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Russia’s Rule of Law Deficit

Gideon Rachman has a Russia-focused column running in tomorrow’s FT which argues that the new president will need to do more than just offer rhetoric to repair rule of law. His point of departure: the extraordinary meekness with which Western companies respond to Russian rule breaking. rachman060908.jpg

Respect for the law is in Russia’s interestBy Gideon RachmanA burglar breaks into your house, ties you up and starts loading your possessions into a bag labelled “swag”. From behind your gag, you say: “May I suggest that behaving in this fashion is not in your long-term interests?” That could be true. But the remark still sounds a little weak.Such bleating, however, tends to be the stock response of western businesses when they run into nastiness in Russia. The current dispute between BP and its Russian partners does not involve overt law-breaking. But BP executives may feel that they are being subjected to a sort of legalised mugging.Tony Hayward, BP’s chief executive, is struggling to rescue the situation. Last week he issued the standard, futile appeal to Russian self-interest, arguing that the country’s economic future depends on “consistent application of the rule of law”.BP’s Russian partners may, in fact, have some legitimate grievances about the management of their joint venture. But the sudden pressures being applied to BP have a distinctively Russian flavour. They include raids by the security police, mysterious tax investigations and the denial of visas.Western businesses involved in disputes in Russia are getting wearily familiar with this sort of thing. Shell was forced to sell part of its stake in a $20bn (€13bn, £10bn) energy project in Sakhalin to state-owned Gazprom – after months of pressure and investigations by the Russian environmental regulatory agency. A senior Shell executive likened the experience to eating “a polonium sandwich”.Russian businesses have also discovered the cost of falling out of favour with the powerful. Most famously, Yukos – a huge energy company – was destroyed after tax investigations. Its former boss, Mikhail Khodorkovsky, is currently in prison in Siberia.Speaking at the St Petersburg Economic Forum in Russia last weekend, Rex Tillerson, chief executive of Exxon Mobil, told his audience bluntly that “there is no confidence in the rule of law in Russia today”.Mr Tillerson and the other foreign executives tried to warn their Russian audience that they would pay a price for this. But the fact that the bosses of Shell, BP and Exxon had all chosen to appear on the same platform in Russia rather undermined the message. The oil and gas are in Russia – so the big western energy companies cannot afford to walk away from the country.Under the circumstances, the Russian authorities might be tempted to ignore self-interested warnings by foreigners about the rule of law. With the oil price soaring, why change anything? In fact, there are at least three reasons Russia needs to take the rule of law more seriously.The first is that the country cannot afford to be a one-club economy. The Russian government keeps insisting that it wants to diversify away from oil and gas. Dmitry Medvedev, the new Russian president, told the St Petersburg forum of his ambitions for Russia to become an important financial centre. But while the energy companies are compelled to operate in Russia, the same is not true for other businesses. Nobody has to site a manufacturing plant or a trading floor in Moscow. If foreign companies have no faith in the legal environment, they are less likely to open up in Russia.The second reason for Russia to pay attention to the rule of law is that the country now has an image problem that goes well beyond the business world. In its dealings with smaller neighbours such as Georgia, Ukraine and the Baltic states, the Russian state has a growing reputation for using legal pretexts to justify thuggish intimidation. So when the Ukrainians find their gas cut off in mid-winter, the Russians insist that it is just a business dispute about unpaid bills and pricing. The rest of the world, however, assumes that this is politically motivated intimidation.This kind of behaviour – whether in business or in foreign policy – means that foreigners increasingly talk of Russia as a gangster state. One big western businessman claims that dealing with the Kremlin is just like dealing with the Mafia – partly because job title and function bear little relationship to each other.A Mafia-style reputation can be useful in getting your way, in the short term. In the long run, it means that even when Russia has a strong case it will be treated with suspicion.But the biggest reason for the Russian government to get serious about the rule of law is the welfare of its own citizens. Wealthy foreign businessmen can ultimately look after themselves. It is ordinary Russians who suffer most from a lawless environment. They are the ones forced to pay bribes to get into university or to get medical care – and who know that, if things go wrong, they can be muscled out of their possessions by the well-connected.Mr Medvedev can be frank about Russia’s shortcomings. In an interview with this paper last March, he called Russia “a country of legal nihilism”. He has promised to take on the “monumental” task of improving matters. The St Petersburg forum was full of similar-sounding talk about the importance of corporate governance, transparency and the rule of law. Russian companies increasingly look and sound like their western counterparts. But appearances can be deceptive. St Petersburg itself was constructed to be a model European city – but remains a quintessentially Russian place. And Russia, after all, is the country that invented the Potemkin village.Mr Medvedev’s biggest task is to end this gap between appearance and reality. As he must know, it really is in Russia’s long-term interests.