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A Russian Twist on Responibility

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For the last year corporate social responsibility, or CSR, has been the "in" business term in Moscow. It seems hardly a week goes by without a conference on CSR in some suitably swank hotel, where representatives of the government, big business and foreign consultants get together to talk about CSR and what it means for business in Russia. Given the buzz about CSR, one might expect that Russian business is adopting CSR as its new mantra, but the fact is that corporate social responsibility as defined internationally remains poorly developed in Russia.

Virtually from the moment it was introduced in Russia, the term corporate social responsibility was co-opted by the political establishment. The Kremlin defines it as paying taxes in full, obeying the demands of the state and staying out of politics. This corruption of CSR's meaning is indicative of the Kremlin's efforts to construct a vertical power structure where it is the sole source of authority and legitimacy in the country. Russian politicians' interest in CSR stands in marked contrast to international practice, where shareholders, customers, employees and suppliers are the primary drivers of CSR. By politicizing the term, the Russian government risks making corporate social responsibility a code word for the subservience of the private sector to parochial state interests.

The Russian business community has quite clearly gotten the message. At a recent gathering of managers from leading Russian companies, the consensus definition of CSR was that companies should obey the law and pay taxes. While following the law and paying taxes are definitely good things, being "legal" is not what CSR is about. Rather, as it is understood internationally, CSR implies going above and beyond legal and regulatory requirements to ensure that a firm's business model not only promotes profitability, but that it promotes this profitability through sound and sustainable labor, environmental and social policies.

So, why should anyone care that the concept of corporate social responsibility is being corrupted in Russia? After all, isn't corporate social responsibility merely a faddish Western business concept? Although CSR may seem like yet another soon-to-be-forgotten buzzword, there are two compelling reasons why Russian companies, particularly those in the extractive industries, ought to pay serious attention to CSR. Both reasons relate directly to a company's bottom line.

First, an increasing number of Russian companies in the extractive industries are acquiring significant assets in Western countries or are using international financial markets to raise capital. They are finding themselves under much greater scrutiny internationally by those skeptical about Russian business practices. Having a serious CSR strategy in place can help Russian companies deal with this additional scrutiny by demonstrating that the company is trying to address the environmental and social impacts of its business model. This in turn can lower the cost of capital and the risk premium that Russian companies pay when raising capital internationally.

The second reason is much closer to home for Russian companies, and that is the changing nature of municipal government in Russia. Over the last several years, the Russian federal government has been shifting the burden for funding government programs to regional and local administrations, while simultaneously reducing the ability of those regional and local governments to cover the costs of those obligations through additional taxation. Faced with insurmountable fiscal difficulties, local administrations are putting ever more pressure on enterprises in their communities to make up for budget shortfalls.

This tendency is particularly a problem for large Russian companies with enterprises in remote, underdeveloped regions. In these areas, the local administration is likely to view the company as a resource for addressing all of the community's social and economic ills. This problem will only become more acute when the new law on local governance comes into effect in 2006.

By putting in place a proactive CSR policy that defines those issues where the company believes it has a responsibility and by allocating resources -- human, financial and in-kind -- to deal with those issues, a company can dramatically reduce the tendency of the local administration to come to the enterprise with its hand out every time there is a shortfall in the local budget. By defining the company's areas of responsibility, a company can help define its agenda with the local community in a way that allows the company to play a positive role while ensuring profitability.

To appease the politicians, many Russian companies are paying lip service to the government's notion of corporate social responsibility, but the business case is the more compelling argument for many companies in Russia. By lowering the cost of capital and limiting the tendency of local administrations to seek handouts, a functioning CSR strategy saves a company far more than it costs.

Stephen Schmida is the former director of the Eurasia Foundation in Russia and the founder of the Aurora International Consultancy. He submitted this comment to The Moscow Times.

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