The Russian Federation Today New business opportunities and challenges for the future by Dr. Igor Oleynik
Introduction
The profound economic and political reforms which have taken place in Russia and the other Newly Independent States (NIS) during the past four years have dramatically changed the balance in the world economic system. Because of the unlimited deposits of various natural resources, high levels of industrial development, strong export potential, and the psychological readiness of many Russians to accept democratic and free market values, it may become an economic miracle of the next century despite current election results. Contradictory market reforms that have been taking place in Russia during the past four years have launched new and powerful political and economic forces. These forces and especially its emerging private sector will influence the world economy more and more, thereby creating numerous strategic business opportunities and challenges.
At least four important changes which will influence the international markets can be mentioned specifically.
First, the world market has been joined by more than 300 million dissatisfied and very active consumers from all 15 former SovietRepublics. Russia with its 150 million consumers is now one of the largest new markets in the world. These consumers rely on import to satisfy up to 40-60 per cent of their needs for basic food and consumer goods. Russian and other consumers with growing buying power, which can be estimated to be at least $150-200 billion per year, are creating new opportunities for industrial leaders and aggressive businessmen from all over the world. Second, there is a danger of political, economic, and legal instability, as well as expanding protectionism. This trend is taking place because Russia and all (NIS) with their rich mineral resources and a cheap labor will try to continue selling increasing quantities of raw materials, metals, and semi-finished products at dumping prices. Neutralization of this negative trend will demand additional efforts from the G-7 and other Western countries.
Third, Russia and all the other countries that have appeared in place of the Soviet Empire are now competing for foreign investments, offering a cheap and educated labor force, rich mineral resources, and industrial facilities. If not now, in the near future, Russia and other NIS will compete economically with other developing and even developed countries.
Fourth, the increasing involvement of Russia and other countries in the world economy creates a risky but enormous market not only for Western consumer goods, but also for technologies and services, especially telecommunications, transportation, construction, financial services, distribution, and health care, which always will be in demand. The embryonic service sector inherited by Russia and all other newly independent countries produces currently less than 10 percent of GNP. In the future the service sector will be the fastest growing and most promising profit-generating sector of the transitional economies.
Some other important strategic changes that have occurred in the international economic and business environment can be mentioned. It is clear that Western countries will face two groups of challenges that resulted from the current global modification of the world market. The first is necessity in additional flexibility and aggressiveness to exploit the new business opportunities, including those emerging in Russia, in other NIS, and Eastern Europe. The second is being able to neutralize the potentially damaging effect of Russia invading the world market with underpriced materials and products.
Strategically, it is very important now to build all the necessary prerequisites for the efficient involvement with privatized industry in Russia and other NIS in the international division of labor. The experience accumulated by Western companies that have been trying to penetrate the Russian market shows the strong demand for both business information and the shared knowledge of the ever-changing Russian economic, political, and legislative system. Despite recent elections returns and the war in Chechyna, there are still tremendous business opportunities in Russia.
Although there are a number of export-import companies interested in doing business in Russia, anyone who is trying to penetrate the Russian market today should clearly understand the structure and the rules under which both government, as well as business operate. Without such an understanding, attempts to penetrate the enormous but risky Russian market will bring more failure than success. A brief description of the new government system in Russia might help in strategic business planning and in understanding better the current political system.
I. The Political and Administrative Structure of Russia: A New Circle of Evolution
The Russian Federation, or Russia, became an independent state at the end of 1991 with the dissolution of the Soviet Union. From a macro-economic point of view, the Russian Federation is conditionally sub-divided into 11 basic economic regions. These regions do not play a major political role, but at the same time they are rather important for the macroeconomics planning and the industrial development of the country.
Administrative Structure of Russia
The Russian Federation presently consists of 21 Republics, 6 Krays (territories), 49 Oblasts (provinces), 1 Autonomous Oblast, 10 Autonomous Okrugs (ethnic districts), and two federal cities (Moscow - the capital of the federation - and St. Petersburg). Following the adoption of the new Constitution, all members of the Russian Federation, in spite of their different names, territorial size, number of inhabitants, internal ethnic and administrative structures, and various levels of political and economic development, have enjoyed equal rights within the federation. Their jurisdictional status can be roughly compared with the federal system in America.
The existing political and administrative system, and especially the role which different jurisdictions play in the political development of the country, will be significantly modified when the political and administrative reforms outlined in the new Russian Constitution adopted in December 1993, are actually implemented. The process of restructuring the current political system in accordance with the ideas of the new Constitution, is still proceeding.
Republics. All 21 Russian republics, regardless of their size and population, are the most politically developed and active members of the federation. The boundaries of Russian republics were drawn during the 1920s to give political recognition to important ethnic minority groups. Governmental structures include legislative parliaments as well as executive branches. Presidents have already been elected in ten of the Russian republics, while most of the other republics plan to elect their presidents in the near future.
According to the new Constitution, parliaments of the republics have the right to adopt their own laws and regulations provided they do not contradict the federal law. Executing these rights, parliaments and councils of representatives in republics, Oblasts, and krays have already adopted more than 10,000 local laws and resolutions which take priority within their administrative borders.
Oblasts. (Provinces) An Oblast is a political structure, and continues to be primarily an administrative subdivision. According to the new Constitution, and especially after the elections of local governments which took place in March 1994, their role has substantially increased. After local elections, the legislative branch of the government in each Oblast is represented by a Council of Representatives and an Executive Administration - or elected and appointed officials, who will have a dominating influence on local political and economic development. Under the emerging political system, local governments will assume a more significant role not only on the local level, but on the federal level as well. From the political and economic point of view an Oblast continues to be primarily an administrative subdivision of the federation which encompasses no significant ethnic group other than Russian.
Krays (Territories) In spite of the ongoing changes of the Russian political structure, a kray can still be considered a unique administrative entity which is best described as a combination of a republic and an oblast. Boundaries of the krays have been laid out arbitrarily, mostly for administrative purposes. From this point of view, the main difference between krays and oblasts is the presence within the krays of one or several political entities of the lower echelon. One based on a certain nationality group in the form of an autonomous oblast, an autonomous okrug, or both. Under the development of the new political system in Russia, which is leading to political and jurisdictional equality among Federation members, the present distinction between a kray and an oblast will gradually disappear.
Autonomous (Ethnic) Oblasts (Provinces) and Okrugs (Districts) These jurisdictions were created with the intention of granting political recognition to relatively small ethnic groups. All autonomous okrugs are usually assigned to large, sparsely populated areas in the North, Siberia, and Far East regions. Because all okrugs are situated on the territory of larger jurisdictions, their role on the federal level has been rather limited. In the near future, it is envisaged that their role will gradually increase. After the adoption of the new Constitution all prerequisites for such a shift are in place. Without a doubt, representatives of these jurisdictions will gradually obtain more independence from the federal government in solving their economic problems, especially with respect to the use of rich mineral and other natural resources concentrated on their territories.
All republics, oblasts, krays, and okrugs are divided into " rayons" which are comparable with counties in the United States. There are 1,857 such rayons and 372 cities with separate metropolitan areas (gorsovets) in Russia. Each rayon has an administrative center, a local council of representatives, and an executive administration which consists of appointed officials. All urban settlements and small cities are under the jurisdiction of their respective rayon government. When an urban town reaches a certain size (usually a population of 50,000) or achieves a certain economic significance, it may be transferred to the higher level jurisdiction, such as republic, oblast or kray.
II. Changes in the Political System Introduced by the New Russian Constitution
According to the new Russian Constitution adopted in December 1993, the jurisdictional status of all republics is determined by both federal and local constitutions or charters. The status of all other jurisdictions is determined by the federal Constitution as well as local Charters adopted by the legislative branches of each local government. During certain transitional periods, relationships between an ethnically-based jurisdiction and the government of the kray or Oblast where the jurisdiction is located are defined by federal law and an agreement between the governments of the kray (Oblast) and the ethnic district. Borders within the Federation can be changed only by mutual agreement.
The official state language of the Russian Federation is Russian. Republics within the federation may choose their own official language to be used in conjunction with Russian. Local jurisdictions have legal rights to independently regulate all other matters.
The constitution prohibits the establishment of any customs, local duties, or any other barriers to free movement of goods, services, and financial resources. Such limitations may only be established by the federal government to protect the lives and health of citizens, the environment, cultural heritage, or state security. The monetary unit of the Russian Federation is the ruble. Only the Central Bank of Russia is entitled to print and circulate money.
All jurisdictions of the Russian Federation are authorized to design and develop their local governments in accordance with the federal constitutional order, federal laws, and their own domestic legislation. Federal government institutions may establish their own units and subsidiaries to execute their duties. Federal and local governments may create joint governmental institutions within local governments or transfer their authority to international institutions subject to the limits determined by international treaty, the federal constitution, and federal and local law. Each has its own local government with a legislative and executive branch.
According to the basic principles mentioned above, the federal government of the Russian Federation shares power with local governments in the republics, krays, and oblasts. The allocation of power and responsibilities between different legislative and executive bodies in Russia continues to develop with the adoption of new constitutions in republics and charters in other jurisdictions. During the transition period, which may take from five to ten years, the federal government in Russia may continue to operate at a level of centralization which is much higher in comparison with that of the United States. Nevertheless, the current trend clearly shows that the level of political and economic decentralization in Russia is progressing at a constant rate.
All oblasts, okrugs, rayons, cities, and towns have a local executive body (administration) which is headed by a Governor and includes elected and appointed officials. The administration is responsible for all matters related to the territory's economic development.
The representatives in Moscow from each Russian jurisdiction play an important role in lobbying the Federal Government to grant favors for their specific region.
Since the fall of the Soviet Union, the Russian Federation has undergone enormous political, social, and economic changes. The Russian political and administrative system should be changed dramatically in accordance with the new Russian Constitution. The division of power between the executive and legislative branches remains undefined. The executive branch itself has undergone changes, and the whole structure of the federal and local governments is in flux. Because of this restructuring, the regions' importance in the country's political and economic life is growing,
III. Russian Regions: Conflicting Trends of Development
The problem of regional political development is by far one of the most puzzling dilemmas facing the Russian government. Resolving this problem may determine the very survival of the entire Russian state. During recent years, this problem has become a real threat to the integrity of the Russian Federation.
It is also very important to stress that the regional issue (or the issue of regional development of the Russian Federation) has been neglected by the Russian government. Throughout Russian history a certain cultural tradition has been emerging - to dismiss rather than to take advantage of the benefits derived from the ethnic and economic diversity of Russian regions. The new Russian Constitution includes prerequisites for solving many problems inherited from the past.
Modernizing Russia's administrative structure is now becoming increasingly more complicated because of specific historical and current transitional factors. Historical factors are reflected in its inefficient economic and political structures and the absence of certain cultural and administrative traditions. Present factors are evident in the limited abilities of the government to operate at both a federal and local level.
Several trends reflect the complexity of the current situation in the Russian regions:
- The slow transition from a totalitarian political system (with its highly centralized administrative and economic structure) to a new democratic system of government.
- Political and economic reforms at the federal level occurred without a concurrent adjustment of the administrative system at the regional level. This induced the rapid shifting of ethnic issues into the territorial dimension and resulted in numerous ethnic conflicts.
- The political and economic gaps between the federal and local level in Russia resulted in a slow improvement of the structural composition of Russian society. It also led to the development of dangerous separatist trends.
- Many politicians started actively exploiting the regional and separatist issues in order to channel the dissatisfaction and frustrations of the population towards the current federal government.
The regional issue in Russia is currently determined by endemic and historical differences that exist throughout the country. The modern political and economic reality in Russia reveals that Russian society has reached the end of a certain stage in its development. There are only a few countries in the world where traditions, territorial and ethnic structure, and specific economic characteristics predetermine the unique nature of political and economic activities as they do in Russia. That is why it is impossible to understand Russia without taking into consideration several important distinctions.
Traditional & Historical Distinctions are based on a number of territorial, climatic, ethnic, and other fundamental characteristics which make Russia a unique country. Listed below are only a few which can be considered the most important to the understanding of current political and economic problems.