Sunday, November 8, 2009

Is there an Antidote for Russia's Corruption Problem? by Vlad Frants

Recently, a BusinessWeek article depicted corruption as "Russia's economic stumbling block." Sure, if corruption were decreased then people would be less weary of investing in Russia and a major economic stumbling block would be removed. But how easy can it be to markedly decrease corruption in a place where for so many years judicial enforcement was almost nonexistent, substantive legal remedies available to underpaid and inexperienced judges were ill-defined and Russians were working under tremendous cultural constraints to not follow the law?

Anti-corruption laws don't sound bad and Russia has already made important strides in the right direction by overhauling a problematic tax system, introducing bright-line limitations on local authorities in order to reduce arbitrary bureaucratic actions and creating the Council for Combating Corruption. But perhaps the focus shouldn't be only on decreasing corruption by side line participants. Perhaps there should be a solution from the inside-out.

What if there existed a corporate governance model for Russia that itself led to decreased corruption by molding the right cultural mindset? Bright-line rules, rather than standards, to define proper and improper behavior. Strong legal remedies to compensate for the low probability that the sanctions will be applied. Greater protection of outside shareholders than is common in developed economies. Enforcement, as much as possible, through actions by direct participants in the corporate enterprise (shareholders, directors, managers), rather than indirect participants (judges and regulators).

These are elements of the "self-enforcing" model of corporate law which was introduced by professors Bernard Black and Reinier Kraakman in 1995 for Russia. After creating the model and seeing that it was unable to withstand the socio-economic difficulties and setbacks that Russia faced in the years preceding Russian President Vladimir Putin's tenure, the professors abandoned the model.

In a law review article entitled "Russian Corporate Law: is "Self-Enforcement" Still the Way to Go?, 13 UCLA J. INT'L L. & FOR. AFF. 435 (2008), I reviewed some of the positive changes that President Putin implemented in Russia and argued that we should reconsider a self-enforcing model for Russia.

Perhaps assimiliating the elements of the professors' "self-enforcing" model, coupled with aggressive anti-corruption campaigns, would be the best antidote for Russia's corruption problem.

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1 comment:

  1. I haven't read the Law Review article so I apologize if my comments are addressed therein. Nevertheless, a few thoughts.

    It is difficult to say the least to examine (or speculate about) the power of direct corporate participants (shareholders) without necessarily examining the power of indirect corporate participants (judges and regulators) in the same breath. This is so because a violation of a bright-line rule empowering shareholders to vote out a corrupt corporate director, for example, is meaningless without a remedy for breach of that rule - a remedy necessarily enforced by judges, regulators, and, I would add, very importantly for Eastern Europe - by arbitrators.

    So, while the point about improving corporate governance in Russia from the inside out is well-taken, I suspect it will go nowhere without a concomitant improvement of legitimate legal fora. This is precisely the reason that virtually no self-respecting foreign corporation agrees to do business in Russia without contracting to have all significant disputes resolved by arbitration panels in Western Europe, preferably in London, and to apply non-Russian law at that. To this end, whatever changes may be introduced into Russian corporate governance laws are a secondary matter.

    All that said - clearer rules are a step in the right direction for decreasing corporate corruption Russia, for reasons I would venture to guess you discuss in the law review article.

    On the other hand, according to Transparency International's Corruption Index, (can't link in comments, please google it), Russia is one of THE most corrupt nations in the entire world, more corrupt than Cuba, Ghana, Burkina Faso, Bolivia, Rwanda, Kenya, Lybia, Liberia or Vietman, to name a few. And perhaps I am a cynic, but having grown up in the MotherLand, I have to sort of snicker when I hear about such things as "Council for Combating Corruption".

    Corruption is not a problem of laws in Russia - it is a promlem of men; it is an outlook and a set of expectations so deeply ingraned in the psyche of the population that changing it will take generations. An unfortunate reality, I think, because I certainly agree with one of your basic premises that lowering corruption - inside out or outside in - is a necessary step towards attracting investors to and otherwise improving the economic conditions in Russia.


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