Doing Business in Russia: From Perestroika to the Current Challenges of Putin’s Time

Doing Business in Russia: From Perestroika to the Current Challenges of Putin’s Time

It is interesting to examine the present-day paradigm for doing business in Russia under Vladimir Putin versus what was originally set out just over 25 years ago in Mikhail Gorbachev’s Perestroika. As a global leader, Russia has one of the more challenging business and investment environments, exacerbated by its political history and culture.

At the 27th Party Congress in 1986, Perestroika, Mikhail Gorbachev’s program of economic, political, and social restructuring, became the catalyst for dismantling what had taken nearly three-quarters of a century to erect: the Marxist-Leninist-Stalinist totalitarian state (Library of Congress 2016). Soviet forces withdrew from Afghanistan, democratic governments overturned Communist regimes in Eastern Europe, Germany was reunited, and the Cold War finally ended (Library of congress 2016). But reactions to the new policies were mixed. Reform policies were in direct opposition to the traditional power bases in the Communist party as well as those in the economy, and did not replace them entirely. The new right of assembly, freedom of speech and religion, the right to strike, and multicandidate elections undermined not only the Soviet Union’s inherent authoritarianism, but also the familiar sense of order and predictability (Library of Congress 2016). The more Mr. Gorbachev reformed the antiquated Soviet system, the more he undermined the traditional authority of the party leader- in other words- himself. The new tolerance also brought forward countless long-suppressed problems, including nationalist discontent, to the surface of political life (Brown 2015).

As a result, over the next ten years, Russia underwent a coup attempt, looting of state assets by ruthless oligarchs, and the collapse of the of the ruble, the national currency. Now the country seems to be turning away from the three main things Gorbachev wanted to achieve with perestroika: reduced state management of the economy, greater political freedom, and warmer relations with the West (Matlack 2014).

Gorbachev implemented policies designed to begin establishing a market economy by encouraging limited private ownership and profitability in Soviet industry and agriculture. This in turn would also warm the international business market to potential Russian investment. But instead of his ideas and policies translating into economic growth and prosperity, there has been a complete regression. Putin has assumed control of major news outlets and squashed political opposition. Moscow’s recent intervention in the Ukraine and Syria have the potential to erase more than a quarter-century of peace with the West that began with the 1987 deal between Gorbachev and U.S. President Ronald Reagan to reduce the size of their countries’ nuclear arsenals (Matlack 2014).

On the business front, President Vladimir Putin and his political and business allies have taken over Russia’s wealthiest companies and banks, ousting and often jailing their executives. The Russian term “Reiderstvo,” which means asset-grabbing, is widespread and one of the risks of doing business there (Hansen 2014). This asset-grabbing, along with a weak rule of law and embedded corrupt practices across Russian political, bureaucratic and business spaces is currently a significant market-entry barrier for firms. In addition, they also act as a key deterrent for existing business operations in Russia to seek to self-invest and modernize. There is little incentive to strive towards efficient and transparent business solutions when, at any given juncture, either the state or other private firms – in cahoots with state agencies – can either seek to extract bribes or shift the property rights of a given company (Hansen 2014).

Putin’s Russia currently lacks the democratic principles of transparency within the business environment. Instead, it encourages corruption such as asset-grabbing and cronyism. For the global leader, these are big obstacles. To successfully do business in Russia, company executives need to acknowledge the duality of the formal and informal spheres of business and the importance attached to them by the different state and non-state actors in Russia (Rogers 2015). Nowadays, it’s Putin’s Russia, and the international community can either choose to play by his rules or stay out of his sandbox.

 

References:

Brown, Archie. (2015). Perestroika: Reform the Changed the World. University of Oxford. BBC News. Retrieved from: http://www.bbc.com/news/world-europe-31733045

Hansen, Philip. (2014). Reiderstvo: Asset-Grabbing in Russia. Chatham House. The Royal Institute of International Affairs. Retrieved from: https://www.chathamhouse.org/publications/papers/view/198133

Library of Congress. (2016). Perestroika. Revelations from the Russian Archives. Library of Congress. Retrieved from: https://www.loc.gov/exhibits/archives/pere.html

Maclachland, Matthew. (2010). Challenges of Doing Business in Russia. Communicaid Group Ltd. Retrieved from: https://www.communicaid.com/cross-cultural-training/blog/challenges-of-doing-business-in-russia/

Matlack, Carol. (2014). The Unintended consequences of Gorbachev’s Perestroika. Bloomberg Businessweek. Retrieved from: https://www.bloomberg.com/news/articles/2014-12-04/the-unintended-consequences-of-gorbachevs-perestroika

Rodgers, Peter. (2015). When in Moscow: How to Do Business in Putin’s Russia. The Conversation. Retrieved from: http://theconversation.com/when-in-moscow-how-to-do-business-in-putins-russia-38261

The World Bank. (2016). Russian Federation Overview. The World Bank Group. Retrieved from: http://www.worldbank.org/en/country/russia/overview