MBS Blog

This is the kind of news….that is not really news…at least to someone who does business in emerging markets. Nonetheless, it is good to keep tabs on where bribes need to be paid to get business.

It an ironic way, the authors of this report-Transparency International-have raised the bar not only in emerging markets like Russia, China and Ukraine, but also in the developed economies like the United States. This would apply not only to the financing of political campaigns or the “sale” of Senatorial offices, but specifically to the types of financial instruments that may have been the catalyst for the Global Economic meltdown.

What is needed is greater transparency in the financial services industry. Many investors had been blinded or lulled into a false sense of security by the advice of institutions that have a direct financial stake in keeping information private. Indirectly, these companies were being “bribed” by their clients to give favorable ratings and analysis. As I was reminded during my short time on Wall Street, “when was the last time you heard of an investment bank urging their clients to sell?”

In some ways, emerging markets are more “honest,” as it is assumed that corruption is part of the normal process of doing business. While this doesn’t negate the need for reform, or diminish the fact that corruption is a huge obstacle preventing development in emerging market economies, it also means those with higher standings in the “least corrupt” category need to look at their own institutions more carefully as well.

 From www.ft.com:

Emerging powers’ companies bribe ‘routinely’

By Michael Peel in London

Published: December 9 2008 15:57 | Last updated: December 9 2008 15:57

Chinese, Indian and Russian companies bribe routinely to win overseas contracts, a global survey of executives claimed on Tuesday, highlighting fears that leading emerging economies are undermining international efforts to tackle corruption.

The bribe-payers’ index published by Transparency International, the anti-corruption group, ranks the three nations and Brazil in the bottom five of 22 countries surveyed.

The research highlights how intensifying global competition for natural resources and infrastructure projects threatens a “race to the bottom” between established western multinationals and leading companies from the new financial powers.

Huguette Labelle, Transparency International chair, called on all big exporting countries to join the landmark OECD anti-bribery treaty, which so far has been signed by 38 mainly rich nations.

Ms Labelle said Transparency International’s research “provides evidence that a number of companies from major exporting countries still use bribery to win business abroad, despite awareness of its damaging impact on corporate reputations and ordinary communities.”

The Transparency International index ranked Russia in last place with a score of 5.9 out of 10, with India and China also both scoring below 7.

Belgium and Canada topped the rankings jointly with a score of 8.8, while all the other members of the Group of Seven leading industrialised nations except Italy scored more than 8.

The countries ranked in the index account for about three-quarters of world foreign direct investment outflows and exports of goods and services. The survey – carried out by Gallup International, the polling organisation – is based on the perceptions of 2,742 business executives from 26 countries, including six in Africa, four in Central and South America, and eight in Asia.

The research says the most corrupt sectors among 19 surveyed are construction, real estate, energy, heavy manufacturing and mining, while the cleanest are information technology, fisheries and banking.

Many anti-corruption activists warn that the expansion of companies from emerging economic powers into resource-rich but often poorly governed countries in Africa and elsewhere could prolong and extend a tradition of bribery already established by western multinationals.

The OECD has launched a partnership with the African Development Bank to fight bribery on the continent, while Chinese officials will attend a meeting of the OECD’s anti-bribery working group this week .

Another TI index published in September accused the world’s wealthiest countries of failing to live up to their commitments to fight corruption, highlighting fears that only the US and a few other nations were serious about tackling graft by their businesses.

TI’s surveys are widely seen as useful yardsticks on corruption, although their basis on business executives’ perceptions rather than more objective measures means they are susceptible to individual prejudices.

Funders of the latest index include the German and Norwegian development agencies and Ernst & Young, the international accounting firm.

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Feeling the effects of the current Global Economic Crisis, there is little doubt that Russian and Ukrainian Governments are preparing to let their currencies slide even further. The question remains as to how low they will go and what effect they will have on these emerging market economies.

In Ukraine, the hryvna is now hovering around 6 to $1USD, having lost more than 20% over the last 60 days.  The Russian ruble is also getting battered and could see levels against the U.S. dollar that it has not experienced since the financial crisis of the late 1990s.

Devaluations in either economy could exascerbate already high levels of inflation. Russia is particularly vulnerable as it relies on imports of basic food products, plus it derives a significant portion of its revenues for oil and natural gas exports. As oil revenue has declined, and subsequent market interventions have depleted Russia’s foreign currency reserves, Russia could be hit with a higher degree of stagnation than Ukraine. In fact, Ukraine may be able to weather a devaluation better than Russia.

The industrial sector located in Eastern Ukraine could benefit from the lower prices of their steel and chemical products, making their products competitive with China and South Korea. The Ukrainian agricultural sector could also benefit from devaluation.  The fomer “bread basket” of Imperial Russia and the Soviet Union, could regain this title, but with exports to Europe and Asia. This vastly under utilized sector could see a surge in foreign investment next year, or whenever the global credit markets become unfrozen.

In the meantime, businesses and individuals are going to have to adjust to the new reality.

Anton Olff

Technorati Tags: Global Economic Crisis, Ukraine, devaluation, currency reserves, hryvna, Russia, ruble, dollar, Eastern Ukraine, China, South Korea, Soviet Union, exports, Europe, Asia,

We have all heard the “war stories.”  Sit at any pub, club, bar or cafe in Ukraine where ex-pats congregate, and the topic of conversation will eventually turn to the difficulty in getting things done here.  The inevitable comparsions between how easy things are accomplished in the United States, the U.K. compared with Ukraine begets the question: “why are you here then?”

Of course, we know the reasons.  We are here to make  money, and lots of it.

Here is the attraction: excellent geographic location between Europe and Russia, a developing market with a population the size of France,  rising incomes, burgeoning consumer demand, and a seemingly less anti-business regulatory and tax environment than the mature economies of the United States and Western Europe.

That all sounds great. So why is so difficult? Why do businessmen, particularly foreign businessmen feel like they are pioneers or as one American real estate developer said to me, “like one of those characters in the HBO TV series Deadwood.”  Yes indeed!! Here are the top reasons, in no particular order.

1. Corruption- you always pay…and then pay some more…and everyone has their hand out.
2. The Government- or should we say, lack thereof. The rules change on a daily basis.
3. Business Culture- not exactly Western, not exactly Soviet. The customer is wrong!!!
4. Work Ethic- more for less…work that is. I get my salary whether I do a good job or bad job.
5. Bureaucracy- you always need one more paper or permit…but the office is closed today.
6. Transparency- you always find out afterwards. Information is seldom volunteered.
7. Punctuality- are you kidding? Ukrainians rarely show up on time for meetings.
8. Contract Negotiation- signed, sealed, delivered…and then undone. Just when you think you are ready to move forward, the contract needs to be renegotiated. Of course, you are the one who must “negotiate.”
9. Visibility- you want to be noticed. You want your product and services to be recognized …but you have to be discreet too.
10. Bias- not xenophobia on the part of Ukrainians which can certainly be a factor, but more importantly the bias of foreigners. Ukraine is not, and may never be an easy place to conduct business. Hard to accept. Even harder to deal with, but a fact unlikely to change.

Anton Olff

Technorati Tags: Asia, Bias, Bureaucracy, Business Culture, Contract Negotiation, corruption, Europe, France, mature economies, Punctuality, Russia, Soviet, tax environment, The Government, Transparency, U.K., ukraine, United States, Visibility, Western Europe, Work Ethic