The Country Risk Analysis of Russia

Submission of the draft copy of INB-355 Term Paper on Russia & its Car Industry To XXX By XXX 16 March , 2009 LETTER OF TRANSMITTAL Date: 16th March, 2009 To XXXX Faculty BBA Department North South University. Subject: Submission of the draft copy of INB-355 Term Paper. Dear Madam, We have presented the spring’09 INB-355 term paper (Draft Copy), which you assigned us to prepare as a course requirement. This particular report has given us the opportunity to analyze the country risk analysis of Russia. Through this project, we came to know about the real life applications of the theories in the context of Russia that you taught us in the class.

We are grateful to you for giving us such an opportunity to learn the materials practically during the course. We enjoyed preparing the report though it was challenging to finish up to your good taste within the given time. In preparing this report, we have tried our level best to include all the relevant information about country risk analysis of the country assigned by you, and tried to identify different aspects of country risk analysis. Sincerely yours, XXX ACKNOWLEDGEMENT We are indebted to many for providing us motivation and support during the time we were working with this project.

We are very much grateful to XXX, our respective course instructor of INB 355 to assign us this project. Without her excellent explanation of the issues related to country risk, it would have been impossible to finish this project properly in time. METHODOLOGY Research Methodology Used Information Sources The information has been compiled from authentic and reliable sources like books, newspapers, trade journals, and white papers, industry portals, government agencies, trade associations, monitoring industry news and developments. Analysis Method

Methods like historical trend analysis, judgmental forecasting, and cause and effect analysis have been used in the report for a prudent analysis. TABLE OF CONTENT Topic Page No. INTRODUCTION TO RUSSIA GAD – GREY AREA DYNAMICS CAR INDUSTRY IN RUSSIA PORTERS 5 FORCES PEST ANALYSIS RECOMMENDATION CONCLUSION BIBILOGRAPHY INTRODUCTION INTRODUCTION OF RUSSIA Background:- Founded in the 12th century, the Principality of Muscovy, was able to emerge from over 200 years of Mongol domination (13th-15th centuries) and to gradually conquer and absorb surrounding principalities.

In the early 17th century, a new Romanov Dynasty continued this policy of expansion across Siberia to the Pacific. Under PETER I (ruled 1682-1725), hegemony was extended to the Baltic Sea and the country was renamed the Russian Empire. During the 19th century, more territorial acquisitions were made in Europe and Asia. Repeated devastating defeats of the Russian army in World War I led to widespread rioting in the major cities of the Russian Empire and to the overthrow in 1917 of the imperial household.

The Communists under Vladimir LENIN seized power soon after and formed the USSR. The brutal rule of Josef STALIN (1928-53) strengthened Russian dominance of the Soviet Union at a cost of tens of millions of lives. The Soviet economy and society stagnated in the following decades until General Secretary Mikhail GORBACHEV (1985-91) introduced glasnost (openness) and perestroika (restructuring) in an attempt to modernize Communism, but his initiatives inadvertently released forces that by December 1991 splintered the USSR into 15 independent republics.

Since then, Russia has struggled in its efforts to build a democratic political system and market economy to replace the strict social, political, and economic controls of the Communist period. While some progress has been made on the economic front, recent years have seen a recentralization of power under Vladimir PUTIN and erosion in nascent democratic institutions. A determined guerrilla conflict still plagues Russia in Chechnya. Location: Northern Asia (that part west of the Urals is included with Europe), bordering the Arctic Ocean, between Europe and the North Pacific Ocean Geographic coordinates: 60 00 N, 100 00 E Map references

Asia Area Total: 17,075,200 sq km Land: 16,995,800 sq km water: 79,400 sq km Area – comparative approximately 1. 8 times the size of the US Land boundaries: total: 20,017 km border countries: Azerbaijan 284 km, Belarus 959 km, China (southeast) 3,605 km, China (south) 40 km, Estonia 294 km, Finland 1,340 km, Georgia 723 km, Kazakhstan 6,846 km, North Korea 19 km, Latvia 217 km, Lithuania (Kaliningrad Oblast) 227 km, Mongolia 3,485 km, Norway 196 km, Poland (Kaliningrad Oblast) 206 km, Ukraine 1,576 km Coastline, 37,653 km Maritime claims territorial sea: 12 nm xclusive economic zone: 200 nm continental shelf: 200-m depth or to the depth of exploitation Climate ranges from steppes in the south through humid continental in much of European Russia; subarctic in Siberia to tundra climate in the polar north; winters vary from cool along Black Sea coast to frigid in Siberia; summers vary from warm in the steppes to cool along Arctic coast Terrain: broad plain with low hills west of Urals; vast coniferous forest and tundra in Siberia; uplands and mountains along southern border regions Elevation extremes owest point: Caspian Sea -28 m highest point: Gora El’brus 5,633 m Natural resources wide natural resource base including major deposits of oil, natural gas, coal, and many strategic minerals, timber note: formidable obstacles of climate, terrain, and distance hinder exploitation of natural resources Land use: arable land: 7. 33% permanent crops: 0. 11% other: 92. 56% (2001) Irrigated land 46,630 sq km (1998 est. Natural hazards permafrost over much of Siberia is a major impediment to development; volcanic activity in the Kuril Islands; volcanoes and earthquakes on the Kamchatka Peninsula; spring floods and summer/autumn forest fires throughout Siberia and parts of European Russia Environment – current issues air pollution from heavy industry, emissions of coal-fired electric plants, and transportation in major cities; industrial, municipal, and agricultural pollution of inland waterways and seacoasts; deforestation; soil erosion; soil contamination from improper application of agricultural chemicals; scattered areas of sometimes intense radioactive contamination; groundwater contamination from toxic waste; urban solid waste management; abandoned stocks of obsolete pesticides Environment – international agreements arty to: Air Pollution, Air Pollution-Nitrogen Oxides, Air Pollution-Sulfur 85, Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Seals, Antarctic Treaty, Biodiversity, Climate Change, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Wetlands, Whaling signed, but not ratified: Air Pollution-Sulfur 94, Climate Change-Kyoto Protocol Geography – note: largest country in the world in terms of area but unfavorably located in relation to major sea lanes of the world; despite its size, much of the country lacks proper soils and climates (either too cold or too dry) for agriculture; Mount El’brus is Europe’s tallest peak Population: 143,782,338 (July 2004 est. ). GDP: – Much of Soviet manufacturing was unfit for consumption, and Russians flocked to alternative, imported goods that flooded the market following the liberalization of Russian Crime History The crime rate in Russia sharply increased during the late 1980s.

The fall of Marxist-Leninist governments in Eastern Europe had tremendous influence on the political economy of organized crime. The collapse of the Soviet Union destroyed much of the systems and infrastructures that provided social security and a minimal standard of living for the population, and law and order across the country broke down resulting in outbreak of crime. In the transition to a free market economy, production fell and there was huge capital flight coupled with low foreign investment. Due to these factors, economic instability increased and a newly impoverished population emerged, accompanied by unemployment and unpaid wages. Extreme poverty as well as unpaid wages resulted in an increase in theft and counterfeiting.

Since the dissolution of the Soviet Union, organized criminal groups in Russia and other former Soviet republics have been involved in different illegal activities such as drug trafficking, arms trafficking, car theft, human trafficking and money laundering being the most common. The internationalization of the Russian Mafia along with the Sicilian Mafia, the Camorra, the Triads and the Yakuza played a vital role in the development of transnational crime involving Russia. From 1991 to 1992, the number of both officially reported crimes and the overall crime rate increased by 27 percent. By the early 1990s, theft, burglary, and other property crimes accounted for nearly two-thirds of all crime in the country. There was a rapid growth of violent crime, including homicides.

Russia is the largest country in the world but is covered with abundant types of offensive factors which affect and threatened a foreign investment. Statistics says in 1990, the number of registered crime in Russia was 1. 84 million. This figure increased to 2. 8 million in 1993, then fell slightly. In 1996, there were a total of 2. 63 million officially registered crimes, which was more than 40 percent; higher than in 1990. In 1999, total reported crime was 3 million, and it continued to increase in 2000 and 2001, and then fall in 2002. The Gray Area Dynamics or GAD framework is made of some country specific factors that cause under-perform or cessation of investment or assets.

Some key factors are ranked (Here a scale of 10 to 1 ranking is held where number 10 is the maximum and number 1 is the minimum weight holding positions) and explained below: • Corruption In Russia’s criminal legislation, “corruption” is not defined as a specific crime, but a collective term which include bribery, abuse of office and others. It is accepted in both inside and outside the country that corruption is widespread in Russia. Corruption is often considered as a major factor behind economic problems in the nation. According to a survey conducted by the Economist Intelligence Unit in 1997, Russia received the maximum rating for corruption among public officials. In the Corruption Perceptions Index 2007, Russia was ranked 143rd out of 179 countries for corruption.

On a scale of 0 to 10 with 0 the most corrupt and 10 the most transparent, Transparency International rated Russia 2. 3. Luneev (1996 – 87) extracted a statistics from Ministerstvo Vnutrennikh Del; according to these statistics, corruption in Russia began to decline from the middle of the 1980s, reached its lowest point around the year 1990 or in the first half of the 1990s, and then began to pick up again in the second half of the decade. The statistics is illustrated in the table below : Table : Number of Recorded Offences Committed by Officials in Russia (thousand) | |1986 |1987 |1988 |1989 | |20. 58 |0. 182 |0. 23 |0. 568 |0. 048 | 1 Fraud Fraud refers to as anyone owes a property with the assurance of your bank cheque but in course of time his or her cheque got dishonored by the bank. Beside this, there are also various kinds of fraud, which is found during the country risk analysis of Russia. Duplicate money or unauthorized money is also a very common problem in Russia. Suppose one sells a product in cash and other party pays him or her on the spot. Afterwards he or she will find the fake money which is the duplicate of real money. 2 White-Collar Theft Organized crime groups are extremely influential in Russia.

These criminal groups which are addressed by mafia used to do all white-collar theft activities too. Bank robbery or tender control or even foreign contracts are under control of the mafia. Mafias used to transfer the local arms to different countries of the world. 3 Blue-Collar Theft Russia is an industrial country. There are many labor groups in Russia. They often go for strike because of the pressure from upper level employees. Labor union is involved with stealing and transferring of product from the industry. 4 Product adulteration Product adulteration is mixing identical kind of product with the original product, which is much cheaper than the original product. In Russia honey adulteration is a very common phenomena.

The profession of the Beekeeper can be described as; the raising of bees, production, and sale of honey to wholesalers, the profession of the Conditioner can be described as: selection of honeys in barrels (harvested by the conditioner, if he or she is a beekeeper, and/or bought from other producers or merchants) and then put into pots, for resale in grocers, supermarkets or specialized retailers, and the specialist retailer: direct sales to the public of honey, apiculture Products diversified honey products: sweets, cakes, gingerbread etc. It is not because occasionally (but in fact, more rarely when labels try to make one believe) the same person exercises the three activities that one must confuse and mix these very different competencies. • Cultural Issues • Language There are many countries where language is a big factor for business or any other purposes. But in that case Russia is much more flexible. They exercise English as a common language in every phase of transactions and activities. • Tradition and custom Russia is a very large country so many types of culture found here.

Even some culture has no similarity with each other. In Russia people who are educated and involved with job or some challenging works are very time conscious. They attend the meeting and reached at office at right time. But there are also some people from different culture in Russia, they never keep their words. So, culture differs from state to state but this doesn’t affect the business and other activities in a high extent. • Corporate Culture The same reason of tradition and custom is also present here. In some area the culture is very fast and other the culture is too much slow. So, here one thing is important that in which part a company is going to deal.

First, the company has to understand the corporate culture other than the general culture of Russia. 5 Public Distrust Russian people’s distrust of law in general, the depth of which may be clearly illustrated by some common Russian proverbs regarding law and courts, these are pointed below: • Law is a pole of a cart, you can handle it as you like • Wherever there is law, there is also insult • Wherever there is a law court, there is also untruth • Even if you go to a court, you cannot find justice there • Fed up with lawsuits, reconciliation is the best • We don’t fear a trial, but fear a judge (‘Judges are prone to take bribes’. ) Like a duck’s stomach, it is difficult to fill up a judge’s pockets • What is good for a judge is good for his pockets • Into a court wearing a coat, out of the court without a shred of clothing on. By the phrases pointed above, the abhorred cultural perception of general people of Russia towards legal framework is very obvious and clear. • Legal Safeguards While optimism about the future of the Russian economy must be highly circumspect during the fall of 1998, the economic crisis overtaking Russian public finance and banks at the present time will likely mark the end of an era of high-risk, high-yield investments in government and corporate securities that followed the breakup of the Soviet Union in December 1991. To the extent that more foreign and domestic Russian funds may now be irected into productive assets (if only because various other forms of high-risk, high-yield investments are no longer available) and the Primakov government imposes effective limitations on capital flight, some good may come from Russia’s new time of troubles As a backdrop to planning future leasing activities in Russia, it is necessary to understand the principal frustrations encountered with leasing during the seven years since the break-up of the Soviet Union. Firstly, little or a noticeable lack of capital has been available to finance lease transactions. Investments in Russian government and corporate securities during the period were made at the expense of investments in new productive assets. The bidding up of the value of corporate securities in 1996 and 1997 continued speculative gains reaped by insiders during Russia’s mass privatization of former Soviet enterprises. In this environment, new owners of Russian industry largely postponed long-term investments in the enterprises acquired, had insufficient capital, or lacked a real intention to undertake such investments.

Secondly, large-scale capital flight from Russia during the period reportedly greatly exceeded the value of inbound loans and investments, resulting in a reduction of available capital that could have been applied to retooling Russian industry via leasing or other forms of capital investment. Thirdly, the government postponed the development of necessary legal and regulatory infrastructure. Regulation of the banking sector has been shown to have been insufficient to safeguard deposits or to stave off a system-wide banking crisis. Increasing amounts of government and corporate borrowing hid the fact that amounts owed exceeded what could be repaid. Reckoning time arrived in mid-August 1998 when the government defaulted under its short-term treasury obligations (“GKOs”), immediately precipitating the collapse of the nation’s banking system, currency and stock market.

Fourth, Russian banks, which often lacked capital, preferred to invest what funds they did have in high-risk, high-yield instruments, and previously in currency speculation. The return from investments in more mundane equipment financing transactions, or other operations needed by Russian industry, seemed paltry in comparison. Russian leasing companies, for the most part subsidiaries of Russian banks, accordingly had very little capital made available to them. Russian leasing companies could not finance large scale imports of foreign equipment, or adequate amounts of new Russian equipment. Many viable leasing projects considered by Russian leasing companies that showed an ability to generate sufficient cash to pay lease obligations went unfunded.

Cross-border leasing transactions by Russian leasing companies were used mostly as a conduit for foreign capital in transactions involving the pledge of export proceeds, or a shift of the risk of loss to foreign manufacturers, foreign banks, various national export credit organizations, and multilateral organizations. As a result of the fall 1998 banking crisis, those domestic Russian banks, which survive will be even less able to provide financing for leasing transactions or their subsidiary leasing companies. Several Russian bank-controlled leasing companies are likely to attempt management buy-outs and other forms of acquiring independence from their parent banks. • Industrial action

In Russia government have no right to disclose a company. Even Government has no way to stop the labor that is in strike. Industrialist is independent in doing his business. • Trade union influence Trade unions are moderately influential in Russia. As the labor union groups are backed by the mafias, these unions are so much powerful than any other labor union in the world. Even if a small organization group goes for strike then the whole city worker stop working for supporting them. They have very tight bond among them. Government never interrupts in the work of these trade unions. • The economic crime in Russia Economic crime is mobile in Russia.

It is moving from traditional sectors, such as industry and agriculture, and from traditional activities, like property theft and improprieties in the office, to new sectors, such as banking and insurance, and new activities that require sophisticated skills and organizational structures. Russia is a victim of gradually improving economic crime year by year. • Organized Crime The Russian Mafia, Red Mob or Bratva (slang for “brotherhood”, which applies to all gangs, including rivals), often transliterated as Mafya or Mafiya, are names designating a diverse group of organized crime syndicates originating in the former Soviet Union (Russia and the CIS). Since the 1991 fall of the USSR, these groups have amassed considerable worldwide power and influence.

In early 1993, the Russian Ministry of Internal Affairs reported there were over 5,000 organized crime groups operating in Russia. These groups were comprised of an estimated 100,000 members with a leadership of 18,000. Although Russian authorities have currently identified over 5,000 criminal groups in that country, Russian officials believe that only approximately 300 of those have some identifiable structure. Knowledgeable sources within the Financial Crimes Enforcement Network (FinCEN) have provided one model of the structure of groups in Russia. The principle behind this structure is to minimize contact with other cells that could lead to the identification of the entire organization.

Each boss, called a “pakhan,” controls four criminal cells through an intermediary called a “brigadier. ” The boss employs two spies that watch over the action of the brigadier to ensure loyalty and that he does not get too powerful. At the bottom of the structure are criminal cells specializing in various types of criminal activity or functions such as drugs, prostitution, political contacts, and “enforcers. ” A similar structure places an elite leadership on top which is buffered by support and security personnel from the street operators who are committing the crimes. Street operators are not privy to the identity of their leadership. Strategy and planning is done only at the top echelon in order to minimize the risk of detection.

According to law enforcement sources, those structures described above would fall into the old style of Soviet criminal enterprises. It is quite possible as organized crime has changed in Russia, so has the structure of these groups. • Code of Conduct There is a traditional code of conduct within this old style of organized crime in Russia called “Vory v Zakone,” or thieves in law. This group existed throughout the Soviet era and continues today throughout the republics of the former Soviet Union. In this society the thieves in law live and obey the “Vorovskoy Zakon,” the thieves’ code. The members are bound by 18 codes and if they are broken, the transgression is punishable by death.

Law enforcement officials in the former Soviet Union indicate that most of the organized crime groups are well organized with sophisticated technical equipment, computers, transportation, financial support, and an excellent counterintelligence network. Those groups are involved in extortion, precious metal and raw material smuggling, money laundering, fraud, weapons smuggling, narcotics trafficking, and black marketing. The Thieves’ Code A thief or group member is bound by the Code to: 1. Forsake his relatives–mother, father, brothers, sisters… 2. Not have a family of his own — no wife, no children; this does not however, preclude him from having a lover. 3. Never, under any circumstances work, no mafter how much difficulty this brings-, live only on means gleaned from thievery. 4.

Help other thieves — both by moral and material support, utilizing the commune of thieves. 5. Keep secret information about the whereabouts of accomplices (i. e. dens, districts, hideouts, safe apartments, etc. ). 6. In unavoidable situations (if a thief is under investigation) to take the blame for someone else’s crime; this buys the other person time of freedom. 7. Demand a convocation of inquiry for the purpose of resolving disputes in the event of a conflict between oneself and other thieves, or between thieves. 8. If necessary, participate in such inquiries. 9. Carry out the punishment of the offending thief as decided by the convocation. 10.

Not resist carrying out the decision of punishing the offending thief who is found guilty, with punishment determined by the convocation. 11. Have good command of the thieves’jargon (“Fehnay”). 12. Not gamble without being abie to cover losses. 13. Teach the trade to young beginners. 14. Have, if possible, informants from the rank and file of thieves. 15. Not lose your reasoning ability when using alcohol. 16. Have nothing to do with the authorities (particularly with the ITU [Correctional Labor Authority]), not participate in public activities, nor join any community organizations. 17. Not take weapons from the hands of authorities; not serve in the military. 18. Make good on promises given to other thieves. • Major gangs The Solntsevskaya bratva, or Solntsevskaya brotherhood (the Solntsevo District gang), is one of most powerful organized crime group operating in Moscow. • Dolgoprudnenskaya was a Russian mafia organization and was considered one of the largest groups of organized crime operating in Moscow. It was really named after Dolgoprudniy, which is a Moscow suburb. It was founded in 1988 and was allegedly very influential. • The Izmailovskaya gang (from Izmailovo) was considered one of the country’s most important and oldest Russian Mafia groups in Moscow and also had a presence in Tel Aviv, Paris, Toronto, Miami and New York City. It was founded during the 1980s under the leadership of Oleg Ivanov and was estimated to consist of about 200 active members (according to other data of 300–500 people).

In principle, the organization was divided into two separate bodies— Izmailovskaya and Gol’yanovskaya, which utilized quasi-military ranks and strict internal discipline. It was involved extensively in murder-for-hire, extortions, and infiltration of legitimate businesses. • The Tambov Gang of Saint Petersburg. • The Obshina (“community” in Russian), or Chechen mafia, was a formidable organized crime group in the Russian underworld. According to experts, ethnic Chechen criminal gangs formed the most dominant minority criminal group in Russia. It is believed some gangs may have ties to Chechen militant factions. • The Potato Bag gang was a gang of con artists operating in New York’s Brighton Beach in the mid-1970s. • The

Orekhovskaya gang (from Orekhovo) was a powerful criminal group in between the late 1980s and early 1990s. • In California Armenian-American organized crime groups have also appeared in Los Angeles County, and are involved in many white-collar frauds as well as drug trafficking and extortion. • Foreign Businessmen & the Russian Mafia An unknown number of foreign businessmen, believed to be in the low thousands, arrived in Russia from all over the world during the early and mid 1990s to seek their fortune and to cash in on the transition from a communist to a free market/capitalist society. This period was referred to by many of the businessmen as the “second great gold rush”.

Generally, 1990 to 1998 was a wild and unstable time for most foreign businessmen operating in Russia. Dangerous battles with the Russian Mob occurred, with many being killed or wounded. The Mafia welcomed the foreign businessmen and their expertise in facilitating business and making things happen in a stagnant and new economy. The Mafia considered them as a good source of hard currency, to be extorted under the usual guise of “protection money”. Many different Mafia groups would fiercely compete to be able to “protect” a certain businessman; in exchange, the businessman would not have to worry about having more than one group showing up demanding tribute from him. Many foreign businessmen left Russia after these incidents.

The following map is representing the names the showing places of location of these groups : Diagram: Name and location of organized criminal groups of Russia Table : List of some organized crimes in Russia |Kidnap/Ransom |Embezzlement | |Smuggling |Control of black markets | |Cyber crime |Robbery | |Extortion |Armed assault |Drug Trafficking |Prostitution | |Product diversion and parallel trading |Gambling | |Money Laundering |Fraud | |Racketeering |Car theft | |Trafficking in weapons and radioactive materials |Trafficking in human beings and endangered species | Some severe activities of Russian Mafia are illustrated below : • Kidnap/Ransom

Kidnapping refers to seize people as hostages with the intention of receiving a ransom from either their relatives or the government. Kidnappings have indeed been a major crime practiced in southern Russia — and a major business for many of the anarchic gangs. Foreigners and strangers are more demandable to be kidnapped by organized crime groups for more income. • Smuggling Burdensome customs procedures have made Russia into a nation of smugglers. One-quarter to one-third of Russia’s foreign trade is carded out by small-time importers who travel by every means imaginable. Every day, large quantities of copper, zinc, nickel, cobalt, weapons, and other “strategic materials” are shipped in unmarked trucks or military aircraft, from Central Russia to various Baltic ports.

The nation’s natural resources are being purchased at subsidized domestic prices and smuggled abroad for large profits. St. Petersburg, with close proximity to the West, has become the backdoor of Russian-European smuggling operations. • Drug Trafficking Drug trafficking and illicit drug use is a significant problem in the country. The disintegration of the Soviet Union, the civil war in Afghanistan, the civil war in Tajikistan, and the conflicts in the North Caucasus have made the favorable conditions for the development of illegal drug trade in Russia. In the early 1990s, use of cocaine was increasingly noted among the young population of the nation.

In the mid-1990s, the growing drug abuse that appeared in Russia was caused by lack of border controls, and the country became one of the world’s major transit corridors of drug trafficking. The entrance of producers of cocaine of South America in the Russian market was proved by intercepting cocaine shipments in Saint Petersburg in 1993. As of 1996 internal production of narcotic substances was also rising in Russia. Limited quantity of illicit cannabis is cultivated in the country. Opium poppies and marijuana are cultivated illegally in the Southern Federal District. Russia is one of the two major drug producers along with Morocco, and one of the five major drug trafficking entry points along with Iran, Turkey, Italy and Spain in the Mediterranean region.

The drug trafficking also involves the supply of opium, heroin and marijuana from Central Asia and the Golden Crescent, comprising Pakistan, Afghanistan and Iran. [18] Russian drug rings work with the Sicilian mafia and the Colombian drug traffickers to import and distribute cocaine. Many local Russian distributors have connections with criminal organizations in Central Asia, the Caucasus, and Ukraine. According to the Moscow State Institute of International Relations, a regular trafficking route exists from Tajikistan to Rostov-on-Don via Turkmenistan, and from there to Western Europe. Below are some drug-trafficking routes through the Russian Federation: Name of Drug |Source country |Destination country | |Poppy straw |Belarus, Lithuania, Moldova, Ukraine |Estonia, Poland | |Opium |Afghanistan, Azerbaijan, Kyrgyzstan, Pakistan, Tajikistan, |Canada, Europe, Japan, US | | |Turkmenistan, Uzbekistan | | |Heroin |Afghanistan, Azerbaijan, Kyrgyzstan, Pakistan, Tajikistan, |Australia, Canada, Europe, Israel, Japan, US| | |Turkmenistan, Uzbekistan | |Cannabis |Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Turkmenistan, |Canada, China, Europe, Japan, Republic of | | |Uzbekistan |Korea, US | |Cocaine |Bolivia, Brazil, Colombia, Europe, Venezuela, US |Europe, Ghana, Oman, South Africa, Zambia | Between 1993 and 1995, the annual amount of seized narcotic substances increased from thirty-five tons to ninety tons. At present approximately three to six million people use illicit drugs in Russia. Russia has the biggest heroin problem along with Iran and Estonia.

Russia is a major consumer of opiates. In March 2003, Russian President Vladimir Putin established the Russian State Committee for Control over the Illegal Trafficking of Narcotics and Psychotropic Substances for combating drug trafficking with more coordinated manner. However, still the rate of drug trafficking is unchanged. • Human Trafficking Russia is a supply, transit, and destination country for men, women, and children being trafficked for various purposes. The trafficking is multidimensional and it involves both commercial sexual exploitation and labor exploitation. Russia is a significant source of women trafficked to over 50 nations.

Internal trafficking is a problem in the country; women are trafficked from rural areas to urban settlements for commercial sexual exploitation. Men are trafficked internally and from Central Asia for forced labor in the construction and agricultural industries. Debt bondage is common among the trafficking victims. Russia is a transit and destination country for men and women being trafficked from Central Asia, Eastern Europe, and North Korea to Central Europe, Western Europe, and the Middle East for forced labor and sexual exploitation. Unemployment problem affected many women in the country which is an important factor behind the trafficking of women.

In 1995 approximately 20 percent; of women were the sole wage earners for their families. Unemployed women and desperate mothers are recruited with promises of jobs and good incomes outside of their region or country. Many women involved in prostitution within Russia and abroad have cited the need to support their children as the main reason for being engaged in prostitution. In the Volga region, many women including teachers, nurses, single mothers and schoolgirls were reportedly involved in prostitution to survive. This resulted in increase in sexually transmitted diseases like syphilis and AIDS in the region with syphilis rates reported to be four times higher in 1998 than they were in 1995.

Worldwide, criminal organizations most frequently seize women and girls for commercial sexual exploitation from Russia along with the other former Soviet republics, large parts of Asia, Central America and South America. Trafficking of women is controlled by Russian criminal organizations often in cooperation with foreign criminal groups in Turkey, the former Yugoslavia, Italy, and Japan. In 2003 approximately two-thirds of the women trafficked to Western Europe were from Russia. Many women are sent to the United States, especially in New York, Florida, California, and Hawaii. Some Russian criminal organizations control prostitution rings in parts of Europe and the United States. • Arms Trafficking

Arm trafficking has become a significant problem in the Russian Federation following the disintegration of the Soviet Union. The former Eastern Bloc countries (including Russia) are the source of the majority of illegal weapons in circulation around the world. Illegal arms possession is a problem in many regions in the nation, especially in the areas suffering from insurgency such as Chechnya and Dagestan. Because of the general weakening of the government control and the decentralization of power in the nation in the first half of the 1990s, small arms from several military units and arsenals made their way into the hands of civilians and local unofficial armed formations.

Gun-running in Russia stemmed from corruption in the armed forces and the illegal sale of military equipments. It has been suggested that parts of the Ministry of Defense of the Russian Federation and arms industry were engaged in arms trafficking with the Chechen separatists. Russian troops play an important role in arms trafficking especially in the war zones. Poor salary for service persons coupled with lack of control over weapon storage resulted in troop involvement in illegal arms trade. The Chief of the General Staff Anatoly Kvashnin publicly stated in 2003 that increasing corruption left the Russian military in a “post-critical state”. The types of firearms in illegal possession aries throughout the nation: in Siberia unregistered hunting rifles are the primarily found illegal weapons while in Chechnya the predominant illicit arms are illegally held military weapons. Small arms are illegally proliferated from the main centers of small arms manufacturing, Tula and Izhevsk. In 2003 an estimated 300,000 to 1. 5 million illegal arms were in circulation within Russia. According to the statistics from the Supreme Court of the Russian Federation, 1. 5 times more people were arrested for gunrunning in 2001 than in 2000; in total 26,113 arrests were made and 65,000 crimes were committed using illegal arms. In 2000, the number of seized unregistered firearms was 300,000, which was a 37 percent; increase compared with 1999.

Many Russian criminal organizations, aside from arms trafficking in Russia, provide weapons to the separatists groups in Chechnya. However, several attempts were made to combat arms trafficking, government is hopeful about minimizing this trafficking. • Poaching Poaching was extremely uncommon in the Soviet Union, but has recently become a significant problem in the country. The main cause for poaching in Russia is the consequence of the social and political changes since the dissolution of the Soviet Union. State-controlled farms stopped functioning due to the fall of the previous system resulting in high unemployment. Unemployment, poverty, inflation, shortage of food and demand for foreign currency have major impact on the wildlife in the country.

Between 1992 and 1996, law enforcement agencies in Russia mainly focused on drug trafficking, arms trafficking, money laundering and the First Chechen War. Environmental crimes like poaching and illegal timber smuggling were generally not treated as national security issues. During the post-perestroika transition, the government agencies for environment and wildlife protection experienced severe budget cutswhich led to layoffs and salary reductions for wildlife rangers in places like Primorski Krai and it reduced the resources of the rangers to fight against the poachers. Animals being poached in the country are bear, musk deer, tiger etc. Approximately 50,000 cases of poaching are registered annually.

According to the tiger experts and enforcement officers in Russia, the characteristics of tiger poaching in Russia are: • Tiger poaching is carried out by two sets of poachers: organized poaching gangs and opportunistic poachers. • Poaching of the tiger’s prey base (i. e. wild pig and deer) occur for the consumption of the local population. • The poachers generally sell the tiger parts to middlemen operating out of the cities like Vladivostok, Khabarovsk, Ussuriysk, Nakhodka and Plastun. • The middlemen who buy or sell tiger parts are generally Russian, Russian Korean, or Russian Chinese. • Most tiger parts are being smuggled to the People’s Republic of China, South Korea and Japan. However several attempts were made to combat commercial poaching of animals. • Cyber Crime

Organized crime is proving as flexible and adaptable in its exploitation of cyber opportunities as it is in any other opportunities for illegal activity. The purposes are espionage and obtaining money through bank account transfers, extortion, use of credit cards, stolen identities, services, etc. In addition, of course, organized crime groups use the Internet for communications (usually encrypted) and for any other purposes when they see it as useful and profitable. Software Piracy is so rampant in Russia that many consider the Russian Federation a “one copy country” referring to the mass illegal copying of software to supply total demand for the product. SIIA projections place Russia as one of the most egregious violators of software piracy in the world with a 92% piracy rate as of 1998.

The onslaught of computer viruses like the recent “Love Bug,” and growing cases of online credit card fraud has brought the world’s attention to computer crime and the vulnerability of the internet. FBI announced in March 2001 that ongoing computer hacking by organized criminal groups in Russia and the Ukraine had resulted in more than 1 million stolen credit card numbers. Much of the hacking crime originates in Russia, where overeducated and underemployed young computer specialists strive to become world famous “hackers” capable of breaking into secret and lucrative databases. • Money Laundering Money laundering is the processes whereby criminals conceal illicitly acquired funds by converting them into seemingly legitimate income.

Drug traffickers, as well as crime groups, launder money through casinos, exchange bureaus, and the banks. The 1999 Bank of New York scandal revealed that some US $7 billion had been illegally transferred from Russia abroad, involving a total of approximately 160,000 transactions over a four-year period. This is the largest money laundering case ever. An international conference in Germany has been told that organized crime is investing millions of dollars won in illegal operations into local business and industry. Much of the money is believed to come from racketeers in Russia and other parts of the former Soviet Union. Russia’s “ORGANIZED CRIME” is a severe threat for overseas business investors.

By the given detailed reasons and relative explanations we ranked this activity in the highest risky position which is 10th rank. • Unfair Trade • Minority Quota Russia does not maintain any quota for providing special facilities to its minorities. • Lobbying Lobbying includes the efforts to influence legislation by influencing the opinion of legislators, legislative staff and government administrators directly involved in drafting legislative proposals. Business organizations generally may not lobby except in limited circumstances such as on issues affecting their tax-exempt status or the deductibility of gifts to them. The use of links with political elites and bureaucracy is a common practice in Russia as they perceive it as legal. • Unfair Competition

A recurring problem in non domestic markets is that established players often resort to such unethical and illegal means as espionage, lobbying, plants, and litigation to obstruct the activities of potential competitors, especially recent market entrants. Russia is also facing these problems. • Commercial Espionage Espionage is conducted by one company against another, either using its own agents or professional corporate spies to find out competitor’s R&D break-through, potential bids for deals, customer lists or general strategies. Methods include technical and non-technical surveillance (including lip-reading), physical theft and communications intercept. Hacking into IT systems is common and becoming increasingly sophisticated and dangerous but it is far more useful to recruit people inside a target company who have real or potential access to useful information.

Russian government is keen to improve the military and technological progression and to support the efforts of the national businesses. Their intelligence services are more active than ever and are often employed against tempting and usually poorly protected Western business targets. Russian cyber crime has special contribution to the field of commercial espionage. Surveys of major companies by private security firms show that in 1996 alone, 58-percent of the companies surveyed reported at least one attempt to gain unauthorized access to their computer systems. • Litigation Litigation, in commercial business world, refers to the filing a false lawsuit to destroy another competitors reputation. This is also available in Russia. • Plants

Planting or placing employees of a company to disrupt the operations of competitors. This is done with a view to causing damage to the production process of potential competitors. Russians are also involved in these sorts of activities. Sometimes, OCGs in Russia do these to remove the competitors from their way in businesses they are involved. • Asset Security Asset security is “The condition achieved when designated information, material, personnel, activities, installations and other assets are protected against espionage, sabotage, subversion, extremism, terrorism and crime, as well as against loss or unauthorized disclosure’ (covert intelligence sources).

Asset security is a sound business principle to achieve for international market as it allows senior management to plan and execute business strategies without interferencefrom competitors or scrutiny by the press, pressure groups and other interested parties. We will focus on three forms of violations on assets against which foreign companies should adopt measures to secure them : Threat to premises If foreign firms do not comply with the OCGs requirements in Russia, their properties are threatened and damaged by them. Moreover, rampant theft, fraud, and extortion have rendered property rights meaningless to many Russians, and without credible property rights, ownership will not facilitate investment and economic efficiency. Minority groups and extremists (environmentalists)

Russia has some very active environmentalists’ groups named “Green World”, “the greens”, “Greenpeace”. Russian environmentalists are becoming increasingly alarmed about stifling ecological oversight in pursuit of economic progress. • Natural Disasters There are different types of natural disasters in Russia. Most frequent are earthquake, flood, epidemic, drought/famine, slides, volcano, wild fires, wind storms. Others are extreme temperatures-waves/surges, insect infestations. Many people are killed every year due to those disasters. • Extremism Extremism is the kind of mentality which attains the topmost radicalism, maxims in behavior and religious bigotry and suggests personal worldviews and goals deviating from those accepted in society.

It covers the whole range of certain actions employed to destabilize society by wording and implementing threats, by unlawful and violent acts which have proved to be ready to deform society and please one’s personal or corporate goals. Extremism in the form of organized groups or anarchic mobs may target foreign businesses for political, nationalists or religious reasons. • Political Extremism There are approximately 200 nationalist groups in Russia, some with just a handful of members, others with several thousand. Russian authorities and media consider a semi-military organization known as Russian National Unity among the more dangerous and anti-Semitic. The RNU have clearly struck a nerve in Russian society.

Limonov’s National Bolshevik Party (NBP), which has chosen to work among the youth as its strategy, can be considered a more or less successful radical party in Russia over the past decade, which might be described as an extremist party. The NBP has been operating successfully enough. There are skinhead gangs in Russia. As the Interior Ministry and figures from other experts have it, their numbers are 10,000-15,000, with some 5,000-7,000 based in Moscow. Moscow saw several bombings aimed at civilians, which were blamed on Chechen terrorists/gangsters and which may or may not have been the work of Russian government personnel acting agent provocateurs. • Religious Extremism Islamic extremism poses direct threat to Russia’s national security.

In the last few years, the Government has closed down Russian subsidiaries of several international terrorist organizations, such as Hezbollah, Muslim Brotherhood, Grey Wolves and others. This has turned them to be more violent. Russian Automotive Market Russia is, with a population of over 140 mio. , a large attractive market, measured by the number of potential consumers. With a nominal GDP per capita of 6. 854 USD in 2006, growing at almost 7% annually, consumers are able to make investments on a constantly increasing scale. The automotive market is one of the most eye-catching sectors to reflect these positive trends. The consumer potential together with increasing income makes Russia today one of the most attractive markets for the world automotive industry.

Already by 2009, Russia is going to overtake Germany in terms of new cars sold, and most of the vehicles will be of foreign origin. 2006 became the first year in which Russians bought more foreign cars than those of domestic brands. New car sales reached 1,8 mio. in 2006 – a huge increase from less than 1 mio. in 2002 – and will continue to grow at a rate of 21% until 2010. This rapid development is, apart from growing income, driven by a comparatively old Russian car parc, better access to car loans, increasing local production of foreign cars and expanding dealership networks. Alongside with the car parc, the market for components and spare parts is growing fast as well, at a rate of 14% until 2010.

The major growth will be in the sector of components and spare parts for foreign car brands, whereas the market for Russian brands will almost stagnate over the next years. In 2008 and 2009 the primary (components) and secondary (spare parts) markets for foreign brands will overtake the same markets for Russian brands, respectively. ANALYSIS OF PORTERS 5 FORCES • THREAT OF ENTRY – East Asian companies – Globalisation – Quotas reduced or abolished – Labour • BUYER POWER – High – Imports By Individuals – Distribution Channels – Large Number Of Substitutes – Second Hand Market – Over Capacity – Large purchase • SUPPLIER POWER – New Registrations – Just In Time – Brands – Dealerships • SUBSTITUTES – Public Transport Other Segments Of The Market – Similarity Of Product – Alternative Fuels • COMPETITIVE RIVALRY – Mature Market – Price Wars – Ease Of Access – Large Number Of Competitors PEST ANALYSIS • POLITICAL – Legislation • Environment • Company Cars • Competition – Taxes and Duty – Subsidies • ECONOMIC – Excess Capacity – Economies Of Scale – Diversification – Mergers and strategic alliances • SOCIAL – Environment – Car Culture – Fashions and taste – Redundancies • TECHNOLOGICAL – E-Commerce – Safety – Plant efficiency RECOMMENDATION CONCLUSION BIBILOGRPAHY [pic][pic] ———————– RUSSIA Gray Area Dynamics Corruption [9] [pic] INB – 355 Country Risk Analysis