Russia

Political Environment (political system, structure, political parties, political risk)

Political System
The politics of Russia (the Russian Federation) takes place in the framework of a federal semi-presidential republic. According to the Constitution of Russia, the President of Russia is head of state, and of a multi-party system with executive power exercised by the government, headed by the Prime Minister, who is appointed by the President with the parliament's approval. Legislative power is vested in the two chambers of the Federal Assembly of the Russian Federation, while the President and the Government Issue numerous legally binding by-laws.

General Political Environment

The ruling United Russia party suffered significant losses in the parliamentary elections on December 4th 2011, seeing their two thirds constitutional majority drop to a slim majority with 49% of votes. Despite a significant decline in popular support (down from 70% in the 2008 Duma elections) there were allegations of widespread vote-rigging which led to demonstrations, highlighting the authorities growing challenge of retaining legitimacy. Protesters have clear demands including the release of political activists and the immediate organization of fair and open elections. Despite the demonstrations and the waning support for United Russia, it is widely expected that Putin will win the Presidential election in March as he remains the most popular political figure in Russia and there is no credible alternative. Under a new law that came into effect under Medvedev, presidential terms have been

extended to 6 years (from 4) which will see Putins holding the Presidents office at least until 2018.

Political Structure
Political power in Russia is highly centralized in the President and the Presidential Administration within the Kremlin which exert their influence over all aspects of domestic and foreign policy. Following the election of former President Vladimir Putin in early 2000, political stability and policy predictability gradually increased, which has been continued under President Dmitry Medvedev, Mr. Putins protg. The State Duma is a body that is loyal to the Kremlin and has little autonomy. Given the dominance of United Russia in the Duma and Mr.Putins position as Prime Minister, the legislative and executive branches are for all intents and purposes now fused with little effective opposition to the ruling party. Parties represented in the State Duma

Name

Abbr.

Ideology

Leader

MPs

United Russia

ER Russian conservatism, Pragmatism

Dmitry 238 Medvedev

Communist Party of the Russian Federation KPRF Communism, Marxism-Leninism, Leftwing nationalism Gennady 92 Zyuganov

Liberal Democratic Party of Russia

LDPR Nationalism, Pan-Slavism

Vladimir 56 Zhirinovsky

A Just Russia

SR Social democracy, Democratic socialism

Nikolai Levichev

64

Legal Environment
The Russian Court System
The Russian court system is composed of three essentially separate and distinct court systems. They are the: (1) Courts of General Jurisdiction; (2) Arbitrage (or Commercial) Courts; and (3) Russian Federation (and in a few cases, "subject"-level) Constitutional Courts. In distinction to the legal system of the United States, both the Courts of General Jurisdiction and the Arbitrage Courts have their own appellant structures, which do not eventually end up in a single final-instance court such as the United States Supreme Court. With respect to constitutional issues, in the Russian system, if a constitutional issue is encountered during the course of litigation in either the Courts of General Jurisdiction or in the Arbitrage Courts, the constitutional issue is referred out to the Constitutional Court, adjudicated there, and then reported back to the appropriate non-constitutional court for further proceedings in accordance with the Constitutional Court's ruling.

In very broad terms, the Courts of General Jurisdiction decides on criminal and family disputes, as well as civil disputes between private individuals. The arbitrage Courts decide on disputes between business entities, although the phrase "business entity" includes individuals who are registered to do business.

The Russian Federation Constitutional Court adjudicates matters which are governed by the Russian Federation Constitution. A small minority of subjects of the Russian Federation have sufficient political status to permit them to adopt their own "subject" constitutions, and therefore, their own "subject" constitutional courts.

Economic Environment
Economic System
Russia has undergone significant changes since the collapse of the Soviet Union, moving from a centrally planned economy to a more market-based and globally integrated economy. Economic reforms in the 1990s privatized most industry, with notable exceptions in the energy and defense-related sectors. Nonetheless, the rapid privatization process, including a much criticized "loans-for-shares" scheme that turned over major state-owned firms to politically connected "oligarchs", has left equity ownership highly concentrated. As of 2011, Russia's capital, Moscow, now has the highest billionaire population of any city in the world.

Main Products

Major Exports
Russia's major exports are fuels, energy, metals, machinery & equipment, chemicals, and oils Vadca, and clothes.

Major Imports
Russia's major imports are machinery & equipment, food and agricultural raw materials, chemicals and metals.

Economic Risk
According to the most recent data released by the Central Bank of the Russian Federation, the year-to-date trade balance registered a surplus of US$148.5bn through to September, 29.2% higher than the same period of the previous year. This was due to strong export growth of 32.5% over the first nine months of the year. As result, we hold to our view that the current account will remain in surplus to the tune of 4.8% of GDP in 2011 before narrowing to 3.9% in 2012 on account of a smaller trade in goods surplus and rising outflows from Russias income balance.

Monetary Environment
Currency System
Russian Monetary policy let the Ruble to fluctuate in a narrow band. The regime emerged in an environment of very low international reserves, low monetization and public distrust of the ruble. Gradual monetization backed by the accumulation of international reserves. As the terms of trade continued to improve the emphasizes of policy shifted to limiting excessive real appreciation of the rouble to protect competitiveness of domestic producers.

Currency Risk

Trade Environment
According to the World Trade Association, Russia's exports by main destination were as follows: For Russia exports by main origin 1. European Union (27) 58.7

2. China 5.2 3. Ukraine 5.0 4. Turkey 4.7 5. Belarus 4.3

For Russia imports by main origin

1. European Union (27) 44.6 2. China 9.4 3. Ukraine 6.7 4. Japan 5.7 5. Belarus 5.0

Russia Trade, Exports and Imports

Rich in natural resources, Russia has the largest natural gas reserves in the world, the second largest coal reserves and the eighth largest oil reserves. All these resources constitute a major portion of Russias exports. In fact, 80% of Russias exports constitute oil, natural gas, metals, timber, and defense equipment. Russia uses these reserves to secure both its economic and political interests. The EU is by far Russias biggest trading partner, accounting for 46.8% of its overall trade in 2010, and by far the most important investor for Russia. It is estimated that up to 75% of foreign direct investment in Russia came from EU member states.

Russia's Trade Indicators at a Glance (2010)

Current Account Balance: US$181.7 billion or 4.9% of GDP Trade to GDP Ratio: 43.3%

Total value of exports: US$429.4 billion Primary exports: oil, natural gas, metals, timber Primary exports partners: EU (44.8%), United States (6.0%), China (5.8%), Turkey (4.9%), Ukraine (3.7%) Total value of imports: US$247.7 billion Primary imports: machinery, transport equipment, plastics, medicines, iron and steel, consumer goods, meat Primary imports partners: EU (50.2%), China (14.1%), Ukraine (5.3%), Japan (3.8%), Belarus (3.4%)

Russia - International trade/ main trading partners

Russia's foreign trade consisted of US$75 billion in exports and imports of US$48.2 billion in 1999 and then to US$105.1 billion in exports and US$44.2 billion in imports by 2000. Russia sells a broad range of commodities and manufactures including petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals, and a wide variety of civilian and military manufactures. Russia's largest trading partners for exports are Ukraine, Germany, United States, Belarus, the Netherlands, and China. Russia imports machinery and equipment, consumer goods, medicines, meat, grain, sugar, and semi-finished metal products. Russia's largest trading partners for imports are Germany, Belarus, Ukraine, the United States, Kazakhstan, and Italy.

Real GDP growth in Russia in 1999 was over 3 percent. The main contributing factors were the devaluation of the ruble, which made Russian products competitive abroad and at home; high commodity prices on international markets, particularly oil (while domestic costs were substantially lower); low inflation and a consensus that inflation must be controlled; and a relatively healthy fiscal situation based on strict government budget discipline. The major

contributor to growth was trade performance. Exports rose to US$74.3 billion while imports slumped by 30 percent to US$41.1 billion. As a result, net exports ballooned to US$33.2 billion, more than double the previous year's level. Higher oil prices had a major effect on export performance, particularly in the latter half of the year. Even though volumes of crude oil exports (to non-CIS countries) were down by 3 percent, prices jumped 46 percent. Fuels and energy comprise 42 percent of Russian exports. Other exports performed better in 1999; fertilizer exports were up 16.7 percent, forestry products up 38 percent, copper up 17.6 percent, and aluminum up 10 percent.

Tariff-Rate Quotas
Russia has committed that its agricultural policies will be consistent with its bilateral and multilateral commitments, including the United States-Russia WTO Bilateral Market Access Agreement. Consistent with the 2005 United States-Russia Meat Agreement, the Russian Government established country specific TRQ volumes (including for the United States) and reduced in-quota tariff rates for beef, pork, and poultry meat imports from 2006 to 2009. However, in October 2008, Russia proposed renegotiating the terms of access for poultry and pork for 2009. In December 2008, U.S. and Russian negotiators agreed to decrease the 2009 in-quota volume for U.S. poultry, increase the 2009 in-quota volume for pork, and increase the over-quota tariff rates for both poultry and pork. Because the 2005 Meat Agreement expires at the end of 2009; the United States expects to begin negotiations this year on these products. Import tariffs on automobiles, aircraft, and aircraft parts have presented particular obstacles to U.S. exports to Russia. The effect of the tariff, VAT, and customs handling fees on aircraft was equivalent to a 40 percent tax, making it virtually impossible for Russian airlines to afford to purchase foreign planes. When Russia joins the WTO, tariffs on aircraft and aircraft parts will be substantially reduced. Tariffs on civil aircraft parts, including engines, will be

reduced to an average of 5 percent. As a result of our bilateral agreement on leased aircraft, which entered into force on November 19, 2006, in January 2007, the Russian government approved the decision to cut import duties on foreign leased aircraft from 20 percent to 8 percent for aircraft with 50 seats and fewer and from 20 percent to 10 percent for aircraft Between 115 seats and 160 seats. The measure would apply to planes leased for no more than three years and would remain in force until January 1, 2011. However, the necessary decree implementing this tariff reduction has not yet been issued.

Investment Barriers

Russias foreign investment regulations and notification requirements can be confusing and contradictory, which has an adverse effect on foreign investment. In addition, U.S. investors and others cite corruption in commercial and bureaucratic transactions as a barrier to investment. In 2008, reports by the World Bank, Transparency International, the Foreign Investment Advisory Council, Russias Higher School of Economics, and Columbia University found that corruption had worsened and had become a greater concern for Russias businessmen. Reasons cited for these trends were slowing reforms and government Complacency fostered by oil revenues. Telecommunications and media services companies also report investment restrictions. Russian entities with more than 50 percent foreign ownership are prohibited from sponsoring television and video programs or from establishing television organizations capable of being received in more than 50 percent of Russias territory or by more than 50 percent of the population. Further obstacles to increased U.S. investment in Russia include inadequate dispute resolution mechanisms, weak protection of minority stockholder rights, the absence of requirements for all companies and banks to

adhere to international accounting standards, and the failure of some companies to adopt and adhere to business codes of conduct. Initiatives to address these shortcomings, either Through regulation, administrative reform, or government-sponsored voluntary codes of conduct, have made little headway, and contribute to endemic corruption. Inadequate transparency in the implementation of customs, taxation, licensing, and other administrative regulations also discourages investment. In 2008, the United States and Russia began exploratory discussions on the potential negotiation of a bilateral investment treaty.

Other Barriers
The U.S. logging industry reports that illegal logging accounts for as much as 20 percent to 30 percent of Russias timber harvest. This percentage continues to increase, particularly in the Russian Far East, due to its proximity to China, where many illegally harvested Russian logs are smuggled for further processing. Supplies of illegally harvested timber in Chinas market adversely affect U.S. exports to that market. The Russian government is taking steps to combat illegal logging, having adopted a National Plan initiative in 2006 with the objective of reducing timber poaching by 20 percent to 30 percent. However, poor socio-economic conditions in remote forest areas, lack of transparent regulations, and weak law enforcement make effective control difficult. A government program approved in 2008 ("Forestry Development Plan 2020") outlines several ways to combat illegal logging, including: establishing better interagency cooperation, mandatory forestry certification, improving monitoring, and tightening enforcement for illegal logging.

Russia Balance of Trade

Russia reported a trade surplus equivalent to 19.8 Billion USD in February of 2012. Metals and energy make up more than 80 percent of Russia's exports. The country is the worlds largest oil producer and the biggest exporter of natural gas, nickel and palladium. Russia imports mostly vehicles, machinery and equipment, plastics, medicines, iron and steel, consumer goods, meat, fruits and semi-finished metal products. Its main trading partners are: European Union (Germany, Italy, and France), China and Ukraine. This page includes: Russia Balance of Trade chart, historical data and news.

Economic Integration
Russias state and business interest in maximizing budgetary revenues and corporate profits from long-term export contracts with buyers in the European Union is met by the interest of EU governments and EU companies to secure stable energy supplies. The mutual benefits and dependence on bilateral energy trade, common pipeline projects, and regular negotiations in the context of the Energy Dialogue have fostered economic as well as

political cooperation. On the other hand, Russia rejects the idea of a common value system in economic relations, considering it as outside interference in its internal affairs, and some groups of EUs member states, like Poland and the three Baltic States, have shown resistance to Russian FDI coming to their domestic energy sector, frequently claiming that Russia is using energy dependence of the former socialist countries to blackmail them and gain political and economic advantage (Nowak in Nowak et.al 2004; Miskinis, 2004). Those fears and accusations are not without reasonable grounds since, as previously mentioned, Russia has already used cuts in gas supplies to Ukraine, Georgia, and Belarus, and the denial of pipeline access to Turkmenistan and Kazakhstan, to force these countries to comply with its political demands. In spite of that, energy relations are the major cooperation-promoting factor in RussiaEU relations. Since they are economically beneficial to both sides neither side (the EU and Russian government and companies) is interested in escalation of conflict. Accordingly, they have always agreed to make a compromise to put an end to conflicts. Thus, energy trade opens up a possibility for further and deeper cooperation and integration in the future if both sides find it mutually profitable and acceptable.

Cultural Analysis
Hofstedes Value Dimensions
If we explore the Russian culture through the lens of the 5-D Model, we can get a good overview of the deep drivers of Russian culture relative to other world cultures.

Power distance

This dimension deals with the fact that all individuals in societies are not equal it expresses the attitude of the culture towards these inequalities amongst us. Power distance is defined as the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally.

Russia, scoring 93, is among the 10% of the most power distant societies in the world. This is underlined by the fact that the largest country in the world is extremely centralized: 2/3 of all foreign investments go into Moscow where also 80% of all financial potential is concentrated. The huge discrepancy between the less and the more powerful people leads to a great importance of status symbols. Behavior has to reflect and represent the status roles in all areas of business interactions: be it visits, negotiations or cooperation; the approach should be topdown and provide clear mandates for any task.

Individualism
The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among its members. It has to do with whether peoples self-image is defined in terms of I or We. In Individualist societies people are supposed to look after themselves and their direct family only. In Collectivist societys people belong to in groups that take care of them in exchange for loyalty.

If Russians plan to go out with their friends they would literally say We with friends instead of I and my friends, if they talk about brothers and sisters it may well be cousins, so a lower score of 39 even finds its manifestations in the language.

Family, friends and not seldom the neighborhood are extremely important to get along with everyday lifes challenges. Relationships are crucial in obtaining information, getting introduced or successful negotiations. They need to be personal, authentic and trustful before one can focus on tasks and build on a careful to the recipient, rather implicit communication style.

Masculinity / Femininity
A high score (masculine) on this dimension indicates that the society will be driven by competition, achievement and success, with success being defined by the winner / best in field a value system that starts in school and continues throughout organizational behavior. A low score (feminine) on the dimension means that the dominant values in society are caring for others and quality of life. A feminine society is one where quality of life is the sign of success and standing out from the crowd is not admirable. The fundamental issue here is what motivates people, wanting to be the best (masculine) or liking what you do (feminine).

Russias relatively low score of 36 may surprise with regard to its preference for status symbols, but these are in Russia related to the high Power Distance. At second glance one can see, that Russians at workplace as well as when meeting a stranger rather understate their personal achievements, contributions or capacities. They talk modestly about themselves and scientists, researchers or doctors are most often expected to live on a very modest standard of living. Dominant behavior might be accepted when it comes from the boss, but is not appreciated among peers.

Uncertainty avoidance
The dimension Uncertainty Avoidance has to do with the way that a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? This ambiguity brings with it anxiety and different cultures have learnt to deal with this anxiety in different ways. The extent to which the members of a culture feel threatened by ambiguous or unknown situations and have created beliefs and institutions that try to avoid these is reflected in the UAI score.

Scoring 95 Russians feel very much threatened by ambiguous situations, as well as they have established one of the most complex bureaucracies in the world. Presentations are either not prepared, e.g. when negotiations are being started and the focus is on the relationship building, or extremely detailed and well prepared. Also detailed planning and briefing is very common. Russians prefer to have context and background information. As long as Russians interact with people considered to be strangers they appear very formal and distant. At the same time formality is used as a sign of respect.

Long term orientation

The long term orientation dimension is closely related to the teachings of Confucius and can be interpreted as dealing with societys search for virtue, the extent to which a society shows a pragmatic future-oriented perspective rather than a conventional historical short-term point of view.