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The risks of Russia

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The risks of Russia

Published: June 5 2008 20:00 | Last updated: June 5 2008 20:00

The problems faced by BP in dealing with its oligarch partners in their joint venture, TNK-BP, and the Russian authorities, demonstrate the big risks still inherent in doing business in Russia.

The TNK-BP affair is not like the attack on Yukos by the Kremlin, which was a naked projection of state power, although BP executives in the joint venture do look to have been subjected to a campaign of harassment.

It does not take a ministerial intervention to get foreign companies investigated for labour law violations or tax evasion. Nonetheless, the case provides a vivid example of Russia’s central problem: weak institutions mean that the rule of law is haphazard and vulnerable to power and money.

The Kremlin may not be the sole author of TNK-BP’s problems, but its policies create the atmosphere in which obligations can be made worthless.

The government has encouraged officials to make arbitrary use of the law in a number of cases, most notoriously on Yukos. It cannot now be surprised that public servants are also selective in their application of the law.

When institutions of state can harass foreign companies and private individuals can avoid their contractual obligations, governments cannot simply dismiss this as being merely an issue for the shareholders.

Some businesses will always get away with as much as they can; but in the absence of properly functioning institutions, companies in Russia can get away with a lot. If the state refuses to step in and apply the rule of law, the winners will not be the people who are right, but the parties who are the toughest and the least compromising.

This law of the jungle means partners may not be allies, but competitive predators. Investors, furthermore, would do well not to assume Russian law will be applied evenly. Foreign businesses have found that obscure government agencies and courts in far-flung provinces can be both powerful and partial.

President Dmitry Medvedev is the first to admit this. In an interview with the Financial Times in March, he called Russia “a country of legal nihilism” and noted that the task of building up Russian institutions would be “monumental”. He has taken some steps to that end which are welcome but very modest.

There is no sign Russia is going to be a safer place to do business in the near future. For now, investors should be aware the Russian risk premium is here to stay. Russians should be aware that, ultimately, it will be they who will pay it.


Lex: BP in Russia – May-28

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