Control Risks has released a new report considering some of the key issues surrounding the issue of grey practices in Russia. A report synopsis follows, and you can request a copy of the full report here.

 

Grey practices, a phrase frequently used in the Russian business lexicon, are designed to deceive another company or a regulatory agency within or outside the law, and to maximise profits through deception. They are, by their very name, intangible and shady, a way to describe the mechanisms involved in tax evasion schemes, one-day companies, black cash and offshore ownership structures. These practices may not at first sight appear clearly and explicitly illegal, but they can very quickly turn from grey to black. For example, the money these schemes generate and the structures themselves can form part of deliberate and concerted efforts to defraud, facilitate money laundering, pay bribes and conceal conflicts of interest.

 

Grey practices are not necessarily part of corruption, one of the biggest and most intractable problems facing Russia, though the two are certainly linked. Grey practices generate the cash that is used to pay for bribes. Like corruption, grey practices also expose foreign companies to criminal prosecution – tighter regulation, in the form of the Foreign Corrupt Practices Act and the OECD Anti-Bribery Convention, and more proactive enforcement is only increasing this exposure. However, unlike corruption, grey practices are the company-level financial mechanisms which lie behind – and fuel – much of the embezzlement and fraud that takes place in Russia. They are the day-to-day schemes that erode the integrity of transactions, the short-cuts, loopholes and financial sleights-of-hand that all too often turn legitimate business deals into regulatory minefields.

 

That grey practices flourish as they do in Russia is a reflection of the opacity which stifles openness and accountability in the Russian business environment. And, as the last eighteen months have shown, the impact of the global financial crisis has increased Russian companies’ reliance on these practices. Cash constraints, liquidity shortages, bottlenecks in supply chains and longer payment terms have only encouraged local companies to resort to the use of one-day companies or other measures to maximise their revenue and minimise their financial reporting.

However, this is not to say grey practice is endemic. More and more Russian companies are embracing higher standards of corporate governance, particularly in those sectors which are open to foreign capital, such as FMCG and financial services; likewise, foreign companies are not always in a position of moral and legal strength to preach about governance and transparency to Russian companies, many of whom are fully aware of high profile corporate scandals in the West. Grey practices are not unique to Russia; neither do they infect every transaction in the country. What they do, however, is to offer us a telling insight into just how business works in Russia, the patterns of behaviour, the pitfalls and dangers.

 

Russia clearly presents a difficult, though not unique, set of challenges to foreign companies. The business environment tests, more than most, the willingness of foreign companies to stay resilient in the face of practices. However, this should not force them to pack up and leave, difficult as it may be to bridge the gap between the local pressures on the ground and tighter international – and domestic – regulation. Many foreign companies are continuing to make a great success of their investments and operations in Russia, particularly those which institute best practice internal compliance policies and – through external engagement strategies - seek to understand the nuances of the local operating environment. Foreign companies should look to take advantage of this market, but to do so with care and discrimination. The Russian business environment remains, despite everything, an attractive long-term investment.

 

If you would like to request the White Paper on Grey Practices in the Russian Business Environment, please complete the online request form.