Corruption still bane of business in Russia

By JANET MCFARLAND

Saturday, July 14, 2001 – Print Edition, Page B6

German watchdog group Transparency International released its annual corruption index two weeks ago, ranking Russia and several other former Soviet states among the most corrupt nations in the world.

Russia tied for 11th-worst place out of 91 countries included in the survey, earning a corruption score of 2.3 out of 10, barely beating notorious Indonesia and its 1.9 score. Ukraine was slightly worse than Russia, with a score of 2.1. A total of six former Soviet countries scored less than 3.0 out of 10.

Russia's slide into mafia-controlled chaos is news to no one. The initial burst of enthusiasm for Russia's attempts to transform itself into a functioning capitalist state has long since disappeared. Few foreign companies are willing to move into the Russian market these days, and corruption is the main reason.

Ten years ago, there were 35 Alberta-based companies active in Russia; today there are two. Randall Oliphant, chief executive officer of Toronto's Barrick Gold Corp., told reporters this spring: "We don't think Russia is a suitable environment to invest in nowadays." Those foreign companies that have stayed in Russia have become the world's canaries in the mine.

Calgary-based Norex Petroleum is the latest canary to succumb. Norex, which majority-owns Russian oil company Yugraneft, watched helplessly two weeks ago when its minority Russian partner Tyumen Oil sent heavily armed men into Yugraneft's Siberian head office and ordered all staff to leave. Tyumen then seized control of Yugraneft's nearby oil field, again banishing staff at gunpoint. This week, it took control of Yugraneft's $30-million (U.S.) bank account.

Norex CEO Alex Rotzang immediately received a Russian court order requesting that Tyumen remove its thugs from Yugraneft's offices in the Siberian city of Nizhnevartovsk. It hasn't worked, and Mr. Rotzang noted helplessly to a Globe reporter: "They have over 1,000 armed men around the city. That's more than the police have."

Those who promote investment in Russia have been quick to insist that Norex's case is not common, and that corruption is being cleaned up. But many isolated cases instead paint a disturbing pattern. Numerous Canadian companies most operating in the resource sector, where Russia's wealth is concentrated have found themselves muscled out of projects and forced to walk away from substantial investments. If Russia is becoming less corrupt, it's hard to see the signs from here.

Vancouver's Ivanhoe Energy lost oil field licences in a deal it claims amounted to an illegal takeover. Archangel Diamond Corp. says its Russian partner has breached a deal to give it a 40-per-cent stake in a joint venture, after Archangel had already invested $30-million (Canadian) in the project. Pan American Silver Corp. of Vancouver was muscled out of a Russian project and ended up writing off its $38-million investment. IMP Group of Halifax for years fought attempts to wrest away its investment in Moscow's Aerostar Hotel.

Transparency International chairman Peter Eigen argues Russia and other former Soviet countries must do far more to establish the rule of law in their countries. Such advice is dismissed by corrupt world leaders as either an unwelcome intrusion or an unrealistic luxury only available for rich countries. They fail to realize (or simply don't care) that transparency and legality are the fundamental keys to strengthening their economies.

Yet Transparency International's corruption index makes the compelling argument, with only a few exceptions, that corruption correlates closely with poverty. The four worst countries in the corruption index are Bangladesh, Nigeria, Uganda and Indonesia.

Indonesia, like Russia, has been a problem for Canadian companies because it has also actively sought foreign investment, but failed to protect it once it arrives.

Manulife Financial saw the problems first-hand last year when an unknown shell company emerged to accuse Manulife of fraud in the purchase of shares. Although this company showed nothing reasonable to substantiate the claim, police and prosecutors leapt on Manulife. At one point, a Manulife executive was held for three weeks without charges. Both the International Monetary Fund and the World Bank intervened to defend Manulife. Following revelations that a wealthy Jakarta businessman tried to solicit a $40-million (U.S.) payoff to settle the dispute, Manulife was finally declared innocent in May.

Still, thus far Russia's mining sector has proved the biggest trap for Canadians. Certainly it's now become clear that any foreign company choosing to operate in Russia is willing to accept the risk of complete financial loss. Companies have been amply warned, and it's now a simple case of buyer beware.

Russian President Vladimir Putin was in Ottawa in December urging Canadians to forge economic ties with his country. The idea is laughable. Mr. Putin must first rehabilitate Russia's corrupt bureaucracy, then its even more corrupt local politics, and then its yet more corrupt business sector. Allowing companies such as Norex to flounder with court rulings that are unenforceable against gangland-stle thugs is proof that Mr. Putin has no true commitment to support foreign investors.