There is a clear trajectory which companies in emerging economies follow when it comes to corporate governance. Many start out barely paying lip service to the concept while others are frankly criminal. Then, as corporate success starts to ramp up, the flakier enterprises either implode or they improve or are acquired by “improving” organisations, and you can’t improve without becoming more efficient.
Being efficient goes along with getting better access to the capital markets and funding and that means subjecting yourself to much more stringent reporting criteria. Which in turn means cleaning up your act. For some, of course, this is taken at first to mean that one simply has to get better at disguising the dodgy deals, but as companies mature they come to grasp the fact that reputational damage can be terminal and there really is no substitute for honest success.
This doesn’t take a Damascus conversion. At a certain point it actually consumes more resources and takes vastly more energy to cover up things the market won’t stand for, than it does to play the game straight, or at least, straighter… Both Enron and Worldcom found this to their cost and the lesson has been taught over and over. Management tend to eventually “get it” even without shareholder activism (a very recent Western invention that would be extremely dangerous in certain quarters in Russia). This is the point at which dodgy management and nefarious deals get the chop and the organization either sorts itself out, usually with a new broom in charge, or crashes out.
However, the clean up process is never automatic or easy, and many companies in all economies, emerging and emerged, who look compliant, are actually nothing of the kind, with management actively “at it” in a variety of ways. Sometimes, too, companies that were pillars of the corporate community leave the straight and narrow path and wind up supping with the devil, generating much pain a little further down the track for their investors and shareholders.
We saw a fair bit of this in the financial services sector in the run up to the 2008 global smash. There will be some in AIG, for example, who will regret the fact that the company ever saw fit to set up its dodgy derivatives operation in the regulation-light London of the mid-noughties.
How does this template of a corporate journey from darkness and impenetrable reporting opacity to accounting transparency and good governance map against the Russian experience? If Russia’s own president, Dmitri Medvedev, is to be believed, the country is being eaten away by the collusion between organised crime, business and politicians. Medvedev’s 2012 platform for the presidency, in which he is running against his mentor and former master, Vladimir Putin, who wants his old job back for a third term, is very much a modernization and anti-corruption platform (the two are almost synonymous in Russia). There is, of course, no point running on an anti-corruption platform unless your audience out there thinks things are rotten pretty much to the core – which, when you think about it, should give us pause when the message comes direct from the president of a country.
Which is where Wikileaks comes in. Thanks to Julian Assange’s little portal to all things governments don’t want us to see, the world now knows that one of Spain’s most energetic anti-mafia prosecutors has accused Russia of being a corrupt, autocratic kleptocracy centred on the leadership of Vladimir Putin. As the Guardian notes in an article on December 2, José Grinda González, a Special Prosecutor for Corruption and Organised Crime, “has put in more than a decade trying to unravel the activities of Russian organised crime in Spain”, and that has led him to take a long hard look at Russia itself.
González’s conclusions are detailed in a cable from one US department which went variously to the FBI, the Department of Justice and the Office of Terrorism and Financial Intelligence. They were presented on January 13 2010 at the US-Spain Counter-Terrorism and Organized Crime Experts Working Group meeting in Madrid. The document was classified secret, so we can thank Wikileaks for the fact that it ever saw the light of day.
“Grinda stated that he considers Belarus, Chechnya and Russia to be virtual “mafia states” and said that the Ukraine is going to be one. For each of these countries, he alleged, one cannot differentiate between the activities of the government and organized crime (OC) groups.”
That is not exactly a happy state of affairs. The Spanish prosecutor argued that the Russian mafia, with its political buddies, exercises “tremendous control” over certain strategic sectors of the global economy, such as aluminium and natural gas.
His allegations are corroborated from a range of sources. One of the neatest summaries of the rise to power of the Russian mafia is given by Capo in a report on the Russian documentary film on the mafia, “Thieves-by-Law":
"When the Soviet Union imploded at the end of the 1980s the resulting power vacuum allowed the mob to acquire enormous power extremely quickly. With the government unable to enforce the laws, the old Soviet power structure discredited, business establishments transitioning from collectives to private ownership, this was a prime opportunity for the mob to grab power. Seldom has organized crime become such a powerful societal force and seldom has the violence been as extreme as in Russia.
"With the Russian mafia growing stronger, dominant gangs moved from the basic protection rackets to partnering with legitimate businesses. Whereas in the 1990s, we are told in the film, mobsters tended to kill each other, by 2000s they were killing businessmen. Well, sort of. The businessmen were often themselves gangsters, or at least partners of gangsters. The Mafia had penetrated nearly every sector of the economy – banking, energy, trade companies, etc.”
The question then for fund managers enthused about the growth opportunities of the BRICs (Brazil, Russia, India and China) is, does it matter what company they are keeping when they invest in Russian companies? How could they possibly know whether the organisations whose stock they fancy are squeaky clean or crawling with vice money? The great clean up of Russian stocks began some time ago, without much fanfare, as companies struggled to extricate themselves from the Wild West days of early privatisation of state industries. However the process is far from complete and there are probably going to be some real shockers unearthed before this game is done….
Further reading on emerging market risk:
- How to Manage Emerging Market Risks with Third Party Insurance, by Rod Morris
- Costs and Benefits of Accounting-Based Regulation in Emerging Capital Markets, by Wang Jiwei
- Corporate Strategies in Central and Eastern Europe (CEE) from 2009 to 2011, by Nenad Pacek
- Lessons from Russia, by Bruce Misamore
Tags: Accounting , BRIC , Dmitri Medvedev , emerging markets , Russia , Russian mafia , transparency , Vladimir Putin