The Escape from Institution-Building in a Globalized World: Lessons from Russia

Abstract

Strong institutions and accountable governments are imperative for any country’s long-term prosperity. Yet the development of such institutions has presented a continuous challenge for many countries around the world. Using Russia as a case, this study brings attention to the unexpected negative impact of global interdependence and shows that institutional arbitrage opportunities have enabled economic actors to solve for institutional weaknesses and constraints in the domestic realm by using foreign institutions, thereby limiting the emergence of a domestic rule of law regime. We argue that such opportunities lower the propensity of asset-holders, normally interested in strong institutions at home, to organize collective action to lobby for better institutions. We demonstrate the main ways through which Russia’s capital-owners make use of foreign legal and financial infrastructures such as capital flight, the use of foreign corporate structures, offshore financial centers, real estate markets, the round-tripping of foreign direct investment, and reliance on foreign law in contract-writing and foreign courts in dispute-resolution.

Capital Round-Tripping: Determinants of Emerging Market Firm Investments into Offshore Financial Centers and Their Ethical Implications

“…Furthermore, the volume of these flows is relatively balanced: the value of Russian inward FDI flows from OFCs comprised approximately 77% of the outward FDI flows from Russia into OFCs. Hence, researchers have concluded that FDI from OFCs into Russia largely represents the round-tripping of Russian capital, which returns formally as FDI from abroad (Kuzmina et al, 2014;Ledyaeva et al, 2015;Novokmet et al, 2018;Sharafutdinova & Dawisha, 2017).…”

Domestic courts, transnational law, and international order

“…Yet economic elites have historically fought for the development of the rule of law in their home countries. The fact that they can selectively arbitrage the rule of law suggests that their incentives to push for change at home may be diminishing (Sharafutdinova and Dawisha, 2016). Such “extraterritorial litigation” has seen monumental court battles between emerging market plutocrats, such as Berezovsky v. Abramovich , take place in the London courts (Kalyanpur, 2019).…”

Mapping the impact of home‐ and host‐country institutions on human resource management in emerging market multinational companies: A conceptual framework

“…Cuervo‐Cazurra and Ramamurti () cite the case of Russian MNEs expanding their companies' assets in Western Europe to avoid the “expropriation hazards” of the domestic context. Also focusing on Russia, Sharafutdinova and Dawisha (, p. 371) chart the ways in which “new capital owners cleverly engage in institutional arbitrage to make profits at home and use foreign institutions to protect their assets abroad, in more politically secure and institutionally stable countries.” The precise techniques used by Russian firms included the use of foreign corporate structures, stock market listings in other countries such as the United Kingdom, the “round‐tripping” of foreign direct investment in which Russian firms invest in firms in other countries that then re‐invest in Russia in order to secure the advantages of being a foreign firm, the development of contracts in other legal jurisdictions and the use of foreign courts for dispute resolution. Another example comes from companies using binding international commercial arbitration, which constitutes an instrument for international joint venture partners to “opt out” of a country's institutions and borrow institutions from another jurisdiction (or the international sphere) (Pinkham & Peng, ).…”

“…Indeed, where this process of arbitrage may obviate the pressure for change in domestic institutions that these firms would otherwise have exercised, then this process actually reinforces the weaknesses that led to these strategies of arbitrage. As Sharafutdinova and Dawisha (), p. 374) put it, the incentives for Russian MNCs to “organize and engage in collective action to reform institutions at home could be expected to decline considerably.” They argue that those Russian MNCs engaging in institutional arbitrage actually benefit from the unpredictable institutional environment and “have stakes in maintaining it in its present, highly suboptimal, state” (p. 374), as competitors may continue to be exposed to it.…”