage of Russia IB-73 p. and 1 autonomous oblast Suffrage: Universal from 18 years of age Economy • GDP (Official Exchange Rate): 2005 – $740 billion. 2006 – $734 billion. 2 federal cities. plus considerable underemployment • Natural resources: Wide natural resource base including major deposits of oil.3%. 33 • • • Branches: Executive – President (chief of state). Germany 8. Ukraine 8%.6%. South Korea 4. grain.6%. timber (note: formidable obstacles of climate. natural gas. Real GDP Growth 6.2%. 80% of exports (2006 est. Cabinet Legislative – bicameral Federal Assembly Judicial – Constitutional Court. 4.4%.).1% Source: Compiled from the CIA’s “The World Factbook” (2007) and The Economist Intelligence Unit’s “Country Profile: Russia” (2007).5 billion) – machinery and equipment. Turkey 4. terrain. Italy 4. Premier (head of government). Imports ($171. and distance hinder exploitation of natural resources) • Trade: Exports ($317. 1998 rubles) • Unemployment: 7.000 of the pre-January 1. Ukraine 5.1 percent (2006 est. Supreme Court.S. semi-finished metal products.7%. 21 republics.6 billion) – petroleum and petroleum products. consumer goods.7%. natural gas. 7 krays. Switzerland 4. meat.
609 146.2 6.8 10.4 6.182 765 1.698 6.4 464 24.4 296 25.6 2005 13.0(f) 446(f) -300(f) 146(f) 89(f) 3.059(f) 14.4 5.691(f) 2.661 142.3 244 -125 118 83 7.366(f) 1.328(f) 1.881 7.115 10.9(f) 665(f) .The Competitive Advantage of Russia IB-73 p.8(f) 13.504(f) 6.772 7.5(f) 469(f) -353(f) 115(f) 58(f) 2.131 989 1.934 13.1 9.2(f) 11.4(f) 10.6 20.301(f) 7.5 10.920(f) 16.638 260 1.190 142.1 12.0 11.220(f) 141.9(f) 6.0 1.900(f) 17.1 105 -45 60 47 2.7(f) 2009 17.6 9.5(f) 28.861 143.4 24 28.2 2008 16.0(f) 9.6 2006 14.966(f) 2.5(f) 6.3 9.2 304 -165 139 94 7.342 11.290 2.6 355 -223 132(f) 78 5.700(f) 141.Excluding gold 2000 9.5 176 27.7 7.6(f) 24. 34 Exhibit 2 Russian Federation Macroeconomic Data Annual Indicators GDP at Market Prices (Rb bn) GDP (US$ bn) Nominal GDP at Purchasing Power Parity (US$ bn)* Real GDP Growth (%) GDP per Head (US$) GDP per Head at Purchasing Power Parity (US$) Population (m) Consumer Price Inflation (%) Unemployment (%)* Lending Interest Rate (%) Working capital loans of 1 yr maturity* Exchange Rate (average Rb:US$) Exports of Goods fob (US$ bn) Imports of Goods fob (US$ bn) Trade Balance (US$ bn)* Current Account Balance (US$ bn) Budget Balance (% of GDP)* Foreign Exchange Reserves (US$ bn) .7 7.2 2007 15.5(f) 556(f) 24.4(f) 13.7 10.4 10.087 8.233 1.
com (April 8. . Country Data. “China: Selected Series.bvdep.” http://countrydata. All other information is from Economist Intelligence Unit. 35 Annual Indicators Total Foreign Debt (US$ bn) 2000 160 2005 229 2006 251 2007 341(e) 2008 378(f) 2009 406(f) Notes: f=forecast. June 11. e=estimate Source: Data marked with an asterisk is from EIU Data Services.The Competitive Advantage of Russia IB-73 p. 2008. 2004).
363 175.869 561.070 174. 36 Exhibit 3 Foreign Direct Investment (FDI) in Russian Federation (2001-2006) 2001 Russian Federation --Inward --Outward Comparative Data Developing Economies --Inward --Outward World --Inward --Outward In Million US$ 2002 2.145 43.301 314.095 651.958 9.194 379.215.398 1.444 13.305.284 2002 2002 2.” Data from 2004 through 2006 compiled from UNCTAD’s “World Investment Report 2007.979 2.421 3.145 43.284 2002 2003 7.363 162.188 647.421 3.469 2.431 47.104 283.852 1.533 2001 209.789 Source: Data from 2001 through 2003 compiled from UNCTAD’s “World Investment Report 2004.766 12.732 17.727 2003 2004 15.860 945.138 35.” .030 117.336 742.782 2004 2005 12.445 162.143 877.188 647.382 823.095 651.The Competitive Advantage of Russia IB-73 p.316 115.763 2005 2006 28.795 837.825 711.566 557.
June 2008. September 2007.9 (f) 131.1 114.34 30.0 122.The Competitive Advantage of Russia IB-73 p. f=forecast Source: Nominal real effective exchange rate data compiled from Global Financial Data.00(f) 24.69 28.81 28. 37 Exhibit 4 Ruble-Dollar Historical Exchange Rate (2000-2009) 2000 Nominal exchange rate (Rb/US$)* Close Real effective exchange rate index – CPI based** 2001 2002 2003 2004 2005 2006 2007 2008 2009 28.8 79.7 81.0 107.12 29.50(f) 66.16 31.2(f) Notes: * Expressed in re-denominated rubles **Trade-weighted basket of currencies converted to an index (1997=100) and adjusted for relative price movements.19 25. .28 27.9 88.58 24. Real effective exchange rate data compiled from EIU Country Data.2 97.1 77.
Source: Economist Intelligence Unit.319 2.990(e) 46. .8 -6 -4.The Competitive Advantage of Russia IB-73 p.1 (e) Kazakhstan 104 167 (e) 10.8 -7 -6.6 (e) 2.1 36 (e) 8.2 78 6. 38 Exhibit 5 Comparative Economic Indicators (2007) Russian Federation and Other Countries Russia 1.6 (e) 16.7 40(e) 21.5 n.3 183 5.4 (e) Germany 3.a.6 10.807 33.5 -16 -3. June 2008.290 2. n.990 (e) 82.760 (e) 15.661 142. Country Data.0(e) Ukraine Poland 141 422 323 (e) 621 (e) 6.1 2.a.2 12. paid (%) Note: e=estimate.2 16 (e) 24.291 (e) 38.9 22 (e) 39. GDP (US$ bn) GDP (US$ bn at PPP) GDP per head (US$ at PPP) Population (m) Consumer price inflation (av %) Current-account balance (US$ bn) % of GDP External debt (US$ bn) Debt-service ratio.087 14.3 9.
team members would support one another. There had always been inequality and struggles for power. as highly qualified scientists and doctors pursued better-paying work abroad. stony resolve. Russian workers typically wanted a place where they would be understood. but in times of crisis. Some observers likened present-day Russia to the American Wild West of the 1870s⎯fortunes were being made and sometimes lost in the scramble. Women had reasonable access to key professional positions⎯virtually all doctors. were big spenders. Teamwork Russian society had a pronounced collective emphasis. They wanted work to feel like home. Outside the cities. Levels of income and quality of life in Moscow and St. Only a handful of people earned more than $400 a month and they were in Moscow. which led to a debilitating braindrain after 1991. Many Russians. Groups might even become almost closed to outsiders. where the cost of living was high compared to the regions. Russians wanted and needed to feel a part of a greater good. Young children were taught how to behave and relate to others from an early age. Russian culture was characterized by two main groupings: the intelligentsia and the working class. and their extravagant spending habits. Harshness and casual indifference were stark features of everyday Russian society. Yet the vast majority of working Russians got by on the equivalent of between $50 and $300 a month. needed time on the job to chat. One of the biggest changes since the break-up of the USSR has been the rapid rise to wealth of some individuals. However. were female. as most did not trust the ruble. and strong will) was a characteristic of the Russian people (who had been isolated from the rest of the world for centuries). or at least at someone else’s expense. often assuming that wealth was amassed dishonestly. and many were still reluctant to deposit cash in a bank following the high-profile collapse of some banks and investment schemes in the late 1990s. and teams often developed a family atmosphere. Petersburg greatly surpassed those in the other regions. Respect and deference for authority figures was the norm in every classroom. An emergent middle class had begun to establish itself in major cities such as Moscow and St. label-conscious. as well as rural and urban dwellers.The Competitive Advantage of Russia IB-73 p. for example. . 39 Exhibit 6 Doing Business in Russia and Characteristics of Russian Society In 2007. located primarily in the big cities. such as those between free-market economists and nationalists. Attitudes Toward Money In Russia. Many Russians held their savings in US dollars or Euros. Russians tended to be uneasy about financial success. Laws existed to protect against racist-related violence but were rarely invoked. and time off for special occasions. Petersburg. Russia was still going through a tortuous struggle to exchange the values of communism for those of a free-market economy and democracy. ethnic minorities had a harder time. Russians worked very well together in teams. relations between people were almost entirely oriented around money. Diversity and Lifestyle Diversity was not a big concern of most Russian companies. and gadget-loving. There could be a high level of human contact between colleagues. Ethnic tensions within Russia were also coming to a head and threatening to disrupt social stability. Lifestyles varied enormously between the rich and poor. Distance as a means of survival (often manifested as selfreliance.
40 Change at short notice could unnerve a team. Russian regulations represented the biggest liability to any successful joint venture.gov/bisnis/country/Rsfactsheet_2002. however. Representative offices and branches were not legal entities under Russian legislation. were often lacking. a good legal expert was essential for anybody setting up in Russia. Status was valued and respect for age and position was expected to be observed. If the manager stood up for workers’ interests. which was liable for their activity in Russia.doc. assertive. fairly dictatorial. 2001 Federal Law "On State Registration of Legal Entities" (entrepreneurs). Registration Business registration in Russia was regulated by the following basic laws and government resolutions: • • • • The 1999 Federal Law “On Foreign Investment in the Russian Federation. Conducting business without registration was illegal. so typically would have grown up in the Communist era. Providing State Registration of Legal Entities" of May 17. The August 8. 2002).. Majority ownership of a company was different in Russia from the West. Russian leaders were almost always male. 319 "On Authorized Federal Entity of the Executive Power. . and inspirational⎯but also to understand and work at a grassroots level.S. The privately held. and even the humblest of employees felt free to speak to the boss. closed joint stock company (ZAO) and the publicly held. International Trade Administration. then s/he could count on their loyalty. opened joint stock company (OAO). Since these regulations were in constant flux. as accepted in Western Europe and the U. Registration as an individual private entrepreneur.htm (December 26. but were considered subdivisions of their head office.137 Source: Compiled from TMA’s Country Navigator: Russia. The Russian Government Resolution No.The Competitive Advantage of Russia IB-73 p. but Russians often operated without back-up or contingency plans. Russian law offered several commonly used modes to conduct business. The representative or branch office of a foreign company. Older-style Russian managers were. Department of Commerce. as most companies required unanimity among the partners for major decisions. Management skills. including: • • • • Several different forms of corporations such as the limited liability company (OOO). so change had to be implemented with care and sensitivity. http://www. and mostly middle-aged. “The Russian Mindset” (2007) and BISNIS.” The 1999 Civil Code. 2002. Everyone was entitled to have his or her voice heard. 51 percent was not a controlling interest.bisnis. whereas the more educated managers would let objective facts dictate the truth. Russian managers were expected to be authoritarian.S. September 2002. although Russians were enthusiastic to learn. U. An enterprise was considered a democratic institution.
2 7. The percent of response figures listed above are weighted to reflect the assigned rankings. The Global Competitiveness Report 2006-2007 (New York: Oxford University Press.0 8.3 8.The Competitive Advantage of Russia IB-73 p. Source: World Economic Forum. respondents to the World Economic Forum’s 2007 Executive Opinion Survey were asked to select and rank the five most problematic factors for doing business in Russia (from a list of 14 factors).0 Out of 127 countries 71 77 70 Rank Out of 131 countries 58 116 65 37 60 45 84 33 109 72 88 57 To compile the data in the table above. . 41 Exhibit 7 Sample of Data on Russia from the 2007–2008 Global Competitiveness Report Competitiveness Rankings Global Competitiveness Index (GCI) Overall Institutions Infrastructure Macroeconomic stability Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market sophistication Technological readiness Business sophistication Innovation Business Competitiveness Index (BCI): 2006-2007 Overall Ranking Sophistication of company operations and strategy Quality of the national business environment Most Problematic Factors for Doing Business Corruption Tax regulations Tax rates Crime and theft Inefficient government bureaucracy Access to financing Inflation Percent of responses 18.4 8.0 10.8 15. 2007).
All rights reserved. Institute for Strategy and Competitiveness. Reprinted by permission of Michael E. Harvard Business School. Porter.The Competitive Advantage of Russia IB-73 p. 42 Exhibit 8 Excerpts from Porter’s Research on Russian Competitiveness Source: Presentations on National Competitiveness. . Copyright © 2007.
Porter.The Competitive Advantage of Russia IB-73 p. Institute for Strategy and Competitiveness. All rights reserved. Copyright © 2007. Harvard Business School. 43 Source: Presentations on National Competitiveness. . Reprinted by permission of Michael E.
Reprinted by permission of Michael E. 44 Source: Presentations on National Competitiveness. Copyright © 2007. Institute for Strategy and Competitiveness.The Competitive Advantage of Russia IB-73 p. Porter. All rights reserved. Harvard Business School. .
http://www.” The Economist. 27 Ibid. cit. Bureau of European and Eurasian Affairs. February 2007. 29 “New Jobs. Pursued by a Bear. February 28. 30 “Russia – Political Risk.democracy. 2008). 2007). pp. 21 “Background Note: Russia. May/June 2008.economist. “The Russian Economy in 2006. June 5. 15 “Russian Legislative Election—2007. http://www. 29 A Strange Kremlin Wedding. July 1996. During Yeltsin’s presidency.economist. August 23.cfm?story_id=10792183 (June 5. http://www. 2008).” www. March 2. 45 Endnotes Igor Nikolayev. Russia had a younger generation of powerful businessmen favored by the Putin administration and an influential group of former members of the security services.com/world/europe/displaystory.com/research/articlesBySubject/displaystory. 12 “Russia: A Country Study.” The Economist.wikipedia. 22 “A Putin-Shaped Throne. 28 “Russia Country Profile. http://lcweb2. 4 Powerful businessmen. 20 “Constitutional Court of the Russian Federation.cfm?subjectid=349002&story_id=10765120 (June 5. May 15.economist. 2008).” Library of Congress.com. December 2006. May 8. 2008. http://www.loc. 2008.” The Economist. 9 Padma Desai.S. 2008).wikipedia.com/world/europe/displaystory. http://www. 2008.wikipedia. 2008..” Foreign Policy. 2008.org. http://en. by 2007.” The Washington Post. op. 2007). Conversations on Russia: Reform from Yeltsin to Putin (Cary.washingtonpost. 13 “Background Note: Russia. May 8. http://en. cit.economist. cit. 2008. 31 Ibid. 2008. 2007. Some of these oligarchs served as ministers while others were awarded prestigious official positions. 3 Economist Intelligence Unit. 2008).” www.” The Economist.economist. 2007). 2008). Country Data. 17 “Federation Council of Russia.” The Economist.org/wiki/Constitutional_Court_of_the_Russian_Federation (September 4. 18 Desai.economist. 25 “An Ugly Victory. NC: Oxford University Press. 14 Ibid.wikipedia. 2007). wherein a number of Russian companies were ‘privatized’ at bargain rates in exchange for loans used in part to fund Yeltsin’s 1996 re-election campaign.” op. cit. the Russian government engineered the infamous loansfor-share scheme in 1995.html (December 19.org.wikipedia._2007 (September 4. cit. 2007).com/world/europe/displaystory.org/wiki/Federation_Council_of_Russia (September 4.gov/frd/cs/rutoc. cit. 2008. http://en.” The Economist.” March 1998. http://www. pp.com/opinion/displaystory. 2002). 25-28.cfm?story_id=11332639 (June 5. 6 “Background Note: Russia. 2006). 2008.” Datamonitor. 24 “An Ugly Victory. Old Faces. 11 Ibid.The Competitive Advantage of Russia IB-73 p.” op.cfm?story_id=11332356 (June 5.com/world/europe/displaystory.” The Economist.” BMI. March 6. commonly referred to as ‘the oligarchs.’ exerted considerable influence on Russian political life during the 1990s. “What Russia Wants. 48-51.” op.” www.html (September 4. March 2. “Alternative Voting Systems for Electing Deputies to the State Duma of the Russian Federation.cfm?story_id=10808981 (June 5. 26 “Enter.com/wp-adv/specialsale/spotlight2006/articles_v6/economy.wikipedia.cfm?story_id=10792183 (June 5.ru/english/library/comments/eng_1998-5. Apart from the continuing influence of the ‘old’ oligarchs. June 11. 7 “Russia Country Profile.html (September 4. 8 “Smoke and Mirrors. http://www. http://www. Inc. State Department.” The Economist. 2 “Putin’s People.” U.org/wiki/Russian_legislative_election. 10 Ivan Krastev.” op. 5 “Russia Country Profile. 23 Ibid.org. 19 “Federation Council of Russia. 1 . 16 Robert Alan Dahl.” op.
” American Metal Market.org. 2008.S.” Eurasia Daily Monitor. June 11. August 2007. 2008. cit.The Competitive Advantage of Russia IB-73 p.ru/busbrief/20080131/55306488.html (June 12.pbs.forbes. 2007. 32 .” op. cit.” The Wall Street Journal. May 8. 2006. 2008. 58 Ibid.co. 2007).cfm?story_id=11376699 (June 5.” op.” op. 2007). 54 “Background Note: Russia. July 2007.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/T/TNK-BP_Overview.timesonline. 46 Alan Cullinson and Marc Champion. 57 Vladimir Kvint.” Economist Intelligence Unit. 1998. 2007.cfm?subjectid=349002&story_id=10765120 (June 5. “Russia’s Surging Economy.” The Wall Street Journal. 36 “Background Note: Russia. cit.” op.” The Times Online. http://www.” U. 2008). 49 “The Economy and Investment Climate in Russia. January 31.” American Chamber of Commerce in Russia.com/world/europe/displaystory. http://www. “Small Victory for Speech in Russia.stm (September 28. 33 A Strange Kremlin Wedding.uk/tol/business/industry_sectors/natural_resources/article1577240. 66 “BP Playing Russian Roulette.org/edm/article. 2007.cfm?story_id=11332639 (June 5. 47 Economist Intelligence Unit. http://www. cit. 51 “Background Note: Russia.pdf (September 28.” The Economist.stm (September 28.” 2007. http://www. http://en.” op. May 15. 38 “New Jobs. “Putin. 2007). 2007).html (June 12. 46 Ibid. A10. May 28. October 2003.php?article_id=2372149 (September 28.” The Economist. 2008. 50 “Zubkov Forecasts $40 Bln Budget Surplus in 2008. cit.” Forbes.html (September 5. 39 “Russian Financial Crisis. Companies. http://www. http://news.” op. 2008.co. White and Daria Solovieva. 63 Sergei Blagov. 33 “New Jobs. 2007).” op. 35 Krastev.wikipedia. 2005. 2008. 65 “BP Sells Siberia Stake to Gazprom.” www.com/world/europe/displaystory. p.uk/1/hi/business/6230556. http://news.bbc. 2008. May 8. A9.” The Economist. http://business. March 23.org/wiki/Russian_financial_crisis (September 5. op.co. Old Faces. 2007). 44 “Smoke and Mirrors. 2008).bp. Department of State. Still Plays a Presidential Role Overseas. 2008). March 28.” BBC News. “Rosneft Wins Key Yukos Assets in Eastern Siberia.org/newshour/forum/september98/russia.mnweekly. 60 “TKN-BP Overview. 52 Ibid. BBC News. cit. http://www. September 17.uk/1/hi/business/4854530.com/research/articlesBySubject/displaystory.S. http://www. 43 “Smoke and Mirrors.economist. February 28. 34 “Country Outlook. http://www. 55 Ibid. May 15. June 4. 41 “Russian Financial Crisis.” Country Navigator.ece (September 28. June 22. 64 “Russia Risk Profile. 2007).economist. Old Faces.bbc.wikipedia. 59 “Doing Business in Russia: A Country Commercial Guide for U.” Moscow News. 37 Gregory L. 48 “Country Outlook. 2007. 62 “Rosneft Buys Asset Cheaply After BP Drops Out of Early Bidding.economist. cit. 53 “Russia Country Profile. p.jamestown.” BP. 61 “Bankruptcy Court Opens Yukos Case. & Foreign Commercial Service and U.S.” Emerging Europe Monitor. 2008). 42 “Flight Pack: Russia. Country Data. TMA 2007. Now Premier. 2008.” The Economist. cit. 2008). 40 “Russia’s Crisis: Will Russia Survive its Economic and Political Crisis?” PBS. January 8. 2008.com/2008/01/08/russia-economy-projections-oped-cx_vkv_0108russia. 56 UNCTAD’s “World Investment Report. 45 Ibid.
http://www. 2008).” Wall Street Journal. 2004).worldwidetax.isc. 94 This section was drawn heavily from TMA’s Country Navigator: Russia.cfm?story_id=11376699 (June 5. cit. 2008.” op. 68 Vedomosti. 80 Sheila Puffer. 2004.com/world/europe/displaystory. 1990). and Firms. “Chinese Competitiveness: Where Does the Nation Stand?” Institute for Strategy and Competitiveness (Harvard Business School). White and Guy Chazan. Regions.18. 74 “Trouble in the Pipeline. cit. p. 88 A. “Boardroom Brawl Roils BP’s Russia Venture. op. cit. 85 G. July 9. cit. “Competitiveness in a Globalized World: Michael Porter on the Microeconomic Foundations of the Competitiveness of Nations. 72 Gregory L. http://commercecan.tfreview.Legal+Issues/exactphrase. 86 “New Jobs. 2008.06.com/xq/asp/txtSearch. cit. p. May 8. Porter. 2006.” CommerceCan.” Journal of International Business Studies.com/opinion/displaystory. http://www. p. as was Exhibit 3. 47 “Another Inspector Calls. June 18. 71 Gregory L.0/articleid. June 12. Shleifer. 2007).ca/scdt/bizmap/interface2.worldwide-tax.” CountryWatch.pdf (August 19. cit. 77 “New Currency Control Law.hbs. 96 Michael E. “Can Russia’s State-Managed Network Capitalism Be Competitive?” Northeastern University.” Wall Street Journal 19. The Global Competitiveness Report 2006-2007 (New York: Oxford University Press.” Wall Street Journal. “The Russian Mindset. cit.economist. http://www. 2006.com/research/articlesBySubject/displaystory. 100 Ibid. 102 Ibid.com. 98 Ibid. 2007. 79 “New Currency Control Law.” op. March 27.economist. 101 World Economic Forum.” op. 93 “Russia Country Profile. Q3 2006.The Competitive Advantage of Russia IB-73 p. 83 Puffer. 2007).asp (September 5.cfm?subjectid=349002&story_id=10925679 (June 5. Chazan. Old Faces. 2005). 95 B. Tuda Nelzya. 70 Ibid.economist.” The Economist.. 99 Ibid. 81 Ibid. Porter. 73 Ibid. 76 “Background Note: Russia.edu/pdf/CAON_China_2004. 69 “Another Inspector Calls. http://www. The Competitive Advantage of Nations (New York: Free Press. August 2006. 2007. 2008). 2007). 90 “Business Environment: Russia. http://www. June 30.cfm?story_id=11332313 (June 5. 2008).” Business Monitor International. 67 .” www. 97 Michael E. 91 Ibid.” op. Stonehouse. White and Guy Chazan.1/sid. A1. 82 “Smoke and Mirrors. 2007). May 15.” op. 2006.7B40443F-1398-475A-B3E581468606D1AB/qx/display.” 2007.” op.com/russia/russia_tax. 2008. 92 “2007 Country Review: Russia. cit.” Trade and Forfaiting Review.DOC (September 5. Snowdon and G.” The Economist. 2008. 87 Ibid. op. 192. 2008. 78 “Alla Russia Con Amore.ic.nsf/vDownload/IMI_0502/$file/X_3717013. A Normal Country: Russia After Communism (Cambridge: Harvard University Press. December 11. “BP is in the Dark in Battle to Save Russian Venture. Inc. 84 “Putin’s People. 75 “Russia Income Taxes and Tax Laws. http://www.gc. A1.” The Economist.. “Kremlin Capitalism.htm (September 5. 89 Puffer.
August 24.RussiansAbroad.internetworldstats. “Putin Has Been Working on the Railroads. 2007.html (September 6. http://countrystudies.” Foreign Policy. November 11. 2007).russiansabroad. 114 Ibid.American. 2007). 120 “Internet World Stats.com/europa2. 131 “Country Data: Russia. 48-51.edu/initeb/sw5840a/infrastructure. http://countrystudies. 110 Ibid. February 17.” The Banker..htm (September 6. 125 Ibid. The Global Competitiveness Report 2006-2007. 2007) p.htm (June 6. 2005. A16. 128 Michael Mainville. “Will Russia Bet on its People?” The International Herald Tribune. 2007. “Russia’s Innovation Gap.brookings. Desai and Itzhak Goldberg.brookings.” Moscow Times. 136 Ivan Krastev. 95.” op. 108 Raj M. pp.” The Toronto Star. http://www. http://www. 135 Ibid. 109 Simon Ostrovsky..edu/views/op-ed/20061024desai. cit. “What Russia Wants.” www. p. op. July 16.” October 2006. 118 “Russia Infrastructure Forecast Q2 2007. “Report Warns of Crisis in Workforce. 134 Raj M.com/russian_history_89.” Economist Intelligence Unit. 111 Ibid.edu. 2007. 2004.” October 2006. April 28.” BusinessWeek. 2007). 104 World Economic Forum..edu/views/op-ed/20061024desai. 2006. 2007. New York..edu/views/op-ed/20061024desai. cit. cit.” www.htm (September 6. 2007. 121 “Telecommunications Forecast Q2 2007. 115 Thomson Financial and National Venture Capital Association. 1996. June 14. 133 World Economic Forum. The Global Competitiveness Report 2007-2008 (New York: Palgrave MacMillan. August 9.” op. Curtis. cit. 132 Ibid. 105 Porter.The Competitive Advantage of Russia IB-73 p.” http://www. 117 Ibid. May/June 2008. 123 “Russia Infrastructure Forecast Q2 2007.brookings. 112 Raj M. op. 95.htm (September 6. 126 “Russia. “Russia-Kremlin Nurtures Venture Capital—Moscow Hopes Venture Capital Will Boost Investment and Kick-Start a High-Tech Industry That Is Sadly Lacking Funding. http://www.htm. 2003. 2007). Desai and Itzhak Goldberg. “Chinese Competitiveness: Where Does the Nation Stand?” op. “Russia’s Innovation Gap.us/russia/25.htm.” The Chronicle of Higher Education.” Business Monitor International. “Russians Relish Their Freedom to Shop.” Business Monitor International. “Russia Looks to Reform its Higher-Education System. 124 Glenn E. “Russia’s Innovation Gap. cit.” op. November 1. p. 130 Ibid. http://www. 119 Ibid. 103 . 106 Thomas Friedman. 113 Ben Aris. p.htm. 107 Byron MacWilliams.us/russia/59. 129 “Background Note: Russia.” October 2006. 116 Jason Bush. 122 “IT in the Russian Federation. 95.” Washington: GPO for the Library of Congress. 48 World Economic Forum. June 14. 2008). p. Desai and Itzhak Goldberg.com. 127 World Economic Forum. “Russia: A Country Study. http://www. 22. cit. op. 137 “Flight Pack: Russia. cit.american.
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