Russia

Political Environment (political system, structure, political parties,

political risk)

Political System

The politics of Russia (the Russian Federation) takes place in the framework of

a federal semi-presidential republic. According to the Constitution of Russia, the President of

Russia is head of state, and of a multi-party system with executive power exercised by the

government, headed by the Prime Minister, who is appointed by the President with the

parliament's approval. Legislative power is vested in the two chambers of the Federal

Assembly of the Russian Federation, while the President and the Government Issue numerous

legally binding by-laws.

General Political Environment

The ruling United Russia party suffered significant losses in the parliamentary elections on

December 4th 2011, seeing their two thirds constitutional majority drop to a slim majority

with 49% of votes. Despite a significant decline in popular support (down from 70% in the

2008 Duma elections) there were allegations of widespread vote-rigging which led to

demonstrations, highlighting the authorities’ growing challenge of retaining legitimacy.

Protesters have clear demands including the release of political activists and the immediate

organization of fair and open elections. Despite the demonstrations and the waning support

for United Russia, it is widely expected that Putin will win the Presidential election in March

as he remains the most popular political figure in Russia and there is no credible alternative.

Under a new law that came into effect under Medvedev, presidential terms have been

extended to 6 years (from 4) which will see Putin’s holding the President’s office at least until

2018.

Political Structure

Political power in Russia is highly centralized in the President and the Presidential

Administration within the Kremlin which exert their influence over all aspects of domestic

and foreign policy. Following the election of former President Vladimir Putin in early 2000,

political stability and policy predictability gradually increased, which has been continued

under President Dmitry Medvedev, Mr. Putin’s protégé. The State Duma is a body that is

loyal to the Kremlin and has little autonomy. Given the dominance of United Russia in the

Duma and Mr.Putin’s position as Prime Minister, the legislative and executive branches are

for all intents and purposes now fused with little effective opposition to the ruling party.

Parties represented in the State Duma

NameAbbr

.Ideology Leader MPs

United Russia ERRussian conservatism, Pragmatism

Dmitry

Medvedev238

Communist Party of

the Russian

Federation

KPRF Communism, Marxism-Leninism, Left-

wing nationalism

Gennady

Zyuganov92

Liberal Democratic

Party of Russia

LDPR Nationalism, Pan-Slavism Vladimir 56

NameAbbr

.Ideology Leader MPs

Zhirinovsky

A Just Russia SRSocial democracy, Democratic socialism

Nikolai

Levichev

64

Legal Environment

The Russian Court System

The Russian court system is composed of three essentially separate and distinct court systems.

They are the: (1) Courts of General Jurisdiction; (2) Arbitrage (or Commercial) Courts; and

(3) Russian Federation (and in a few cases, "subject"-level) Constitutional Courts. In

distinction to the legal system of the United States, both the Courts of General Jurisdiction

and the Arbitrage Courts have their own appellant structures, which do not eventually end up

in a single final-instance court such as the United States Supreme Court. With respect to

constitutional issues, in the Russian system, if a constitutional issue is encountered during the

course of litigation in either the Courts of General Jurisdiction or in the Arbitrage Courts, the

constitutional issue is referred out to the Constitutional Court, adjudicated there, and then

reported back to the appropriate non-constitutional court for further proceedings in

accordance with the Constitutional Court's ruling.

In very broad terms, the Courts of General Jurisdiction decides on criminal and family

disputes, as well as civil disputes between private individuals.

The arbitrage Courts decide on disputes between business entities, although the phrase

"business entity" includes individuals who are registered to do business.

The Russian Federation Constitutional Court adjudicates matters which are governed by the

Russian Federation Constitution. A small minority of subjects of the Russian Federation have

sufficient political status to permit them to adopt their own "subject" constitutions, and

therefore, their own "subject" constitutional courts.

Economic Environment

Economic System

Russia has undergone significant changes since the collapse of the Soviet Union, moving

from a centrally planned economy to a more market-based and globally integrated economy.

Economic reforms in the 1990s privatized most industry, with notable exceptions in the

energy and defense-related sectors. Nonetheless, the rapid privatization process, including a

much criticized "loans-for-shares" scheme that turned over major state-owned firms to

politically connected "oligarchs", has left equity ownership highly concentrated. As of 2011,

Russia's capital, Moscow, now has the highest billionaire population of any city in the world.

Main Products

Major Exports

Russia's major exports are fuels, energy, metals, machinery & equipment, chemicals, and oils

Vadca, and clothes.

Major Imports

Russia's major imports are machinery & equipment, food and agricultural raw materials,

chemicals and metals.

Economic Risk

According to the most recent data released by the Central Bank of the Russian Federation, the

year-to-date trade balance registered a surplus of US$148.5bn through to September, 29.2%

higher than the same period of the previous year. This was due to strong export growth of

32.5% over the first nine months of the year. As result, we hold to our view that the current

account will remain in surplus to the tune of 4.8% of GDP in 2011 before narrowing to 3.9%

in 2012 on account of a smaller trade in goods surplus and rising outflows from Russia’s

income balance.

Monetary Environment

Currency System

Russian Monetary policy let the Ruble to fluctuate in a narrow band. The regime emerged in

an environment of very low international reserves, low monetization and public distrust of the

ruble.

Gradual monetization backed by the accumulation of international reserves. As the terms of

trade continued to improve the emphasizes of policy shifted to limiting excessive real

appreciation of the rouble to protect competitiveness of domestic producers.

Currency Risk

Trade Environment

According to the World Trade Association, Russia's exports by main destination were as

follows:

For Russia exports by main origin

1. European Union (27) 58.7

2. China 5.2

3. Ukraine 5.0

4. Turkey 4.7

5. Belarus 4.3

For Russia imports by main origin

1. European Union (27) 44.6

2. China 9.4

3. Ukraine 6.7

4. Japan 5.7

5. Belarus 5.0

Russia Trade, Exports and Imports

Rich in natural resources, Russia has the largest natural gas reserves in the world, the second

largest coal reserves and the eighth largest oil reserves. All these resources constitute a major

portion of Russia’s exports. In fact, 80% of Russia’s exports constitute oil, natural gas, metals,

timber, and defense equipment. Russia uses these reserves to secure both its economic and

political interests.

The EU is by far Russia’s biggest trading partner, accounting for 46.8% of its overall trade in

2010, and by far the most important investor for Russia. It is estimated that up to 75% of

foreign direct investment in Russia came from EU member states.

Russia's Trade Indicators at a Glance (2010)

Current Account Balance: US$181.7 billion or 4.9% of GDP

Trade to GDP Ratio: 43.3%

Total value of exports: US$429.4 billion

Primary exports: oil, natural gas, metals, timber

Primary exports partners: EU (44.8%), United States (6.0%), China (5.8%), Turkey (4.9%),

Ukraine (3.7%)

Total value of imports: US$247.7 billion

Primary imports: machinery, transport equipment, plastics, medicines, iron and steel,

consumer goods, meat

Primary imports partners: EU (50.2%), China (14.1%), Ukraine (5.3%), Japan (3.8%), Belarus

(3.4%)

Russia - International trade/ main trading partners

Russia's foreign trade consisted of US$75 billion in exports and imports of US$48.2 billion in

1999 and then to US$105.1 billion in exports and US$44.2 billion in imports by 2000. Russia

sells a broad range of commodities and manufactures including petroleum and petroleum

products, natural gas, wood and wood products, metals, chemicals, and a wide variety of

civilian and military manufactures. Russia's largest trading partners for exports are Ukraine,

Germany, United States, Belarus, the Netherlands, and China. Russia imports machinery and

equipment, consumer goods, medicines, meat, grain, sugar, and semi-finished metal products.

Russia's largest trading partners for imports are Germany, Belarus, Ukraine, the United States,

Kazakhstan, and Italy.

Real GDP growth in Russia in 1999 was over 3 percent. The main contributing factors were

the devaluation of the ruble, which made Russian products competitive abroad and at home;

high commodity prices on international markets, particularly oil (while domestic costs were

substantially lower); low inflation and a consensus that inflation must be controlled; and a

relatively healthy fiscal situation based on strict government budget discipline. The major

contributor to growth was trade performance. Exports rose to US$74.3 billion while imports

slumped by 30 percent to US$41.1 billion. As a result, net exports ballooned to US$33.2

billion, more than double the previous year's level. Higher oil prices had a major effect on

export performance, particularly in the latter half of the year. Even though volumes of crude

oil exports (to non-CIS countries) were down by 3 percent, prices jumped 46 percent. Fuels

and energy comprise 42 percent of Russian exports. Other exports performed better in 1999;

fertilizer exports were up 16.7 percent, forestry products up 38 percent, copper up 17.6

percent, and aluminum up 10 percent.

Tariff-Rate Quotas

Russia has committed that its agricultural policies will be consistent with its bilateral and

multilateral commitments, including the United States-Russia WTO Bilateral Market Access

Agreement. Consistent with the 2005 United States-Russia Meat Agreement, the Russian

Government established country specific TRQ volumes (including for the United States) and

reduced in-quota tariff rates for beef, pork, and poultry meat imports from 2006 to 2009.

However, in October 2008, Russia proposed renegotiating the terms of access for poultry and

pork for 2009. In December 2008, U.S. and Russian negotiators agreed to decrease the 2009

in-quota volume for U.S. poultry, increase the 2009 in-quota volume for pork, and increase

the over-quota tariff rates for both poultry and pork. Because the 2005 Meat

Agreement expires at the end of 2009; the United States expects to begin negotiations this

year on these products.

Import tariffs on automobiles, aircraft, and aircraft parts have presented particular obstacles to

U.S. exports to Russia. The effect of the tariff, VAT, and customs handling fees on aircraft

was equivalent to a 40 percent tax, making it virtually impossible for Russian airlines to

afford to purchase foreign planes. When Russia joins the WTO, tariffs on aircraft and aircraft

parts will be substantially reduced. Tariffs on civil aircraft parts, including engines, will be

reduced to an average of 5 percent. As a result of our bilateral agreement on leased aircraft,

which entered into force on November 19, 2006, in January 2007, the Russian government

approved the decision to cut import duties on foreign leased aircraft from 20 percent to 8

percent for aircraft with 50 seats and fewer and from 20 percent to 10 percent for aircraft

Between 115 seats and 160 seats. The measure would apply to planes leased for no more than

three years and would remain in force until January 1, 2011. However, the necessary decree

implementing this tariff reduction has not yet been issued.

Investment Barriers

Russia’s foreign investment regulations and notification requirements can be confusing and

contradictory, which has an adverse effect on foreign investment. In addition, U.S. investors

and others cite corruption in commercial and bureaucratic transactions as a barrier to

investment. In 2008, reports by the World Bank, Transparency International, the Foreign

Investment Advisory Council, Russia’s Higher School of Economics, and Columbia

University found that corruption had worsened and had become a greater concern for Russia’s

businessmen. Reasons cited for these trends were slowing reforms and government

Complacency fostered by oil revenues. Telecommunications and media services companies

also report investment restrictions. Russian entities with more than 50 percent foreign

ownership are prohibited from sponsoring television and video programs or from establishing

television organizations capable of being received in more than 50 percent of Russia’s

territory or by more than 50 percent of the population. Further obstacles to increased U.S.

investment in Russia include inadequate dispute resolution mechanisms, weak protection of

minority stockholder rights, the absence of requirements for all companies and banks to

adhere to international accounting standards, and the failure of some companies to adopt and

adhere to business codes of conduct. Initiatives to address these shortcomings, either

Through regulation, administrative reform, or government-sponsored voluntary codes of

conduct, have made little headway, and contribute to endemic corruption. Inadequate

transparency in the implementation of customs, taxation, licensing, and other administrative

regulations also discourages investment. In 2008, the United States and Russia began

exploratory discussions on the potential negotiation of a bilateral investment treaty.

Other Barriers

The U.S. logging industry reports that illegal logging accounts for as much as 20 percent to 30

percent of Russia’s timber harvest. This percentage continues to increase, particularly in the

Russian Far East, due to its proximity to China, where many illegally harvested Russian logs

are smuggled for further processing. Supplies of illegally harvested timber in China’s market

adversely affect U.S. exports to that market. The Russian government is taking steps to

combat illegal logging, having adopted a National Plan initiative in 2006 with the objective of

reducing timber poaching by 20 percent to 30 percent. However, poor socio-economic

conditions in remote forest areas, lack of transparent regulations, and weak law enforcement

make effective control difficult. A government program approved in 2008 ("Forestry

Development Plan 2020") outlines several ways to combat illegal logging, including:

establishing better interagency cooperation, mandatory forestry certification, improving

monitoring, and tightening enforcement for illegal logging.

Russia Balance of Trade

Russia reported a trade surplus equivalent to 19.8 Billion USD in February of 2012. Metals

and energy make up more than 80 percent of Russia's exports. The country is the world’s

largest oil producer and the biggest exporter of natural gas, nickel and palladium. Russia

imports mostly vehicles, machinery and equipment, plastics, medicines, iron and steel,

consumer goods, meat, fruits and semi-finished metal products. Its main trading partners are:

European Union (Germany, Italy, and France), China and Ukraine. This page includes: Russia

Balance of Trade chart, historical data and news.

Economic Integration

Russia’s state and business interest in maximizing budgetary revenues and corporate profits

from long-term export contracts with buyers in the European Union is met by the interest of

EU governments and EU companies to secure stable energy supplies. The mutual benefits

and dependence on bilateral energy trade, common pipeline projects, and regular

negotiations in the context of the Energy Dialogue have fostered economic as well as

political cooperation. On the other hand, Russia rejects the idea of a common value system

in economic relations, considering it as outside interference in its internal affairs, and some

groups of EU’s member states, like Poland and the three Baltic States, have shown

resistance to Russian FDI coming to their domestic energy sector, frequently claiming that

Russia is using energy dependence of the former socialist countries to blackmail them and

gain political and economic advantage (Nowak in Nowak et.al 2004; Miskinis, 2004).

Those fears and accusations are not without reasonable grounds since, as previously

mentioned, Russia has already used cuts in gas supplies to Ukraine, Georgia, and Belarus,

and the denial of pipeline access to Turkmenistan and Kazakhstan, to force these countries

to comply with its political demands. In spite of that, energy relations are the major

cooperation-promoting factor in Russia–EU relations. Since they are economically

beneficial to both sides neither side (the EU and Russian government and companies) is

interested in escalation of conflict. Accordingly, they have always agreed to make a

compromise to put an end to conflicts. Thus, energy trade opens up a possibility for further

and deeper cooperation and integration in the future if both sides find it mutually profitable

and acceptable.

Cultural Analysis

Hofstede’s Value Dimensions

If we explore the Russian culture through the lens of the 5-D Model, we can get a good

overview of the deep drivers of Russian culture relative to other world cultures.

Power distance

This dimension deals with the fact that all individuals in societies are not equal – it expresses

the attitude of the culture towards these inequalities amongst us.

Power distance is defined as the extent to which the less powerful members of institutions and

organizations within a country expect and accept that power is distributed unequally.

Russia, scoring 93, is among the 10% of the most power distant societies in the world. This is

underlined by the fact that the largest country in the world is extremely centralized: 2/3 of all

foreign investments go into Moscow where also 80% of all financial potential is concentrated.

The huge discrepancy between the less and the more powerful people leads to a great

importance of status symbols. Behavior has to reflect and represent the status roles in all areas

of business interactions: be it visits, negotiations or cooperation; the approach should be top-

down and provide clear mandates for any task.

Individualism

The fundamental issue addressed by this dimension is the degree of interdependence a society

maintains among its members. It has to do with whether people´s self-image is defined in

terms of “I” or “We”.

In Individualist societies people are supposed to look after themselves and their direct family

only. In Collectivist society’s people belong to ‘in groups’ that take care of them in exchange

for loyalty.

If Russians plan to go out with their friends they would literally say “We with friends” instead

of “I and my friends”, if they talk about brothers and sisters it may well be cousins, so a lower

score of 39 even finds its manifestations in the language.

Family, friends and not seldom the neighborhood are extremely important to get along with

everyday life’s challenges. Relationships are crucial in obtaining information, getting

introduced or successful negotiations. They need to be personal, authentic and trustful before

one can focus on tasks and build on a careful to the recipient, rather implicit communication

style.

Masculinity / Femininity

A high score (masculine) on this dimension indicates that the society will be driven by

competition, achievement and success, with success being defined by the winner / best in field

– a value system that starts in school and continues throughout organizational behavior.

A low score (feminine) on the dimension means that the dominant values in society are caring

for others and quality of life. A feminine society is one where quality of life is the sign of

success and standing out from the crowd is not admirable. The fundamental issue here is what

motivates people, wanting to be the best (masculine) or liking what you do (feminine).

Russia’s relatively low score of 36 may surprise with regard to its preference for status

symbols, but these are in Russia related to the high Power Distance. At second glance one can

see, that Russians at workplace as well as when meeting a stranger rather understate their

personal achievements, contributions or capacities. They talk modestly about themselves and

scientists, researchers or doctors are most often expected to live on a very modest standard of

living. Dominant behavior might be accepted when it comes from the boss, but is not

appreciated among peers.

Uncertainty avoidance

The dimension Uncertainty Avoidance has to do with the way that a society deals with the

fact that the future can never be known: should we try to control the future or just let it

happen? This ambiguity brings with it anxiety and different cultures have learnt to deal with

this anxiety in different ways. The extent to which the members of a culture feel threatened by

ambiguous or unknown situations and have created beliefs and institutions that try to avoid

these is reflected in the UAI score.

Scoring 95 Russians feel very much threatened by ambiguous situations, as well as they have

established one of the most complex bureaucracies in the world. Presentations are either not

prepared, e.g. when negotiations are being started and the focus is on the relationship

building, or extremely detailed and well prepared. Also detailed planning and briefing is very

common. Russians prefer to have context and background information.

As long as Russians interact with people considered to be strangers they appear very formal

and distant. At the same time formality is used as a sign of respect.

Long term orientation

The long term orientation dimension is closely related to the teachings of Confucius and can

be interpreted as dealing with society’s search for virtue, the extent to which a society shows a

pragmatic future-oriented perspective rather than a conventional historical short-term point of

view.