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«Peter Zashev Electronic Publications of Pan-European Institute, 10/2004 I would like to express my gratitude to the Paulo ...»

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RUSSIAN INVESTMENTS IN LITHUANIA –

POLITICS, BUSINESS, CORPORATE CULTURE

Peter Zashev

Electronic Publications of

Pan-European Institute, 10/2004

http://www.tukkk.fi/pei

I would like to express my gratitude to the Paulo Foundation and the Academy of Finland.

Without their research funding, this investigation could not have been accomplished.

Contents

EXECUTIVE SUMMARY

INTRODUCTION

1. POLITICAL AND ECONOMIC COOPERATION BETWEEN LITHUANIA

AND RUSSIA 1991 - 2004

1.1. POLITICAL RELATIONS BETWEEN RUSSIA AND LITHUANIA

1.2. ECONOMIC LINKS BETWEEN LITHUANIA AND RUSSIA

2.1. FOREIGN DIRECT INVESTMENTS AND INVESTORS IN LITHUANIA

2.2. RUSSIAN INVESTMENTS IN LITHUANIA – TO FEAR OR NOT TO FEAR?..................12 2.2.1. Yukos in Lithuania

2.2.2. Gazprom in Lithuania

2.2.3. Lukoil Baltija in Lithuania

2.2.4. MDM Group in Lithuania / Lifosa and Snoras

3. PATTERNS OF CORPORATE CULTURE AMONG RUSSIAN

COMPANIES OPERATING IN LITHUANIA

3.1. CONTEMPORARY RUSSIAN CORPORATE CULTURE.

3.1.1. Commonly Russian values and moral

3.1.2. Soviet values and moral

3.1.3. Transition values and moral

3.2. WHAT CORPORATE CULTURE RUSSIAN COMPANIES SPREAD IN LITHUANIA........24 3.2.1. The unbroken dependence on the state

3.2.2. Corruption and bribing

3.2.3. Productivity and efficiency

CONCLUSIONS

REFERENCES

Executive Summary As in the 1990s relations between Lithuania and Russia had their ups and downs Lithuania tried hard to minimize its economic dependence on Russia. Ironically the closer Lithuania got to its foreign policy objectives of becoming NATO and EU member, the easier for Russian companies became to enter and operate in the Lithuanian market.

Being only the 7th biggest investor in the Lithuanian economy in 2004 quantitatively Russia’s investment record is perhaps not impressive. However, as the Yukos controls the biggest GDP contributor and taxpayer in Lithuania, MDM Group owns the 4th biggest Lithuanian bank as well as the 5th biggest (in terms of sales volume) industrial producer, Lukoil has approximately 25% of the Lithuanian retail fuel market while Gazprom has stakes in the biggest gas distribution company, qualitatively Russia has increasingly significant role. These investments and investors are in the focus of the report.

Briefly reviewing the major sets of factors forming the contemporary Russian business culture one may conclude that serious problems of business ethics plague and continue to plague the way business is conducted in Russia. Consequently the internationalisation of Russian companies puts forward the question what exactly business cultural influence they spread when they internationalise? The report elaborates on three main areas of concern, namely, (1)the unbroken link/dependence of Russian companies on state, (2)the non-negative attitude towards bribing and corruption, and finally (3) the somehow neglected in Russia issues of raising efficiency and productivity.

In the report the mentioned above biggest Russian investments in Lithuania are checked against these main concerns and certain conclusions are made. While there is no evidence to slink Russian ownership with deteriorating efficiency and productivity in Russian controlled companies, the unbroken dependence of the Russian corporations from the Russian state and the readiness to use bribing, whenever an opportunity exists need certainly bigger attention. Based on its findings the report also makes some policy recommendations.

Introduction

Immediately after the Baltic States gained their independence in 1991 they took the road of economic and political transition. A strong unifying factor driving the Baltic States politics and economics was the urge and the perception to drift away from their colossus neighbour Russia and to get closer to the West.

Such policies were not always balanced and certainly did not to help find the most optimal and practical relations with Russia but in the long run paid off in the form of full integration of the Baltic States to the West. Only 13 years later the three countries are members of both the North Atlantic Treaty Organisation /NATO/ and the European Union /EU/.

Russia also did not choose the best pattern of foreign policies. For quite some time it was trying to assert political and economic pressure that to a large extent misfired.

First, such pressure served the Baltic States as a confirmation that their only course of action is to pursue even more vigorously for continuing integration with the West.

Second, it was not only the Baltic States who suffered economically from the spoilt political relations as quite some time Russian investors were almost banned from freely operating and participating in the Baltic economies.

Lithuania is perhaps the country whose relations with Russia could be characterised as quite normal compared to those of Latvia or Estonia. Lithuania did not have a large Russian-speaking minority as in Latvia or Estonia. Still, the Lithuanians were quite cautious in building their new relations with Russia and constantly tried to prevent the active participation of Russian companies on the Lithuanian market.





Ironically enough the closer the Baltic States were getting to NATO and the EU, the easier it became for Russian companies to enter and operate in their markets. The more EU legislation and business practices were adopted by Lithuanian decision makers in both political and economic matters the more Russian investors were enabled to participate in key areas of the Lithuanian economy.

Russian investments abroad are gaining momentum and the question of what exactly business ethics Russian corporations spread during their increased internationalisation is becoming more actual than ever. The Baltic States are natural area of Russian investment interest as they were part of the Russian empire and later the Soviet Union. During these eras intensive economic links were created and enhanced.

Therefore the Baltic States represent an interesting environment for monitoring and observing what corporate culture Russian companies bring along when they invest and operate abroad.

In the focus of this report are the Russian investments in Lithuania and the corporate culture Russian companies radiate when they operate in this (new) EU market – business ethics, corporate governance, productivity, and efficiency. The study is divided in three parts. Part 1 provides a short background of the political and economic relations between Lithuania and Russia since Lithuania gained its independence. Part 2 focuses on the issue of foreign direct investments /FDI/ in Lithuania and analyses the Russian share of this process in both qualitative and quantitative aspects. The final part briefly states the main factors formulating the contemporary business culture and derives some important concerns that should be observed from a point of view of the country hosting Russian investments. At the end the four most prominent Russian investments in Lithuania are reviewed against the underlined concerns and conclusions are made.

1. Political and economic cooperation between Lithuania and Russia 1991 - 2004

1.1. Political relations between Russia and Lithuania Independence and initial Russian pressure As the Mikhail Gorbachev’s “perestroika” decreased the oppression stemming from the Soviet totalitarian regime in 1988 in Lithuania nationalism drove the movement for independence and the beginning of the state building process. A national movement (Sajudis) was formed, which gained wide public support for its program of restoring an independent Lithuanian state and won the first democratic parliamentary elections in Lithuania.

Predictably Moscow inserted considerable political pressure on Lithuania that was accompanied by corresponding economic sanctions. When the Lithuanian Supreme Council refused to abide by the Soviet constitution, the President's decrees and resolutions of the Congress of People's Deputies, Moscow began an economic blockade against Lithuania (on April 18, 1990) by suspending deliveries of energy resources and raw materials to Lithuania. The shortage of raw materials led to the closing of some factories and there was an acute shortage of petroleum and other types of fuel and oil. In short, the Lithuanian economy began to falter (Vitkus, 1996).

That was perhaps the strongest signal to the Lithuanian authorities that Lithuania must aim at gaining maximum economic independence from Russia with an emphasis on independent energy supplies and policies.

The victory of the Russian democrats after the unsuccessful coup of August 19-21, 1991 meant that the real political power moved in the hands of the Russian Government, which had already committed itself to respect Lithuania's independence.

Starting at the end of 1991 Lithuanian-Russian relations began developing on a wholly new legal basis. Lithuania became an independent state de facto and de jure (Bildt, 1994).

At the end of 1991 in Lithuania and the other Baltic States there were still military troops. Under Russia's command; the economy of the new states was fully and completely integrated into the economic space of the former Soviet Union; in the Baltic States there were many people of Russian nationality (28,1% in Estonia (CIA, 1998), 29,6% in Latvia (CIA, 2002) and 8,7% in Lithuania (CIA, 2001)), who upon the dissolution of the Soviet Union suddenly found themselves living abroad.

Thus, the withdrawal of the Russian armed forces and the regulation of economic relations on a new basis became the main problems in Lithuanian-Russian relations.

In Lithuania, alongside the growing political confrontation and re-grouping of political forces, an economic crisis was developing. Certainly, just like the 1990 economic blockade was not Prunskiene's fault, the blame for the deterioration of the Lithuanian economy in the summer of 1992 fell not only on Vagnorius government (Vitkus, 1996).

The end of the summer of 1993 and the withdrawal of the Russian troops marked the beginning of a new stage in Lithuanian-Russian relations. Both states were no longer burdened by the complicated problems of the troop withdrawal, the solution of which had required tireless efforts, so the tension about and fear of the breach of the withdrawal timetable receded.

Russia’s fears of NATO membership and the links to Kaliningrad The Lithuanian NATO membership was another issue that for some time looked to seriously overshadow the relations between Lithuania and Russia and which again put the economic pragmatism aside. While NATO became less of problem after the USA granted Russia increased non-member role in NATO, later the problem crystallized in the question how citizens, military personnel and equipment would travel between Russia and Kaliningrad. As the Baltic exclave of Kaliningrad is entirely surrounded by Lithuanian and Polish territory no visas were necessary for residents of the exclave who wished to travel to Russia proper. But the EU membership required on some form of visa regulation, saying that such measures are needed to control what could be a large flow of illegal immigrants into the EU territory.

Russian and European Union leaders finally agreed on travel rules for Russia's exclave of Kaliningrad, thus defusing a dispute that had been straining relations. The new travel rules are designed to make it easy for Russians in Kaliningrad to reach the rest of their country through the territory of future EU members Lithuania and Poland.

But Lithuania has doubts. The agreement came into force in July 2004. It was a compromise deal under which Kaliningraders will be able to transit with so-called "facilitated travel documents" that will be easier and cheaper to obtain than regular visas (EU Business, 2002).

It must be mentioned that the most serious issue in the political dialogue (or dispute) between Russia and the Baltic countries was the treatment of Russian minorities in the Baltic States. However, Lithuania was in much better position to avoid such tensions, as the ethnical Russian minority in Lithuania is approximately 9% of the total population.



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