The Risks of Operating in Russia

11 MINS READOct 19, 2006 | 03:08 GMT
By Fred Burton The business manager of Russian state news agency Itar-Tass, Anatoly Voronin, was found dead in his Moscow apartment Oct. 16, reportedly with multiple knife wounds. The incident is the latest in a string of killings involving high-profile victims over the past month that underscore the challenges and very real dangers of doing business in Russia. Many of the risks — from organized crime rings, skinheads, corrupt government and security officials or random street violence — have long been evident, and arose as Russia reinvented itself after the fall of the Iron Curtain. These core issues, however, often seep down into daily life in ways that are not always easy to anticipate, and yet can impact business operations and finances in serious ways. Moreover, though much of the political and industrial violence has to do with Russia's internal dynamics, it also relates to the current geopolitical dynamic to some degree. With the United States and other world powers distracted by issues such as Iraq and North Korea, the international community is not prepared to pressure Moscow on behalf of multinational corporations or nongovernmental organizations (NGOs), even if useful levers were available for doing so. For that reason, if no other, foreign businesses and NGOs must be informed and prepared to look after their own interests when contemplating operations in Russia. The Geopolitical Environment International pressure has limited value in improving the operating environment for foreign businesses or NGOs because, in most cases, it is not the Russian government that harasses or oppresses them directly. That said, a shift in the geopolitical dynamic in recent years has led to regulatory changes and other actions that can be casus belli in the diplomatic sense. Since the fall of the Soviet Union, Western states and even NATO have been steadily expanding their influence in the former Warsaw Pact countries — and even, in places like Ukraine and Georgia, into the former Soviet Union itself. Moscow perceives this encroachment as a threat and has moved in recent years to counter it. NGOs have been put under careful scrutiny, and Moscow views the activities of many as a threat to Russia's national security. Harassment and intervention have resulted. In November 2003, for example, Russian security forces raided the offices of George Soros' Open Society Institute. Human rights groups working in Chechnya and the North Caucasus also have become targets. The government has moved to deny legal status to the Russian Research Center for Human Rights, and the "School of Peace" and Krasnodar Human Rights Center, which work for the rights of minority groups in Krasnodar territory, have been harassed. Even Russian organizations, such as Mikhail Khodorkovsky's Open Russia Foundation, have been targeted for political reasons. Following Ukraine's "Orange Revolution", in which NGOs were instrumental in focusing pro-Western sentiment, President Vladimir Putin signed a law that requires all NGOs to register with the government, thus giving the Kremlin greater insights into their finances and activities. The Russian-Chechen Friendship Society (whose former leader was detained and allegedly tortured several times between 2000 and 2006) was shut down under the auspices of this new law, which has been sharply criticized in the West as an attack against civil rights (especially when a particular NGO is banned). However, Putin insists that the measure is necessary for preserving Russia's national security. Pressures related to the registration law are now reaching a climax. The director of the Justice Ministry's Control Department, Natalya Vishnyakova, recently announced that foreign nonprofits that have not re-registered, or submitted their registration applications, by Oct. 18 will be forced to suspend operations. Now, Russian authorities have said NGOs will not be outlawed and that registration will be permitted beyond the Oct. 18 deadline, but in realistic terms, Vishnyakova's announcement does open the way for "selective enforcement" of the law against certain NGOs, especially those whose work involves political issues. Similar tactics have been used against foreign religious organizations and missionaries. The Duma passed a law in 1997 that allows the Kremlin to regulate and control such groups, which are often suspected of stirring up dissidence against the government. This law has been invoked most frequently against nontraditional religious groups such as the Church of Scientology, The Jehovah's Witnesses and the Unitarian Church, but visas have been denied for Protestants, Roman Catholics, Muslims, Jews and Buddhists as well — including the Dalai Lama — for the same reasons. Because a 2002 "Law on Foreigners" transferred much of the responsibility for visa affairs to the Interior Ministry, the Federal Security Service (FSB) has a hand in determining which religious groups constitute "dangerous cults and sects." Meanwhile, there has been a broad movement — involving both the government and criminal groups — to exert more control over the press, accompanied by a general increase in xenophobic and racist attacks, with ultranationalists seeking to force all foreigners out of Russia. A Spate of Violence For the most part, it appears that business motivations rather than politics have spurred the recent spate of killings in Russia. High-profile cases include:
  • Andrei Kozlov, who — along with his driver/bodyguard — was fatally shot outside a soccer stadium in eastern Moscow on Sept. 13. Prosecutors almost immediately recognized it as a contract killing; as Russia's top banking investigator, Kozlov oversaw the closure of dozens of banks that had been linked to money-laundering and regulatory violations. On Oct. 16, the Russian Prosecutor General's Office announced the arrest of three Ukrainian men (reportedly, two shooters and a getaway-car driver) who have confessed to taking part in the killing, but they have not determined who hired them. Authorities have not released the names of those in custody, fearing they would be killed by others involved in the plot to ensure their silence.
  • Enver Ziganshin, a chief engineer at TNK-BP subsidiary Rusia Petroleum, who was killed Sept. 30 at his home in Siberia. Ziganshin's body was found by his wife in a sauna around midnight. He had been shot three times, including once in the head — a sign that it was likely a contract killing. It has been speculated that Ziganshin was killed as part of the government's efforts to reassert its control over key industrial sectors, including energy.
  • Investigative journalist Anna Politkovskaya, whose body was found Oct. 7 in an elevator at her Moscow apartment building. She had been shot twice, once in the head, and the weapon and extra cartridges were left at the scene — an obvious sign that the killing was political. Politkovskaya was known for critical coverage of the government's prosecution of the war in Chechnya. Her life had been threatened several times over reports involving alleged torture and human rights abuses by Russian and Russian-aligned forces in Chechnya.
  • Alexander Plokhin, the director of a Moscow branch of state-owned foreign trade bank Vneshtorgbank, who was killed Oct. 10 as he left an elevator in his apartment building. Plokhin was shot once in the head; police say it appears to have been a contract killing.
The one exception to this pattern is the most recent killing. Because he was stabbed repeatedly, Itar-Tass's Voronin might not have been killed in a contract hit (which are usually more efficient than passionate). That said, it is not unheard of for assassins in Russia to disguise their killings as crimes of passion or arrange details of the scene in ways that would besmirch the character of the victim. Under any circumstances, the killing is noteworthy because Voronin, like Politkovskaya, had connections to the media. Another member of the press, U.S. citizen Paul Klebnikov (the editor of Forbes magazine's Russian edition) was assassinated in Moscow in July 2004 after writing a book about Russian organized crime. Organized Crime and Corruption Clearly, organized crime poses a deadly threat to businesses in Russia. Though all of those killed during the past month were themselves Russian, foreigners like Klebnikov also are at risk on numerous levels. From a business standpoint, the need for awareness begins to arise with some of the most basic issues involved in launching operations, such as finding office space. Organized crime groups — faced with the need not only to launder ill-gotten funds but to invest them in ways that produce residual income — now have substantial holdings in Russian real estate. Many of the more recently built apartments and commercial office buildings in Russia are partly or totally owned by criminal cartels. The lack of transparency that has dogged Russia's transition to a market economy makes it quite difficult for foreign companies to determine who owns the buildings in which they might want to place offices or retail operations — and the problems of hidden costs, such as the need to pay protection money to landlords, can be quite difficult to resolve after the fact. This is particularly true for American companies, which are restricted by the U.S. Foreign Corrupt Practices Act from (among other things) paying bribes and kickbacks that are demanded by crime lords or corrupt government officials. The real estate dilemma is compounded by the fact that newer buildings, wired for the needs of IT-intensive companies, tend to be more attractive to foreign entities than are the older, Soviet-era spaces. For a foreign business or NGO, one of the bonuses of renting space in such a building is that employees normally are not approached by criminals soliciting protection money — such payments already have been factored into the rent. On the other hand, it could be quite embarrassing to a Western company if reports emerged that it was renting space from the Russian, Chechen or Georgian mafia. Organized crime groups also are involved in theft, fraud, cargo theft, the manufacture of counterfeit products and numerous other activities that can impact profits or other business concerns in Russia. Practically speaking, one needs connections in order to even break into the Russian market — and that often means paying off a contact in some way. These issues are most daunting for companies whose operations require a significant physical presence in the country — for instance, manufacturing and retail businesses — as opposed to service companies, which do not control inventory and may require only a few sales representatives. It is fair to say that corruption, enabled by both human nature and conflicting laws, is now hard-wired into the Russian business environment. Foreign companies report that shakedowns, requests for bribes, harassment and official obstruction have been common practices since the fall of the Soviet Union. In the early 1990s, there was a free-for-all when the government began selling off its vast assets, many of which were purchased at rock-bottom prices — with the collusion of officials who previously had overseen a particular facility or sector. The culture of "gifts" has persisted: Last year, Russia ranked near the bottom of Transparency International's Corruption Perceptions Index, with a score of 126 — tying with countries like Niger, Sierra Leone and Albania. In fact, bribery is so routine that many people do not expect to receive even basic services, such as medical attention, without bringing a token (such as a box of chocolates) for the doctor. Caught between the demands of the local business environment and international law, many companies have found that their most effective option is to turn to Russian partners or product distributors who have greater room for maneuver, thus mitigating the risks for core operations and personnel. This pushes the risk (and the dirty work) to the local partners, who in some cases may also be associated with organized crime groups. It does not completely reduce the risk to the corporation, of course. In private discussions, many foreign investors report having been cheated by their partners. This means that due diligence investigations are of paramount importance for companies contemplating business in Russia, but comprehensive investigations are difficult to conduct in an environment with so little transparency. Given the confluence of geopolitical and domestic trends, Russia remains, at the end of the day, a region that requires a painstaking cost-benefit analysis for corporations and NGOs. Religious and social aid organizations likely will continue to focus efforts in the country, but will move carefully to keep from falling on the wrong side of government. For-profit corporations — lured by Russia's wealth of raw materials, energy resources and its growing middle class — may be drawn to that market but, in the absence of legal protections from crime or government corruption, frequently find that the risks outweigh the advantages. The need for careful cost-benefit analysis, extraordinary levels of due diligence and more than a little creative thinking about security solutions will be significant factors shaping the foreign business presence in Russia for some time to come.

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