Written Assignment

1. How would you compare Chinas and Russias corruption percentage index? What might be driving these differences? What issues could this create? Over 170 countries are ranked annually from 100 (low corruption) to 0 (high corruption) based on the Corruption Perception Index (CPI) which describes corruption as the mistreatment of public influence for private advantage. In 2013, China scored a mark of 40 for its CPI while Russia scored just 28. Hence, both countries have scored similarly and can be classified as highly corrupted countries. There are many driving factors to reflect on in relation to such scores. The primary issue is high levels of concentrated ownership in both the countries. Companies listed in their respective countries stock exchanges are majorly state owned enterprises (SOE) or owned by block holders which causes inadequacy in asset allotment. This causes a deviation of capital away from corporations, diminishes liquidity and disheartens minority shareholders from contributing in long term projects. Secondly, due to concentrated ownership, there exists an absence of self-governance within the board. The minority investor benefits are conceded and in China, the managerial board has not caused an effect in its authority role. Moreover, insider trading is still flourishing in both countries (In Russia, an efficient law against insider trading was only passed just in 2011) due to absence of encouragement for whistle blowing, incompetent legal system and futile Securities Laws. Incorrect financial reporting by companies, particularly in China, continues to create a crisis and in Russia, the mean size of bribes has considerably increased over the years. This has created many issues in Russia and China. In Russia, corruption takes up as high as 48% of its GDP based on a report by World Bank. The main focal point of bribery has also experienced changes: bribes were taken by bureaucrats as they could aid legal breaches; however, they now get bribes just to do their work. Cost of corruption is paid by the Russian people. Their amounts to paid as tariffs for housing, gas, electricity and water has been rising quickly. On the other hand, the cost of corruption in China can as high as $86 billion according to Minxin Pei. Corruption in China also affects Western company curiosities and foreign investors as they risk human rights, financial liabilities etc. and at the same time competing with local firms as employ legal infractions to gain market power.

2. In general how would you rate the overall political risk of both countries? Are there any recent examples of political risk? What are some possible methods, as well as potential drawbacks, to hedge against such risk? Political risk in China, comparative to other emerging markets, is deemed as moderately low. However, international stakeholders should take into account legal and regulatory transparency hazards. Additionally, earnings disproportion between the countryside underprivileged and city privileged may cause reprisal against this setting. A modern illustration takes in the objection by one underprivileged family in Shanghai in anticipation of the knocking down of their residence for city construction because of the derisory reimbursement suggested by the government. Shiping Zheng states that the case of the 'Wenling couple' shows the rising discrepancy between the rich and poor as it symbolizes a form of political protest to delays the urban expansion projects. Concentrating on Russia now, it can be said that it has a relatively high level of political risk One such example that could lead to this is the Ukraine crisis. The Ukraine crisis has caused the domestic demand outlook in Russia to deteriorate. It is expected that the Russian real GDP growth rate could slow down to 0.6% year over year in 2014, compared to 1.3% in 2013. Furthermore, the food import bans forced by PM Medvedev on countries in the EU and the USA has propelled grocery expenses in Russia high and immensely worsened inflation and it has been a severe blow to the country's slowing market.There are many techniques to hedge against political risk including political risk insurance for various cases such as for exploitation, nationalisation, war and political violence. Other ways could be firms functioning with their governments to force the foreign nation to respect its contractual commitments, apply basic economic set of laws, defend intellectual property privileges and execute strict governance structures. Moreover, companies should look to depend on special technology, use domestic resources, and discuss terms with foreign nation related to income and taxes. The corporation may also employ defence in cases where the threat of hostility is elevated. It is significant to keep in mind however, although these dealings will help in reducing political risk, a small degree of risk will always exist and companies must look out for the business atmosphere methodically prior to getting involved in international markets. In addition, full insurance is practically unfeasible as cash flows are doubtful, hence, insuring amounts that are more than the initial investment is difficult.

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