BOFIT Viikkokatsaus / BOFIT Weekly Review 2020/29

Problems in public administration present a long-standing barrier to improving the business environment in Russia. Problem areas include shortcomings of the judiciary, abuses by law enforcement, as well as complex regulatory rules and supervision of business activities. The latest annual review by the presidential ombudsman for business shows that these problems are highly relevant, and have gotten worse in some cases.

The latest review found that 94 % of firms surveyed felt that they lack protection from baseless criminal charges. Allegations of corporate economic malfeasance are often made by law enforcement officials with personal interests at stake or based on initiatives from a competing firm. A large part of investigations never results in judicial action, however, due to the failure of investigators to show cause. Even so, investigations may be very burdensome for targeted firms as documents are confiscated and assets frozen. Indeed, 74 % of respondents said that the Russian justice system was neither independent nor objective. About a quarter of respondents felt that corruption has increased over the past year.

The review also looked at the regulation and monitoring of business activities such as fire safety and compliance with environmental requirements. Companies said that many of legal requirements, particularly numerous inspections, were difficult and costly. The authorities can also use inspections and fines as a way to squeeze out revenues for the state treasury or their own pockets. The report noted that the number of inspections imposed on companies has decreased considerably in recent years, but penalties on companies for violations have increased. Last year, on average, one in four companies in Russia was sanctioned for regulatory violations. Almost half of companies surveyed said that the likelihood of successfully overturning state officials in court were miniscule at best.

Russia, however, often lacks the effective monitoring needed to prevent industrial accidents. Even president Putin has commented on this problem recently in addressing the massive fuel spill in May at the Norilsk Nickel facilities. Russian oversight authorities estimate that the environmental damage caused by the spill will likely exceed 150 billion rubles (nearly 2 billion euros). The Russian government says that total costs from industrial and other such accidents in 2015 amounted to about 600 billion rubles.

In late 2016, Russia launched a major project to reform regulatory and supervisory activities. The reforms seek to reduce accidents and their resulting financial losses, while simultaneously diminishing the regulatory and inspection burdens on businesses. The project is scheduled to be ready by 2025.

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