At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Rilka Dragneva-Lewers (University of Birmingham), Larry King (University of Cambridge), and Sveta Borodina (University of Cambridge) presented their work on law and finance in Russia. In this podcast interview, they summarize their findings.
Rilka Dragneva-Lewers presented on the EUs influence on Company Law Reform in the Eastern Neighbourhood:
“My main area of interest is the Ukraine, which stands out amongst the rest of the eastern European states in that it was probably the last country to reform its law on the books and it is of course in a state of very serious turmoil at the moment.
“The main approach of the EU has been to insist on legal approximation so it has pursued both integration and stimulating economic development through reform of the laws. But as we have seen this is definitely not enough and this external pressure has not been a critical factor, for legal change. Businesses manage to protect their property rights through various extra-legal ways through access to political power for example and protection.
“The difficultly with large businesses in Ukraine is that there are often run by holding companies and they are owned by oligarchs. This has meant that there has been a very strong business effort to keep transparency low and maintain the privacy of dealings. Transparency remains a critical issue in business dealings.
“At the EU level the economics is quite complex. The EU despite having had a very strong response to Russia’s policy in Ukraine with sanctions still suffers from a lot of disagreement with its member states because Russia’s approach of subsequently imposing its own sanctions against the EU has been divisive.”
Larry King, Professor of Sociology and Political Economy University of Cambridge spoke about ‘The Governance Grenade, the Effect of Mass privatisation on Corporate Governance in Russia’:
“There are many different ways to privatise and we looked whether how you privatise makes a big difference, for example how do you allow state owned enterprises to compete with other private firms? How do you allow domestic owners to emerge which then go on to privatise firms and which will probably have much better outcomes? This happened in Poland and much of Central and Eastern Europe, and here there is a big role for foreign investors. However, when you try to privatise everything at once, without waiting for domestic owners to emerge, or without inviting in competitive auctions involving foreigners, you have to embark on artificial privatisation.
“Rather than that being a corrupt process in itself, my argument was that it created corruption. It led to firm failure. Creating owners who had no capital, who had no expertise, who had no connections, and who couldn’t monitor firm insiders, created a perfect storm for firms to fail. Once they started to fail it created a fiscal crisis for the state as nobody was paying taxes.
“This led to a situation where firms were retreating from the market as state bureaucrats, who were already demoralised from the transition and were not being paid, were now ripe for corruption. What emerged in many of these countries, Russia or Ukraine, is a system of social property relations that were based on client type ties between political officers and captured businessmen who were what we call Oligarchs.
“Clearly these systems needed to change but Russia for example could have done what Poland did and it could have protected its domestic market and allowed competition to drive enterprise restructuring and reforms of the state but they tried to do everything at once and that led to disaster.
“In summary, you can’t really describe these countries as in transition from socialism to a market society, what you have is a new type of market society developing, one in which the relative separation of the political and the economic spheres is different. There is much less separation and to be in big business you also have to be in a political community in these countries.”
Sveta Borodina outlines her findings on law and finance in Russia:
“In Russia people tend to do business with their friends and acquaintances and there is also the concept of reputation so people know each other. They rely on law to formalise what they have agreed informally previously. Trust used to be the way of making deals but nowadays lawyers are getting involved at earlier stages and they look at the letter of the law before the signatures are put on the paper.
“People are starting to understand that if you lead your business according to the rules you are more secure you are safer and you will have more chances of keeping your business in case there is an attack from a hostile acquirer.
“I was very pleased to find that the micro side of the business is improving and that it has improved considerably and the technocrats are moving the country in the right direction but the trouble is that the political set up is in conflict with this forward movement. “
More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014