Russia faces a fight against endemic corruption while finding responsible business definitions that resonate domestically
Everyone, including the long-voiceless Russian consumer, agrees that corporate responsibility is an issue of increasing importance in the Russian Federation. In a 2011 global survey from Let’s Heal and Winkle Research, 93% of Russian respondents said companies and brands should take responsible business activities to heart.
However, the bear in the room, so to speak, is the Russian Federation’s serious struggle to get corruption under control and loosely agree what corporate responsibility should mean.
In 2008, at the same time as the newly elected president, Dmitry Medvedev, promised zero tolerance for corruption, the Economist published a comprehensive report on Russian corporations’ “excellent” efforts with corporate responsibility reporting and activities. With a fairly solid economy and a feeling of new optimism in civil society, it seemed that perhaps Russia might settle smoothly into its role as global economic player, adopting western norms of corporate responsibility.
Three years later, while the economy continues to be propped up by petro-profits, Russia continues to fall down in efforts to control corruption, dropping in the last year from 147th place (out of 178 countries) to 154thin Transparency International’s corruption ratings, trailing Libya, among others. It also rates 123rd in the World Bank’s Ease of Doing Business list, behind Uganda and Ethiopia.
Since it opened more purposefully to the outside world with perestroika’s advent in the 1990s, Russia has had trouble building many basic institutions underpinning contemporary democracies. That fact, and what many have described as a “culture of corruption”, have hindered development. Russian businesses, according to a 2007 WWF report, started seriously thinking about managing their good reputations only when they began turning to international markets.
Absolute power
Can you name any globally well-known Russian brands? It isn’t easy. Stolichnaya, the Russian vodka, perhaps. Or Aeroflot, the Russian airline. Maybe you’ll recall Volga or Lada cars, or perhaps the name Rosneft, so often in the news of late with Arctic exploration a hot topic.
The difficulty in thinking of popular or respected Russian brands is in direct contrast to the burgeoning number of powerful Russian corporations playing in the international arena. Gazprom is the world’s largest gas company in reserves and production. Rosneft, Russia’s largest oil company, recently signed a deal worth billions with ExxonMobil to pursue Arctic development; Rusal, through a 2006 merger, became one of the globe’s largest aluminium companies; and Norilsk Nickel has the world’s largest output of nickel and platinum.
Russian companies are also among the largest outward investors in the world, and according to the Economist Intelligence Unit, have spent hundreds of billions in the past decade on the acquisition of foreign assets.
Enriched by a globe eager for oil and gas, Russian companies are active in their pursuit of becoming world players, as the ExxonMobil-Rosneft deal attests. Ironically, revenue from oil and gas reserves has a contradictory set of effects in Russia. On the one hand, riches initially fuelled corrupt practices and made those involved powerful enough to feel no need to develop rule of law and sound business processes. On the other, growth of the same oil and gas companies has pressed Russia into the international arena where certain norms and responsible business practices are considered de rigueur.
Matthew Murray of the Centre for Business Ethics and Corporate Governance (CBECG), a non-profit group based in Moscow, calls the space between these competing tugs the Russian “governance gap”.
“The main obstacle to progress with CR in Russia,” Murray says, “is the gap between over-regulation and under-enforcement of the law.”
Since being founded in 2000, CBECG has worked extensively with public and private stakeholders to promote Russian adoption of corporate responsibility norms. Murray is quick to note, however, that the US/European-centric view of corporate responsibility has limited cultural resonance in Russia.
“The term has been redefined by the state,” he says, “to mean social investment – what can a company do for the federal or regional government rather than for civil society stakeholders.” CBECG and other organisations, especially the UN’s Global Compact, the Russian Union of Industrialists and Entrepreneurs, and the International Business Leaders Forum (IBLF), have worked slowly over a decade to help interested Russian companies develop internal codes for conduct. As they have matured, certain oil and gas companies have led the way, with TNK-BP (see sidebar), Gazprom, Lukoil, and Sakhalin Energy nearly always topping informal listings of CR leaders.
Alexey Kostin, of the Corporate Social Responsibility Russian Centre in Moscow, says that currently only about 100 Russian companies are seriously involved in corporate responsibility, and he characterises those firms as the internationally oriented companies, representing about one quarter of the Russian economy.
Elena Panfilova, a well-known and outspoken activist against corruption, and general director of the Russian office of Transparency International, agrees that most Russian companies are getting neither carrot nor stick from the government to induce responsible behaviour.
“They cannot be islands of integrity in a sea of corruption,” she says. “Even if they are, it’s important to remember that more and more companies are subject to corrupt extortion.”
Against this backdrop, the news that Vladimir Putin will run for president again in 2012 (and by recent law he is able, if elected, to serve two consecutive six-year terms) and Medvedev will not run is not welcomed by some in the business community.
International influence
But then again, it’s not seen as entirely negative, either. For Putin is focused on bringing foreign investment into Russia, and large companies want to expand their exports. Those two factors, more than any others, inexorably move business in the direction of the international business community and towards some responsible business norms, such as increased transparency and non-financial reporting. Looking at the status of corporate responsibility as a whole in Russia, even leaders are still mostly working at this basic level – a decade or more behind their multinational counterparts, in most cases.
Two non-Russian standards, the US Foreign Corrupt Practices Act, and the UK Anti-Bribery Act, are having subtle but important impacts on companies’ views of their need for risk management in the environmental and social realms. According to WWF’s 2007 report, in 2004 only 20% of Russian chief executives believed that an environmental accident, for example, could undermine their company’s reputation.
Matthew Murray of CBECG, Alexey Kostin of CSR Russia Centre and Brook Horowitz of IBLF all agree anecdotally that beliefs have changed. Companies are responding to outreach efforts as well as becoming more savvy on international corporate responsibility norms and wanting to achieve them.
Beyond oil and gas, it is in the metallurgy, chemicals, mining, cement, construction and forest industries that the seeds of corporate responsibility have been developing in the top 100 corporate leaders, Kostin says.
Cleaning up
The trend in improving corporate governance in Russian companies can only be good, says IBLF’s Brook Horowitz. “IBLF runs a forum for non-executive directors on Russian boards with the PwC and the Independent Directors Association and we see definitive progress – both in independent directors increasing impact on board-level decision making, and in their ability to establish reliable corporate governance procedures throughout the company,” he says.
Horowitz adds that he sees a number of positive developments in reducing corruption, too. Russia’s recent signing of the OECD’s anti-bribery convention and its own domestic anti-corruption laws are important steps, and several large Russian companies have introduced internal audit procedures and compliance management systems. While many practices that would not be acceptable elsewhere are still prevalent, Horowitz believes that business mores are beginning to change.
The shareholder dispute at TNK-BP that caused BP to lose out in the Rosneft Arctic deal demonstrates a level of trust among the parties – a precondition for responsible business practices, Horowitz says. “The parties resorted to international adjudication. While the decision may have gone against BP, the process was a lot more transparent than the last boardroom brawl at TNK-BP a few years ago when the then CEO, Bob Dudley [now CEO of BP], had to flee from Russia to avoid trumped-up charges.”
Veteran corporate responsibility watcher Veronika Kabalina (a former Norilsk manager now working in human resource development at the National Research University’s higher school of economics) says that, on the plus side for corporate responsibility development, most of the 100 or so leaders are using international guidelines such as the Global Reporting Initiative, or those from Global Compact or the AA1000 series.
In addition, Kabalina sees the first indications that SMEs are entering the corporate responsibility space. Novard, a diversified group of development and construction companies, is one example. Novard is straining to bring accounting at all its various companies under international standards, and has created a “responsible investment fund” to pursue projects that it says are “benefitting society”.
Kabalina notes that Russian corporations still tend to go beyond their western counterparts in social benefit programmes, and some of these initiatives, such as coal company Suek’s outreach with indigenous groups, can be evolved and integrated into corporate social responsibility strategy. However, Kabalina is frank about the remaining handicaps.
“Maybe it is characteristic of the Russian management style – especially in large companies – there is a bureaucratic, hierarchical structure which means employees have little freedom or ability to use their own creativity and are not given the trust to handle relationships with external partners or customers,” she says.
That makes it hard for internal innovations to emerge. Kabalina and others also say Russian companies reporting on their corporate responsibility have had difficulty in providing solid quantitative indicators – accurate data gathering is not yet the norm. CBECG’s Murray points out positive and negative trends. He views the development of a solid Russian middle class and civil society activism (as evidenced by well-known bloggers such as Alexey Navalny) as signs of inexorable movement towards what he terms “horizontal accountability” – a social structure that, rather than dribbling out a few minimal improvements from the top down, works to some degree for all stakeholders.
“An important factor driving CR is Russia’s increased interdependence with the global economy. Recently, this led Russia to join the working group of the OECD Anti-Bribery Convention, a development that will help Russian companies comply with the strict requirements of the UK Anti-Bribery Act,” he says. “As a result of Russia’s adoption of such international conventions, there are fewer grey areas in Russian law. Companies can’t play in the governance gap to the same degree they used to do.”
The Russia Centre’s Kostin bemoans the fact that Russia is not yet a member of the World Trade Organisation or the OECD, and says it is only continued international pressure on the country to join these and other important conventions, especially environmental conventions, that will spur great strides forward in corporate social responsibility.
Horowitz, while acknowledging the importance of Russia’s integration into global markets as one of the main drivers for encouraging responsible business practices, sees the new generation of local entrepreneurs as critical to future corporate responsibility efforts.
“If CR is seen as some kind of western mission to reform Russia,which is how it is often perceived, it is unlikely to work,” he says. “However, there are many home-grown senior executives of Russian companies that are now participating activelyin our programmes. They represent the new generation of business leaders truly looking to develop not only their commercial and managerial skills, but leadership values as well.”
Case study
TNK-BP: corruption punished
For TNK-BP, the jointly owned BP and Russian oil company, it’s been a rough year, media wise. After negotiations between BP and TNK-BP turned into a bitter money battle, BP lost out on a potentially lucrative Arctic exploration deal with Rosneft because TNK insisted BP hadn’t the authority to partner with another Russia corporation for oil exploration … and the courts agreed.
That intrigue led to yards of critical media ink, leaving little room for positive coverage of TNK-BP’s expanding effort to internally combat fraud.
The company announced in 2011 that it had officially fired drilling, transport, and IT services provider Belsibservisgarant (BSSG), after it discovered fraudulent practices.
TNK-BP discovered the internal problems with BSSG through a tip from its anonymous hotline, which was enhanced in 2010 (a whistle-blowing programme has been in place since 2005). Newspaper accounts, however, focused their headlines on the 365 cases of alleged corruption or other violations of company rules turned up by the hotline, rather than the benefits of its very existence and function as an internal integrity tool.
“We clearly understand the utter importance of promoting ethical culture and ethical behaviour among employees, and emphasising that corruption will be punished without any exceptions,” says TNK-BP’s risk management officer, Paul Kitson. Kitson says that in addition to the hotline, other channels detecting and preventing unethical behaviour include contractor security checks, audits of major contracts, and corruption risk assessments for all suppliers.
Kitson says the BSSG decision has been an important “learning point” for the evolution of TNK-BP’s efforts.
“Clearly, the system was not perfect,” he says, “because this case of fraud was not instantly discovered. We are now taking steps to improve and fine-tune existing rules related to disclosure of affiliation, and improvement of monitoring mechanisms.”
Case study
Sakhalin Energy: learning from experience
By Amy Brown
Sakhalin Energy is constructing two large offshore platforms on Sakhalin, an island in far eastern Russia. Two 800km pipelines are being laid to carry oil and gas onshore for processing. Phase two includes the building of a huge liquefied natural gas plant.
On the one hand, Sakhalin Energy has long been the bane of environmental activists claiming that the project will affect the world’s last 100 or so western pacific grey whales, destroy the marine environment, and threaten the livelihood of tens of thousands of fishermen.
But rather than bury its head in the sand, the company has engaged with its critics. To address the concerns, the company works with international conservation groups to monitor the grey whale population and changed the route of the offshore section of its pipeline to avoid the whales’ feeding area.
In 2006 the company committed to allocate $300,000 a year for five years to implement the Sakhalin Indigenous Minorities Development Plan and has since renewed that pledge. The grievance process it developed was chosen as a pilot by John Ruggie, the UN special representative on business and human rights.
In 2008 Russia’s biggest indigenous peoples’ association, the Russian Association for the Indigenous People of the North (Raipon), commended the company’s efforts with a Letter of Honour. The International Finance Corporation, the private sector arm of the World Bank, has called it a model of international “good practice”.
“We approach this case as one of the best models in Russia regarding the relationship between big business and indigenous peoples,” says Rodion Sulyandiziga, first vice-president of Raipon. “It is an example of how development can be an opportunity for consensus and mutual benefit rather than for a company to demonstrate its power over more vulnerable parties.”
Emma Wilson, a researcher at the International Institute for Environment and Development, says that while the company’s performance is “not exemplary”, it is nonetheless “a pioneer because it was one of the first oil companies to pilot many CR tools”. She points out that its grievance procedure was only perfected towards the end of the construction period, and while the company has been congratulated for developing a special version of the grievance procedure for indigenous peoples, this only relates to the distribution of funds as part of the indigenous peoples development plan.
“Despite the challenges they have faced and the imperfect nature of their response, they have been very open about their experiences. This is admirable for the company but also extremely useful for people hoping to learn from their positive and negative experiences,” Wilson says.
April Streeter is a writer specialising in sustainability since 1998. Formerly based in Sweden, where she covered Scandinavia for Windpower Monthly, she now lives in Portland, Oregon, and is a blogger for Tree Hugger and The Huffington Post.
Amy Brown, based in Washington DC, has written sustainability and integrated annual reports for Novo Nordisk, Electrolux and Ericsson. She’s also written extensively for the International Herald Tribune on sustainability issues and was editorial consultant for the World Business Council for Sustainable Development’s 10th anniversary publication Walking the Talk.