FacebookTwitterLinkedIn

This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.

By Daniel J. McCarthy (Northeastern University) and Sheila M. Puffer (Northeastern University)

During each of the three periods of Russia's tumultuous evolution over the past century, government leaders and others had opportunities to change the traditional ways that informal networks crept into economic, political and social systems. […] However, the more pervasive phenomenon was that government officials and their cronies opted to enrich themselves at the expense of a more efficient, transparent and less corrupt market-based economy.” 

Russia's Business Landscape

The significant political and economic changes that have swept through Russia during the past century have gone hand in hand with the reconfiguration of the country's informal social networks and the emergence of specific corrupt practices.

The Russian business landscape may change further because of its government's decision to wage war on Ukraine. While the nature of such changes cannot be fully predicted at this stage, there are some initial indications that many foreign companies are already reducing their presence in the country (see here for a list of which multinational companies have already decided to exit Russia, scale back their operation, or are holding off further investments decisions).

Recent research examines these changes along three phases, namely the Soviet (1917–1991), post-Soviet (1992–1999), and Putin eras (2000 – present).

Soviet Era (1917-1991)

During the Soviet Era, Russia banned private businesses. The state controlled almost every aspect of daily life, which enabled the emergence of blat or an “economy of favors”, which allowed individuals to satisfy their basic needs (such as getting a job or admission to a prestigious university), through informal agreements, exchange of services and connections, and black-market deals.

Post-Soviet Era (1991-1992)

In the Post-Soviet Era, fledging institutions were too weak to control another form of corruption that emerged – the so-called sviazi, which involved gaining illegal access to government officials through various corrupt practices. Sviazi is more political than blat, as it involves gaining access to influential people, especially in government, who could help in obtaining resources to further one's interests, particularly in business.

Putin Era (2000-Present)

Both blat and sviazi have persisted throughout the post-Soviet and Putin eras. But, as Russia transitioned farther and farther away from its Soviet-era institutions, another type of informal social network emerged, with its own toolkit of corruption and bribery-related practices – the so-called sistema.

Sistema supports the mutual interests of the Russian government, individuals, and private businesses, but with the ultimate objective of serving Putin's hold on power. Even though the early phases of the Putin era appeared to have been characterized by a somewhat citizen-friendly approach, this façade has quickly disappeared, as the central government has increased its grip on the domestic economy and the sistema has expanded its influence throughout the economy, as more and more influential companies have become willing to please Putin and his acolytes. It is during Putin's era that Russia's traditional “economy of favors” has turned into an “economy of greed.”

What does this all mean for business? Well, as it stands under sistema, managers operating in Russia may find that public officials—including law enforcement—will turn a blind eye on corrupt practices, since they are so embedded in the relationship between businesses and government. Thus, bribing-related sanctions are unlikely, unless the individual or company in question has been targeted as being out of favor with the government.

Original Article

Daniel J. McCarthy and Sheila M. Puffer. 2022. The co-evolution of informal networks, institutions, and corruption in Russia: from an economy of favours to an economy of greed. European Journal of International Management, http://dx.doi.org/10.1504/EJIM.2022.10044812.

Contact

If you are interested in learning more about this work, contact Professor Puffer.