Russia Corruption Report

Companies dealing with the Russian judicial system contend with high corruption risks. Corruption in the courts takes many forms, including bribery and the fabrication of evidence (ICS 2016). Bribes and irregular payments are widely exchanged in return for favorable court decisions (GCR 2015-2016). Even though the law provides for an independent judiciary, judges are subject to undue influence from politicians, the executive branch, the military and other security forces (HRR 2016); this is particularly true for the lower-courts (BTI 2016). Corruption is prevalent in high profile or politically sensitive cases, furthermore, local courts often favor local politicians when settling disputes to the disadvantage of civil rights (HRR 2016, BTI 2016). Independent dispute resolutions can be difficult to obtain (ICS 2016). Business executive do not perceive the courts as independent and describe the legal framework as inefficient in settling disputes and challenging government regulations (ICS 2016). Other obstacles to effective dispute settlement are frequently changing laws, decrees and regulations, often leading to an overlap or conflict in practice (ICS 2016). While court rulings in inter-firm cases are perceived as fair, those against state agencies are not (BTI 2016). Thus, companies are advised to include foreign arbitration clauses in their contracts to minimize the role of the Russian legal system (Export.gov, Jun. 2016).

Commercial disputes previously fell under the purview of the Court of Arbitration, however, following an amendment to the Constitution, the court was merged with the Supreme Court, broadening the jurisdiction of the latter to rule in criminal, civil and commercial cases (Russian News Agency, Feb. 2014). The merger excluded most former Supreme Arbitrage Court judges (Export.gov, Jun. 2016). Russia has signed and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and is also signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

In a recent retrial, and perhaps one of the most illustrative cases of political influence over the courts, the prominent opposition leader and potential 2018 presidential candidate, Alexei Navalny, was handed down a five-year suspended prison sentence for embezzlement by a provincial court in Kirov. The conviction effectively bars Navalvy from running in the 2018 presidential election. Navalvy was initially sentenced in 2013 in connection with allegations that he had embezzled USD 502,700 worth of timber from the state-owned company Kirovles. However, Navalny appealed the sentence, and following a ruling issued by the European Court of Human Rights describing Navalny’s trial as unfair, the Russian’s Supreme Court overturned the conviction in 2016 and sent it back to Kirov for retrial (OCCRP, Feb. 2017, Russia News Agency, Feb. 2017).

Corruption is endemic in Russia’s law enforcement (OECD 2014). Credible evidence suggests that police officers arbitrarily imposed heavy fines or extorted bribes from unregistered persons (HRR 2016). The Russian police are considered unreliable in protecting companies from crime (GCR 2015-2016).

Corruption is a high risk in the public services sector. Bureaucracy, corruption and a lack of funds, render the operations of the public administration erratic (BTI 2016). In effect, companies consider corruption as the biggest obstacle to doing business in Russia, and very often encounter irregular payments and bribes when applying for public utilities (GCR 2015-2016). Reportedly, nine out of ten entrepreneurs have encountered bribery at least once, with the average bribe for all purposes reaching USD 9,810 (OECD 2015, HRR 2016). In fact, companies reported that bribery was so widespread in some regions of the country that it was considered as a convenient alternative to administration compliance (OECD 2015). Compliance with regulations can prove to be a daunting task for companies as rules frequently change, are inconsistently interpreted and applied by different officials and jurisdictions, and can contain conflicting provisions (ICS 2016). The decision of one official or jurisdiction may be contested or overruled by another (ICS 2016). Hence, companies are advised to seek local counsel when setting up commercial operations in Russia (ICS 2016).

Starting a business in Russia takes around 11 days and is less costly than the regional average (DB 2017).

The tax administration carries high corruption risks for companies. Tax rates and regulations are among the most problematic factors to doing business and companies report that bribes and irregular payments are often exchanged when meeting with tax officials (GCR 2015-2016). Police officers and prosecutors can legally initiate tax cases, even if the State Tax Authority has not determined a tax violation, leading to concerns, particularly among SMEs, over potential abuses and corruption (ICS 2016). Having aligned the tax administration with OECD standards, Russia has simplified paying taxes for businesses (ICS 2016). Nevertheless, multiple audits and requests for documentation continue to hamper businesses (ICS 2016).

Dealing with tax payments in Russia is less time-consuming compared to the regional average (DB 2017). Furthermore, most tax payments are filed online, decreasing the possibilities of bribery through physical encounters (DB 2017).

Companies operating at the Russian border face high corruption risks when importing and exporting (GETR 2016). Companies report that the border administration is inefficient and non-transparent, with irregular payments and bribes being commonly exchanged (GETR 2016). When exporting and importing, border compliance is much more costly and time-consuming in Russia compared to other neighboring countries (DB 2017).

The public procurement sector in Russia carries high corruption risks for investors. Bribes, kickbacks and other irregular payments are often exchanged to obtain public contracts and licenses (GCR 2015-2016, HRR 2016). Companies report favoritism in decisions of government officials, and public funds are frequently diverted due to corruption (GCR 2015-2016). The government introduced mandatory tenders, which have improved procurement regulations and the transparency of the process; however, the latter still remains complex and protracted and may be subject to manipulation (BTI 2016, ICS 2016). Businesses are likely to experience approval for investments depending on their relationships with government officials and demonstration of commitment to the Russian market (ICS 2016). Tenders are organized and published online on five official electronic trading platforms (OECD 2015). Bidders are vetted and unfair bidders are blacklisted, however, companies previously involved in corruption are not barred from bidding on tenders in Russia (OECD 2015). In certain sectors, the government has implemented local content requirements (LCR), a measure that requires businesses to source a certain percentage of intermediate goods from domestic manufacturers (ICS 2015). LCRs are especially prevalent in government procurement (ICS 2016).  Information regarding public procurement regulations are available on the official public procurement website (in Russian). Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in the procurement process.

In mid-2015, Vladimir Yakunin resigned as head of the state-owned company, Russian Railway, reportedly under pressure from the president, as it was revealed that Yakunin’s son had used Russian Railways’ resources to further his own business interests (NiT 2016). Yakunin was not charged with a crime, however, the case sheds light on the extent to which heads of state-controlled companies have access to abuse public funds with impunity (NiT 2016). Both Yakunin and Igor, heaf of state-owned company Rosneft had resisted disclosing their income until President Putin pressured to do so (NiT 2016).

High-levels of political influence in the energy sector creates a risk for businesses in Russia. Russia is among the largest oil producer but due to deficient government reporting, ambiguous laws and a weak judicial system, there is a lack of contract and revenue transparency in the extractive sector (RGI 2013). The economy suffers from graft and a misuse of billions of dollars in public revenue from energy sales; however, the government shows little intention of fighting the issue and is oftentimes a beneficiary (NiT 2015). The oil and petrochemicals sectors are dominated by the interests of government and oligarchs members (Reuters, Aug. 2015). As of recently, senior government officials are allowed to serve on boards of state-owned energy companies, and Rosneft, Gazprom, and Transneft now have Ministers and Deputy Prime Ministers on their boards (ICS 2016).