Miami University Professor Karen Dawisha recently published a scathing indictment of the United States and Europe’s complicity in the Russian ruling regime’s wrongdoing, particularly its corruption at the elite level. Professor Dawisha argues that Putin and his supporters treat the West like an “a la carte menu” by protecting and multiplying their wealth abroad under the safe haven of Western rule of law, while avoiding the consequences of being held accountable for their “marauding” within Russia. This is damaging not only for Russia, but for the West as well. According to Professor Dawisha, the “presence [of Russian oligarchs] strengthens the worst aspects of our system, and weakens the best.”
One of Dashiwa’s central examples for this claim is Russian companies’ presence in Western stock markets. She argues that Russian companies’ foray into foreign stock markets has failed to “improv[e] the quality of Russian corporate governance and transparency” and should be lamented. While I will not attempt here to evaluate Professor Dawisha’s broader argument, I do believe that this particular example does nothing to support her broader point–and may ultimately illustrate its weaknesses–for two reasons:
- First, as Professor Dawisha herself acknowledges, Western investors are not blind to Russian corruption, and Western markets discount the value of Russian companies because of that corruption. Professor Dawisha notes that Gazprom, “despite having the world’s largest net profits,” trades at “one-third the stock market valuation of Exxon Mobil, due to what is widely regarded as rampant and Kremlin-directed corruption.” If markets punish Russian companies for corruption through lowered prices, then it is hard to see how American or European investors and markets are harmed by the participation of Russian actors.
- Second, and more important, research shows that participation in foreign primary markets does have the potential to improve corporate governance for companies based in corrupt countries. A 2013 study analyzed foreign IPOs by companies from emerging economies and concluded that companies from more corrupt countries tend to disproportionately emphasize “organizational virtue” to potential investors. Furthermore, IPO performance increases with greater emphasis on “organizational virtue.” Although these companies may not ultimately deliver on the promises in their prospectuses, it is significant that companies based in corrupt countries embrace stronger corporate governance values to appeal to U.S. investors. This study suggests companies from corrupt countries bend their practices to suit American standards, not the other way around.
Thus, although I agree with Professor Dawisha that Europe and the United States should be taken to task for failing to make life more painful for Russian oligarchs, I do not think that the listing of Russian firms on U.S. or European stock exchanges is a particularly compelling example of Western complicity in the bad behavior of Putin’s cronies. Nor do I think it’s appropriate, at this point, to contemplate such extreme remedies as the complete exclusion of Russia from Europe or U.S. markets. There remains a lot of productive middle ground to explore, and a lot of ways that the West can put pressure on Russia without excluding Russian firms from U.S. capital markets.
Great post! Indeed, access to capital markets is a great “carrot” complement to the stick of anti-corruption law enforcement. Perhaps the Professor’s argument would have been stronger if she pointed out that Gazprom is probably much less likely to be prosecuted for FCPA offenses than Exxon-Mobil… I think what she is really getting at, if incompletely, is that while Gazprom’s ability to raise capital in the West does perhaps encourage improved corporate governance to attract investors, this improvement is paltry compared to the increased opportunities for Russian oligarchs to protect their wealth and engage in corrupt behavior through Gazprom that they gain by its presence on Western exchanges. I generally agree with you however that there are lower-hanging fruit that can be more appropriately seized in the struggle against corruption in Russia.
Interesting post, and certainly a difficult issue to grapple with. I’m more inclined to be sympathetic to Dawisha’s argument, though, for a couple of reasons. First is the issue with waivers for lower income companies: to the extent that smaller companies are exempted from audit requirements, they’re able to do precisely what Dawisha is concerned about–tap western cap markets without increased accountability. This means added risks for Western investors and an unearned shield for non-transparent firms. You note that western investors aren’t blind to Russian corruption–and that’s certainly true. But it’s also not clear they can adequately assess it. Is Gazprom undervalued? Overvalued? Correctly assessed? I’m not sure it’s possible to get a good answer to that question without more transparency about what is actually going on within the company. And so long as it’s joined to the Kremlin at the hip, it’s unlikely that investors will be able to get the info they need.
Regarding your second point, I agree that greater exposure to good governance standards can be a boon. And permitting companies to seek western funds can provide the impetus to fix governance issue. But I’d skeptical that this would be the case for companies with close links to a government that cares little, if at all, about corruption in its ranks. Where a company’s close and corrupt links to a government–like Russia’s–pay greater dividends than the slight increased in valuation added transparency might bring in intl cap markets, I’d be immensely surprised if a company opted for the latter. I suspect that companies would more often add good provisions to their books and continue to routinely violate good governance standards. It’s debatable whether just having a provision on the books is helpful, but I’d be more concerned that the consistent undermining of written rules is more likely to harm the rule of law than improve the company’s governance structure.