Vladislav Soloviov believes that embracing international corporate governance standards can help Russian companies shake off their negative image.

More and more Russian companies are going global and when it comes to international mergers and acquisitions involving Russian corporations, they are increasingly the predator, not the prey. There have been numerous examples in recent years, particularly in the Russian metals and mining sector, an industry that requires international expansion de facto, as growing companies search for new raw material assets and attempt to stay ahead of the competition.

RUSAL, the world's third largest aluminium producer and one of Russia's largest private companies recently announced a proposed merger with its domestic rival SUAL along with the acquisition of the alumina assets of Swiss company, Glencore. Evraz, Russia's largest steel maker by volume, and Norilsk Nickel have both made international acquisitions in recent years and Severstal is pushing forward with its proposed acquisition of Arcelor. In addition to the increase in outbound Russian investment, there are a growing number of Russian companies, particularly those involved in natural resources, listing on the London Stock Exchange. However, despite this progress and the associated need to improve corporate governance to meet international best practice, a negative international perception of Russian business prevails.

Independent assessment

In an attempt to understand the disparity between perception and reality, and realising the importance of an independent assessment of Russian internationalisation, RUSAL commissioned independent research group, the Economist Intelligence Unit (EIU), to explore the issue in depth. Russian companies have a huge potential to shape the global competitiveness of entire industries. However, there are major operational and perception-based challenges for any Russian company seeking to go global. RUSAL's hope was that the resulting report: The Russians are Coming - Understanding Emerging Multinationals would help to rejuvenate the debate and serve as a call to action for all those interested in the future of Russian business.

In drawing up the white paper, the EIU interviewed over 300 chief executives from leading multinational companies, in order to gauge their opinion of Russian companies and their corporate expansion. The results make compelling reading.

Recently, Russian companies have enjoyed a high profile, not only among industry peers, but also in the media, transforming themselves from little-known companies into major global players. This emergence of Russia as a global player has surprised the established business world. The country's 'ambitious corporate advance', as described in the white paper, is often seen by the West as a strategic move by the Kremlin to position itself geopolitically, while the companies themselves are perceived as shady corporations, with poor standards, backward technology, weak management structures and with Machiavellian oligarchs at their heads.

By way of contrast, Russian business and its supporters see these companies as rapidly changing, emerging multinationals and argue that it is vital that the international business community recognises that that they are primarily driven by commercial logic and competitive advantage - not by political agendas.

According to the EIU, it is essential for these emerging companies to take upon themselves the responsibility for improving their international image by improving transparency, corporate governance, accounting and environmental standards. Without a significant dedication to the improvement of these issues, the expansion schemes of Russian companies will face the 'onslaught of the opposition'.

As cross-border transactions become ever more common, Russian business is increasingly adopting international best practices as a direct consequence. This commitment is far-reaching - from operational structure and financial reporting to corporate citizenship and sustainable development.

However, it is widely (and in some ways inevitably) assumed that Russian firms with international ambition are fast-tracking their corporate governance programmes in an effort to capitalise on current investor interest. But a closer look shows that there have been important changes in corporate governance and disclosure across Russia over the past three to four years, that should provide a degree of confidence to the international financial community. This is particularly true of Russia's larger companies. RUSAL, for example, has developed an 18-month corporate governance programme, with the help of the European Bank for Reconstruction and Development and the International Finance Corporation, appointing an independent board among a series of other activities. It has also started the process of disclosing information on its ownership structure and data on consolidated actions.

The emergence of new multinationals in Russia is part of a broader global phenomenon. As economic power shifted towards emerging markets, Asian and Latin American companies were the first to break on to the global business scene, challenging the dominance of western players. By comparison, Russian companies are relative latecomers, but their recent expansion, facilitated by oil liquidity, has been rapid. Indeed, Russia is now the third largest foreign investor among emerging markets.

The expansion drive began in the CIS and Eastern Europe, and is now moving rapidly into Africa as many Russian companies start to build on their first tentative steps in developed markets to build a genuinely global presence. As an example this international presence, RUSAL now operates across five continents in 17 countries and is the largest Russian investor in Australia.

Globalising Russian companies enjoy a number of significant competitive advantages over established players. In particular, they have emerging markets know-how, a powerful but flexible corporate structure, liquidity and enormous ambition. These characteristics allow Russian investors to act quickly, to operate at low cost, and to consider acquisitions in both emerging and developed markets that are too risky or too problematic for others.

However, the results of the survey conducted by the EIU showed that international business is far more aware of the risks than of how to mitigate those risks and take advantage of the opportunities presented by the ambitious expansion programme of Russian business. Many of those interviewed also put the success of these companies down to external and circumstantial factors rather than talent or business prowess. The results showed that while the interviewed chief executives expressed concern that Russian companies are politicised (59%) and need to put more emphasis on political independence to improve their image abroad (41.74%), political support for Russian companies was seen as a key competitive advantage (38.63%) alongside access to natural resources, low energy costs and a strong research and development base. More than a third of respondents (40.81%) regard a perceived lack of reform in Russia as the major obstacle to further growth of the economy.

On the one hand, it could be argued that at the moment, there is little international business knowledge of Russia and Russian companies, and that only a small handful of companies are familiar to people outside Russia and the CIS. Therefore, the onus should be on international business to gain a better understanding and banish their prejudices.

On the other hand, one could argue that the results of the report will give Russian companies a more succinct idea of what actions they need to take to become internationally accepted as credible, transparent and worthy business partners, attracting global investment through their thorough adherence to international best practice standards.

Changes required

Regardless of which school of thought one subscribes to, the results of the EIU white paper are clear. While the prevalent negative image of Russia as a business partner is clearly exacerbated by ignorance and stereotyping, it will take more than a PR campaign to change it. Russian companies must focus on making clear structural changes at board level, and enforcing the adoption of international business standards throughout their companies.

RUSAL embarked on a corporate disclosure programme in 2004, the same year that its first 10 year strategy was introduced. Its creditors and client base were key - in order for RUSAL to achieve its stated strategic goal of becoming the world's leading aluminium producer, they will be investing an estimated $8 billion in its development in the coming years. Since projects are usually financed 30% from own resources and 70% through debt, (well outstripping the capability of local Russian institutions) it makes it crucial to be in good standing with global financial institutions and to possess an excellent reputation.

Equally, RUSAL's customers are major international corporations willing to pay a premium for long-term reliable supply. With these kinds of business partners, it was recognised early on that disclosure and corporate governance would need to meet international best practice.

It is clear that the future presents a challenge for Russian companies seeking recognition and acceptance abroad. Strict adherence to international corporate governance standards is essential for companies who wish to stand on the same platforms as their international peers, and to strip away the long-standing, stereotypical perception of Russian firms. But this will happen in a matter of years, not months. Therefore, the global business community must also give Russian business its due. The Soviet legacy has not been entirely negative. Not only does Russian business enjoy a hugely intelligent and highly educated human resources pool, it also takes advantage of a spirit of determined ambition to progress and modernise and is home to young and dynamic management teams. Focusing on similarities rather than prejudices will reveal that they share the same craving for competitive advantage and the same drive for success.

Russian firms are shedding their debilitating image to become not only credible business partners, but real competitors to, and indeed owners of, some of the world's most eminent companies. The Russians are coming - and we are here to stay.

- Vladislav Soloviov is chief financial officer of RUSAL, www.rusal.com

Russian companies are lagging behind their European counterparts in implementing corporate governance procedures, but are taking steps to close the gap, according to Marsh. Speaking at the Economist conference Attracting Foreign Investment in Russian Companies in London recently, Cristiana Baez-Safa, managing director of Marsh's European FINPRO practice, said: "There is a growing understanding among Russian companies of the need to improve their corporate governance, disclosure and risk management structures." This awareness coincides with other pressures on Russian companies to improve their practices, including institutional investors asserting their influence and governance expectations, and Russian companies seeking to access global capital markets.

Baez-Safa said: "Appropriate corporate governance is a pre-requisite for attracting investors and facilitating IPOs. There is also increasing awareness of directors' and officers' liability issues as Russian companies list their securities on foreign exchanges. The number of Russian companies offering IPOs has grown dramatically in 2006, with this year's volumes at the end of October doubling those for all of 2005.

"Russian companies understand the importance of corporate governance, but it is a question of changing the behaviour of the entire organisation, not just at the top, and that takes time."

Baez-Safa added: "There are still issues with corporate governance practices that make investors nervous. Although corporate decision-making procedures are being improved, the imbalance of interests between different shareholder groups on boards continues to be one of the weakest areas of governance. Additionally, the Russian legal and regulatory environment is not adequately advancing international corporate governance standards, with only minor regulatory improvements and weak enforcement."

She said that recent independent surveys and assessments show that only moderate progress is being made to evolve Russian corporate governance, with appointments of independent directors and the creation of board committees on the rise.

Baez-Safa concluded: "In order to develop corporate governance practices in Russia, it is important to understand the legal and cultural environment. While the UK and US corporate governance models focus on the interests of shareholders and maximising shareholder value, continental European jurisdictions focus more on the success and the viability of the company, requiring a balance of the interests of the various different stakeholders. Russia will find the experience and progress made in other continental countries to be a good example when moving forward."


Established in June 1999 and backed by the OECD and the World Bank Group, the Russian Corporate Governance Roundtable brings together an informal but influential network of Russian and international policy-makers and private sector decision-makers who seek to guide future corporate governance reform efforts.

The Roundtable aims to:

- improve the understanding of present governance practices

- provide information about ongoing initiatives

- formulate practical avenues for bringing Russian corporate governance standards closer to global standards

- in the process, make visible to the international community the progress that is being made by Russian institutions, public and private.

The Russian Corporate Governance Roundtable brings together on a regular basis twice a year -a network of the main decision-makers from the public and private sectors to provide high quality policy advice and to facilitate an exchange of multilateral experience. This provides the main vehicle for eliciting discussion on corporate governance conditions and setting priorities for reform efforts in Russia. Meeting agendas reflect the main chapters of the OECD Principles of Corporate Governance.

In 2002, the Roundtable produced a white paper on corporate governance in Russia.


In Russia, as well as in other transitional economies, the state and the business community have yet to create an institutional and legal framework for a fully-fledged corporate governance system. However, in the opinion of Russia's more farsighted business leaders, this sphere of activity is increasingly taking on a financial and economic dimension, according to Sergei Porshakov, adviser to the chairman of the National Council on Corporate Governance and head of the corporate programs division of INTERROS.

Writing in Russia in Global Affairs earlier this year, Porshakov said that Russian business majors are spending more money on improving corporate governance practices. 'Corporate transparency strengthens a company's reputation, while ultimately yielding more dividends than through the dubious practice of skimming profits into offshore accounts. To foreign investors, this development is just as important as witnessing progress in macroeconomic indicators.'

Although some Russian companies are demonstrating good results in improving corporate governance, Porshakov explained that in the past one or two years, the biggest achievements had been in creating new corporate governance instruments and procedures. 'The decision-making role of various corporate boards of directors is increasing as the number of major deals subject to their approval is expanding. Companies are streamlining their structure, in particular by setting up specialised committees - on auditing, human resources and remuneration, strategic planning, relations with investors and so on. Furthermore, the proportion of independent members on boards of directors continues to increase, in both large and medium-sized companies. At some large companies and banks, beneficial owners (real owners of securities not subject to promulgation) are moving from operating control to strategic planning, leaving it for company management to run day-to-day activities.'

Porshakov said that it was important that the Russian legal framework be amended and adjusted to meet the needs of domestic business.

Russia in Global Affairs is a quarterly publication, co-founded by the Council on Foreign and Defence Policy, the Russian Union of Industrialists and Entrepreneurs, and Izvestia newspaper. To read Porshakov's article in full, visit www.eng.globalaffairs.ru/numbers/15/1029.html.