Higher School of Economics

RUSSIA AND GERMANY COOPERATION IN THE EU CONTEXT: CASE-STUDIES IN FIVE FIELDS OF SPECIAL INTEREST

ACADEMIC PAPERS OF THE 7TH INTERNATIONAL HSE SUMMER SCHOOL “BALTIC PRACTICE”. WITTEN-HERDEKE, 29 JULY – 06 AUGUST, 2007

Interlegal Foundation for Political and Legal Research Centre of Public Policy and Global Governance

Russia and Germany cooperation in the EU context: case-studies in five fields of special interest

Academic papers of the 7th International Summer School HSE “Baltic Practice”. Witten-Herdeke, 29 Jily – 06 August, 2007

Preface by Evgeniy Yassin, Scientific Leader of State University - Higher School of Economics

Edited by Nina Belyaeva, International HSE Summer School “Baltic Practice” Academic Director

Moscow 2008

Международный общественный фонд«Интерлигал» Центр публичной политики и глобального взаимодействия

Россия и Германия взаимодействие в европейском контексте: case-studies для пяти направлений сотрудничества

Научные доклады Седьмая Международная летняя школа ГУ-ВШЭ «Практика на Балтике», Виттен-Хердеке, 29 июля – 06 августа 2007 г

Предисловие научного руководителя ГУ-ВШЭ Е.Г. Ясина

Под редакцией Н.Ю. Беляевой, научного руководителя Летней школы ГУ-ВШЭ «Практика на Балтике»

Москва. 2008

УДК 001.83(100) Международное научное сотрудничество

Данное издание выпущено за счет средств, выделяемых ГУ-ВШЭ на ежегодные Международные летние школы «Практика на Балтике» www.hse.ru http://new.hse.ru/sites/summerbaltika/default.aspx

Россия и Германия. Взаимодействие в европейском контексте: case- studies для пяти направлений сотрудничества. Научные доклады. Седьмая Международная летняя школа ГУ-ВШЭ «Практика на Балтике», Виттен- Хердеке, Германия, 29 июля – 06 августа 2007 г. / Научное издание / Текст : на англ. яз. / Отв. ред.-сост. Н.Ю.Беляева, - М.: Центр публичной политики и глобального взаимодействия Международного общественного фонда политико-правовых исследований «Интерлигал». – 2008. – 392 c.

УДК 001.83

Издание содержит научные доклады участников Седьмой Международной летней школы ГУ-ВШЭ «Практика на Балтике». Школа проводится с 2001г. в разных странах Балтики на базе партнерских университетов ГУ-ВШЭ в рамках развития академической мобильности и международного научного сотрудничества по общей теме «Россия – Европа: пути взаимодействия». В 2007 г. тема Школы - взаимодействие России и Германии. Научные доклады включают работы молодых ученых - российских и немецких студентов, магистров, аспирантов - и их старших коллег - преподавателей ГУ-ВШЭ, российских и международных экспертов. Структура книги включает три раздела: вступительные статьи руководителей и организаторов школы с российской и германской стороны, установочные доклады ведущих экспертов по общим проблемам взаимодействия России и Европы на пленарных заседаниях, а также пять глав, в которых представлены результаты работы исследовательских групп Школы, раскрывающих конкретные стороны этого взаимодействия. Издание ориентировано на специалистов по проблематике Российско-Европейской интеграции, а также на всех, кто интересуется вопросами академической мобильности, Болонским процессом и организацией международного научного сотрудничества.

УДК 001.83 (100)

Seventh International HSE Summer School «Baltic Practice» ·2007 CONTENTS

CONTENTS ...... 5

PROF.YEVGENIY YASSIN, SCIENTIFIC LEADER OF STATE UNIVERSITY, HIGHER SCHOOL OF ECONOMICS WHY DO I LIKE SUMMER SCHOOLS?...... 9 PROFESSOR NINA BELYAEVA, ACADEMIC DIRECTOR, INTERNATIONAL HSE SUMMER SCHOOL "BALTIC PRACTICE", PUBLIC POLICY DEPARTMENT CHAIR, SU-HSE SU-HSE SUMMER SCHOOL “BALTIC PRACTICE” AS AN EFFECTIVE INSTRUMENT OF MASTERING THE PROCEEDINGS OF THE BOLOGNA PROCESS ...... 11 PROF. CARSTEN HERRMANN PILLATH, DIRECTOR, SINO- GERMAN SCHOOL OF GOVERNANCE, WITTEN/HERDECKE UNIVERSITY RUSSIA AND EUROPE: CONFLICTING PERCEPTIONS, CONVERGING REALITIES ...... 17 CONTRIBUTIONS OF THE PLENARY SPEAKERS ...... 24

PROF. ROLAND GOTZ, GERMAN INSTITUTE FOR INTERNATIONAL AND SECURITY AFFAIRS GERMANY AND RUSSIA – STRATEGIC PARTNERS? ...... 24 FYODOR LUKYANOV, EDITOR-IN-CHIEF, RUSSIA IN GLOBAL AFFAIRS RUSSIA AND EU: BETWEEN VALUES AND PRAGMATISM ...... 33 PROF. HEINRICH VOGEL, GERMAN INSTITUTE FOR INTERNATIONAL AND SECURITY AFFAIRS EUROPE IN THE GLOBALISING WORLD ...... ERROR! BOOKMARK NOT DEFINED. PROF. TERRENCE MITCHELL, UNIVERSITY OF DORTMUND, GERMAN ASSOCIATION OF UNIVERSITIES BOLOGNA PROCESS BOLOGNA: MOBILITY AND RECOGNITION AS KEY ELEMENTS OF THE PROCESS...... 44 CHAPTER ONE. INTERNATIONALIZING HIGHER EDUCATION ...... 48

TATIANA ZAICHKINA THE STRUCTURE OF THE FINANCING IN EDUCATION AS A CONDITION FOR INTERNATIONALIZATION OF STUDENT MOBILITY ...... 48 ALEXEY TROFIMENKOV ADEQUATE ESTIMATION OF EDUCATIONAL QUALITY INTEGRATION OF 5 Seventh International HSE Summer School «Baltic Practice» ·2007

THE RUSSIAN HIGHER SCHOOLS AND SU-HSE IN PARTICULAR IN THE BOLOGNA PROCESS ...... 64 ALEXEY SHCHERBAKOV LEGAL REGULATION OF THE HIGHER AND POSTGRADUATE EDUCATION IN RUSSIAN FEDERATION...... 73 JANE TSYBINA BARRIERS AND ADVANTAGES OF THE “INTERNATIONALIZATION MANAGEMENT” AT THE UNIVERSITY LEVEL. CASE STUDY OF THE HSE ...... 88 CONSTANTIN BUSCHMANN STUDYING ABROAD: CHALLENGES AND SOLUTIONS...... 107 CHAPTER TWO. BARRIERS OF THE BOLOGNA PROCESS ...... 124

INTRODUCTION BY THE GROUP ACADEMIC ADVISOR ...... 124 ALEXEI ZAKHAROV RUSSIAN SYSTEM OF HIGHER EDUCATION: OVERCOMING CHALLENGES THROUGH THE BOLOGNA PROCESS ...... 126 NADEZHDA MOROZOVA PSYCHOLOGICAL BARRIERS OF THE INTERNATIONAL STUDENT’S MOBILITY ...... 130 ULRICH AUWÄRTER PSYCHOLOGICAL BARRIERS OF MOBILITY CONCERNING BOLOGNA PROCESS...... 150 TATIANA MILACHEVA, OLESYA MALINOVSKAYA UNIVERSITIES OF RUSSIA AND GERMANY: COMPARING THE LEVEL OF STUDENT AWARENESS OF THE BOLOGNA PROCESS ...... 157 SERGEY EFREMOV RUSSIAN SYSTEM OF HIGHER EDUCATION DURING ITS INTEGRATION INTO THE BOLOGNA PROCESS: TASKS AND CHALLENGERS ...... 174 CHAPTER THREE. INNOVATION POLICIES COMPARISON...... 191

INTRODUCTION BY THE GROUP ACADEMIC ADVISOR ...... 191 ALEXEY TITKOV INNOVATION POLICY IN RUSSIA: INTERNAL AND EXTERNAL ECONOMIC CONTEXT ...... 193 DARIA CHIZHIKOVA, OLGA DOVBYSH, JULIA LITVINOVA, VICTOR KOVALKOV 6 Seventh International HSE Summer School «Baltic Practice» ·2007

INNOVATION POLICY IN THE EUROPEAN UNION, CHINA AND THE UNITED STATES: LESSONS FOR RUSSIA ...... 196 ANASTASIA BELONOGOVA, THOMAS KREUER, MARIA TURIKOVA INTERNATIONAL COOPERATION AND INNOVATION PROJECTS IN THE NORTH-WEST RUSSIA ...... 210 PHILIPP MUHLBAUER THE GERMAN BUSINESS IN RUSSIA: INVESTMENT LOOKING FOR INNOVATIONAL POTENTIAL ...... 222 CHAPTER FOUR. CORPORATE SOCIAL RESPONSIBILITY ...... 235

INTRODUCTION BY THE GROUP ACADEMIC ADVISOR ...... 235 OLGA MELITONYAN, JAMES GILLIES CORPORATE GOVERNANCE AND ITS INTERNATIONAL CONTEXT ...... 236 DMITRY KUSCHIN, MARGARITA PUGACHEVA, GALINA SHATILOVA CORPORATE GOVERNANCE AND CORPORATE LAW: COMPARATIVE ANALYSIS OF DIFFERENT COUNTRIES PRACTICES ...... 244 SARAH PORANZKE "TRUST IS GOOD - CONTROL IS BETTER". THE DEVELOPMENT OF CORPORATE GOVERNANCE IN GERMANY...... 263 KATHRIN HAMM CORPORATE SOCIAL RESPONSIBILITY IN GERMANY. PUTTING REGULATIONS BEFORE RESPONSIBILITY...... 273 MATTHIAS NAUMANN WHAT ARE THE PRINCIPLES OF CORPORATE CITIZENSHIP, HOW DO THEY COINCIDE IN EUROPE AND GERMANY AND HOW IS COOPERATION AFFECTED BY IT? ...... 285 CHAPTER FIVE. RUSSIAN FINANCIAL MARKETS ...... 313

INTRODUCTION BY THE GROUP ACADEMIC ADVISOR ...... 313 STANISLAV RUMYANTSEV CONSUMER PROTECTION IN THE FINANCIAL MARKETS: EU STANDARDS AND RUSSIAN LEGISLATION...... 315 NIKITA DANILOV PRINCIPLES FOR FINANCIAL SUPERVISION AND FINANCIAL SYSTEMS

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ACTIVITIES: SOLVENCY, TRANSPARENCY, FINANCIAL STABILITY, ACCOUNTABILITY ...... 335 ANNA KLIMOVA, RAMIL FAYZIEV INTERNATIONAL FINANCIAL STANDARDS AND PRACTICES OF RUSSIAN BANKING AND FINANCIAL SECTOR...... 347 FAHD HAJJI RUSSIAN OUTWARD INVESTMENTS INTO COMMONWEALTH OF INDEPENDENT STATES...... 360 LUKAS KLIPSTEIN INTERNATIONAL STANDARDS AGAINST INSIDER INFORMATION USAGE AND MARKET PRICE MANIPULATION IN FINANCIAL MARKETS ...... 377

ABOUT SUMMERSCHOOL “BALTIC PRACTICE”...... 389

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Yevgeniy Yassin Why do I like Summer Schools?

I have to confess: I generally like creative youth Summer Schools. There are several reasons for it: First, they provide an informal opportunity for students to meet their academic peers and establish normal human relations with them, which is not just important, but essential for the understanding and trust between researchers of different generations, that can only produce true interaction and cooperation in research and analysis. Second, those schools are normally focused on the pioneer topics, rather than those in the regular curricula, so that both professors and the students themselves can choose the issue of their passion and formulate the problem, that they really want to work on. Finally – and most important – those Summer Schools, if organized by the devoted research team, are able to produce a unique creative atmosphere of a joint research and mutual learning of people with different backgrounds, which is crusual for a scientific breakthrough in any field. Summer School “Baltic Practice” – the first one at HSE, launched in 2001, have all the above qualities, and each year it surprises us with something new. In 2007 this was a truly international format, joint work between HSE and Witten-Herdeke University, Between Russian and German students, that studied at HSE public policy department through the Bologna Process. Having produced a serious book as a result of the “Baltic Practice” – is another surprise, very promising one. So, there is a reason to believe that producing a book as an academic result of a Summer School – might become a good tradition of HSE Summer Schools.

9 Seventh International HSE Summer School «Baltic Practice» ·2007

Wish you ever more boldness in challenging the research topics you choose!

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Nina Belyaeva SU-HSE Summer School “Baltic Practice” as an Effective Instrument of Mastering the Proceedings of the Bologna Process

“There is a certain level above which professional discussion can and should be held, but below it lies the area of all the specialists’ total consent and agreement of opinions. The goal of the School is to draw as many people with world-standards education as possible to this level. Later, politicians, administrators, businessmen and, of course, researchers will emerge from this level…” /SU-HSE Research Supervisor YASIN Evgeny Grigoryevich/

This is how Evgeny Grigoryevich greeted the participants of the first Summer School that took place back in 2001, when we didn’t yet know that this was the beginning of a successful long-term creative project. It has become a sort of “driving machine” for the Bologna process, though officially Russia only joined the Bologna Declaration two years later. Today in 2008, “Baltic Practice” is one of the most powerful and effective pan-university students’ projects at SU-HSE. It enables the students and the professors to understand and to experience what is international academic mobility, to work in an interdisciplinary team of analysts and practicians, to test their skills in solving practical problems of the Russia-Europe cooperation, and to see what life is like at European universities. Each year, 50-100 people take part in the School, including not only SU-HSE students from different departments, but also other students: for example, from Moscow State university named after Lomonosov, MGIMO University, Russian University of Peoples’ Friendship, and many other universities from all over the country: Saint 11 Seventh International HSE Summer School «Baltic Practice» ·2007

Petersburg, Yaroslavl, Perm, Nizhny Novgorod, Krasnodar, Petrozavodsk, Syktyvkar, Ekaterinburg, Krasnoyarsk, Tomsk, Ufa and many others – one can’t even name them all. For the past five years, more and more young researchers from Germany, Austria, Poland, Estonia, Latvia and Lithuania have been coming to the School. Regional administrations and legislative assemblies, trade missions and embassies become the Summer School’s partners, as well as different Ministries and Governing Institutions of the Russian Federation – such as the Ministry for Foreign Affairs, the Ministry for Economic Development and Trade, and the Ministry for Regional Development. Representatives from the European Council and major international Foundations take part in the School. Russian Union of Industrialists and Entrepreneurs, All- Russian Association of Insurers, as well as the authors of Federal laws and the Recommendations for the G8 meetings act as customers for the School’s practical projects. The School’s final reports were presented in Mariinsky Palace, Saint Petersburg, in the main hall of Baltic Russian Institute, Riga, and in the “glass hall” of Witten University, Germany. What determines the School’s popularity? And which proceedings of the Bologna process does it help to master? The “secret” that we are ready to share is the following: “Baltic Practice” represents the model of public civil expertise on socially important issues; moreover, it always deals with certain topical problems that require interdisciplinary approach. The School unites the students’ creative initiative with the politicians’ experience and the experts’ knowledge: professors from the country’s leading universities, politicians and prominent public activists take part in the School. At the same time, the “Bologna proceedings” have become an essential instrument of reaching our goals because they can’t be reached in any other way – i.e., without • using an open educational environment – between Russian and Europe – to use all the knowledge in this or that sphere, • orientating team research and the School’s professors’ educational technologies for the needs of social practice, • obeying international educational standards – both among Russian and foreign universities, because young participants complete group tasks and, as a result of the School, receive a certain amount of points which are recorded in the final Certificate, • using innovative technologies – Internet, in the first place, because most arrangements “between the Schools” and communication with the research supervisor take place at the 12 Seventh International HSE Summer School «Baltic Practice» ·2007

School’s special web-site. The work starts with the “description of the problem area” and with a group supervisor setting a creative goal, and ends with the evaluation of the essays sent by the candidates. It’s particularly important for those who can’t take part in work group meetings. At the web- site, one can follow all the process of structuring a work group’s research program and adjusting their goals; all final works and the customers’ appraisal are published there. But our main secret, I believe, is how to motivate a “bulk” of students for such a difficult and important job. Moreover, taking into consideration the fact that all the student participants pay for their direct expenses related to the School themselves. This secret also is one of the most important tactics of the Bologna process: it means student participation in the control over education and control over the quality of education. “Baltic Practice” isn’t a “Rectorate’s project” or an “EU project”, you see – it really is a students project where they play the main role, from choosing the topical issues they would like to work on and inviting a research supervisor to finding the place for another School and drafting “student budget”, not to mention the communication with foreign partners, the web-site and the visas and tickets arrangement. The fact that we have entrusted the students with the Summer School has made them interested in its content-richness and quality. While our work – the work of the Summer School’s Staff, which, by the way, includes the student supervisors of the research groups – is to provide highly professional level and to invite external experts. The selection for the Summer School is competitive but those who “haven’t made it” shouldn’t worry because “Baltic Practice” is an annual event, so one can always join the School the next year. What is more, one can work both in person and through internet to acquire knowledge and experience to use one’s analytical skills in practice the next year, and to work on topical issues in research groups, together with the students from different departments and universities. The Summer School has its Rules written and approved by the students at the School’s meeting 5 years ago. The Rules are published at the School’s web-site. They clearly state all the participants’ – and the Staff’s – rights and obligations that we believe to be adequate and sensible. “Baltic Practice” implements a unique teacher-student partnership model in education process, where the student plays the main role, where he is a creative personality, a “perceptive subject” and a demanding “customer” for the knowledge he wants from us. 13 Seventh International HSE Summer School «Baltic Practice» ·2007

It seems that this very requirement of the Bologna process – independence, “subjectivity” of a student – is constantly underestimated in Russia, pushed to the sidelines and replaced with “administrative reconstruction” of our traditional 5-year education into a two-level system, which faces resistance everywhere, even among the students. The students resist because they don’t understand the system, which isn’t surprising as no one really makes it clear to them. The students start to see the advantages of the Bologna process only when they see it work – for example, at such a Summer School where they work together with foreign students at the European University. That’s when they really start to take interest in the proceedings of the Bologna process and become its passionate defenders and attentive researchers. It was the students who, during the School-2004 that took place in Latvia, initiated that the problems that prevent our country from benefiting from the Bologna Declaration and entering the united European educational environment should be considered at the School. From that moment on – when 4 years have already passed! – the problems of implementing the Bologna process to life have been an essential topic for one of the work groups, and the students’ interest in this topic doesn’t fade away because it seems that the problems won’t be solved soon. At the same time, each year a new specific problem is discussed, a problem that the students work on during the whole year. For example, if in 2004 the general problem was that of the “necessity” and “possibility” of the total implementation of all the Bologna agreements in Russia, the problems of the following Schools were much more specific. For example, in 2005, the profound understanding of “mobility culture” as the necessary level within the country was discussed – mobility between universities and before that – between certain professions and disciplines. In 2006, the system of academic credits and their calculation became the focus of the students’ attentions, while in 2007 it was the legal and economical problems that prevented Russia from implementing the “internalization” principle of higher education. A dozen of essays and final analytic report summarizing the work were written on each of these topics; all of them were openly presented, published in the final digests and passed to the customers. Moreover, when a “customer” is really interested in implementing the results of the analysis, it takes a really short time. Here are several examples. In 2001, the School drafted a new version of the Kaliningrad Oblast law “On the Interaction of Government Authorities and Public Associations” – and it was passed in that very wording several months later, while the School got another “order” from the Administration of Kaliningrad Oblast, 14 Seventh International HSE Summer School «Baltic Practice» ·2007 which included the expertise of the innovative program on strategic regional development. The expertise was carried out in a year’s time, in 2002, and its recommendations were included in the final edition of the strategic development plan of Kaliningrad Oblast. In 2003, the Ministry for Economic Development and Trade approved our recommendations on the pension reform based on European experience. The Ministry for Foreign Affairs approved our suggestions about the law “On Trans- Border Cooperation” in 2004, and in 2005 – the draft of the “Green Card” insurance program for Russian motorists in Europe. And finally, here is a short example of how the developments of “Baltic Practice” have helped the implementation of the Bologna process at our university. In summer 2006, the problems of the European educational environment were described in Finland and Vyborg in the following way: “The Bologna Process: General Educational Standards”. Problem. A lot is said both at the state and inter-state level about the “mismatch” of these standards, about the difficulties of implementing a unified system of “educational credits” (ECTS), about the “big differences” in what is credited for and how. But what are these differences? How big are they in the context of certain spheres of Russian higher education, such as Political Analysis, Economics, and Management? The participants have to answer this question. Work procedure. The participants within a group choose 1-2 leading foreign university in one of the three European countries – England, France or Germany (according to their language skills) and thoroughly analyze educational standards and the quality of education, including the system of academic credits at the universities of their choice, in comparison to similar Russian standards in the same sphere. As a result of their work, essays on the work proceedings at 19 Russian and foreign universities that use academic credits were written. Special comparative charts were built to enable graphic comparison of the subjects and academic hours that get credited for at each university. It helped to see that at SU-HSE, many subjects aren’t credited for at all, which leads to a greater amount of subjects and – subsequently – to the fact that the student is overworked. A final analytic report was prepared, featuring the recommendations –both for the authorities at the Federal level – Ministry of Education - and the suggestions for the SU-HSE Administration on changing the system of credits assignment and calculation. In included the necessity of “crediting” for the students’ practical trainings, course works and analytic seminars. These suggestions were partially taken into 15 Seventh International HSE Summer School «Baltic Practice» ·2007 consideration right away – just in the next academic year, which allowed our Master’s program to admit foreign students and to issue ECTS Certificates that were accepted at Witten University, Germany, and accounted for the total amount of credits needed for a diploma in a European University. So, “Baltic Practice” has made its small contribution to the promotion of the Bologna process as a “two-way street” between Russian and European Universities. Now, I believe, it becomes more clear, why our students as well as professors are so fond of our “Baltic Practice” – wherever it is held. But still, there remains a question: why the Summer School, which was always held somewhere around the Baltic Sea, on its seventh year “landed” in Witten-Herdeke, in the South of Germany – and so far from the Baltic shore? The answer may sound unexpectedly: this is Bologna Process again, that is to blame for it. But as the first step – that were we who worked on Bologna Process, and at the second stage - Bologna Process itself started working for us. Those brave and motivated four German students, that joined our Master Program in Public Policy in spring 2007 – they were from Witten University. Studying with us, they did not only made all our student group to study in English and demonstrated high devotedness to learning and research, providing a very serious level of discussion at the class work during all the semester, they have really become our friends and colleagues. Being true pioneers in academic exchange between HSE and Witten University, they also accepted a challenge of providing this opportunity of creative interaction between students of our two countries – to more young people from HSE student community – and suggested to host the next Summer School at Witten University. This idea was greeted with a lot of enthusiasm from HSE students. Thus, students, united by the Bologna Process, immediately created a joint Student Organizing Committee for the Summer School -2007 in Witten. Thank you, Katrin, Sarah and Fahd! You really proved to be wonderful hosts – both in terms of learning environment, logistics, and academic level of all German participants, but especially for providing wonderful team-work with your friends and creating a special caring “support team” for our HSE students, who were much younger and less experienced. This is the best, what HSE had got in 2007 from the Bologna Process!

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Carsten Herrmann Pillath Russia and Europe: Conflicting Perceptions, Converging Realities

There is a long-standing tension between Western perceptions of Russia and the Russian views of Russia. For example, the German public had been very receptive to Michail Gorbachev, while his policies were received rather critically in Russia. Or today, most Western comments on President Putin’s strategy to strengthen Russia in world politics express an increasing mistrust and uncertitude, whereas the Russian population seems to be highly supportive of many of the changes that took place since he is in charge of the presidency. Of course, it depends on whom you ask, as liberal intellectuals in Russia will certainly present a dissenting opinion, but still there will remain a systematic divergence between the Western and the Russian views of Russia. What are the reasons? I think there are three, and I wish to present some thoughts on all of them. Further, I will put them into the context of the HSE Summer School at Witten. • A lack of information • Different political goals and aspirations • Different values and historical traditions.

I. The first one, a lack of information, is certainly important, but not decisive. One can safely state that, generally speaking, knowledge about other countries is shallow in the average citizen’s case in most countries. Mutual perception is driven by events and facts which are impressive and unusual, such as, in the case of Russia, the stark contrast between the living conditions of the urban poor and the Russian noveaux riches who populate the Swiss Alps. Perceptions influence the way how weights are assigned to different news, or, even more fundamental, which is regarded to deserve the status of a “news” at all. Thus, it is a news if Russian military aircrafts start to resume cold war routes, whereas it is not a news that the Russia and America cooperate for years in the improvement and 17 Seventh International HSE Summer School «Baltic Practice» ·2007 safeguarding of Russian nuclear security, or that America funds the procurement of Russian helicopters for the Afghan government. On the other hand, President Bush rejects a Russian treaty proposal on the military use of space, for reasons of US realpolitik. I think that the increasing distance between Russia and Europe which is currently emphasized in the Western media is partly just a product of this sort of biased media attention. Still, there is a problem here which results from the fact that after the fall of the Soviet Union, there was a decline of academic research and education related to Russia, especially in Germany, which should be a stronghold of this in academia, it seems. This was a very strange development, mainly driven by administrators who wished to restructure budgets. The idea was that with the end of the military conflict, and with the expected convergence between Russia and the West, there would be less need for special capacities in research and teaching in the area studies related to the eastern part of Europe. What people did not see was that in a sense, things were quite simple before 1989. For example, the Soviet economy was easy to understand in the sense that it was a centrally planned economy, with predictable features and performance. The economics of transition was a much more complex issue, but it was assumed that you can just analyze it with the help of established economic models. Only years after the series of policy failures had accumulated, people woke up and realized that the complicated relation between politics and economics requires a more sophisticated approach also to the Russian economy. In a nutshell, Russia became more complex, and at the same time Western academic capacities to understand Russia were curtailed, because the assumption was, that Russia will converge with the West, become more similar, and hence, easy to understand. This error necessarily contributes to biased perceptions today. Against this background, events such as the HSE Summer School are extremely important to intensify the flow of information across borders. It is also necessary that this goes beyond the typical international exchange event, but includes serious work about understanding the other country’s facts and circumstances. The Russian and German students who met at Witten University did a great job in collecting and exchanging mutual information in the respective issue fields. There is a need to intensify the professional relations in academia on all levels, which, astonishingly, had also tended to diminish in some areas after 1989. For example, in economics there were more regular exchange relations between the German research institutes and Soviet counterparts

18 Seventh International HSE Summer School «Baltic Practice» ·2007 than today. This kind of professional exchange would be the natural sequel to the more area-based research collaboration of the past. At this Summer School, the so-called Bologna process received a lot of attention. This is a great opportunity, and we at Witten University ventured to exploit the increasing openness of academic standards and practices at HSE in sending our first exchange students to Moscow in spring 2007, actually following the Bologna procedures as far as possible. We were gratefuk to HSE and, in paricular, Nina Belyayeva, to prepare the groudn for this. The return flow is still on hold, unfortunately. Student exchange faces lots of difficulties, which are detailed in the students’ elaborations, beginning with the psychological and economic barriers to international student mobility. But this is the king’s way to build a foundation for adequate mutual perceptions in the future. There is a tendency for students who study at the very best universities in a country just to stay there, in order to reap the full benefit of the place. American Ivy League universities show this pattern very clearly. If you study at Harvard, earn a good performance there, and with high speed, of course, given the costs of the programs! But this means that a precious opportunity is lost, namely to go abroad in a stage of your life that allows much more leeway for curiosity and adventure, which is a precondition to get into closer touch with the realities of other countries and cultures. So the paradox results: The better the university you study with, the more restrained your world outlook might become! A Chinese colleague once complained to me about the young Chinese student generation at the top universities: He noted the paradoxical fact that in spite of the exploding world of the global internet and information networks, students turn more inwardly, precisely because they start to prefer to stay with their top university, which is rapidly improving its quality. This is worrysome. In the global world, universities at all levels of reputation and in all areas of specialization should better conceive themselves as global hubs of education, with different orientations and scope, of course, but still not simply as the only place to be. Student mobility should be the regular case, not the exception. This is precisely the Bologna idea, and it is fascinating to observe that Russian universities do recognize this and that they wish to jump on the train. Just because the HSE and Witten students together have analyzed the problems and challenges in such a lucid way, administrators should find it easy to improve the conditions further!

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II. Beyond the lack of unbiased mutual information, there is the fact of diverging interests, which have deep geopolitical roots. To understand this, Western observers should briefly reflect on the watershed that 9/11 resulted to be for American politics. The fact that there was an enemy attack on American soil was a deep shock to the American people. As a result, the Bush administration declared “war” against terrorism, with all the consequences that many Europeans deplore. Russia is a country with gigantic size and extremely different geographic and economic conditions. Ruling Russia was always a feat, especially with regard to the inherent tension between the Asian and the Europan part, which is today partly muted in the tension arising from religious diversity, especially, of course, with regard to Islam. The geopolitical challenge to hold this large (and great) country together is one of the deeper reasons for many of the peculiarly Russian phenomena in politics and society. This is a raison d’etat which is different from European countries, which emerged from a long history of divisions and downsizings of larger political units in the past. It is especially relevant with regard to the relations between Germany and Russia: The fact that Stalin led the final Russian effort to break the German fascists’ invasion to include Russia into their “Third Reich” is of crucial relevance until today. Russia has the historical experience of having been fundamentally threatened in terms of its existence as a state. Thus, the problem of internal stability is closely interconnected with the problem of external security. Western observers tend to interpret international politics along the lines of a liberal-institutionalist approach, sometimes forgetting that this is partly a normative view. The realist school in international relations would always maintain that all governments all over the world factually concentrate on their raison d’état, which means, in particular, mutual power relations, and fundamental issues of economic and military security. In this regard, Europe is indeed exceptional because its internal political complexity prevents to formulate and implement a concisely European raison d’état externally. One reason for the increasing nervousness over Russia is the fact that Europe has recognized the political ramifications of energy economics. But there is still a far way to European Realpolitik. Evidently, this cannot be made a standard for judging the performance of other countries. The Russian government is keen to unmask realist political approaches abroad, especially also in the US, which appear to be only disguised in liberal-institutionalist terms. After all, also many European believe that oil was a (the?) major issue in the 20 Seventh International HSE Summer School «Baltic Practice» ·2007

American war against the “Evil” in Iraq. Some observers would even claim that Russia is simply honest and straightforward, whereas Western countries tend to mystify Realpolitik. Just take President Sarkozy as a prime recent example, who started out with a human rights agenda, but ended up in selling weapons to Lybia. So, for improving external relations it is of utmost significance to understand the raison d’état of the other country. In the case of Russia, the Europeans have to understand the strategic and geopolitical concerns driving Russian politics, externally and internally. Of course, this does not make obsolete European criticism directed at certain practices at Russian elections, for instance. But at the same time, the underlying interests have to be taken seriously. Again, the ultimate precondition for this is information. Realpolitik has one advantage: You know the issues, and you know that everybody tries to find optimal solutions, given their interests. So it can be very transparent. I think it was very illuminating for the Germans at the HSE summer school to observe how problem solving can dominate other concerns. The question how to create a stable financial system is a major concern for everybody in Russia, especially with the lively memories of the 1998 crash. Today, this is a global issue. So governments are well advised to cooperate in this field. Real problems very often provide the basis for a convergence of perspectives and interests. International best practice is convincing on its own sake.

III. There are two cleavages between Russia and Europe which have very deep historical roots. One is related to the previously mentioned geopolitics. Some observers would say that Russia still manifests features of an “Empire” (a property which it would share, for example, with China). Empires are very large territorial units spanning different cultures and manifesting a political centre which is also a symbolic apex of the body politic understood as a community of fundamental values. When viewing Russia though this lense, observers are very sensitive, for example, to the recent attempts at rewriting the history of the Soviet Union as a part of Russia. In a sense, a larger part of Russian politics may be related to restore the symbolic capital that is constitutive for the Russian body politic, especially with regard to the zeal to reinstate the global power of the Soviet Union. That is, we have to distinguish between symbolic politics and real action, of course, always taking into account that the symbol may possibly be where the action is.

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The notion of the empire is closely intertwined with the religious revival in Russia and the special historical role of the orthodox church. Historians have always emphasized that Russian orthodoxy supports a very different value system as compared to the Western churches, in particular the Protestant ones, such as, for example, related to the place of the active community in the liturgy. Visitors to present Russia feel intrigued by the exalted status of rebuilt churches in the urban spaces. Still, it is difficult to say how far these values still impact on the Russian society and even politics. Again, this seems to e an area where biased perceptions might prevail, given the attractiveness of news about President Putin’s spiritual adviser heralding a bycantinic revival on ancient orthodox fundaments. However, where are the values actually reproduced and preserved? This is the education system, apart from the family and the neighborhood institutions, including, of course, the churches. What do we learn about the Russian education system from the HSE Summer School? Well, it is undergoing a thorough process of further modernization and internationalization. HSE students are well aware of the challenges which is Russian system of higher education is facing, and they understand the possible cures. They have presented clear-eyed and concise analyses of their mother university, the HSE, with reference to the Bologna Process. German students learn a lot about Russian realities behind the myths. So, what is the real status of the historical legacy? Or, how about the challenges of the innovation process? HSE students clearly identify the functional requirements of innovation policies in the global competition. So, were is the grip of the past? I think that we should avoid the fundamental mistake of the amateur anthropologist, that is, hypostacising culture as an immutable and monolithic entity. In the global society, culture and history should be viewed as resources for human action, but not as human destiny. In particular, modern cultures appear to be much more flexible and eclectic, even fragmented, than traditional cultures, and they manifest a caleidic picture of rapid change. From this viewpoint, it is perfectly possible to have a revival of traditional values in one societal domain, and at the same time, let us say, a professional globalized mentality in another domain, such as innovation management. Tradition and values are resources that can be mobilized for many goals, individual, political and societal. I think if Europeans look at Russia, they should always keep in mind how strong the hold of religion on American politics can be, and how vibrant the many Protestant churches and sects are. American “culture wars” can split society into widely separate groups. Modern 22 Seventh International HSE Summer School «Baltic Practice» ·2007 societies are functionally diverse, and many worlds can coexist, even in the lives of the same persons. From that perspective, there are certain deficiencies on the European side, as far as those symbolic resources are concerned, which is mostly discussed under the heading of the European identity. In this sense, Europe is a functionalist-modernist political entity by default.

IV. In conclusion, I want to congratulate the HSE for the unique endeavour of the annual summer schools abroad. This is a real contribution to solve the problems that I have indicated. It is an example worth to be copied at other places, with different foci. We at Witten/Herdecke University were proud to be the hosts of this event. As I said previously, the university of the future is a networked place. The future student will not study at a particular location, though this might be the place where the degree is issued, but with networks that offer special services and perspectives. This is also the main idea of the Sino-German School of Governance, which was the operative partner of HSE at Witten, supporting the Witten student initiative which carried the largest burden of the work. I think that the Eurasian nature of Russia should be a rallying point for global initiatives in inter-university networking. But as this summer school has also shown, there remains a lot of work to be done. Let us begin!

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CONTRIBUTIONS OF THE PLENARY SPEAKERS

Roland Gotz Germany and Russia – strategic partners?

Europe’s two largest peoples have never been able to ignore one another, thanks to their dominating role on the Eurasian continent. German-Russian relations have always been characterised by contradictory feelings, in which admiration and dislike, fear and Romantic attachment have intertwined rather than alternated1. Since 1990, these relations have developed in a pleasingly pragmatic direction. Today, German-Russian relations are characterised by great breadth. There is a long tradition behind this: think of German emigration to Russia and the numerous German businessmen and industrialists who worked in Russia before the First World War.2 Measured in terms of volume of trade, German is Russia’s main business partner and will remain so for several years, until China takes its place (see Table 1). Germany’s imports oil and gas imports from Russia are much higher than those of any other country in the world. Germany is also Russia’s main supplier of investment goods. For Germany, which is above all economically tied in with the EU, Russia was in 10th place in terms of imports and in 14th place in terms of exports (see Table 2).

1 See Gerd Koenen, Der Russland-Komplex, Munich, 2005, p. 15ff. 2 See Dittmar Dahlmann and Carmen Scheide, eds., "... ‘das einzige Land in Europa, das eine große Zukunft hat". Deutsche Unternehmen und Unternehmer im Russischen Reich im 19. und frühen 20. Jahrhundert,” Essen 1998.

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Table 1 Russia’s largest trading partners (without CIS countries) and their share of total imports and exports (including transit supplies of oil), in percent 2006 Russian imports from Russian exports to Germany 16.0 Netherlands 13.8 China 11.2 Italy 9.7 Korea 5.9 Germany 9.4 USA 5.6 China 6.1

Source: Statistical office of the Russian Federation, www.gks.ru

Table 2 Largest trading partners of the Federal Republic of Germany in the first half of 2005 and their share of imports and exports (percent) German imports from German exports to France 9.0 France 10.6 Netherlands 8.6 USA 8.7 USA 6.8 UK 8.1 Italy 6.0 Italy 7.1 UK 6.3 Netherlands 6.1 China 5.9 Belgium 5.8 Belgium 5.2 Spain 5.3 Austria 4.1 Austria 5.3 Switzerland 3.8 Switzerland 3.8 Russia 3.5 Poland 2.6 Japan 3.4 China 2.5 Spain 3.2 Czech Republic 2.4 Czech Republic 2.9 Sweden 2.2 Poland 2.5 Russia 2.0

Source: Statistisches Bundesamt, Rangfolge der Handelspartner im Außenhandel 2005, (Ranking of Commercial Partners in Foreign Trade) www.bundesstatistik.de (1.2. 2006).

Apart from energy imports, Germany’s economic relations with Russia are above all born by small and medium-sized enterprises. Important help is provided by organisations like the Alliance of the German Economy in the Russian Federation, the Delegation of the

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German Economy in the Russian Federation and the Eastern Committee of the German Economy. The Federal Republic of Germany is present in dozens of Russian towns as a result of cultural and economic organisations. Personal contacts have arisen through the hundreds of thousands of Russians of German origin who have settled in Germany as well as through tourism and scientific and student exchanges.3 More than three million Russians are learning German, more than in the whole of the rest of the world put together. The Petersburg Dialogue and the German-Russian Forum have created the bases for continuous dialogue between representatives of both societies. Since 2005, the German Historical Institute in Moscow had enabled German and Russian researchers to work together on their common history.4 That German-Russian relations are so dynamic has to do with the fact that many factors which tend to disturb relations between states do not obtain between Germany and Russia. There are no unresolved border issues, no ethnic or religious conflicts, and no rivalry for world domination on the international stage. The only questions still outstanding from the Second World War concern war booty, mainly art, which is a delicate matter but certainly not a major source of conflict. Even Kaliningrad/ Königsberg is not a bone of contention between Germany and Russia but rather an object of common concern. In spite of the numerous forms of cooperation and the meetings which bring Germans and Russians together, however, Russia’s image in Germany is mixed. At economic events and high-level meetings, the good relations are given prominence but in the media Russia is often criticised. The cause of this does not lie in direct relations between the two countries but instead in the way the Russian state deals with its own citizens and with the states on its borders: the dismantling of democracy, the weakening of parliamentarianism, restrictions on press freedom, excessive use of force in Chechnya, pressure on the CIS states Ukraine, Georgia and Moldova which want to distance themselves from Moscow, support for the totalitarian Lukashenko regime in Belarus and for separa- tist forces in Transnistria, South Ossetia and Abkhazia.5 People in Russia

3 For cultural and scientific contacts, see www.ifa.de/russland/index.htm/publikation (1.2. 2006) and www.bmf.de/2513.php (1.2. 2006). 4 Deutsches Historisches Institut (DHI), Moscow, www.dhi-moskau.de (1.2. 2006). 5 For a critique of the "Putin system”, see Heinrich Vogel, Rußland ohne Demokratie, SWP-Studie 38/2004, www.swp-berlin.org (1.2. 2006); Eberhard Schneider, Putins zweite Amtszeit, SWP-Studie 1/2006, www.swp- berlin.org (1.2. 2006).

26 Seventh International HSE Summer School «Baltic Practice» ·2007 react very sensitively to these reproaches, they accuse critics of not knowing about the conditions in their country, and they feel misunderstood and treated like children. This can be seen, for instance, on the Chechen issue, where the Russians see themselves as fighting international terrorism and as an ally of the West, for which they ask in vain for recognition, without wanting to take cognisance of the negative consequences of the presence of Russian troops in the Caucasus and Chechnya, or of the Moscow-installed regime there.6 In spite of the broad basis for dialogue between Germany and Russia, it cannot be foreseen that perceptions on these issues are going to grow any closer.

Russia’s own path Thanks for Russia’s support for reunification, Germany was one of the main countries to support Russia financially in its transformation to a democracy and a market economy.7 To what extent this transformation has been a success remains in dispute.8 But in any case, Russia has turned away from Communism, not least because many former Party and state bureaucrats became successful private property owners. However, unlike elsewhere in Eastern Europe, the abandonment of the Communist regime was not the basis for a new state identity. Unlike the other states which emerged from the Soviet Union, Russia could not gain a sense of identity by means of a “national renaissance” in opposition to Russian dominance. Russia, which has never existed as a nation-state within its current borders, has since been seeking its own path. The Russian political class is however divided on whether this is just a diversion which will eventually lead the country into the Western camp or whether, as the “Eurasianists” think – it will lead to a special model for state and society and for relationships with other countries.9 Pointing to Russia’s potential for power (its size, its resources, its missiles) many in Russia dream of a

6 See Uwe Halbach, Gewalt in Tschetschenien. Ein gemiedenes Problem internationaler Politik, SWP-Studie 4/2004, www.swp-berlin.org (1.2. 2006). 7 Between 1990 and 1994, Germany participated in multilateral programmes with 4.4 billion Deutsche Marks for technical and humanitarian help. Far greater sums were given in connection with the withdrawal of Soviet troops and the rescheduling of the Soviet state debt. 8 See Lilia Shevtsova, Bürokratischer Autoritarismus - Fallen und Herausforderungen, in Aus Politik und Zeitgeschichte, 11/2006. 9 On the views of the Eurasianists, see Katrin Bastian/Roland Götz, Unter Freunden? Die deutsch-russische Interessenallianz, in: Blätter für deutsche und internationale Politik, 50 (2005) 5, p. 583 - 592, here p. 591ff.

27 Seventh International HSE Summer School «Baltic Practice» ·2007 return of the empire, or at least of a close alliance of the CIS states under Russian leadership.10 The relatively liberal domestic policies of Boris Yeltsin and the “early” Putin had led to expectations of a fundamental foreign policy line of rapprochement with Europe and at least partial integration in its structures. Thus, in Putin’s speech to the German parliament on 25th September 2001 (still under the influence of 11th September) one finds the expression of a wish for “true partnership” and even Russia’s accession to a “Greater Europe” and the unification of the potentials of Germany and Russia.11 One hears very little any more now in Moscow of such wild dreams, which recall Gorbachev’s wish for a “common European home”. Conversely, from the Western side, the Chechen problem, the Khodorkovsky affair including the transfer of Yukos property to the state oil company, Rosneft, the disaster of Beslan for which Russian behaviour is partly to blame, or the interference of the Kremlin in the Ukrainian presidential elections have all awoken doubts about Russia’s suitability as a European partner. Russia’s place in the world is now situated by the Moscow political elite somewhere between a regional power and a world power.12 Russian analysts like the pro-Kremlin chairman of the political foundation of United Russia, Vyacheslav Nikonov, call for a multipolar foreign policy, which would give Russia freedom of action in all directions, and rejects any dissolution of Russia in European structures.13 Russia should have an independent role in world politics, working within global treaty structures like the UN, the G8 and later the WTO and the OECD, but should preserve her sovereignty by not being integrated into supranational regimes like NATO or the EU. Russia should deal with other world powers on the basis of equality and it should base its policies on its own self-interest and on the principle of the balance of power. The alternative

10 See Gernot Erler, Russland kommt, Freiburg-Basel-Vienna 2005, p. 156 ff.; Jutta Scherrer, Ideologie, Identität und Erinnerung, in: Osteuropa, 54 (2004) 8, p. 27 - 41, here p. 34ff. 11 Speech of the President of the Russian Federation, Vladimir Putin, to the German Bundestag, 25th September 2001, www.documentarchiv.de/brd/2001/rede _ putin_ bundestag.html (1.2. 2006). 12 See Lilia Schevtsova, Rossija - god 2006: Logika politieskogo stracha (Russia 2006 – the Logic of Political Fear), in: Nezavisimaja gazeta 13th – 16th December 2005; for extracts see Russia in 2006: The logic of political fear, www.russiaprofile.org/cdi/2005/12.19. 2904.wbp (1.2. 2006). 13 See Vyacheslav Nikonov, Strategija Putina (Putin’s Stategy), in: Rossijskaja gazeta, 22nd December 2004, English translation in Global Affairs, 3 (2005) 1, http://eng.globalaffairs.ru/numbers/10/813. html (1.2. 2006), see also Falk Bomsdorf, Ein Hauch von Ukraine, SWP-Zeitschriftenschau 4/2005, www.swp-berlin.org (1.2. 2006).

28 Seventh International HSE Summer School «Baltic Practice» ·2007 of a European orientation for Russia, by contrast, is supported by only a small number of Russian analysts.14 Since the supporters of the “great power option” see the EU as a union of countries which compete with one another, they push for bilateral relationship, above all with Germany. The idea of a Paris-Berlin- Moscow axis which is supposed to defy American hegemony and also drive a wedge into the EU phalanx corresponds to the same thinking. Conversely, Germany’s role is often seen as a door-opener for Russia’s integration into Europe, without it being noticed that Russia does not need any such help because the obstacles to any integration are not to be found in any reluctance by the EU but instead in Russia’s own lack of will to subject herself to the European rules of the game.

Values and interests A consequence of the complex German-Russian relationship is that it cannot be expressed by any simple formula. The hackneyed term “friendship of peoples” has been completely debased by the GDR experience, which is presumably why Chancellor Angela Merkel did not use the term when she met President Putin in Moscow in January 2006. Instead she confirmed the “strategic partnership” with Russia, on which the then Federal Chancellor, Gerhard Schröder, and Putin had already reached agreement at the German-Russian summit in June 2000.15 However, the Russians do not understand why they have to take second place to the “American friend” and why only “partnership” not “friendship” is on offer. It leads to German-Russian misunderstandings that by “strategic partnership” Russia understands an alliance of interests. For Russian politics, strategic partners are those with whom one undertakes important projects for mutual benefit and with whom one shares aims. As a result, Russia’s list of strategic partners is a long one, and nearly every country in the world could appear on it. By contrast, in the foreign policy language of the EU, ever since the concept of strategic partnership was introduced into the Common Strategy towards Russia in 1999, the term means not only an alliance of interests but also a

14 On Russian foreign policy conceptions, see Hannes Adomeit/Rainer Lindner, Die "Gemeinsamen Räume" Rußlands und der EU, SWP-Studie 34/2005, www.swp-berlin.org (1.2. 2006), here p. 10 f.; Marek Menkiszak, Russia vs. the European Union - A Strategic Partnership Crisis, CES-Studies 22/2006, www.osw.waw.pl (1.2. 2006). 15 See Christian Meier/Heinz Timmermann, Nach dem 11. September: Ein neues deutsch-russisches Verhältnis?, SWP-Aktuell 22/2001, p. 5, www.swp-berlin.org (1.2. 2006).

29 Seventh International HSE Summer School «Baltic Practice» ·2007 partnership on the basis of common values.16 Significantly, Russia’s corresponding medium-term strategy towards the EU is limited to the expression of common interests without any reference to common values. Under Chancellor Schröder, Germany’s Russia policy gave the impression – in spite of the demonstrative friendship between the two leaders – of wanting to be limited to a partnership based only on common interests, since the German side avoided taking a public position on Russian domestic policy.17 The CDU/CSU and FDP opposition, by contrast, insisted that a partnership with Russia cannot last without a common basis of values.18 Common values are an important element of a foreign and security policy based on cooperation. The former US Secretary of State, Colin Powell, confirmed this is an article in Ivestiya when he drew attention to the fact that beyond the interests and the trust of political leaders the ability of nations to cooperate is based on a convergence of fundamental principles which are shared by the respective societies as well.19 This linkage of values and interests is also based on the idea that only the recognition and practice of democratic values and the creation of a corresponding legal system will guarantee Russia’s market orientation in the long term. This in turn is the basis for balanced economic development not based on the export of gas and oil alone. It is an important pre-condition for the successful involvement of small and medium businesses that they can rely on a functioning legal system Germany has a strong interest in this. Thus there are good arguments to insist on a dual approach to Russia and in addition to pragmatic agreements in the foreign and security policy field (for instance on the involvement of Russia in finding a solution to the Iranian question) there should also be encouragement for progress on domestic developments.

16 See Rolf Schuette, Interest and values: A European Perspective, Carnegie Paper 54/2004, www.carnegieen dowment.org/publications/ index.cfm?fa=view&id= 16269&prog=zru (1.2. 2006). For the text of the EU’s Common Strategy to Russia, see http://europa.eu.int/comm/external_relations/ceeca/com_strat/russia_99.pdf (1.2. 2006). But the EU also occasionally uses the concept of strategic partnership in a limited sense, when speaking of strategic partnerships with the Mediterranean Region, China or the whole of Africa. 17 See Hannes Adomeit/Katrin Bastian/Roland Götz, Deutsche Rußlandpolitik unter Druck, SWP-Aktuell 56/2004, www.swp-berlin.org (1.2. 2006). 18 See Hans-Joachim Spanger, Paradoxe Kontinuitäten. Die deutsche Russlandpolitik und die koalitionären Farbenlehren, in: HSFK-Report 12/2005, p.13 ff., www.hsfk.de (13.2. 2006). 19 Guest commentary by Colin Powell in Izvestia, 26th January 2004, quoted here from Hans-Joachim Spanger, Modernisierung contra Demokratisierung: Putins russischer Weg, in: HSFK-Report 12/2004, p. 34ff., www.hsfk.de (1.2. 2006).

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New style or new content? What has changed since in Germany’s Russia policy since 2005? The friendly private style which characterised the relationship between Schröder and Putin has been replaced by a matter-of-fact diplomatic style. Chancellor Merkel has not been content, as Schröder was, with private admonitions but instead had openly criticised the situation in Russia, much to the displeasure of the Russian president. But the basic conception of the strategic partnership between Germany and Russia has remained unchanged in spite of the change in government. As Foreign Minister Steinmeier adroitly put it, its purpose is that Russia find the way to a stable democracy “on the basis of the values of Europe but also with regard to her own traditions”.20 Germany’s Russia policy is therefore now as before in harmony with the EU’s Russia policy, as laid out in the Partnership and Cooperation Agreement of 1st December 1997, namely it is aimed at the market-economic and democratic transformation of Russia and thus a “harmonisation” of the internal situation in Russia with the EU rules of the game.21 The overarching concept for this has been expressed by the German Foreign Office with the expression “rapprochement through integration”, a phrase which recalls the Leitmotiv of Willy Brandt’s Ostpolitik, “change through rapprochement”. The German Foreign Minister remains firmly committed to this although doubts are growing in Germany about the likely success of this “functionalist logic”. In parallel to the deepening of the partnership with Russia, German foreign policy would like to place its Ostpolitik on a broader basis by lending greater weight to relations with the westerly states of the CIS who have previously been somewhat in Russia’s shadow. In addition, there is new talk of a “Central Asia policy” by which German Ostpolitik will extend beyond the area of EU neighbourhood policy. In this extended Ostpolitik economic interests are mixed with a striving towards “harmonisation” of the domestic conditions of the Eastern partner states with those of the EU. The problem of asymmetric expectations, which has already become clear in the project of creating a strategic partnership with Russia, also characterises the desired partnership with Central Asian CIS states. While those states believe it is sufficient for commercial relations

20 Interview mit Bundesaußenminister Steinmeier im rbb-Inforadio, 14.10.2006. 21 Hans-Joachim Spanger, Partnerschaft: strategisch, pragmatisch oder selektiv? Die EU und Russland suchen nach einem neuen Vertrag, in: HSFK Standpunkte, 6/2006, S.2, .

31 Seventh International HSE Summer School «Baltic Practice» ·2007 to have a political accompaniment and to be framed with cultural contacts, German policy has to be measured according to how far it shows commitment to democracy and human rights in these states. But the more clearly German Ostpolitik emphasises the normative aspect of the “harmonisation” of domestic policies in the whole of Europe, the more it is discredited in the eyes of Russian and Central Asian elites whose goal is to cling on to power. It is also inevitable that, with its Ostpolitik and Central Asian policy, Germany will also enter into implicit competition with Russia which has not given up its claim to a leading role in the CIS. German foreign policy must artfully look after its extended responsibility in Eastern Europe without jeopardising Russia’s confidence. “Energy foreign policy” is an example of such a conflict situation. This is loudly invoked by the EU as a response to the actual or perceived dependence on Russia and the Middle East and as one of the main instruments which is to ensure the spatial diversification of energy supplies. Germany, which can rely on continuing to be reliably supplied with Russian oil and gas, has no reason to take part in the race for the in any case overestimated “energy resources of the Caspian Sea”. It will gain nothing and only awaken Russian suspicion. The goal of Germany’s “rapprochement through integration” with Russia is regarded with reservations by some Eastern EU states, since these countries are seeking to distance themselves from Russia rather than have any rapprochement with it. They do not consider Russia to be capable of democracy, and they believe it to be unpredictable and a continuing security problem as before. Germany is expected to show solidarity with the Eastern EU states and certainly not to “go it alone” with Russia. German Ostpolitik therefore has to be complemented by a policy towards Central Europe which would work towards understanding with the Eastern EU member states. For Germany’s positioning, simple and grand sounding concepts like “the Paris-Berlin-Moscow axis” or “Germany as the leading power in Europe” are useless because they do not match the complexity of Germany’s tasks. But also the more modest-sounding slogan of “rapprochement through integration” must be analysed because it cannot mean the integration with partners regardless of their constitution. A “harmonisation” of the domestic policies in Europe and of the countries to the East remains the ultimate goal which must always be an element of the strategic partnership.

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Fyodor Lukyanov Russia and EU: between values and pragmatism

I’ll start with three descriptions. Description number one. An unprecedented unique voluntary union of nations that are united by common values and common striving for progress and justice. This union peacefully spreads these values to adjacent territories and creates a new political culture based on law, accord and compromise. Description number two. An expansionist empire of a new type which is slowly yet steadily driving Russia out of its traditional sphere of influence, seeking to create a buffer zone on Russia’s border and impose its own views, norms and rules on the Russians. Description number three. An overly centralized and overly bureaucratized association, whose economy is regulated to a point of unceasing stagnation. The association’s foreign policy is made of groundless ambitions which get lost in the chorus of internal dissent and the inability to make a unanimous decision. All the three descriptions relate to one international actor – the European Union. None of them corresponds to reality, yet each reflects certain features of the European Union. However, these descriptions are of interest to us from a different point of view. All of them reflect different stages in Russia’s perception of Europe over the last 15 years. The European Union, established almost simultaneously with post-Soviet Russia, served as a mirror reflecting the development of Russia’s self- identification. The first stage began in the early 1990s and continued throughout the decade. The new Russia sought to be like all the other countries that had freed themselves from Communism. The Russian democratic movement of the 1980s-early 1990s, led by Boris Yeltsin, borrowed its slogans from national-democratic movements of Eastern Europe and other Soviet republics. Those slogans were democratic values and liberation from the Communist empire. But whereas for Eastern Europe 33 Seventh International HSE Summer School «Baltic Practice» ·2007 and other Soviet republics the anti-imperial ideas were a goal, for Russian politicians they were a means, as they sought not to liquidate the empire but to get rid of the federal center’s power. However, when the result was achieved, they found that their habitual and natural country no longer existed. It seemed to both the EU and Russia that Russia would move in the same way that EU candidate countries from Eastern Europe, even though it would move slowly, with great difficulties, making temporary retreats and U-turns. No one seriously spoke of a possibility for Russia to join the EU, yet it was implied that, as Russia became more Europeanized, it would take a place of its own in the Western world. Subsequent developments showed that Russia was moving in a different direction. It failed to become another Poland, only a very large one. The size of the country, the state of its economy and society, cultural and psychological peculiarities, and finally the post-imperial burden – all these factors prevented Russia from becoming “a normal country,” as U.S. scholars Andrei Shleifer and Daniel Treisman wrote several years ago. This is why the European Union remained a beautiful dream, yet few believed that it could ever come true. The second stage, which covered the first few years of the new century, was brief yet rich in events. It saw the deepening of real interaction between Russia and the European Union, the inevitable clash of economic interests, the Kaliningrad problem, and finally the EU’s enlargement which caused changes in Russia’s economic relations with its neighbors and greatly affected the general atmosphere of Russia-EU relations. All these developments made the Russian elite change its attitude towards the European Union, which became more realistic yet more negative, as well. Due to differences in political culture, Russians, who live in a different historical dimension, find it very difficult to understand the complex logic of post-modernist Europe. Several years ago, it was very popular among the Russian elite to describe the European Union as a new empire, naturally competing with Russia. A well-known Kremlin political analyst, Gleb Pavlovsky, once said that the EU’s neighbors feel very uncomfortable, as the EU is not just an empire but an empire that openly proclaims that it does not know where its frontiers will lie. Interestingly, the President of the European Commission, José Manuel Barroso, a couple of weeks ago suddenly echoed the ideas of Russian geopoliticians. He said that the European Union has “the dimension of empire” and that this is “the first non-imperial empire.”

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Such a view of the EU stemmed from Russia’s setbacks in the post-Soviet space. Moscow’s influence there kept decreasing, while other actors built up their presence in the region. This strengthened a feeling that it was a zero-sum game – not only in politics but also in the economy. The Russian state began to formulate its interests, which often did not coincide with those of the European Union. The third stage is going on now. Russia is in a state of euphoria caused by its economic wellbeing and political stability. The Russian elite now has a disparaging attitude towards Europe, whose economy is soft and which lacks political will. The center of global development is moving to other parts of the world. Inner differences prevent the EU from working out a common approach to whatever problem it is facing. Moreover, there is an impression that, generally speaking, Russia does not need Europe. It is a market for Russian raw materials and a place where rich Russians spend their vacations. Today’s self-confident Russia discards as unnecessary the idea of integration at the level of value paradigms and harmonization of standards. Whether our relations are based on common values is a key issue for Russia and the European Union. During the first ten years of our joint history (after 1994, when the parties signed their current Partnership and Cooperation Agreement), both Russia and the EU shared the view that they were bound not only by vast economic ties but also by almost equal understanding of how a modern democratic state should behave. Formally, it was expressed by the notion of “common values.” In practice, it was reflected in more or less acute debates on how much Russia met European political and humanitarian standards. As a rule, the Kremlin’s reaction to criticism from Europe was negative; however, the dialogue was never stopped. That tiresome discussion was an inseparable part of the Russia-EU interaction. The other part comprised efforts to broaden their economic cooperation, which were greatly stepped up under President Putin. The favorable situation on the raw materials market added confidence to hydrocarbon producers and increased the nervousness of consumers. Energy was becoming ever more important, while Russia’s enhanced self-rating and internal political changes added fuel to foreign- economic discussions. When factors that burdened Russia-EU relations were coupled with geopolitical conflicts in the post-Soviet space, economic interests came into conflict with ideological and political differences. Moscow categorically refused to listen to the EU’s lectures, while the EU could not understand how to treat Russia which it needed but which was moving in the wrong direction. 35 Seventh International HSE Summer School «Baltic Practice» ·2007

And then (somewhere in mid-2005) salutary pragmatism came to rescue. Since we need each other yet differ in views, let us leave those views (that is, the value system) aside and focus on mutual benefits. Russia had long insisted on such a model, and now the European Union, which attaches great importance to the value rhetoric, thought it best to depart from it. The new epoch was symbolized by an agreement for the construction of a North European gas pipeline, signed in September 2005 in the presence of the leaders of Russia and Germany. Since then and approximately until the end of last year, the visits by the Russian leader to EU countries focused on energy issues. The EU, in turn, made almost no mention of democracy in Russia, which was particularly striking against the background of growing criticism from Washington. In other words, the provoking humanitarian overhang was removed, so that obstacles to mutually advantageous commerce disappear. Now we have what we have. It has turned out that the non- economic component of Russia-EU relations played the role of a cushion that absorbed the conflict potential. This shock absorber alleviated the general negative picture and balanced the relations. When it was gone, all differences shifted into the economic sphere, which was already plagued by objective and inevitable differences of its own. So, instead of pragmatically separating apples from oranges, there emerged a resonance effect where grounds for discontent overlapped and multiplied each other. The deliberate exclusion of the value component nullified the parties’ efforts, even though they were not very successful, to achieve mutual understanding. The only common conceptual basis that helped them maintain communication on abstract subjects thus ceased to exist. The idea to exchange assets (the participation of European companies in Russia’s extraction industry in exchange for Gazprom’s access to the EU’s marketing outlets) is a serious integration proposal that can lay the foundation for a basically new future. For Russia and the European Union, it can play the same role as the European Coal and Steel Community played for West European nations (France, Germany, Italy and the Benelux countries) in the early 1950s. That is, it can serve as a prototype of deep integration based on stable mutual dependence and a mechanism for joint development in the strategic industry, which earlier generated conflicts. To this end, however, the parties need mutual understanding or, rather, rationally agreed rules of conduct necessary for effective interaction. But this is exactly those “common values” from which Moscow so resolutely dissociates itself. Common values emerge in the 36 Seventh International HSE Summer School «Baltic Practice» ·2007 course of dialogue – even though it may be very difficult – on a wide range of issues, rather than as a result of a bitter bargaining on specific commercial aspects. Without this, a promising economic idea turns from an impetus for rapprochement into a source of conflicts and competition. The pragmatization experiment has produced an unambiguous result – two consecutive summits of Russia and the EU came to nothing. There arises a reasonable question then: Why do we need integration projects with the European Union at all? China will never have “common values” with the EU; meanwhile, Beijing is a very large and very welcome economic partner of the European Union. The secret lies in Russians’ psychology. China does not care at all what Europeans or other nations may think of it, whereas Russia, which keeps declaring its self-sufficiency, constantly expects Europe to appreciate it at its true value and recognize its importance. This is why Russia-EU relations are so emotional. While rejecting values in favor of pragmatism, Moscow nevertheless demands that Europe share its value approach. Here is the root of conflicts with new EU members over interpretations of the past. Russia is indignant that someone may see historical events in a different way and make different moral evaluations. One would think that since we have chosen business, why not ignore East European “pygmies” and not continue encircling them with our pipelines and purchasing foreign assets? But Russia cannot remain impassive, which is natural because, unlike corporations, national states are guided not only by cold calculus but also by an intricate combination of various motives, not all of which are profitable. Normal development requires humanitarian, ideological and political components, without which normal commerce is impossible, either. The present state of Russia-EU relations proves this conclusion. The role of history in present Europe requires special mention. The EU’s enlargement has changed this role. Central and Eastern Europe, which has always been at the crossroads of geopolitical interests of giant nations and which suffered because of that, has accumulated a deep reservoir of historical grievances. But while the western part of the continent naturally came to the realization that the past should be treated in a rational way, Central and Eastern Europe joined the space of “new historical morals” without realizing this. Therefore it took its EU membership as carte blanch to restore justice trampled over centuries. One can argue at length over how justified the fears of Poland and the Baltic States are, which accuse Russia of having aggressive aspirations. Of more importance is that both “new” and “old” Europeans 37 Seventh International HSE Summer School «Baltic Practice» ·2007 have different ideas of security. Western Europe speaks of terrorism and global challenges, while Eastern Europe speaks of Russia’s expansionism. Each party is deeply convinced that it is right, and accuses the other party of the lack of solidarity. The efforts of Warsaw, Tallinn, Vilnius and, partly, Riga have filled the notion of “European solidarity” with new meaning. Earlier, solidarity meant, above all, an ability of participants in the integration project to meet each other halfway and limit their own economic and political ap- petites for the sake of consensus and joint progress. Now solidarity means joint support and protection of a member state that has come into conflict with an outside force. Poland made the EU address the meat problem, Es- tonia made it counter Russia’s “moral terror,” while Lithuania and Latvia made it address the problems of a dried-up oil pipeline, called Druzhba (Friendship in Russian), and idle capacities of the port of Ventspils, respectively. The Russian elite, in turn, is organically unable to assess the past in a balanced, let alone critical, way. In the absence of clear-cut development benchmarks, Russia is putting together its new national identity from debris of history, mainly Soviet history. Since it is difficult to find in it anything that undoubtedly inspires respect, the whole ideological burden falls on one event, namely the victory in World War II. Hence the smashing reaction (in accordance with Russia’s economic scale) to any attempt to call into question the official canonic version of the War and the Victory. In this regard, Russia has become very much like the Baltic States and Poland – the same unwillingness to listen to another truth or, at least, to assume that it can exist; the same desire to replace the multidimensio- nal historical picture with a flat propaganda cartoon; the same readiness to turn problems of the past into a weapon of the present. Ten years ago, there was nothing like this. As a result, a period of dead calm has set in in Russia-EU relations – not because the parties have failed to start negotiations on a new basic document underlying these relations in place of the Partnership and Co- operation Agreement, expiring in November. The parties have exhausted forms of their practical interaction. Moscow’s emphasis on bilateral relations with major European capitals no longer works. The dialogue with “enemies” has come to nought. Meanwhile, no one already wants to exert pressure on Poland or other opponents of Russia. Germany is highly vexed that the Kremlin did not lift a finger to help Berlin break the meat deadlock, although the German

38 Seventh International HSE Summer School «Baltic Practice» ·2007 leadership made titanic efforts for that, while Moscow allegedly promised to meet Germany halfway. At the bureaucratic level, where you would think routine work must proceed in due course, everything is close to a standstill, as well – various technical difficulties have long risen to the highest level. Of course, it is not the new EU members that are to blame for the present sad plight of Russia-EU relations. The enlargement was not a cause but a ca- talyst of the crisis phenomena which have been piling up for a long time. The problem is that Russia and the European Union lack strategic goals and an understanding what Moscow and Brussels want from each other. When the PCA, signed in 1994 and ratified in 1997, was only being prepared, the parties understood integration as Russia’s unilateral harmonization of its laws and standards with those of the EU in all spheres of politics, public life and economy. Those plans can hardly be considered realistic, yet it was a harmonious concept. Today, Moscow views integration as a trade of interests, which can only be equal and mutual. The content of these “interests” has been drastically reduced, actually to one field – energy. The EU, on its part, does not understand at all what kind of integration there may be with today’s self-confident and uncompromising Russia. In addition, both partners are undergoing a process of transformation. No one knows what the European Union and Russia will look like in 10 to 15 years. Russia and the European Union need a new model. Their mutual dependence and cultural and civilizational closeness cause no doubts – just as their inability to build their mutual relations on the basis of their present approaches. Brussels and Moscow keep emphasizing that over the 15 years of their mutual relations they have gained extensive experience of interaction. However, experience is useful only when it is correctly interpreted and when right conclusions are drawn from it. This requires intellectual freedom and readiness to make unorthodox decisions. Today, neither Russia, nor the European Union show any signs of these qualities yet. The EU should understand that dictating rules of behavior to Russia on the assumption that the European model is a priori the best and the only correct one, will no longer work. Russia, on its part, should understand that cynicism, legal nihilism, desire to have everything and at once and to change the rules in the middle of the game, and emphasis on economic pressure will bring about opposite results.

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Heinrich Vogel Europe in the Globalising World

In an academic environment like this, talking some twenty minutes about “Europe in the Globalising World” is impossible, not least, because, from the outset, it directly leads into the morass of unsettled definitions. What Europe? Geographic or cultural definition? The EU in it’s present configuration? But for any case like this, seasoned sociologists have a well established rule: “If you don’t know what the object of your study is - call it a system. And if you don’t know how it works - call it a process”. So, please, forgive my skipping the definitions. I propose to accept that in political and economic terms “Europe” equals “EU” - like it or not. In this perspective, Europe is more than a continent: Having emanated from a painful century-long history of internal wars, it is defined by common political, economic, legal, cultural, and social standards. But Europe is also more than a nation state – it’s a network of supranational, transnational, and national actors having developed into fairly reliable institutions. And lastly, Europe is more than a common market as it is setting or at least influencing international standards for financial flows, technologies, and rules of competition. Contrary to many observers, I maintain that the European Union is functional. Despite the handicap that, until recently, it had no phone- number, it works as a global player in the framework of negotiations about the WTO, Kyoto, Iran, Near East, and the ICC in the Hague, it even has become a global factor in military terms (Lebanon, Africa). The “constitutional project” may be put on ice, or, depending on your perspective, it may only progress with painful, infinitesimally small steps. But parts of this semi-constitution are working in terms of economic, monetary, technical, and legal standards. And a last point in favor of Europe’s political relevance: The process of European integration is attractive to outsiders despite the fashionable blues in talks of stagnation or even failure.

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How does this Europe work? It’s members have to comply with minimal requirements of legislation, laid down in an ”Acquis Communautaire” of whopping 97000 pages, most of which make sense, although parts are just the typical overkill of bureaucracy at work (e.g. import-regulations defining limits for the flexion of bananas). The process of continuous consensus building in painstaking diplomatic battles is based on the principles of Subsidiarity (i.e. intervention from Brussels only if commonly agreed goals cannot be achieved on national levels) and Best practice in a competition of regulatory systems. The latter is less prone to open controversy than hierarchical decisions. In a simplified fashion, the functioning of common EU institutions can be described as follows: the Commission has the exclusive right of initiative, the Council has the exclusive right of decision, the European Parliament has the final right of control, the European Central Bank has the competence for a one-size-fits-all monetary policy, (i.e. differentials of productivity are no longer compensated via the exchange rate but by product- and labor-markets), and the European Court of Justice is the generally accepted last instance of appeal. Opinion polls show that a majority of Europeans (the general public, not always national political elites, and not necessarily the current leaders) want more, i.e. some constitutional framework capable of streamlining decisionmaking by introducing a more stable presidency, a foreign minister, and practical improvements to promote common language and action on security and defense. I am certain that more will be forthcoming. So - everything perfect or close to perfection? Of course not. The key danger lies in a built-in tendency of compromise towards the minimum and the de-facto veto-power of those who prefer to drag their feet. In it’s present form the European Union is also dysfunctional because of a perceived lack of legitimacy (until today, the EU is an elite-project, something “out there”, too bulky in it’s basic documents, beyond compre- hension), and it is threatened by a rising nationalismus in many member states (not only Poland or Great Britain) – understandable as a reaction to globalisation. Moreover, the EU is plagued by painful institutional birth defects defined by differences of national political systems, “permanent elections” changing majorities in the national parliaments for national reasons, i.e. without regard to European issues, and providing fringe parties and demagogues with a Europe-wide impact. Besides, demographic trends (immigration and related cultural clashes) and the unsettled issues of centralisation vs. decentralisation or of diverging national 41 Seventh International HSE Summer School «Baltic Practice» ·2007 standards of welfare policies are putting a lot of pressure on the national elites with their loyalties split between “home-base” and Europe. Nevertheless, the view of the European process being unworkable or unreasonable, is a caricature. This is not to deny problems with new or would-be members like Poland or Turkey. Membership is less of a problem in terms of technical adaptations but rather of incompatibilities in the political culture of these (and other European) countries with European standards. First and foremost, they view their nationhood in terms of the 19th century, unwilling, even incapable of transferring parts of their sovereignty to the Union, even if currently ruling elite groups are willing to consider the sacrifice. Integration into the EU is not an act of grace to be squeezed from Brussels but the result of hard work as defined in the Aquis Communautaire. To put it in simple terms: Accession is about guidelines, not about deadlines. And everybody - members, pre- accession neighbours, would-be members, and non-members - whatever diplomatic nomenclature you choose - is under the Damocles-sword of conditionality. But has the EU not lost it’s momentum? The answer can be given in Galilei’s obstinate statement after painful torture: “E por si move” – and yet: it is moving. I maintain that the EU is moving, that it can even be described as an imperial project of common standards for political and economic behaviour, even a “normative Great Power” and that it is bound to play an increasing role in the globalised world • Due to it’s critical mass (manpower, GDP, technology, currency), i.e. moving even by inertia, • due to internal differentials (culture, language, infrastructure, technology). These are not only obstacles, they are also generators of growth, • due to the deeply rooted secularism of it’s societies which provides a comparatively superior environment for S&T and foreign policy (rationalism of liberal ideas), • due to the European patriotism of younger generations (to put it bluntly: The days of the Kaczynskys are numbered), • due to external pressures: Competition with other powers (first of all the big bully USA, but also Russia, China, and India) will be keeping the heat on, thus creating “progress of integration by defiance”. In restrospect from 2030, the names to recalled as the fathers of European integration will be recalled as Jean Monnet, Alcide de Gasperi, 42 Seventh International HSE Summer School «Baltic Practice» ·2007

Konrad Adenauer, Paul-Henri Spaak – and George W. Bush (the latter, maybe, assisted by Validimir V. Putin). And I am confident that the EU will be remembered as “the most progressive political experiment of this century”. So far, the political elites in Moscow prefer to ridicule the EU as “paper-tiger”, as “normative power” only, and to insist on bilateralism in economic and political relations. This attitude may have two explanations: • their inability to work with or to even understand a transnational entity as complex as the EU and • annoyance over the regulatory impact of the neighbour EU, which keeps undercutting conventional great power ambitions and games. In this perspectice it makes sense to run a strategy of “divide and rule”, i.e. work with Greece and Italy, not with Brussels (just like the US are working with Poland and Czechia).

Russian 20th-century-style geostrategies and the European paradigm of global power are incompatible. In the longer term, I have no doubt as to which region is going to lead.

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Terrence Mitchell Bologna: Mobility and Recognition as Key Elements of the Process

The Bologna Declaration This was signed in 1999 by education ministers from 29 participating countries (not just the European Union) and of course, as with all political documents, contained a lot of “hot air”. But there were a number of goals which the ministers set themselves, and it is worth looking back at these now. Adoption of a system of easily readable and comparable degrees, also through the implementation of the Diploma Supplement, in order to promote European citizens' employability and the international competitiveness of the European higher education system Promotion of mobility by overcoming obstacles to the effective exercise of free movement with particular attention to: -for students, access to study and training opportunities and related services. -for teachers, researchers and administrative staff, recognition and valorisation of periods spent in a European context researching, teaching and training, without prejudicing their statutory rights. „Bologna“ Meetings • Prague 2001 • Berlin 2003 • Bergen 2005 • London 2007 • Leuven/Louvain-la-Neuve 2009 What is relevant in the London Communiqué for us? The two passages on Mobility Number one: Mobility of staff, students and graduates is one of the core elements of the Bologna Process, creating opportunities for personal growth, developing international cooperation between individuals and 44 Seventh International HSE Summer School «Baltic Practice» ·2007 institutions, enhancing the quality of higher education and research, and giving substance to the European dimension. Number two: Some progress has been made since 1999, but many challenges remain. Among the obstacles to mobility, issues relating to immigration, recognition, insufficient financial incentives and inflexible pension arrangements feature prominently. …At national level, we will work to implement fully the agreed recognition tools and procedures and consider ways of further incentivising mobility for both staff and students. This includes encouraging a significant increase in the number of joint programmes and the creation of flexible curricula, as well as urging our institutions to take greater responsibility for staff and student mobility, more equitably balanced between countries across the EHEA. Anything else relevant? We underline the importance of curricula reform leading to qualifications better suited both to the needs of the labour market and to further study. Tools for Mobility and Recognition • The Lisbon Recognition Convention, 1997 • Qualification Frameworks • The Diploma Supplement • ECTS The Lisbon Recognition Convention Three main points: • Holders of qualifications issued in one country shall have adequate access to an assessment of these qualifications in another country. • The responsibility to demonstrate that an application does not fulfil the relevant requirements lies with the body undertaking the assessment. • Each country shall recognise qualifications – whether for access to higher education, for periods of study or for higher education degrees – as similar to the corresponding qualifications in its own system unless it can show that there are substantial differences between its own qualifications and the qualifications for which recognition is sought. Qualifications Frameworks A look back to the Bergen Meeting of 2005:

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We adopt the overarching framework for qualifications in the EHEA. We commit ourselves to elaborating national frameworks for qualifications compatible with the overarching framework for qualifications in the EHEA by 2010, and to having started work on this by 2007. A simple framework: • Short cycle, ca. 120 ECTS credits • First cycle, 180/210/240 ECTS credits • Second cycle, (60)/90/120 ECTS credits • Third cycle, ? ECTS credits, 3-4 years full-time • For each cycle: Dublin Descriptors The Overarching Framework and the National Frameworks will provide the background to implementation of the Lisbon Convention Another quote from London: We are satisfied that national qualifications frameworks compatible with the overarching Framework for Qualifications of the EHEA will also be compatible with the proposal from the European Commission on a European Qualifications Framework for Lifelong Learning. We see the overarching Framework for Qualifications of the EHEA, which we agreed in Bergen, as a central element of the promotion of European higher education in a global context. A tool for information: the Diploma Supplement “They [Ministers] set the objective that every student graduating as from 2005 should receive the Diploma Supplement automatically and free of charge. It should be issued in a widely spoken European language. They appeal to institutions and employers to make full use of the Diploma Supplement, so as to take advantage of the improved transparency and flexibility of the higher education degree systems, for fostering employability and facilitating academic recognition for further studies.” From the Berlin Communiqué of Ministers responsible for Higher Education, September 2003 (Bologna Process). The Diploma Supplement (DS) is a document attached to a higher education diploma aiming at improving international ‘transparency’ and at facilitating the academic and professional recognition of qualifications (diplomas, degrees, certificates etc.). It is designed to provide a description of the nature, level, context, content and status of the studies that were successfully completed by the individual.

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The DS is produced by national institutions according to a template that has been developed by a Joint European Commission - Council of Europe - UNESCO working party. The DS is composed of eight sections (information identifying the holder of the qualification, information identifying the qualification, information on the level of the qualification, information on the contents and results gained, information on the function of the qualification, additional information, certification of the Supplement, information on the national higher education system). Mobility and Recognition for the Individual Student: ECTS ECTS European Credit Transfer AND ACCUMULATION System TRANSPARENCY STUDENT MOBILITY ACADEMIC RECOGNITION WHAT MAKES ECTS WORK ? TRANSPARENCY Information Package Transcript of Records AGREEMENT Conclusion of a Learning Agreement CREDITS One academic year equals 60 credits COURSE UNIT DESCRIPTION (ECTS „Key Features“) CONTENT LEVEL Prerequisites * Aims and objectives * Bibliography CREDIT RATING TEACHING AND LEARNING METHODS ASSESSMENT

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CHAPTER ONE. INTERNATIONALIZING HIGHER EDUCATION

Tatiana Zaichkina The structure of the financing in education as a condition for internationalization of student mobility

In conditions of globalization and integration processes in the Western and the Central Europe efforts on creation of European educational space and modernization of the higher school have been undertaken. According to the Bologna process (by the name of the Bologna declaration signed on the 19th of June, 1999 by the majority of the countries in Europe) the end of creation of the European educational space should provide precise comparison and a mutual recognition of diplomas, transition to three-stage system of higher education the bachelor-master - the doctor (3/5/8), the creation of the general system of test units (ECTS, 60 credits for an academic year, 180 for reception of a title of the bachelor and 300 - the master), encouragement of mobility of students and teachers by means of reduction of administrative and normative obstacles, promotion of the European measurement of higher education and closer interuniversity cooperation. Despite of the declared overall aims, creation of the uniform European space occurs painfully enough and often causes criticism from the opponents of this process. The basic problem is connected with the danger of loss of national originality of the higher school. The problems which have arisen with transition to a new educational system the following: 1. Break of the traditions, fundamentality of education. 2. One more problem it insufficient demand on a labour market for bachelors. Employers frequently do not perceive such qualification. It is necessary to approve 48 Seventh International HSE Summer School «Baltic Practice» ·2007

the status of the bachelor at the state level that it became a level sufficient for professional work. 3. The main barrier on the way of Bologna process it is the human factor: stagnancy, indifference and apathy. There are a lot of barriers on the way of the integration progress. One of the most important barriers for Russian integration is the financing system of the higher education. The differences in financial structures between Russia and European countries are significant. They create a lot of problems on the way of encouraging mobility and interuniversity cooperation. So, I want to investigate the financing system of German and Russian universities, to find out differences and the reasons for them, and to observe the possible strategies and ways of solving these problems. I’ll study the systems of education and the financial structures in Germany and Russia in turn, starting with Germany.

Germany The system of higher education in Germany unites 337 educational institutions the majority of which are state. The basis of system is made by 78 universities (Universität) and the high schools equal to them. German higher educational institutions are divided into classical universities with faculties of medicine, humanitarian and natural sciences, theology, sociology, economy, rural and a forestry, engineering, technical universities (Technische Universität) where various engineering disciplines are taught, the general universities (Gesamthochschulen) where it is possible to receive special professional knowledge. Except for it the structure of the higher school includes pedagogical institutes (Paedagogische Hochschulen), medical colleges, theological and church colleges (Theologische Hochschulen), colleges of sports. The non- university type of high schools (Fachhochschulen) give knowledge in spheres of business, economy, service, an agriculture and an applied art (colleges of arts) (Kunsthochschule and Musik- hochschule)1.

1 http://de.itec-group.ru/

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Financing In Germany the higher education is free-of-charge. Though in a number of the Lands from 2007 there is a payment for getting the higher education. But it remains at an insignificant level and does not exceed 500 euro for a semester, therefore it is possible to consider, that it remains free-of-charge and acceptable both for German students, and for foreigners. For entering the university it is necessary to present school-leaving certificate (Allgemeine Hochschulreife) which pupils get after passing final exams (Abitur) to German high school, i.e. entitles to enter the high school without examinations. The entrance examinations are only at faculties with the limited access - medical, pharmaceutical and architectural. Significant number of high schools are state and subsidized with the government. The number of private high schools is very little. The basic law about higher education allows private higher educational institutions, however they should correspond to a number of requirements. Private higher educational institutions should receive accreditation of the Science board of Germany. As a whole the number of non-state higher educational institutions remains low.

Let's consider the sources of financing of higher education in Germany The higher education in Germany is financed basically at the expense of means of the state budget. Also a number of non-state and non-commercial organizations, welfare and charity funds which provide financing the higher education, give various grants and scholarships. The state (authorities: the Lands, the Federal government) remains the basic source of financing of universities and reserves the basic functions of management. At a regional level high schools submit to the Ministries of the Lands. Such non-state and non-commercial organizations as the industrial enterprises, social groups (churches, trade unions) also provide the financing of higher education. Different companies spend significant resources for improvement of professional skill of the employees. There are also programs of the further education for unemployed which are financed by Fund of unemployment insurance. Except for the usual scholarships, in Germany there is a set of the grants appointed by various funds - there are funds of parties 50 Seventh International HSE Summer School «Baltic Practice» ·2007 and Fund of German nation, funds of churches, the governments of the Lands, and departments of the German government, the small regional organizations, and also such funds as DAAD, KAAD, Fulbright and others. Grants are usually given to a certain category of students, for example, to a “gifted students”. Parents of all pupils till 27 years in Germany have the right to receive so-called “children’s money” (Kindergeld), it is about 154 euro. There is also a widespread system of credits for education. The students who have received school education in Ger- many, at the account of own incomes and incomes of parents, can receive the credit for study (BaFöG) up to 530 euro a month. It is necessary to return half of this credit to the state then. Within the limits of the federal law on assistance to education for students who don’t have other means (basically incomes of their parents) for financings their education, they can receive the financial help for entering the higher education. As a rule, the financial help is giving during “the standard period of studying" which is set in the law of the general principles of the organization in the higher school. Since April, 1st, 2001 for the students living separately from parents the financial help amount to a rate of 585 euro a month. Half of this sum is granted on a non- return basis, other half is given in the form of the interest-free state loan. Since April, 2001 the financing of students studying two or more semesters in the higher schools in other EU countries is carried out. Besides students can receive the credit up to 300 euro a month for the term of two years which should be completely returned including interest rates. After the first scientific degree students can receive the grants supporting their further education within the limits of corresponding certificates of the Federal grounds.

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Let’s consider the structure of the university budget by the example of the Humboldt University. Picture 1. The structure of financing in Humboldt University2.

University Budget (not including Charity):

Structure of finansing in Humboldt University, % 19,46%, (€53,01m)

State funding 2006

Non-governmental grants 2006

80,54%, €272,41m

We can see that the majority of financing is based on the government means.

Statistics relating to non-governmental grant allocation (€, mln). Table 1: Non-governmental grants.1 DFG Bund Stiftun The EU Econo DAAD Other Total (Allian gen my ce) ‘02 14.704 7.282 6.262 2.516 2.708 1.943 1.871 37.285 ‘03 16.878 6.726 5.010 2.168 2.506 1.887 2.274 37.448 ‘04 17.909 6.004 5.366 2.231 3.233 1.258 2.224 38.226 ‘05 21.530 5.354 6.957 3.582 2.958 1.334 3.429 45.144 ‘06 23.825 8.046 6.207 3.405 3.403 2.287 5.839 53.011 DFG (Deutschen Forschungsgemeinschaft) – German research council DAAD – German Academic Exchange Service Stiftungen – Charity Department

2 www.hu-berlin.de

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The German research council is the central self-government organization for the support of the research in colleges and publicly financed research institutions in Germany. The DFG serves the science in all her branches by the financial support of research project and by the support of the collaboration among the researchers. Picture 2. Statistics relating to non-governmental grant allocation (€, mln)3

The table and the graph shows as the variety of institutions, which finance the higher education in Germany.

DAAD (Deutscher Akademischer Austauschdienst)4 The German Academic Exchange Service is the central self- government organization which units all German higher educational institutions. The main goal for DAAD - contribution to development of the academic relationship abroad first of all through development of the exchange system for students and scientists. For these purposes DAAD allocates a plenty of scholarships and grants. Furthermore DAAD supports the higher educational institutions in their international activity by means of such services as - information programs, marketing, the consulting, assistance to students and scientific employees.

3 www.hu-berlin.de 4 www.daad.ru

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Grants System of grants supports young perspective scientists. They can be provided either by private funds or by state. The basic requirements to receiving the grants are: excellent progress, knowledge of language at a demanded level, scientific activity and public work. Students from Russia can enter the German high schools after studying a year or two in the Russian high school. In the first case it is necessary to have preparation in Studienkolleg (a special course) and to study there one year, otherwise you enter the new course and loss two years. For transfer it is necessary to present translated, notarially certified, certificate about secondary education, and the list of the disciplines in high school with the number of academic hours, the information about studying German language by the instruction of hours (not less than 1000), the resume, the letter on the intentions, and other documents. There is a structure of financing the higher education in Germany which is based, as we can see, mostly on the source of the government. There are also a lot of funds and other financial institutions which provide the university expenditures. But there is a critic to the financing structure: some experts say that there is a disbalance in financing of education. Whereas the expenditures on the elementary educations are very law there are great expenditures on the higher education. It may lead to serious losses for the national budget if there is not the right policy.

Russia: the higher education In an economic situation at the beginning of the century there is a number of problems before the higher education, not only seriously complicating its perspective development, but calling into question the vitality of system of higher education in the country.

What are the basic problems in the system of higher education in Russia? We can point out a lot of different reasons of insufficient development of the higher education in Russia. There are the most important: • Insufficient financing of higher education from the government, insufficiently considered pricing policy;

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• Out-of-date material support of educational process and progressing deterioration of a fixed capital; • Decrease in the social status of the teacher and prestige of scientific and pedagogical work; • a critical condition of a high school science, first of all, in the field of fundamental scientific researches; • Bribery: the government finances a free-of-charge education, but high schools take a bribe. And as result - excessively high expenses of the government lower allocation efficiency; • Qualitative education is inaccessible without social net and money; • Gap between science and education: 80 % of higher educational programs are not based on own development; • Specific financing of educational programs does not provide even reproduction, let alone development; • Constantly growing demand for higher education is not provided by resources, but nevertheless "is satisfied" with educational system; • The existing education system inefficiently uses up to 25 % of budgetary funds and up to 35 % of means of families; • The increasing in purchasing by consumers of informal paid educational services on an individual basis; • The competition between educational institutions is suppressed; • Educational institutions have no effective tools for selection and encouragement of the best programs and teachers; • Complexity of transition to two-level system is also in the fact that many our high schools, having received in recent time the status of universities, are not correspond to them.5 According to this analysis we can see that all these problems lead to the creation of barriers on the way of increasing the quality of higher education and raising the mobility of students.

5 http://www.hse.ru/temp/2004/10_22_rosro.shtml

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Formation of market relations alongside with the positive phenomena has led to occurrence of the factors negatively influenced the economy of the higher school, the most important of which are instability and insufficiency of budgetary financing. The federal budget does not allow to finance even current expenses, does not give an opportunity to provide the full maintenance of educational process. All this reasons leads to the increased demand for additional budgetary non-budgetary sources. Additional sources are the objective necessity caused not only by limited opportunities of the state budget, but also by need of inclusion of high schools to market relations. The problem of searching for additional financial resources became more important than other economic problems. There should be an essential growth of economic activity of educational institutions. This activity is defined also by the circumstance, that with the expansion of the economic rights educational institutions have to pay the increasing attention to economic problems and problems of management their own facilities. The existing market of the educational services provided by high schools still doesn’t have the effective mechanism of pricing. In the activity of high schools in the attraction of non-budget sources of financing there is no system of their development, expediency of realization projects and programs.

The system of financing of higher education in Russia As was mentioned above the financing of higher education from the government in Russia is insufficient. Let's consider structure of financing on example HSE:

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Picture 3. HSE budget (Moscow and subsidiary), 2000- 20066.

On this diagram we see that the role of the government in financing is considerably below, that in the above examined Humboldt University (where state financing came to 80,54%). Moreover, since 2000 till 2006 the role of the government has been decreased (in percentage of the whole budget). The reason for this

process can be found not only in the decreasing expenses for education from the government, but also in increasing a number of other source of financing, for example, increasing part of commercial students, accordance of additional services. The same conclusion we can make if we look at the dynamics of incomes in HSE in 2000-2006 (Picture 4).

6 www.hse.ru

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Picture 4. Dynamics of incomes of HSE (Moscow, 2000- 2006)3

On the given example we can see, that the financing from the federal budget considerably below, than in the above investigated Humboldt University.

Structure of incomes of the Russian high schools: Let’s consider the structure of incomes of the Russian high schools from another side – with the participation of families. Family expenditures for education are really high. The next diagram (Picture 5) give as some figures illustrated family expenditures for education. It shows that the main expenditures are made for the higher education.

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Picture 5. Family expenditures for education in Russia7.

Расходы на воспитание или обучение детей в семье, в которой есть: (тыс. руб./год)

5.9 …дошкольники 8.3

6.1 …школьники младших классов 11.2

5.7 …школьники сред них классов 11.4

…школьники старших классов 6.5 (без учета подготовки в вуз) 9.6 Россия 3.3 …учащиеся ПТУ 3.4 Москва 4.1 …поступающие в ССУЗы 3.9

9.8 …студ енты ССУЗов 8.6

9.7 …поступающие в вузы 12.5

16.5 …студ енты вузов 19.8

0 5 10 15 20 25

But the main problem is in the fact that most of the expenses are illegal. The diagram below shows us the volume of these expenses (Picture 6):

7 www.hse.ru

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Picture 6. Income structure of Russian higher schools4

Тыс. руб. 40

30 "Серые" расходы семей

20 Официальные расходы семей

10 Расходы бюджета

0 Возраст 1 3 5 7 9 11131517192123252729

We see that nearly 20% of family expenditures on education are illegal. There is a big problem for Russian education, and now the problem of bribery and corruption is solving in the government. Especially it concerns the problem of high education. To solve the problem of bribery we should know the ways of family payments. Let’s examine the structure of legal and illegal expenses of families on the next table (Picture 7): Table 2: Expenses of families for education in Russia (zones of an inefficiency). The means going into the The means which are not education system (white going into education system expenses): (grey expenses): Official tuition To Private persons for preparing Repair fee, protection, purchases of the writing materials, books, Bribe, gifts and other informal the equipment, copying… payments for the special attitude, estimations, transfer in Official additional employment an educational institution, etc. Official payment for preparation 60 Seventh International HSE Summer School «Baltic Practice» ·2007 for entering the following step Payment to other people for of education preparation of course or degree Preliminary paid testing works Paid entrance examinations, paid Private apartment official registration or a medical Other forms of expenses which insurance can’t be classified Campaigns, holidays

Payments in funds of a class, an educational institution, Canteen, Hostel payments As a result we see that family expenditures to the higher education are rather high. In comparison with the German system - the Russian system of financing basically depends on charges of families, official and the considerable part is illegal – not going to the educational system. It reduces the efficiency of the system of higher education and makes barriers for its further development.

Ways of solving the problems: The specialists in the State University – Higher School of Economics have proposed the model of financing of the higher education in Russia8. The model provides: 1. financing of the operational expenditure of high schools on the basis of the differentiated specifications with use of the state nominal financial obligations (further - SNFO); 2. financing of grants and other social payments in sphere of higher education; 3. financing of preparation of specialists for the state and municipal needs on the basis of subsidies and subventions; 4. financing of development of high schools on the basis of intermediate term (3-5 years) programs; 5. financing of scientific researches of high schools; 6. special financing for leading high schools;

8 http://www.ecsocman.edu.ru/db/msg/179434.html

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7. the state support of educational credits for entering the high school; 8. providing tax privileges to high schools, and also to legal and natural persons putting means in preparation of specialists, providing material support. State normal financial obligations (SNFO) - the document received by the citizen by way established by the law (or other normative legal certificates) according to which the government is ob- lidged to give budgetary funds on studying of this citizen to an educational institution. It will finance educational process during all periods of studying according to the state educational standard. SNFO are classified by categories. The higher the category – the higher the value of financing. The volume of the university budget is determined by the number of received SNFO. SNFO provide all the operational expenditures excepting scholarships. They should be financed separately. The category of SNFO is determined by the results of the graduation examination, participants in Olympiads and competi- tions, for people who have privileges, etc. Subsidies - for preparation of the specialists who have been not demanded by the people, but necessary for the state for its development. With receiving of the subsidiary the graduate is obliged to get a job within 3 months on a specialty and to work not less than 3 years there. Otherwise it should return to the government the sum, spent on his studying. Also, it will be good, if employers (firms, industrial companies) play an active role here. The role of employers in subsidizing educational credits can be real, when it is a question of financing short programs.

Conclusion As we see, the situation in the Russian higher education is difficult. There are some barriers, such as out-of-date material support of educational process, decrease of social status of teachers, critical condition of a high school science, insufficient financing of higher education from the government, bribery. All of them are put obstacles to the development of the quality of higher education, precise comparison and a mutual recognition of diplomas, transition to three-stage system of higher education, increasing the mobility of students and teachers. 62 Seventh International HSE Summer School «Baltic Practice» ·2007

There are a lot of differences in comparison with the German structure: in the role of the government financing of education, in the number of non-state and non-commercial financial institutions, in the conditions of getting credits for education and there is also a difference in mentality. Of course, problems in the financial structure make very great barriers for integration in the EU. But we are on the way of solving these problems. There are a lot of plans and ways of development the higher education and as a part – the financing system. We should eliminate barriers to make our educational system corresponding to the world standards. Otherwise we wouldn’t be able to compete with other countries.

Literature 1. Humboldt Universität zu Berlin. International Office. – 2006-2007. 2. The forming of the all-European space of the higher education. Tasks for the Russian higher school. – The state university – Higher School of Economics. – Moscow,2004. 3. “Soft way” of entering the Russian higher schools the Bologna process. – OLMA Press. – Moscow, 2005. 4. Humboldt University. www.hu-berlin.de 5. Higher School of Economics. www.hse.ru 6. http://inf.hse.ru/gifo/publication/ 7. Federal special information portal – Comparative educational policy. http://comparative.edu.ru:9080 /PortalWeb/ Msg?id=11142 8. Russian-German portal of collaboration in the sphere of education. http://ido.rudn.ru/rgp/Sections.aspx ?btnrid=no &toprid=no&rlid=25 9. Alexander von Humboldt. http://www.avh.de/en/ 10. Informational community. http://www.knogg.net/ 11. DAAD. www.daad.ru

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Alexey Trofimenkov Adequate estimation of educational quality integration of the Russian HIGHER SCHOOLS and SU-HSE in particular in the Bologna process

The legal principles of qualitative education In the educational legislation of Russia it is defined a number of system-social properties and characteristics which define adequacy of an education system to the accepted requirements, as educational quality to social norms, the state educational standards. Educational quality breaks up to quality of conditions and quality of result. The first consists in ability of an educational unit to create inside the educational trajectories corresponding propen- sities and interests of state educational standards trained at obligatory performance. The second, in an estimation of result conformity measure, to customers’ hopes. Fulfillment of educational standards provides unity of educational space of the state and guarantees the right trained on reception of high-grade education. Means of tracking of performance of educational standards is monitoring. Variable component cannot be estimated by the second on the basis of quantity indicators as the result is estimated not, and a direction of development of educational establishment, i.e. the personality- focused component of educational quality. Problems of quality management of education have got the conventional urgency. Up 2000 The Ministry of Education and Sciences of the Russian Fede- ration spends competition "Internal systems of qualitative maintenance of expert preparation»in which have taken part more than 150 higher schools of Russia. In higher schools of Russia works on creation, introduction and certifications of internal systems of a quality management of education widely extend. The purpose of such system construction is to increase the competitiveness of university on internal and an external educational services market. With reference to the sphere of higher education quality of results of educational activity is defined by quality of knowledge, science 64 Seventh International HSE Summer School «Baltic Practice» ·2007 and skills of graduates of university, their active civic stand, a level of culture and morals. High quality of results of education is defined, on the one hand, by its maintenance, and with another - material security. At the same time high educational quality can be reached by qualitative functioning of all system of the university, including quality of management at university. Thus, educational quality is provided through construction of a control system by process of education. Educational quality received by the student in the Russian Federation is adjusted by legal norms at all levels: international law, the federal legislation, the legislation of subjects of the Russian Federation. The Bologna Declaration from June, 19th, 1999 which the Russian Federation has joined in September 2003, in the field of educational quality fixes a principle about assistance which the countries-participants of the Bologna Declaration should render the European cooperation in maintenance of educational quality with the purpose of development of comparable criteria and methodologies. From all noted above it is possible to allocate principles of the federal legislation of Russia in the field of educational quality: • General equal access to education. • Fastening of the state educational standards, methodologies and criteria of an estimation of quality of the education, • Co-operation with foreign colleagues. • An opportunity of educational services financing on the state’s own. • Support of the international cooperation in the designated sphere.

Reduction of quality of the Russian education conformity to requirements of the Bologna process on an example of some higher schools of Russia The basic federal legal act of participation of higher schools of Russia in the Bologna process is the Order of Ministry of the Education and Researches of Russian Federation from February, 15th, 2005. The Order contains a plan of measures on realization of positions the Bologna declaration in system of the higher education the Russian Federation for 2005-2010. In the field of educational quality the following is provided: Creation of system of comparable criteria, techniques and methodologies of an estimation of educational quality with the 65 Seventh International HSE Summer School «Baltic Practice» ·2007 purpose of maintenance of harmonization of the Russian system of an estimation of educational quality with the European systems. 1. Working out of technology of the state accreditation of separate educational programs of the higher education. 2. Attraction of foreign experts to work in competent commissions in the field of educational quality. 3. Creation of the Eurasian network of bodies with authorities of estimation of educational quality (the CIS countries and Baltic) and maintenance of joint activity. 4. Creation of an infrastructure to make possible the estimation of Russian education by other countries- participants of the Bologna process.1 In each Federal District of the Russian Federation by The Order of Ministry of Education and Researches from 25.04.2005, № 126 it is chosen a number of head universities and the organizations which realize the basic purposes of development of system of the higher education according to the Bologna declaration. In Moscow such universities are: the Moscow State University on of Lomonosov and the Moscow State Technical Bauman University. These universities are coordinators, they carry out coordination and interaction of the higher schools located in federal districts of the Russian Federation, within the limits of realization of purposes of the Bologna declaration, provide among them the organization of an exchange by experience. Activity of universities on realization of positions of the Bologna declaration in the field of educational quality is defined by Order of The Ministry of Education and Researches from 3-12- 2004 “About development and introduction of an internal educational control system in higher schools”. It assumes improvement of professional skill more than 200 workers of the administrative board of universities, preparation of control systems of educational quality in universities, introduction of the given systems, and also informing of the public on realization of positions of the present Order. At Tomsk State University, the Order of Rector TSU of G.V.Mayer from 24.06.2005, at faculty of computer science is spent experiment on reorganization of educational process at

1 The Order of Ministry of Education and Researches from 15-02-2005

66 Seventh International HSE Summer School «Baltic Practice» ·2007 faculty according to basic directions of the Bologna declaration, including development of the automated in education system for management of educational process at a level of faculty. Educational process on the basic educational program is conducted on the basis of curricula with use of credit system as ECTS (European Credit Transfer System). The student has the right to education of the individual working plan, having submitted in dean's office the corresponding application. The curriculum joins all so-called "critical disciplines ", i.e. necessary for studying in data to year. They should borrow not less than 50 credit hours. The student is deducted from University if it does not type 50, 110 and 170 credit hours on the first, second and third rates accordingly. The control system of educational quality operates also in the State University of Steel and Alloys (Moscow). Moreover, in 2000 the Given HIGH SCHOOL became the winner in competition of the Government of the Russian Federation in the field of educational quality. In Moscow State University of Steel and Alloys it is spent: modernization of base education and development of preliminary training works with youth of regions of Russia and the CIS countries, the organization 2-level preparations, development of forms and methods of further education, development of scientifically-innovative activity in Moscow State University of Steel and Alloys for maintenance of educational process. At the State Pedagogical University of a name of Gertsen (Saint Petersburg) within the limits of realization of regulations about educational quality following steps are undertaken: Development of parameters of monitoring of activity of structural divisions within the limits of creation of a control system by educational quality at university; development of the program of development of skilled-experimental work on introduction of the individually-focused educational process on the basis of test units in scales of university; Development of projects of Programs of development of branches Gertsen University for 2006-2010, making uniform scientifically-educational space; diversification maintenances of education, development of its continuity and multi-variant approach; strengthening of communication of a science, results of scientific researches with educational practice; Perfection and updating of pedagogical technologies; creation of a complex of personnel, material, financial conditions of efficiency of educational process. There is an increase of language 67 Seventh International HSE Summer School «Baltic Practice» ·2007 competence of students. The teaching structure is updated: competitive selection there have passed 1146 professors. The State University - Higher School of Economics (Moscow) lead greater work in the field of educational quality, and its carrying out has begun long before acceptance of the Bologna Declaration. Gradual realization of base principles of development HSE was expressed in close interaction with leading foreign universities which purpose was education of new standards of the educational services comparable to a level of leading world universities and corresponding to the Russian needs. Active distribution of results of the activity to professional community, including regular carrying out of scientific and scientifically- practical conferences, methodical and research seminars, preparation and the edition of series of textbooks and scientific works, intensive development of an infrastructure of university, including education of modern library with paper and on-line resources, wide introduction of in education technologies is conducted. Development of the branched out system of additional education with the academic degree of quality of programs; creation of programs competitive in the international market (MBA, Executive MBA, etc.). The system of two-level education is developed. In one direction of preparation of bachelors, some specializations in magistracy annually open, the quantity magisterial programs and specializations grows. Attracts attention a high demand of graduates. From 96 up to 100 % of graduates in different directions of training found a job on a specialty. HSE was created to restore in social and economic disciplines communication between educational process and researches. For this purpose the University tried to involve in the structure of the leading scientists possessing recognized authority on the areas of knowledge. As a result today HSE represents the largest research center on social and economic sciences in Russia, involved in the basic higher education reforms. Results of researches and analytical development HSE actively used during reform of education.

The problems arising in the higher school during realization of programs of a quality management of education As it has noted been by consideration of models of a quality management, quality management of education includes an 68 Seventh International HSE Summer School «Baltic Practice» ·2007 estimation of mastering of educational programs by students, the control over quality of teaching of disciplines and the continuous analysis of the given process. One of problems of educational quality in SU-HSE consists in restriction of an opportunity of education by the student of the educational program. In conformity with clause 16 Federal Law “About the higher and postgraduate vocational training in the Russian Federation”, “… the student has the right to participate in education of the maintenance of the education under condition of observance of requirements of the state educational standards of the higher vocational training … “. In practice state standards often interfere with the student in it. One of key principles of the Bologna process is the opportunity of an independent choice the student of the majority of studied disciplines. For it some subjects stipulated in the state standards which give the certain quantity of 60 credits in the sum are obligatory only. And, though in 2007 in SU-HSE precedent of drawing up by the student of the individual curriculum has noted been, realization of the given opportunity for all students is hard since it will essentially complicate monitoring educational quality, rating of students and scheduling of work of teachers. The majority of problems in SU-HSE can be noted in sphere of an estimation of knowledge of students. The estimation of knowledge of students in SU-HSE is made on the basis of internal statutory acts of university. At the analysis of the given statutory acts and practice of their application it is obviously possible to establish the facts of presence of incorrect formulations in texts of acts, and also cases of actual default of their instructions. The control of knowledge of students in SU-HSE is carried out on the basis of Position “About forms of the control of knowledge of students at the State University – the Higher school of Economy”, Academic council SU-HSE approved by the decision from 27.09.02. № 29. Item 6 of a part II of the present Position says: “the Current control is realized mainly in written form … “. The term “mainly” is not categorical and does the given norm optional, i.e. the Position gives the right to define a kind of the control to directly faculty or personally to the teacher within the limits of so-called ”Academic freedom of teaching”. Thus, the given formulation of Position does possible carrying out, both the written control, and oral, assuming thus, that written forms of the control should prevail. In practice it leads to a situation when in different groups of 69 Seventh International HSE Summer School «Baltic Practice» ·2007 one rate of one faculty the current control of knowledge is carried out by opposite methods. While in one group the teacher spends on seminar employment examinations in a format of the test, in other group examination can be lead in the form of a semblance of an essay which should be written during employment. In the third group of examinations can not be at all during all modules allocated on studying of given discipline whereas the teacher is limited to oral interrogation of students. As the estimations received on seminar control, are considered at resulting estimations it can lead to some distinction in estimations received by students. This fact seriously breaks unity of system of a quality management of education at faculty since forms of the current control even within the limits of one rate of one faculty are not unified. Item 7 and 8 present Positions say: “the Intermediate control is carried out mainly in written form … the Final control carried out mainly in written form”. The given formulation creates the same problem, as previous. In practice the choice of the form of carrying out of examination or test depends on the decision of faculty or personally the teacher. As an example probably to result test on History of the Russian State and the Law on 1 year of the Law faculty in 2005 in all groups test it was spent in the oral form. In group XXX the test consisted in the following: students (from one up to three) sat down before the examiner with opened books on tables and immediately answered a question set by the examiner. In other groups students received the ticket with two questions, and after preparation answered them. It has led to various duration of test in groups and to various means score on each group. Item 11 of a part of III Position says: “Within the limits of the modular organization of educational process on preparation for examinations and tests free days are not allocated”. The given position rather reduces opportunities of the student to successful passage of the dead-line control. The schedule of tests and examinations is made individually for each group. In practice of faculty of the right situations when at one group two or three examination or test follow one another are frequent, and in other groups there is some interval. On a degree of complexity the given examinations in what do not concede to that are spent at “traditional” semestrial system, however the student is frequently compelled to choose, it is more preferable to it to be prepared for what test or examination properly.

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Item 23 of a part of IV Position says: “Responsible from faculty for dead-line the control provides uniformity of criteria of check and putting down grades and carries out their selective control”. In practice when at delivery of test on the certain discipline even students of one group successfully hand over the same teacher test with its full complement, and in other group 5-10 and more failures, and also to cases when duration of examination in different groups differs more than twice are frequent. All resulted above a problem as a whole lead to absence of uniformity in exhibiting resulting estimations, and also do absolutely senseless drawing up of a rating of students on dead-line results the control and dependence on a rating of charge of the academic grants, granting of discounts for payment of training and the right to study the second foreign language and other opportunities, given to the student. If at faculty it is impossible to provide uniform exhibiting of estimations the rating system can lead only to mental frustration, to a formalistic approach of the student to studying discipline and delivery of test/examination, “begging” of estimations, enmity between students, loss by students of belief in fair character of management of education. The given situation completely contradicts to the Bologna process and its legal acts since one of its principles - comparability of criteria is broken, methods and technologies of an estimation of educational quality that gives any higher schools of the Europe the right to call into question objectivity of an estimation of knowledge of the student, made in SU-HSE and negatively influences image of the Russian higher schools as a whole.

Optimization of the educational quality Having analyzed the federal legislation on educational quality and practice of execution by its higher schools, it is necessary to note, that the educational legislation of the Russian Federation does not possess laconic, that complicates its application. The given problem will be solved by acceptance of the Educational Code of the Russian Federation which project is at the moment made and can be accepted the nearest year. Other problem consists that in the Russian Federation are absent uniform for all universities of a rule of quality assurance of education which would establish the uniform form and the order of monitoring procedure of knowledge of students in various subjects. They consist in absence of uniformity in an estimation of quality of 71 Seventh International HSE Summer School «Baltic Practice» ·2007 knowledge, absence uniform for all higher schools of criteria of estimation, a various level of financing of educational programs in higher schools. With a view of optimization of quality management of education probably to offer the following: According to item “and” parts of 3 Governmental orders of the Russian Federation from 6.04.2004 158 “Questions of the Ministry of Education and the Science of the Russian Federation ": To offer the Ministry of Education and science to sum up work named above higher schools with the purpose of uniform application by higher schools of the legislation on education and rendering of services of one qualitative level by them, and also development of typical positions about an estimation of quality of knowledge on each discipline stipulated by the state educational standards. To offer Academic council SU-HSE to accept Position ”About forms of an estimation of knowledge of students” on the disciplines stipulated by the state educational standards with the purpose of an establishment of uniform forms of the control of knowledge and exhibiting of estimations.

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Alexey Shcherbakov Legal regulation of the higher and postgraduate education in Russian Federation

Introduction Education has always been a key question for Russia, therefore the government in this sphere has always been directed on support of its quality in the world educational market. Now, when the policy of Russian Federation is directed on cooperation with the countries of the European Union, the sphere of education is the major, because without the qualitative uniform program of preparation of experts on various branches of a science and techniques cooperation with the countries of the Europe is impossible. Economical, political and cultural interaction of Russia with "West" demands a competent educational reform on unification and standardization of education. In recent years there is actually a question on the coordination of formats of educational programs of the various countries in cases of Bologna process. The main purpose of creation Bologna Process is the academic mobility between different countries, and finally competitiveness of each student on a labour market. Russia gradually realizes aspects of Bologna Process. Russian students take part in the international conferences and seminars more often nowadays, to study abroad (for semester of year). The quantity of students and the teachers coming to Russian Federation gradually grows. However, there are different obstacles in realization of principles of Bologna Process, which Russia should be overcome. First of all, there are legal barriers which make it difficult to issue new educational acts, required for successful introduction of main principles Bologna declaration in modern Russian

73 Seventh International HSE Summer School «Baltic Practice» ·2007 educational system. Integration of Russia into the European Higher Educational Area (EHEA) is impossible without an effective legal regulation of corresponding sphere of public relations. In the system of Russian education there are processes of reformation, concerning the presidential project "education", processes of internationalization and standardization in sphere of higher education, creation of the European Higher Educational Area and occurrence of Russia in Bologna process - all these aspects require a modern law reform, competitive with European law system.

Sources of the Educational Law The two-level system of law sources existing at the moment divides legal acts 2 categories: • "Internal", that is interstate, Russian laws concerning education. • "External", it is international law level. In more detail this system is presented on pic. 1. Item 2 of clause 1 of the Federal law «About the Higher and postgraduate education» is about a validity of "internal" and "external" sources of educational law. There the legislator reproduces the constitutional norm establishing a priority of the international law of Russian Federation in comparison with the internal legislation. Item 15 of the Constitution of Russian Federation says: «The conventional principles and norms of international law and international agreements of Russian Federation are a component of its legal system. If the international contract or international agreement of Russian Federation establishes other rules, than stipulated by the interstate law – rules of the international contract are applied». However it is necessary to notice, that the mentioned norm of the federal law only deals with the international contracts of Russian Federation while the Constitution of Russian Federation establishes a priority not only of the international contracts, but also of the conventional norms and principles of international law. It is considered, that such «restrictive» interpretation of the constitutional norm not only deforms a principle of a priority of international law, but also makes hurdles in realization of principles of the international and European educational law.

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Norms of international law Participation in the international conferences and seminars, the academic mobility, exchanges of students and teachers, and also other actions promoting expansion of the international cooperation in sphere of education, are the cause of inevitability of international legal regulation of educational relations. By present time the significant block of norms of international educational law has already been formed. The norms adjusting educational relations, can be found as in the international contracts and the agreements adjusting exclusively educational relations, and in various contracts and agreements in which questions of education are mentioned directly or indirectly, alongside with other questions. For example, we can mention International pact about the economic, social and cultural rights (New York, December, 16th, 1966), the Convention on the rights of the child (accepted on November, 20th, 1989 by the resolution 44/25 of General Assemblies of the United Nations). A number of clauses of this Convention also mention sphere of education. Separate norms can contain be found in multilateral conventions (contracts, agreements). For example: • International acts of universal character, many of which are accepted under aegis of the United Nations, the United Nations Educational, Scientific and Cultural Organization (UNESCO), the International Labor Organization (ILO) etc.: the Convention on struggle against discrimination in education (accepted in Paris 14.12.1960 at 11-th session of General conference of UNESCO); Convention N 142 of the International Labor Organization (ILO) «About vocational counseling and professional education for the development of human resources» (Geneva 23.06.1975 at 60-th session of General conference the ILO), etc.; • So-called regional international acts accepted by the Council of Europe, the CIS, regional conventions of UNESCO: the Convention on a recognition of training courses, diplomas of higher education and scientific degrees in the states of European region (Paris 21.12.1979); the European convention on the academic recognition of university qualifications (ETS № 32) (Paris 14.12.1959); The European convention on 75 Seventh International HSE Summer School «Baltic Practice» ·2007

equivalence of the diplomas for universities (Paris 11.12.1953), etc. Various agreements on cooperation in the sphere of education exist at a bilateral level: for example, the Agreement between the Government of Russian Federation and the Government of the Italian Republic about cooperation in culture and education (Rome 10.02.1998), etc. Aspects of cooperation in sphere of education can be also mentioned in memorandums and reports. Sometimes Governments of the different countries accept programs of cooperation in sphere of education. Bilateral agreements can be both at an intergovernmental level, and at an interdepartmental (ministerial) level. The order of the conclusion, performance and the termination of the international contracts of Russian Federation is established by the Federal law of July, 15th, 1995 N 101-ФЗ «About the international contracts of Russian Federation». This act is applied concerning the international contracts of Russian Federation (interstate, intergovernmental contracts and contracts of interdepartmental character) irrespective of their kind and the name (the contract, the agreement, the convention, the report, etc.). At the same time not all the questions concerning the international contracts, are completely settled by this Law, therefore it should be applied with two Viennese conventions on the international contracts and norms of the international common law which «fill existing blanks». International law block becomes an effectively functioning element of the mechanism of legal regulation of relations in higher and postgraduate professional education. Its role has increased greatly with occurrence of Russian Federation into Bologna process, WTO and a number of other international organizations, and also active participation of Russia in the Council of Europe, the United Nations, etc. On this background we can notice the most serious imperfection of Russian educational legislation, as it doesn’t reflect radical change of the concept of legal regulation of educational relations, activization of participation of Russian Federation in integration processes, first of all in sphere of higher education and as consequence, does not consider essentially new approaches to the international educational law in the mechanism of legal regulation of educational relations. 76 Seventh International HSE Summer School «Baltic Practice» ·2007

The basic legislative sources of Russian educational law - the Law of Russian Federation «About education» and the Federal law «About the higher and postgraduate professional education» - were accepted when the educational law was formed by the national legislator independently, under own discretion, only considering tendencies of development of international law. Today the sources of international law adjusting integration processes in separate spheres of education become the international standards, obligatory for legislature of the state participating in integration processes, at acceptance of certificates of the internal law. And this change of philosophy of the educational law demands the prompt reflection in the text of the Law of Russian Federation «About education» and the Federal law «About the higher and postgraduate professional education». Nowadays, the approach of the legislator to principles of Russian educational law (in the Law of Russian Federation «About education») becomes imperfect and it doesn’t suit the principles of state policy in education today. According to the clause 3 of this Law «the legislation of Russian Federation in the field of education includes the Constitution of Russian Federation, the mentioned Federal law, other laws passed according to it and other legal acts of Russian Federation, and also laws and other legal acts of regions of Russian Federation about education». Without even a word about numerous sources of international law, adjusting the relations in sphere of education, making a subject of the international educational law. The legislator «recollects» the international contracts of Russian Federation only in item 1 clause 57 of the Law, Russian Federation about the international cooperation in education: «The international cooperation of Russian Federation about education is carried out according to the legislation of Russian Federation and the international contracts of Russian Federation. If the international contract of Russian Federation establishes other rules, than what are stipulated by the legislation of Russian Federation, rules of the international contract are applied». Such interpretation of the clause 15 of Constitution of Russian Federation deforms sense of the constitutional norm. Norms in clause 3 and 57 of Law of Russian Federation «About education» mention, that international contracts of Russian Federation adjust only questions of the international cooperation of 77 Seventh International HSE Summer School «Baltic Practice» ·2007

Russian Federation in sphere of education. And for regulation of all other relations in sphere of education, norms of the internal law – acts of the legislation of Russian Federation should be applied. Such approach of the legislator is not simply inexact; it can bring the participant of educational relations to an erroneous conclusion about indirect character of action of the conventional principles and norms of international law and the international contracts of Russian Federation. And in fact the Constitution of Russian Federation in clause 15 defines these sources of international law as a component of legal system of Russian Federation. The similar situation has developed, concerning clause 1 of the Federal law «About the higher and postgraduate professional education». In present edition of this clause it is established, that legal regulation of relations in the field of the higher and postgraduate professional education is carried out as the Federal law «About the higher and postgraduate professional education», and other federal laws and other legal acts of Russian Federation, and also laws and other legal acts of regions of Russian Federation and acts of local authorities. Thus in this clause international law acts, international integration processes of Bologna process and cooperation in the sphere of education of the states of EvrAzEs are not even mentioned.

Interstate sources of the educational law The system of the interstate law sources adjusting the relations in sphere of higher and postgraduate of professional education («internal educational law»), is formed at three levels - federal, regional (a level of the subject of Russian Federation) and local (municipal). The present three-level system of «interstate» sources of the educational law was generated not long ago - since January, 1st 2006, when the Federal law of 31.12.2002 N 199-ФЗ «About modification in separate acts of Russian Federation according to perfection of differentiation of powers» appeared. The previous edition of clause 1 of the Federal law «About the higher and postgraduate professional education» (In edition of Federal Law of 22.08.2004 N 122-ФЗ) assumed an opportunity of legal regulation of relations in the sphere of the higher and postgraduate educations only at a federal level. The federal sources of the educational law adjusting the relations in sphere of higher and postgraduate of professional 78 Seventh International HSE Summer School «Baltic Practice» ·2007 education are presented by federal laws and bylaws, accepted according to them. The system of federal sources of the educational right is shown on pic. 2 At a federal level the legislative basis of legal regulation of relations in sphere of the higher and postgraduate educations is presented by:

1. The Constitution of Russian Federation; 2. The federal law of 22.08.1996 N 125-ФЗ «About the higher and postgraduate professional education»; 3. The law of Russian Federation of 10.07.1992 N 3266-1 «About education»; 4. Other «profile» federal laws, i.e. the laws accepted for regulation of relations, exclusively in the field of education; 5. «Non-profile» laws, containing separate norms, adjusting relations in sphere of education.

1. The constitution of Russian Federation Clause 43 of the Constitution of Russian Federation is entirely about education. In it the right of everyone for education is fixed. As for the higher education the norm says: «Everyone has the right to receive free of charge on a competitive basis higher education in the state or municipal educational institution and at the enterprise». Thus Russian Federation «establishes federal state educational standards, supports various forms of education and self-education». Along with clause 43, the separate positions adjusting the relations in the sphere of higher and postgraduate of education, can be found in other clauses of the Constitution of Russian Federation: so, in clause 72 (item 1) the general questions of education are in the joint conducting of Russian Federation and regions of Russian Federation; in clause 114 it is established, that the Government of Russian Federation provides carrying out in Russian Federation a uniform state policy in education.

2. The federal law of 22.08.1996 N 125-ФЗ «About the higher and postgraduate professional education» Accepted in four years after the «base» law - the Law of Russian Federation of 10.07.1992 N 3266-1 «About education», - it has developed, concretized and has specified substantive 79 Seventh International HSE Summer School «Baltic Practice» ·2007 provisions of the Law of Russian Federation «About education» with reference to the sphere of higher and postgraduate education. The federal law «About the higher and postgraduate professional education» adjusts various kinds of the public relations connected with reception of the higher professional education, postgraduate study and doctoral studies, assignment of academic statuses and scientific degrees, etc. Norms of this Law regulate: • The system of the higher and postgraduate educations and management of this system; • The status of subjects of educational and scientific activity in system of the higher and postgraduate educations; • Economy of system of the higher and postgraduate educations; • International and foreign trade activities of higher educational institutions.

3. The law of Russian Federation from 7/10/1992 N 3266-1 «About education» In the Law of Russian Federation «About education» questions, general for all elements and levels of an education system in Russian Federation are regulated, and the norms, directly concerning the higher and postgraduate education (for example, clauses 24, 25) are mentioned.

4. Other "profile" federal laws Among the acts of Russian legislation adjusting the relations in sphere of higher and postgraduate of education, alongside with the Federal law «About the higher and postgraduate professional education» and the Law of Russian Federation «About education», can be found other acts, accepted for regulation of relations exclusively in sphere of education. For example: federal laws of 10.04.2000 N 51-ФЗ «About the statement of the Federal program of development of education».

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5. "Non-profile" laws containing rules of law by which relations in sphere of the higher and postgraduate educations are adjusted These laws take a special place in the mechanism of legal regulation of relations in the sphere of the higher and postgraduate education as they sometimes fill blanks in the current legislation. Bylaws, adjusting at a federal level of the attitude in sphere higher and postgraduate of professional education, can be incorporated by a principle of decrease of a validity in following groups: decrees of the President of Russian Federation, governmental orders of Russian Federation, acts of federal enforcement authorities (for example, acts of the Ministry of Education and a science of Russian Federation). The regional sources of the educational law adjusting the relations in sphere of higher and postgraduate of professional education are accepted by corresponding state bodies of regions of Russian Federation within the limits of the competence established for subjects of Federation in the field of higher and postgraduate of professional education. These sources, as well as federal sources of the educational right, are presented by acts (laws of regions of Russian Federation) and accepted according to them bylaws. The acts accepted at a level of the subject of Russian Federation, can be accepted on the general questions of the organization of an education system in region. A number of regions of Russian Federation on the basis of the federal law on education has developed the general laws on education which subject of regulation in many respects coincides with a subject of regulation of the Law of Russian Federation «About education» (see, for example, the Law of the Moscow area of 27.07.2006 N 136/2006-ОЗ «About education»). In regional laws on education the general beginnings of the right regulation of activity of educational establishments of the higher professional education in territory of the given subject of Russian Federation are established, the order of their interaction with various elements of an education system in region, distribution of the competence on regulation of relations in sphere of education (including the higher professional education) between the state bodies of the subject of Russian Federation is defined. The municipal educational law represents system of the legal acts accepted by institutions of local government according to their competence and within the limits of powers of municipal 81 Seventh International HSE Summer School «Baltic Practice» ·2007 authority in the field of education. The municipal certificates adjusting the relations in sphere of higher education are not numerous. They are accepted more often with a view of with a view of granting additional social support and granting of side benefits to participants of educational relations.

Features and problems of legal regulation of educational attitudes Characterizing «internal» system of legal regulation of relations in sphere of the higher and postgraduate (that is Russian legal acts on the given question), it is necessary to pay attention of professional education to following circumstances: 1. Long time in a file of normative legal acts including concerning education, such legal certificates as letters have been presented, telegrams, etc. Their share in total amount of sources of the educational right was especially great during «the Soviet period». At that time there was a practice of a direction of the instructive letters quite often contained the instructions of normative character. Practice of inclusion of normative legal instructions in various sorts of the letter and the telegram led to frequent occurrence of cases of collision (collisions) of «normative» letters and acts that, finally, led to discredit of the principle of legality. The governmental order of Russian Federation of August, 13th 1997 N 1009 and Order of Ministry of Justice of Russian Federation from May, 4th 2007 N 88 «About the statement of explanations about application of rules of preparation of legal acts of federal enforcement authorities and their state registration». A great attention should be paid to the Governmental order of Russian Federation from August, 13th 1997 N 1009 «About the statement of rules of preparation of legal acts of federal enforcement authorities and their state registration» In these documents it is established, that «the edition of legal acts in the form of letters and telegrams is not supposed». Besides, there is the direct interdiction on the edition of legal acts structural divisions and territorial bodies of federal enforcement authorities. 2. Legal acts can be published by federal enforcement authorities in the form of decisions, orders, orders, rules, instructions and positions. By letters, telegrams can be made out: answers to inquiries, a position of a management of the state body, etc. 82 Seventh International HSE Summer School «Baltic Practice» ·2007

These documents are the explanatory documents reflecting the point of view of the person, their signed and consequently not having legal character. 3. By the decree of president from May, 20th, 2004 N 649 «Structure of federal enforcement authorities» the structure of the Ministry of Education and science of Russian Federation contains 2 federal agencies: Federal agency of education and Federal agency on science and innovations; 2 federal services: Federal service on intellectual property, patents and trademarks and Federal service on supervision in sphere of education and science. It is necessary to allocate especially the Decree of the President from March, 9th, 2004 N 314 «About system and structure of federal enforcement authorities». In it powers of federal enforcement authorities on acceptance of legal acts are certain. According to item 3 of this decree the federal enforcement authority which is carrying out functions on legal regulation in the established field of activity is the federal ministry (Ministry of Education and science of Russian Federation). Federal services and federal agencies are not expected to carry out legal regulation, except for the cases established by decrees of the President of Russian Federation and the governmental orders of Russian Federation in the special field of activity. They have a right to publish individual legal certificates. The procedure on acceptance of legal acts is established by the Governmental order of Russian Federation from June, 15th, 2004 N 280. Legal acts of Ministry of Education of Russian Federation and other federal enforcement authorities, not last the state registration, and also registered, but not published when due hereunder, do not attract legal consequences as not come into force, and cannot form the basis for regulation of corresponding relations, application of sanctions to citizens, officials and the organizations for default of instructions containing in them. It is impossible to refer to such certificates at the resolution of disputes. One of the sharpest problems on perfection of the legal base of higher education consists in necessity of the prompt reduction of the internal legislation of Russian Federation for conformity with norms of the international contracts of Russian Federation. We shall result only one example. Till now clause 23 of the Federal law «About the higher and postgraduate professional education» in which bases of a recognition and an establishment of equivalence 83 Seventh International HSE Summer School «Baltic Practice» ·2007 of documents of the foreign states about the higher and postgraduate professional education and about academic statuses are established, it is not brought into accord with positions of the Lisbon convention 1997 «About a recognition of the qualifications concerning higher education in the European region (ETS № 165) ». Thus, Russian legislation on higher education starts with necessity of an establishment of equivalence of foreign documents on education, and the Lisbon convention which has come into force for Russia on July, 1st, 2000, assumes recognition of qualifications. Two norms operating for Russian Federation continue to coexist in noted contradiction here already more than five years. Value of the specified problem has noticeably increased in connection with occurrence of Russia in Bologna process. It is enough to note, that the current legislation till now didn’t implement the basic concepts and terms of Bologna process.

Final offers: All this gives food for thought to the modern Russian legislator. There is still much to be done in order to make Russian legislation on education more or less corresponding European. 1. First of all, it is necessary to bring norms about education into accord with norms of international law. 2. It is necessary to make changes and additions to clause 23 about recognition and an establishment of equivalence of documents of the foreign states about the higher education and about scientific degrees of the Federal law «About the higher and postgraduate professional education». In a new edition of the law this clause should be brought into accord with positions of Lisbon convention 1997г. «About recognition of qualifications (ETS №165) ». Thus, it should not establish equivalence of foreign documents on education, but recognize the qualifications of higher education received in foreign high schools. Besides in the clause there should be mentioned about a recognition of the double diplomas which have been given in the countries of the European Higher Educational Area (EHEA), according to the decision accepted on the communiqué in Bergen on May, 19-20th, 2005 3. To publish legal act, which would implement the basic concepts and terms of Bologna process, such as: Bachelor, Master, PhD, Course Catalogue and Course unit, workload, 84 Seventh International HSE Summer School «Baltic Practice» ·2007

recognition, mobility, modules, European Credit Transfer System (ECTS), etc. 4. As sources of law in sphere of education are scattered on various sources that causes numerous collisions in application of norms of the educational law, there is a necessity for ordering system of the legislation on education, for example, having published the Educational code or having brought changes and additions in a law in force of Russian Federation «About education». Necessity of implementation of corresponding international laws into the internal legislation of Russian Federation allows to look at the future of the Federal law «About the higher and postgraduate professional education» from a different angle, as on the converter of Russian legislation to the international standards, that would certainly lead to the full participation of Russia in European Higher Educational Area and real realization of Bologna process in Russia.

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Appendix:

Law sources in the sphere of education:

PRIORITY

"INTERNAL" "EXTERNAL" Interstate acts, Acts of laws international law

Law sources of a federal level

Law sources of a regional level

Law sources of a local (municipal) level

Pic. 1. System of sources of the educational law of Russian Federation

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Federal sources of the educational law

LAWS

The Constitution of Russian Federation (Major Law)

The federal law from 8/22/1996 N 125-ФЗ "About the higher and postgraduate professional education"

The law of the Russian Federation from 7/10/1992 N 3266-1 "About education"

Other "profile" federal laws

"Non-profile" laws

Bylaws

Decrees of the President of Russian Federation

Governmental orders of Russian Federation Pic. 2. Federal sources of the educational law of Russian Federation Acts of federal enforcement authorities

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Jane Tsybina Barriers and advantages of the “internationalization management” at the University level. Case study of the HSE

Before going abroad every HSE student passes some steps, and each is connected to special problems and has particular advantages. This work it to show what problems does HSE have, what may become the cause and how other educational institutions solve them.

1. Test. Checking knowledge of programme and foreign language During this stage all the willing students who claimed they would like to write the test and filled the application in a proper way pass the first stage of contest in English. The test is based on main points of the course – there are, for example, questions about microeconomics or marketing. First of all, the test is to check the knowledge of English – as practice shows, foreign universities do not take even the best students if they do not know English well enough to write a test and be able to pass exams. Problems: there is no system of definition the students to participate in contest. On one hand, they must be well-educated and skilful students that have a high rating and some extra advantages like publications and scientific works. On the other hand, the test is available for all the students who know foreign languages. Language becomes the main criteria of selection. Advantages: the test helps to eliminate students with lack of knowledge in English and subjects of basic course.

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2. Interview After the test a large group of students drops out, the rest go through the interview. Almost every interview there is a representative of the inviting side on the interview. Then the interview becomes the main part of contest – an expert from a foreign university himself selects the students for his university. During the interview the level of English is checked once again – it is obligatory that the student must speak it fluently. During the interview a motivation note can be re-read and examined. The student is also asked questions of common directions and checked of his communication skills. On this stage the knowledge of studies is not as important as the level of basic knowledge, the further occupation that the student had chosen, his knowledge and skills for this occupation. Except the representative of the inviting site there is always somebody from HSE administration on the interview, more often a representative of local departments of academic exchange. On the stage of interview some students resign, preferring to stay in Russia and continue working or seeing they will not be able to learn as much using foreign languages in the other country. Problems: some students that are able to pass the interview in a perfect way do not pass the test. Those, who have completed the test successfully, may not be skilful enough in communication and not pass the interview. Due to differences in cultures and approach to education students are asked questions they are not used to meeting and answering. There is always a risk of simple misunderstanding between a student and a representative of a foreign university. Advantages: the inviting side gets an opportunity to examine students, and students themselves – their chances for further education.

3. Preparation of documents and educational programme As a result of test and interview a group of 6-10 students is chosen for studying abroad. Their documents – copies of passports, students’ cards, passing lists, extra papers – are sent to the department of international student programmes, international academic exchange. In this department their documents are once again checked for conformity and entirety of documents, then the list of students with all properties is sent to the inviting university. 89 Seventh International HSE Summer School «Baltic Practice» ·2007

The department of academic exchange receives the list, co- ordinates a chosen direction with offices of studies and sends the invitation, so that students apply for visa. At the same time administrations launch a procedure of counting for teaching and accommodation. The payment for teaching and accommodation is not made – it is fully covered by a contract of changes. The grants for students are paid from funds of international organizations like Tasis, and are not granted by HSE or foreign universities. On receiving the invitation students apply for visas and buy tickets. They do all the work themselves, but all the expenses are later reimbursed. All the negotiations about the exchange are made by the department of international academic exchange. By the time students leave for the university their school administration prepares for them individual plans of education that cover a period of their international programme and helps them to postpone their studies in HSE. It also includes main points of their education in other university and states basic courses. So everyone know what particular disciplines they will need to study in order to get them in diploma, and what exactly they will be asked back in Russia after their period in other university. In the middle of September the group goes abroad. Problems: most of documentary work that is easy to do in a group in done by students themselves, separately from the administration. Advantages: the system of exchanging documents and interaction of co-ordinators is good, the techniques of working is getting better each year. Students do not have to submit the specifics of their educational courses with offices of studies of the inviting side themselves.

4. Initial stage of studying abroad Students do not enter a particular school, but the whole university. On exchanging programmes students have no attachment to a particular department. Of all the disciplines they choose three subjects of basic course that are obligatory for them and have a set educational type, for example, finance or project management, and two extra subjects without limitations for subject. For a student of direction of microeconomics it can be even medicine. The disciplines cover a particular rate of hours. Students often choose those subjects that are lectured in English – in countries such as France, the Netherlands and Germany 90 Seventh International HSE Summer School «Baltic Practice» ·2007 attending classes in national language needs at least two fluent languages. These four to six basic subjects of one semester are valued as 30 credit points. Credit points are added only for those subjects that have a similar to russian educational type. Problems: because of not so many subjects lecturing in English some useful information is deliberately unavailable for students. It is impossible to organize lecturing of all subjects in English. Advantages: the ability for students to choose extra subject without discrimination for departments is good for students of Arts and those similar to Arts. They get a chance to study not only subjects of their own cycle, but also related ones, for example, psychology – for managers.

5. Everyday affairs of educational process Every group of students gets a chief from the university staff that helps them to solve their local problems. He also carries out the connection between the university administration and students and of students – with heads of studies. In exceptional cases students can contact HSE administration. Students live in youth hostels, for the access to the library they get temporary readers’ cards. Problems: sometimes students have everyday difficulties that cannot be easily explained so they would prefer to have a chief with a good level of Russian language. Advantages: students have an effective feedback with the inviting side.

6. End of education abroad, exams At the end of semester students pass exams on disciplines they learnt. It is not obligatory for them to pass all exams – on subjects of basic course exams can be postponed until next year, on extra subject they can just refuse to pass them. Yet back in HSE they will have to pass obligatory subjects anyway, so they prefer to do it abroad. The staff of a foreign university gives grades for exams and sends the results to Russia. Students pass exams not in module, but in semester system. The first semester is better for studies as there are some universities with a trimester system, and there first trimester also ends in winter. A system of exams includes a number of subjects that cover the whole period of education. In the middle of a semester abroad, exactly when HSE 91 Seventh International HSE Summer School «Baltic Practice» ·2007 modules change, students have nothing for the exception of usual control. Problems: there is no standard way of grading in different countries. Transferring grades to a 10-point system may face difficulties. The faculty of European universities have the right to work for results for three months – by the time students return to Russia their exams may not be yet finished. HSE may have problems with ending exams in paper, for the Russian side tries to put everything in proper time. Advantages: a flexible system of exams gives students a chance not to pass exams on extra subjects they found too difficult and not enough useful.

7. Passing the grades and cancellation of academic debt in Russia The criteria of passing received grades in Russian diploma are fitting in academic plans. If a student has received enough hours of classes during his studies abroad and the subjects he studied were similar to those of HSE, the head of studies of his school passes the grade on this subject as for HSE programme. If the subject does not fit the criteria of HSE, it is not passed for programme and the credit points for this subject are not included in his or her rating. In this situation the student receives a pass as an extra subject and has an extra line in his diploma. Those subject that a student had missed during his semester abroad he passes while studying the second semester – third, fourth and fifth modules in HSE. In some exceptional cases, if the number of subject is too big for the student to pass at once, he applies for an academic leave based on family affairs, mentioning that he or she lived half a year in other country. This application passes first to the head of his school, then to pro-rector. It is available only for girls – with the problem of army youths have no opportunity to stay at the university for a longer period of time. To pass exams in missed subject students get a new, corrected and modernized, plan of individual studies, and follows it until his term is completed. Individual plans are created for each student personally and hardly ever have a common part. Problems: heads of studies make compromises with students very unwillingly as officially there is no rule for students to get academic leaves for finishing terms. The need to pass exams in subjects that are already finished by most of students leads to 92 Seventh International HSE Summer School «Baltic Practice» ·2007 difficulties such as how to find the teacher of fill in documents in a proper way. The system of credit points in HSE is far from perfection and some difficult subjects that need to be studied more carefully, and as a result have a higher amount of credit points abroad are not rated high in HSE, and part of credit benefit is lost while transferring scales. Some subjects that HSE students studied abroad are similar to Russian ones, but due to lack of indoor classes time or other reasons cannot be passed to diploma. Students meet this problem as there are always fewer hours of classes in Europe and America, where most work is done by students themselves. The process of studies is much slower and much more comfortable for students. At the same time as five subjects are studied abroad ten are studied in HSE. In some cases subject finish in the first module, while students are in other universities, so that they have no opportunity to pass exams in time. Passing exams a module later causes difficulties down to dating the registers. The main problem of getting grades for studying is inertness of system and administration, unwilling of heads of studies to make a compromise with students, lack of experience in passing exams after terms and converting grades to russian diplomas. Advantages: the ability to pass some subjects to russian diploma, a chance for students to get education in some subjects on European standards. To say, not so many student are interested in credit points after returning from other universities – with advantage in their diplomas they do not need rating as much as those students who did not go abroad. It is difficult to avoid many difficulties in student exchange on this stage. The role of deans and offices of studies in creating educational plans of HSE and other universities is small – everything is decided by academic councils of universities and does not depend on exchanging programmes. Today the unification of subject is impossible due to two main reasons. The first is that there always will be subjects based on Russian specialization that cannot be included in international base. Internal science of European universities is also not profitable for Russian students. The second reason is that all subjects that a university can offer are lectured by each university with its own educational peculiarities, and universities will not easily give up the way they create their educational programmes. There is also a point about educational plans. A number of class hours is special for every university. And can be not considered by other universities. It is difficult, nearly 93 Seventh International HSE Summer School «Baltic Practice» ·2007 impossible to get extra hours of class time. A student can’t just come and listen two more lections that he needs to enlarge the time of his studies – the programme that is standardised to a longer period of time lectures with a speed that is different from that of a shorter one. Differences in time and approach do not let students transfer their knowledge from one educational system to another. Very often a student loses some special knowledge and gets extra information in those subjects that are similar to Russian ones and are passed. There is always something special about the diploma – at a system of two diplomas a foreign university a diploma of its own standard on all the subjects a student studied abroad. HSE puts on diploma only those subjects that fit its profile. A student can pass half a year studying medicine, get some knowledge and HSE will not even mention it as it is out of programme. Going to universities of much wider that in HSE programme students refuse to study interesting extra subjects knowing that they will not do good for their diplomas. A diploma of HSE contains information about the university where the student studied the subject, so they prefer to have lines signed by European universities, and take those subjects that will definitely be included. Students also do not risk taking more subjects than they feel like studying well enough to pass an exam. The system on postponing exams that works in Europe in a very effective way doesn’t suit the form of student exchanges as HSE cannot keep the student abroad for a long period of time. The state pays HSE foe two full years of master education and the time for diploma. So it would be illegal for HSE to give a student one extra year abroad as this time will not be funded from anywhere. The only way to prolong the time of education is to give the student extra summer for his or her diploma. This special offer works only for those students who go abroad on their second year of masters’ grade and, returning from a student exchange in June, have no time to prepare their diploma works. This too is not controlled by rules, but sometimes the administration makes this step for the better use of studies. With exams fixed on one special term students do not have enough time and freedom to study. There is one more way for them to have a break in their education and get time to learn the material – to leave HSE and later to reinstate, but students prefer to continue studies without a break not to pay for their masters’ education after returning to HSE. Additional difficulties in master exchange programmes are caused by differences in approach. During his four years of 94 Seventh International HSE Summer School «Baltic Practice» ·2007 bacillary a specialist in Europe gets enough knowledge and skills to be employed. Masters programmes there serve the needs of science and are created for those who had chosen a scientific career. In most of universities in Europe masters’ grade is obligatory only for medicine, engineering and teaching. In other cases masters’ studies are an initial level of scientific work as post- grading course and means a different approach. After grading as a master students in western universities go for PhD. In some universities there is a system of art and scientific master programmes – Master of Science in technique and maths and Master of Arts in Arts. There is still no united system of education not only for the whole Europe, but very often for one country. It makes working on exchanging programmes more difficult as each time HSE administration needs to sort out the way of teaching in a particular university and its way of training masters. In Russia masters’ is a final stage of basic secondary education that is necessary for later employment. Bacillary in Russia is just sort of unfinished secondary education, and for most of employers is not a sufficient level of qualification. Differences in approach lead to differences in educational programmes. In Russia masters start getting practice and skills while in many European universities they can be offered scientific education. Not every university fits demands of Russian students. Some universities ask for students with deeper knowledge than schools may send. That’s why there have already been some cases when before going to Humboldt University students of HSE Management school had to attend extra classes with the school of Economics to get more information about economics they were not taught on their own level. Moreover, after these classes they had to pass additional exams to check the level of newly taken subjects. Some European and American universities have “a year abroad” as an obligatory part of their plan. Students of these universities need to study a year in other countries. Exchange of these students is impossible for HSE as HSE doesn’t send students abroad for such a long period of time. An average student exchange occupies a semester – half the time of a full-year educational programme. In addition, students from these universities do everything concerning their education themselves. They send their applications to different universities, examine answers, choose the best place for education. There it comes at mass. Exchanging programmes of HSE are based on a very small 95 Seventh International HSE Summer School «Baltic Practice» ·2007 group of universities that have special contracts with it. Relations that work for already dozens of years in Europe cannot be as wide and effective when created for only 15 years of HSE existing. Now HSE doesn’t have enough exchanging contracts even with universities of Europe, USA, not mentioning Asia and South America. Fast growing of number of these contracts meets the resistance of administration and system which is too slow, and difficulties in making contact. Sides that sign exchanging contracts take material and professional responsibility of three to ten students a year and have to teach them a basic minimum of subjects, and offer extra disciplines. Administration of western universities already have this experience, while for HSE it is still something new. The HSE administration makes new contracts reluctantly. What is also to be mentioned, main flows of students on exchanging programmes bound for western countries – USA and inside the Euro zone. Inequality of educational flows to Russia and from Russia doesn’t let Russian universities organize exchanging programmes well. Now the situation is changing slowly. About a year ago HSE administration decided to change the system of rating subjects so that it fit European standards better. The beginning pulled to surface many serious problems. By this summer it includes three key aspects – credit points, individual educational plans and diplomas. This project is not ready yet, so there can be no references to its structure of contents. Here only a few words can be said of every of this three points. As for credit system, there HSE is fitting its existing credit rating to that of Europe. If it all comes to the European structure, HSE will correct some of permanent rating gaps, but possibly lose its own way of rewarding studies in typically Russian subjects that do not have close analogues in Europe or are valued much lower there. On the contrary, it may get some subjects valued too high for Russia. So the new way of rating credit points must be checked very carefully. Individual educational plans must be revised and though over as soon as possible. With now masters exchanging programme becoming popular and available more and more students get a chance to enter it. Some five years ago there were about four or five students to be sent abroad. Now Management school sends up to ten every year, and this number will increase. Now it is becoming easier not to work with every student in an individual way, but create some kind of a group with one educational plan for 96 Seventh International HSE Summer School «Baltic Practice» ·2007 ten students. It would save time and make work with students more effective. The system of two diplomas first needs to include those subjects that are now not included because of HSE programme. It is clear that a university with its profile in economics cannot give a diploma in medicine, but these extra subjects must be mentioned anyway, either without a grade, or with a note of low qualification. What would students themselves like to add to the existing system of student exchanges – possibly there are not so many points. First of all it would be as many subjects included in russian diploma and passed for HSE internal exams as possible. It happens in some exchanging programmes that on returning from other countries students had to pass their entire programme once again, and only one of five subjects they studied abroad was passed for their diploma without an extra exam. The second point is the period of time abroad – some students go to other universities on their fourth year of studies, and when returning to HSE have to pass missed subjects and State exams. Exchanges of the fourth year are extremely difficult. On the other hand, not so many students are willing to go studying abroad on their second year of masters’ as many of them work at that time and do not want to lose their jobs. So the best time would be first year of masters’, when students have time to go to other countries. Possibly, it is also better for students to participate in the process of making contracts, so that they would choose the universities they are most interested in and share the problems of administration. There is always scientific approach to every situation apart from personal. The effectiveness of processes in every organization is the way people in this organization use their skills and knowledge. This is the basic rule of every HR-based company. If a system doesn’t work in a best way, it means that people are not motivated or skilful enough. It seems like HSE has made a common mistake here – some organizations prefer to check the effectiveness by screening workforce leakages and the level of workers’ satisfaction on their place. If these facts are taken for granted and have no connection with motivation and personality the organization will not succeed. Many aspects of success in organization depend on approach. Even if HR manager know the situation perfectly, the feedback is good and the targets are clear, a simple unwilling for the work can destroy everything. In the case of non-commercial institution this causes the problem of bureaucracy. Workers in bureaucratic systems like educational 97 Seventh International HSE Summer School «Baltic Practice» ·2007 organizations have no strong motivation, they are not funded better if they work better, they do not get extra benefits, so they have are hardly willing for work. If these bureaucratic organizations are taken, there are some ways of intensifying process: 1. systematical revisions of systems of governance and checking if they are appropriate for targets 2. adaptation of short-run strategies of dealing with workers to targets 3. giving HR department clear information of what purposes the organization needs to achieve 4. involving top-management in dealing with workers. Organizations depend on external changes. HSE cannot continue working in the same way as five years ago as the situation has changed. In commercial organizations it is a question of loosing or keeping its market. HSE cannot be called an absolutely commercial institution, and the market of high-quality educational services is highly monopolized. That’s why it doesn’t need immediate changes to follow the situation. The case of studies abroad is the best illustration. For already ten years HSE extremely needs institutional changes to make international student exchanges easier. First, at the very beginning, it didn’t have enough contracts, enough experience – enough abilities for programmes of exchange. But now with the situation changed for better HSE has the ability to improve its ways of working, yet nothing happens. Situations when good environment doesn’t change organizations for better may be caused by internal conflicts. Different interests inside one company lead workers and administration in different directions – this case can be noticed in HSE. Staff of each school try to get extra benefits either for themselves or for their schools, that is often connected, so there is no effective co-operation between schools. When no one wants to share rights and power, the system works much slower. Moreover, in some particular cases administrations of schools stop existing projects just because they do not want to use opportunities for outsourcing, try to create their own institutions for the same services, and do not succeed. Meanwhile relations stop working and the service expires. It is a problem for the head administration to stop this fight of interests on the level of faculty. Theory of strategy shows different solutions to these situations of internal conflict of interests. It is a good means for such situation to create an “it is impossible to continue working this way any longer” 98 Seventh International HSE Summer School «Baltic Practice» ·2007 atmosphere. This causes a local artificial crisis that ensures everyone that either they work for common interests or the whole organization collapse. This may work well in the case of half- bureaucratical organizations like HSE – there people from average workers to the very top depend on stability of university, they will not risk working in a way that may damage this stability. It is also advisable for the head administration to May everybody understands that they may give up some current benefits to get extra abilities in the future. It is a kind of investment strategy in governance. In long terms it may come helpful if people have their relations kept in a friendly way – there must be more informal communication that helps to avoid competition in working. Initial steps have already been made – HSE has a “Professors’ club” where the staff can meet after classes. Informal style of working is very helpful as it leaves less space for competition. Long-term strategy also includes upbringing workers so that they will enjoy their work and willingly keep contacts with each other. Now in HSE only faculty seem to be willing, administration communicates very reluctantly. Some books advice to train staff in a special way, play role games, etc. This is more suitable for small companies that do not have to take out a thousand workers each time. Still HSE has succeeded to create something similar for willing people from staff. This year on May, 9th, administration of different schools together with students had a so-called “Day of health and fitness” in Moscow suburbs. And there were enough workers to participate. Possibly, it would be good to create a description of “an ideal worker” so that everyone will try to fit the criteria, but practice shows that it is not common to follow the ideals among the bureaucracy. If the case of international student exchanges is taken, it is good that the head administration has created an independent department that deals with all students no matter what school they belong to. It helps to co-operate with foreign universities in a centralized way and keeps schools from working separately. Apart from this step, HSE head administration doesn’t do its best for international exchanges. The reason is high monopolization of HSE teaching segment. As it has already been said, there are not many universities of same quality, in fact, lees than 10, and the market of services is not competitive. Were it a western university, the head administration would do everything to keep its organization up-to-date and most suitable for students’ needs, as they would know that otherwise they can lose consumers’ liking 99 Seventh International HSE Summer School «Baltic Practice» ·2007 and, as a result, profits. In Russia universities do not need to work out something new to stay at the top. There is no motivation for institutional changes. But the problem of modernization of educational institutions is a higher level than this work deals with. Theories of managing problems that work on a local lever are a bit different. Here the most popular of them are examined.

1) Theory of Maslow. This is a theory of basic needs. If a concrete problem of student exchanges is taken, the theory advises to stimulate workers with material values – give them extra money if they have sent abroad more students, and with the money they earn they will buy more goods. This is motivation of prosperity. 2) ERG-theory of Alderfer. According to this theory, HSE head administration should employ new staff that will be eager for every little success just to get a pay rise or any other benefit. So young people cope with their work better and need less benefit for every piece of work. 3) Theory of Herzberg. If this theory is taken, the stimulation of workers is a little pay rise and some official means like certificate of good conduct. This theory includes compilation of two factors – the material and the personality. 4) Theory of McClelland. This theory works with internal advantages and disadvantages. It advises to check the psychology of workers and decide whether they are suitable for the work they do or not. All later steps should be based on a deep study of a worker’s personality – either to promise a promotion, or a pay rise, or something else. 5) Theory of Adams. This theory is about fairness. It states that every worker has his or her sense of fairness. So the organization must transform it into “the more you work – the more you get”. It is obligatory to give more benefits to people who work better. They will feel that their work is valued in a proper way and be willing for work. 100 Seventh International HSE Summer School «Baltic Practice» ·2007

6) Theory of Loc. This theory advises to set options that are hard but possible to complete. This will help to learn what is the worker’s best. If the school administration is given an order to send abroad ten students, but manages to send only six, it is anyway better if they used to send only five before. Under the threat of failing a new option, the workers are likely to forget what they used to do before and show a higher level of work. 7) Theory of Skinner. This theory is about dealing with one’s external motivation. Every worker of HSE administration in this case should be watched by his or her chief, rewarded if successful and punished if not. The motivation here lies not only in willing for a reward, but also in unwilling for punishment. No one in HSE would like to lose their extra payment at the end of the season just because they had not sent abroad enough students. 8) Theory of Wrum. The theory is based on expectations. HSE heads should learn how to promise in a right way – not to make false promises about pay rise or promotion, and make sure everybody knows that they achieve what they expect if they do their best. If one has been promised a bonus for two extra students to study abroad and then deceived, they will hardly do good work later. On the contrary, if expectations come real, it is a good motivation to do more. 9) Theory of Porter-Lawler. This theory is fully for science. In hardly can be used for managing organizations, so it will not help to solve particular problems of HSE. These nine theories are to help head administration in their fight against staff’s unwilling for changes and work. In some aspects they contradict each other, in some aspects they repeat. It is difficult to decide which theory is the best, but, obviously, some of them are more suitable in the case of bureaucracy than other ones. It is difficult to employ extra workers again and again without dismissing old ones, so Alderfer’s theory will not work in HSE. Theory of McClelland will also hardly suit as usually educational

101 Seventh International HSE Summer School «Baltic Practice» ·2007 institutions simply do not have enough time and money to deal with every worker in an individual way. Theory of Porter-Lawler is not taken here as a basic for management due to its scientific specification. Wrum’s theory will do good only if a promised reward is good enough. As it has been noticed, sometimes bureaucracy give up their bonus just because they think that it is not worth working. It is still a question whether HSE can promise its staff something they will be eager to get. Theory of fairness by Adams is also good, as bureaucracy have this sense of fair reward, but it still has problems. Every little step like rewarding “for future”, not for a completed work but beforehand, will not only stimulate a rewarded worker, but cause tension in the whole department. Skinner’s theory is effective, but hard to make real. It is known that when it comes to bureaucracy, everybody seeks everybody, and knows perfectly well whether one works well or not. But the heads usually have too much business of their own to watch how other people cope with their work. So in HSE in is unlikely to be effective. Theory of Loc seems to be one of the most suitable ones, as its effectiveness has a specification in bureaucracy structures, but the atmosphere of a constant crisis “either you do more and more or you are punished” is simply bad for health, speaking not of other aspects like mood and creative abilities. In some situations theory of Herzberg works in the most effective way – little material stimulation and a lot of honour with every new certificate really worked in Soviet times and still work if young people are taken, but now the situation has changed and people prefer to get money instead of medals and papers. So the best theory seems to be that of Maslow, but again it does not fully fit the criteria as it leaves little space for personality, considering a worker to live just for basic needs. It looks like no theory will work separately from other ones, so the best result will come if theories of Maslow and Herzberg are compilated. All theories are based on five main approaches to personality. These approaches are of psychology and biology and are not useful for management, but if serious theoretical aspects are taken they are very important as they create the base.

1) Psychodinamical approach. This approach deals with internal, instinctive origin on of behaviour. The aspects of one’s motivation in this

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case are taken as hidden factors that are hard to understand. 2) Behaviourist approach This approach states that one’s behaviour is created and controlled by the environment. It works with external factors that influence on personality and considers education, rewarding and punishment important. 3) Human approach. The approach is about one’s own personality, personal point of view, ideals, experience. It takes one’s actions as a result of clear personal objects and works with the fact of self-motivation. 4) Bio psychological approach. The idea of this approach is biological origin of every person. It explains one’s behaviour using knowledge about their brain, system of nerves and endocrine system. In takes physiology as a base for personality. 5) Cognitive approach. This approach works with the process of mental processing of information. It studies memory, process of understanding and keeping information, taking decisions. The nature of person is in this case close to the origin of computer. This classification of approaches helps to understand how the mind of HSE administration works when taking decisions. Here behaviourist approach seems to suit the situation better – it is no secret that even brilliant workers coming to bureaucracy organizations cannot continue working in their own way. Creativeness stops at the very beginning. In some cases talented workers leave for other jobs, in some cases they stay and soon become incapable of working in a creative way. The system uses behaviourist aspect of a worker’s mind to make him or her fit the bureaucracy environment. The opposite point of view is shown by the human approach. It takes every worker as a personality, possibly ordinary, but with own purposes and own motivation. But still this doesn’t mean good for HSE. Motivation can be not only for common good, but also for one’s own good. And this seems to be one of the worst problems – the good for students and the good for staff are not the same thing.

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Turning to practice again, it would be good to think about HSE’s place among other Russian universities and to see if the problems shown ahead are the same to all educational institutions or not. It seems that nearly every university that tries to run international student exchanges as part of Bologna process faces the problem of unwillingness of administration and lack of information available for students. It has become possible to compare three universities that have had some success in recent years. All of them are situated in European part of Russia which makes it easy to unify them geographically. The first one to be taken is RUDN, a flagship educational institution that has been dealing with some aspects of Bologna system since 1989. According to its head A. Efremov, main point to be done in general is making information more available for students willing to go abroad. This includes creating chat-rooms and special databases both for students and teachers. But this may become rather useless if administration won’t get involved in helping students. Trying to solve this problem, RUDN has created its own way – it provides special exchange programmes for members of university administration. After spending a month or two abroad, seeing Bologna process working successfully, staff is supposed to take changes in their own university easier. Moreover, after these theoretical studies administration workers get to co- operating better as they make personal acquaintance with each other and know how to deal on the level of departments. However, RUDN administration now is one of the most progressive when taking exchange novelties, speaking not of ECTS programmes or bacillary and master studies. It is also remarkable that students there are allowed to search for a university to study in rather than to wait until they are proposed an existing programme based on existing contracts. A very special thing that has not yet took place in RUDN is summer practices abroad – very similar to successful project of HSE summer schools that are well established and work for already several years. Here HSE has much more experience in how international university co-ordination may be started during common practice, like it has been on “Baltic practice”. So experience of RUDN in achieving local objectives seems nearly ideal. Though even this university has some problems similar to those of HSE that it doesn’t seem willing to overcome. The case of passing grades is exactly the same in both universities – no grades are passed if they are not fitting the course programme. So RUDN 104 Seventh International HSE Summer School «Baltic Practice» ·2007 administration would also cancel passing grades for a manager if he studied abroad history of arts. Definitely, RUDN shows ways of solving some problems, but at the same time itself faces points identical to those of HSE. The second one is MUBiNT, a university situated in Yaroslavl, which chose not to cope with its own administration but to work with a higher level. It is the first university to sign a resolution and send it to a vice-governor of Yaroslavl region. The document outlines main points of university’s policy in education, such as to dedicate more time to creating a complex web-site that would include advertising pages, databases and thematical chats. MUBiNT is also regarding to host a conference and a case study seminar for top administration of other universities involved in Bologna process, chaired by A. Efremov, head of RUDN. The main purpose of this conference will be to expand with the process and find solutions to main existing problems, including student exchanges. Unlike most universities that try to solve problems inside, MUBiNT seems to raise the level and make administration of the region issue orders to control the Bologna process in Yaroslavl. This approach is completely different to the one used in HSE though in some cases it may be considered very useful. The last of three universities to be taken is the Pomor University, situated in Archangelsk. The Bologna process in this university is not that well established as in HSE or RUDN, but steps taken by its administration seem even deeper than those taken in HSE. During 2006 the university has succeeded to launch student exchange programmes with universities of Trondheim, Norway, Helsinki, Finland, and Petrozavodsk University of Genoa studies, Russia. Now the Pomor University is working at up to 50 programmes with budgets of 1000-700000€, passing up to 1500 students a year either by sending them abroad or by inviting foreign lecturers to teach. One of the most important programmes is “Oil and gas production management” of 60 ECTS credits and one-year studies in Norway. The university is also expecting to start a professional programme for administration of region based on Oulu University studies of ecological management. Education will include four modules for final 60 ECTS credits, leading in a few years to opening a masters’ programme in ecological management. If daily problems of exchanges are taken, the university has already created a plan of professional skills improvement of 72 hours of seminars and more than 100 hours of 105 Seventh International HSE Summer School «Baltic Practice» ·2007 deeper studies. For those members of administration who would like to receive a special qualification there are special training courses of about 1000 hours. This university has chosen an academic approach to customize its staff to novelties though it seems to less effective, as the university is trying its first steps in Bologna process. Possibly, it would be good to start a similar course for HSE administration, as it will be not obligatory and its main purpose is not to teach but to cause interest and share experience. As the article shows, there may be plenty of problems in establishing Bologna process in HSE; their roots go deep in psychology, habits, monetary aspects. But there can be solutions that are easy to find if HSE gains experience from other educational institutions all over Russia and Europe. Some problems of HSE in Bologna process are very special and need different approach, yet many more of them are quite common, and the real thing that must be done is to catch up with most recent changes that had appeared during the last four or five years and start solving them immediately – mainly to increasing students’ opportunities in exchanges and prepare staff. This will help HSE restore its position of leadership between modern and successful universities. Special thanks to Mrs. Elena Golubinskaya, chief of HSE department of international exchanges and Mr. Sergey Gerasimov, HSE grade, members of 7th International youth summer school “Baltic practice – 2007” inc. Prof. Nina Belyaeva and Prof. Carsten Herrmann-Pillath.

Literature list 1. Materials of on-line library XServer – theory of management. 2. www.socioego.ru research center of social and managerial studies. 3. www.rudn.ru/?pagec=255 RUDN academic mobileness review. 4. Resolution to vice-governor of Yaroslavl region. Approved 01.12.2006. 5. Perspective of business-education in context of Bologna process. N. Sinitskaya. PGU. 6. Local interviews with members of HSE administration, grades and students. 106 Seventh International HSE Summer School «Baltic Practice» ·2007

Constantin Buschmann Studying Abroad: Challenges and Solutions.

Introduction Globalization has shaped the last two decades more than many other developments. Whether you look at economics or political issues, linguistic changes, cultural customs, or even only the little changes at your workplace: the world has become a smaller place and it is noticeable in most parts of our everyday-life. Also in the scientific community, where international connections and projects are nothing extraordinary since the exchange of knowledge has always been more internationalized than many other disciplines, the impacts of globalization are clearly feasible. As new means of communication simplify the exchange of knowledge and travelling becomes easier, new challenges arise for educational and scientific markets. The educational systems of different countries have to open up and focus on defining their position on the new global marketplace in order to keep up with the global competition. In the European Union efforts to internationalize and consolidate higher education are currently resulting in substantial changes in the educational systems which are considered to be necessary in order to prepare the scientific community for these new challenges in the 21st century and create an attractive educational market that does not have to stand back behind overseas-com- petitors. Ultimately a well set-up educational system within the EU is not only bound to educate students as global citizens but also to generate economic growth and political stability through more integration and exchange. In the last few years especially the strategies and aims EU-countries have implemented in the course of the Bologna-Process, boost structural changes by enhancing student- and staff- mobility and by providing a framework for the harmonization of institutional activities. And although many students are still not aware of the Bologna Process it is the institutional 107 Seventh International HSE Summer School «Baltic Practice» ·2007 expression of a significant development that has an impact on everyone currently enrolled in a university or college within the EU. Study abroad- or exchange programs – being one of the most important instruments of educational exchange - continue to become more and more fashionable and by now they are even mandatory requirements at many different schools and can boost many careers. The increasing willingness of German students to study at a university in a foreign country is an underlining example for this development: according to the database of the German Federal Statistical Office (Statistisches Bundesamt) 69.000 German students were enrolled at universities outside of the country in 2004.1 While in 1995 the ratio of local and international students was 1000 to 24, it almost doubled until 2005 when it was 1000 to 44.2 According to a study undertaken in 2005 by the DSW3 (Deutsches Studentenwerk) 2.3% of German students were studying abroad at the time and 13% of all German students said to have spent a part of their studies in a foreign country with the help of governmental or private programs. 22% of those students who were abroad were given federal financial support. Erasmus for example, which is a part of the Lifelong Learning Program initiated by the EU, enables students to study abroad by supporting them financially and socially. In 2002 about 18.500 German students were studying in a European country with the help of Erasmus.4 Looking at all these developments many students become interested in applying for their own academic experience abroad, but many of them realize as soon as they start to put their plan into action that finding a suitable program requires thorough homework since choosing between the seemingly endless possibilities seems almost impossible and one can easily end up being frustrated and overwhelmed by what seems to be a totally over-complex problem. An endless number of study- abroad programs, exchange-agencies, and student initiatives make it difficult to find out about the required organizational framework, academic prerequisites, or support-schemes. In the end going abroad might have become

1. (Studien- & Berufswahl - Internationales Studium) 2. (Mehr deutsche Studierende im Ausland, 2007) 3. (Internationalisierung des Studiums) 4. (BMBF - Internationalisierung des Studiums)

108 Seventh International HSE Summer School «Baltic Practice» ·2007 more popular, but has it also become easier? The reports of many returning students affirm that the experience is worth the effort. However every student enthusiastically planning his stay abroad has to be aware that he will have to cope with criticism that is not always easy to avert since some of the doubts are just. Despite all positive structural changes in the educational systems, the decisions necessary when preparing for abroad-study-program have not gotten any less significant since it affects a significant part of one’s life. But why would anyone want to study abroad at all? Why should anyone leave their home, university, friends, and everything else behind only to experience what it is like to cope with life in an unknown environment when everything at home is just fine? And finally: Why not stay at home and spend all that money on something else? Fortunately there are more than enough counter-arguments to these statements strongly supporting a departure on an academic experience abroad. A lot of returning students, who can probably judge the best if it is worth it, will say they experienced a time which matured them intellectually and personally. They will stress the point that they had to cope with new ways of thinking, talk about many problems they had to solve by themselves without help from their parents or another part of their social background, and explain what it feels like to be a foreigner in an unknown, far-away place or even what it is like to deal with symptoms of culture shock. Being detached from the normal environment is one of the main reasons why studying abroad is the perfect chance to broaden one’s horizons. Suddenly all social routines, former experiences and maybe even the social status and the success at home become irrelevant and one has the chance to start from scratch and maybe see the world from a totally different angle. Thus it becomes possible to experience other cultures, world affairs, globalization and its effects on economy, politics, and many other things from a different point of view. Also, as more and more firms engage in international activities and expand into other industrial- and also development countries, employers more than ever welcome graduates who have to offer more than the average life-experience, have substantial skills in a second language and know how to find their way in an internationalized world which shows that studying abroad might be a chance to enhance one’s career opportunities. Students who have successfully completed a study-abroad program more likely have the skills it takes to work in an internationalized world: they have 109 Seventh International HSE Summer School «Baltic Practice» ·2007 experienced the importance and difficulties of cross-cultural communication, sharpened their analytical skills, and maybe gained an understanding of a different culture where even everyday-problems might be approached differently. Additionally a good part of the students who have spend some time in another country will later say that it was absolutely worth wile, and that they returned home with increased self-confidence and pride. Some of them will even call it a life-transforming experience and say that their view of the world has changed.5

Alternatives and Preparations There are many different approaches to studying in another country. One of the most decisive factors and thus a good starting point for planning is the desired length of the stay. Is the aim to enroll in a foreign university program and maybe even finish with a foreign degree? Or is it spending just one semester abroad? Should it be a summer session of four to eight weeks, an au pair- program or maybe even a combination of an abroad semester and an internship? The only way to find an answer is to develop a clear set of goals that – once pursued – will eventually lead to the right study-abroad program or the right foreign university. However one fact most guides on exchange- or study abroad programs proclaim on the first page must not be forgotten. “Any academically motivated stay in a foreign country should be planned well-ahead.” They are certainly right: going abroad for one semester, one year, or even graduating in a foreign country requires thorough preparation, which should ideally begin more than one year before departure. On the contrary it is important to mention that every student should have enough experience in his major subject to be able to judge the different opportunities. Someone who is in his third year within a Bachelor-program has most-likely developed sufficient knowledge to succeed in a foreign country while someone departing on the same program during his first year of higher education might face serious difficulties because he never had the chance to develop enough personal and academic skills to cope with the challenges that are thrown at him abroad. “The earlier, the better” consequently might not be the right approach to deciding on the time of departure and the necessary preparation

5. (It's Your World: Student's Guide to Education Abroad)

110 Seventh International HSE Summer School «Baltic Practice» ·2007 because students cannot know what to prepare for as long as they have yet to get a hold of the desired subject’s academic scope. On the contrary especially when a language or a subject tightly linked to a country’s culture is studied it can be especially helpful to spend the first semesters abroad in order to get a maybe more difficult but very intense linguistic and cultural introduction.6 Besides this, departing early or maybe even before enrolling at a home-university might be an option to bridge a few queue- semesters, although it should be ensured that the academic achievements are transferrable to the student’s home-university. In every case, especially regarding the applications for financial aid and scholarships like the ones granted by the DAAD (German Academic Exchange Service) thorough preparation is essential to the success of the program and information should be collected as early as possible When starting the research a good first idea is to look through the home university’s list of co-operations and partner- institutions in order to see if the desired country or city is among the ones on that list. The reason for the attractiveness of home university-programs is often their simplicity. “Cross the box and you’re in”: once two or more universities have set up solid partnerships the biggest chunk of the work a student would have to do in order to establish a connection is being taken care of by university officials who know the rules, the people, and the game. They know the other universities’ international offices, the application schemes, the housing possibilities and mostly even the cost of and abroad semester and the ways to finance it. Furthermore there might be existing programs where substantial financial help is granted in the form of tuition money, free supply of books or mobility grants. In short: if there is a well-organized international office at the home-university a student will most likely find good possibilities there. To clarify the most important issues the topics discussed during a first meeting in the international office should include: • which universities offer which courses with which focus, • which programs can be participated in (for example: Erasmus)

6. (Studien- und Berufswahl - Internationales Studium)

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• which language-skills are required and how they have to be proved, • which academic prerequisites there are for the application, • if tuition fees have to be paid and if there are any ways to receive funding • who exactly is eligible for financial support, • if the courses completed abroad are transferrable to the home-university, • which type of insurance cover the plans to go abroad, • which deadlines have to be obeyed. Generally working with the international office has many advantages but except for very elite schools that are very well- connected most university-programs have one disadvantage: the number of partnerships is always limited and also the number of spots available each year is not endless. Mostly the best spots are given to those students who are adequately qualified and “deserve” the best free seats because of their academic achievements. For this reason the decision to enroll in a specific university already influences the possibilities of going abroad and one aspect for or against one specific school should therefore be its choice of exchange and study-abroad programs. Now the fact that in many cases academic achievements can make going abroad a lot easier, does not mean students who do not have well-organized international connections or the grades of a Nobel-Prize-nominee should not even try applying. In most countries there are study-abroad programs all students can apply for that are either federally- or privately funded. Since they are a good example for governmental support I will explain the grants German students can apply for. The German BMBF (Federal Ministry for Education and Research) supports students studying abroad with grants called “Auslandsbafög”. “Bafög” - the most common form of governmental support for students enrolled at Germany universities – is a widespread means of federal support, but many do not know that students studying in other countries are also supported. In 2005 twenty thousand students received Auslandsbafög7 but few studied outside of EU-countries. In that respect it is interesting to know for many students who do not qua-

7. (Spiegel-Online: Dank Auslandsbafög nach Hawaii, 2007)

112 Seventh International HSE Summer School «Baltic Practice» ·2007 lify for Auslandsbafög when heading to an EU destination, that they might nonetheless be eligible for outside-EU support. This is due to the higher cost of living in some non-European countries which the BMBF regards as a reason to grant more financial support. In countries like Japan, where the cost of living is considerably higher than in Germany, students can receive up to € 315 per month8. Since 2007 the given financial support is being split into two parts: one half of it is allowance that does not have to be paid back, the other half is an interest-free loan. To qualify for Aus- landsbafög a student has to be a German resident having lived in the country for a minimum of three years before the enrollment. Furthermore the period a student stays abroad has to be longer than 6 months or one semester within a university-cooperation. Financi- al support can then be granted for one year or up to € 4600. The exact amount of aid again depends on whether the student studies in an EU or a non-EU country.8 Regardless of the destination applications should be handed in at least six months before departure. Now federal initiatives and regulations are by far not the only source of support that can help students to go abroad. Many other private organizations and private or public charitable trusts and foundations or even alumni- or student associations of all shapes and sizes like the Konrad-Adenauer-Stiftung9, the Interna- tional Education Centre (IEC)10, the Carl-Duisberg Gesellschaft, or the Dr. Jost-Henkel Foundation choose a number of students they support every year. Online numerous databases can be find which provide up-to-date lists of Foundations and Trusts. German students should have a look at the list provided by the “Stiftungs- index” or the “Stifterverband für die Deutsche Wirtschaft e.V.”11 when starting their research concerning available scholarships.12 Normally applicants have to pass tests, write essays, or attend meetings or assessment centers in order to qualify for financial aid from the various institutions that look for students who fit into their political, religious, or economic background, have special academic skills or are extraordinarily talented. These private

8. (Home / Auslandsbafög / Studium innerhalb der EU) 9. (Konrad-Adenauer Stiftung - Hauptabteilung Begabtenförderung und Kultur) 10. (International Education Centre) 11. (Stiftungsdatenbank des Stifterverbandes für die Deutsche Wirtschaft) 12. (IEC - Finanzielle Information)

113 Seventh International HSE Summer School «Baltic Practice» ·2007 scholarships are mostly not easy to get but once a student has proved that he has the necessary qualifications the amount of money given can be considerably higher than the amounts granted by federal sources. However it is most important to know that study-abroad programs are also available directly from the EU: the former educational programs “Leonardo da Vinci” and “Sokrates” ended in 2006 and are now part of a new initiative called “Lifelong– Learning-Programme”13 which also includes the “Erasmus”- program14 which I will explain in detail since it is one of the most important if not the most important program existing in Europe today. “Erasmus” is the EU’s flagship-program for education and training, designed to improve the co-operation in education across European borders with special regard to Higher Education.15 It aims to enhance the mobility of students and staff by allowing them to easily move between institutions of Higher Education. Erasmus as well the Lifelong-Learning-Programme are instruments developed in the course of the Bologna Process that contribute to the establishment of one integrated European Higher Education Area (EHEA). Until today over 1.5 million students have gone abroad with the help of Erasmus and the goal is to reach 3 million by 2013.16 In many universities there are Local Erasmus-initiatives (LEIs) consisting primarily of local students who have recently returned from an Erasmus-exchange and of actual exchange- students who currently study at the host university.17 They offer personal and cultural support and also help the international offices with the reception of new Erasmus-scholars, so-called “Incomings”, or assist students who want to participate in solving bureaucratic issues and preparing themselves for the time abroad. Furthermore they arrange activities like excursions, parties, or

13. (Bundesinstitut für Berufsbildung) 14. (Studien- und Berufswahl.de - Förderung) 15. (Das Sokrates/Erasmus Programm) 16. ( The Erasmus Programme) 17. (Local Erasmus Initiatives)

114 Seventh International HSE Summer School «Baltic Practice» ·2007 sports-events, until today there are about 70 LEIs established at German universities.18 In every country participating in the Lifelong-Learning- Programme, there are different national agents responsible for supporting local initiatives not only financially but in all aspects concerning the program.19 In Germany this national Erasmus-agent is the DAAD – the German Academic Exchange Service (Deutscher Akademischer Austauschdienst)20. It is one of the world's largest and most respected intermediary organizations in its field and an endless number of students, teachers, researchers and scientists supported by the DAAD have been able to gain valuable experience abroad. The DAAD’s portfolio of activities includes advising universities who want to start participating in Erasmus, granting financial aid to students and academic staff-members, helping institutions solve individual problems, auditing and monitoring all Erasmus-activities and also working out new regulations and proposals in regard to prevailing EU-regulations. Since 2003 all institutions of higher education can apply for funding from the DAAD and also LEIs are directly supported21 The EU’s and the DAAD’s aim is to enable students to experience life in other European countries and to enrich their study-experience by getting to know the host-country’s language, its educational system, and the local cultural customs. Returning students are likely to become communicators and supporters of the DAAD and the Erasmus-program and thus they help to achieve the goals of the Bologna-process. Probably the biggest advantage for a student is the financial aid: all students on the Erasmus-scheme do not have to pay tuition- fees at the host-university. Additionally they get mobility-grants of up to € 200 per month and in special individual cases even more, for example in the case of a disabled who is in need of special support. The amount of mobility-grants given to participating institutions is derived from their past performance i.e. for example the amount of German students sent abroad on the Erasmus-

18. (Lokale studentische ERASMUS-Initiativen (LEI)) 19. (Lifelong Learning Programme - List of National Agencies) 20. (Aufgaben des DAAD als nationale Erasmus-Agentur) 21. (Europäische Zusammenarbeit von Hochschulen)

115 Seventh International HSE Summer School «Baltic Practice» ·2007 program during the last academic year. 22 Besides financial aspects, another important point is of course the recognition of the academic achievements at the home-university that can be simplified through Erasmus since regarding the transfer of grades and transcripts the institutions can rely on the national agencies like the DAAD who ensure the quality of the educational-modules the students take part in. Finally to enhance not only the students’ academic, but also their social and cultural experience support and counseling throughout the preparation-period are also part of the Erasmus-program. Students are supported for example in regard to their housing-options, the composition of schedules, cultural events at the host university, and their language skills. Every student who has finished one academic year can study abroad on the Erasmus-program and eventually even combine his participation with an internship. Students can apply for support to spend three to twelve months in one of the EU countries as well as in Iceland, Norway, Bulgaria, Romania, or Turkey. The only limitation is that every student is eligible for financial aid only once during his studies until the conferral of a doctorate.23 It is important to know that your home-university is responsible for choosing the students eligible for financial aid.9 Therefore to take part in the Erasmus-program you have to be regularly matriculated at a participating university. Also you have to be an EU- citizen with an unlimited permit of residence in your home country. Finally in order to allow a positive cultural and social experience, adequate knowledge of the language spoken in the desired host- country is required. Regardless of the program a student takes part in the ability to speak the language of the host-country should not be underestimated. Depending on the destination it is more or less important to have substantial language skills before arrival. Especially in countries where English is spoken, standardized tests are mandatory for an application to most programs. Here the TOEFL (Test of English as a foreign language)24 and IELTS (International English Language Testing System)25 are the

22. ( Mobilität von Studierenden und Hochschuldozenten) 23. (Mobilität durch Erasmus/Sokrates) 24. (The TOEFL® Test Details: Learners and Test Takers) 25. (IELTS - International English Language Testing System)

116 Seventh International HSE Summer School «Baltic Practice» ·2007 common required tests. For students applying to French universities DALF (Diplôme approfondi de langue française)26 is very helpful because it acknowledges the existence of sufficient language-skills and releases students from taking a language test during the application process. In general it has to be pointed out that the ability to communicate in the host country’s language is essential. The quality of the academic and social adaptability might suffer severely in the case of an insufficient linguistic foundation and consequently the whole experience might be very negatively affected even to a degree where culture shock effects might be triggered.

The Big Picture - How European Countries cooperate to support the Bologna Process As mentioned above the internationalization of the European Higher Education is mainly driven by the Bologna Process. In the following second part of this paper I want to provide an insight into the Bologna Process that is supposed to be an introduction to “the bigger picture” of educational structures in Europe by explaining the development and some of the instruments used to reach the goals the participating countries have agreed on in the course of various conferences in recent years. One of the main goals of the Bologna Process is to create an integrative European system of Higher Education spanning over all participating countries27 in order to enable institutions of higher education to make better use of the European knowledge-pool and reduce the barriers of student-mobility so that students can choose from a wide and transparent range of high quality courses and benefit from smooth recognition procedures.28 A core element of the Process is the creation of a tiered system of higher education with the Bachelor as first, master as second, and PhD as the highest available academic degree.

The development of the Bologna Process The development of a unified European approach to Education began in April 1997 in the course of a Convention in

26. (DELF / DALF Prüfung- Institut Francais) 27. (Bologna Allgemein) 28. (THE BOLOGNA PROCESS - Towards the European Higher Education Area)

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Lisbon, when the Council of Europe signed an agreement together with UNESCO about the recognition of international qualifications within European Higher Education. Only one year later, in Mai 1998, the initiative continued to gain momentum when the four federal ministers of education from Germany, France, Italy, and the United Kingdom signed what become known as the Sorbonne Dec- laration during a ceremony in Paris in which they expressed their will to reduce barriers of higher education between their countries. Following these first steps by the four main European Nations, 29 other countries joined in a more complex and unifying contract in June 1999, which included the goal to create an integrative system of higher education within the European Union until 2010. This declaration became known as the “Bologna Declaration” and gave the Bologna Process its name. By September 2003 the number of participating nations had grown to 40 and the framework of the actions taken by the initiative was further enlarged during a conference in Berlin where it was also concluded that the definition of compatible degrees in higher education including the education of doctoral candidates was essential and that the integration of such system had to be a part of the Bologna Process. It was declared that "Mobility of students and academic and administrative staff is the basis for establishing a European Higher Education Area.“29 A first summary of results was delivered by the report “Stocktaking London 2007” which gave a first overview over the development of the different participating nations. It describes an apace development but also the discovery of growing concerns especially concerning the recognition of academic achievements30 Bologna-Experts in each country – mostly well known high-ranked academic staff members of universities themselves – work on solving the many individual problems each country has during the implementation of the various steps of the Bologna Process. They support their own university as well as other institutions with their expertise and help them to introduce different instruments that are part of the EU commission’s toolbox, used to reach the goal of a unified and structured European Educational System. The main ones which I will pay attention to in this paper are: The European Credit Transfer and Accumulation System, and the Diploma Supplement.

29. (Die Entwicklung des Bologna Prozesses) 30. (Stocktaking Report 2007)

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Every student currently enrolled in a European Bachelor- or a Master-program encounters the most visible part of the Bologna Process almost every day: the ECTS, which was introduced in 1989 in the course of the development of the Erasmus-program. Until today ECTS has been introduced in over 30 countries and is being used in more than one thousand institutions of higher education. It is a student-oriented workload-based Credit system which means that within this system "Credit Points” are assigned to different components of a student's educational program and the amount of CPs received is determined by the workload a Student has to overcome to finish a course. Principally 60 CP measure the workload of a student per academic year and one credit stands for around 25-30 hours of work. But what exactly does the term “workload” mean? According to the ECTS rules Credit Points can neither linked to contact hours as for example the duration of a seminar. Nor can the amount of Credit Points granted be based on the prestige or status of a famous staff member. In ECTS a student’s workload consists of the time required to complete all planned learning activities such as attending lectures, seminars, independent and private study, preparation of projects and examinations.31 Furthermore the system allows not only to measure a student’s achievements in hours of work but he can be ranked on a statistical basis with the help of an “ECTS-Grade” to document his academic performance: the upper 10% of all students receive an “A“, the next 25% are ranked with a “B”, the following 30% are ranked “C”, and the last 10% to pass a course or an examination are given an “E”. Students who fail receive an FX or an F, depending on the amount of work still required to pass: The grade FX indicates that “some” further work is required, an F indicates that a considerable amount of work still has to be done. The system is suitable for all types of programs, whatever their mode of delivery and target group and it serves both mobile and non-mobile students since it works as an accumulation-system within an institution and at the same time allows the transfer of credit point between participating institutions. Learners can thus move between countries, within a country, and also between different types of institutions taking their Credit Points with them.

31. (ECTS - European Credit Transfer and Accumulation System)

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In regard to study-abroad programs ECTS has helped to enhance the quality and volume of student mobility in Europe because it is applied in all participating institutions which makes programs easier to understand and compare for students and staff- members. In addition to this simplification for students from EU- countries, Europe’s higher education as a whole becomes more attractive for students from overseas since an ECTS transcript is recognized more often than an individual diploma from a single country. To ensure the correct use of ECTS even a label has been developed for institutions who apply the rules of the system correctly and across Europe there are ECTS and Diploma Supplement counselors available to provide support for institutions that are using the system or those who want to introduce it. The second instrument supposed to create more transparency for academic institutions, employers, and students within the EU is the Diploma Supplement. It is handed out as an explanatory note together with a diploma explaining the diploma which is normally only understood within a limited number of countries. When fully completed this document provides all the information necessary to make a valid assessment of any degree or qualification. The Supplement should be issued to every student of every type of degree program, upon graduation, together with their official diploma, free of charge, in a widely spoken European language.32 It enables students to demonstrate extraordinary achievements, and also it allows academic institutions to explain their system of grading, mention particularities about a student’s development. Studying abroad seems to be a complicated mission. But as has been shown on the last few pages it is not as difficult to get an overview of the many various topics involved as one maybe assumes during the first few steps of the investigation. For every student who wants to make his dream of an abroad-semester come true engaging into a few days or weeks of extensive research is mandatory but it is worth the effort. This paper provides enough references and shows coherences which can be used to start researching, reasons for studying abroad are given and the necessary preparations are examined. Furthermore the Bologna Process is basically explained allowing a basic understanding of

32. (Example: Diploma Supplement)

120 Seventh International HSE Summer School «Baltic Practice» ·2007 the development of educational structures in Europe which is an essential prerequisite for any student who wants to realize all chances and possibilities available. An continuation of this paper could include the description of the effects of culture shock which is an important psychological phenomenon occurring after the departure to a foreign country, consisting of several phases, or the collection of data from actual returning-students and the analysis thereof. Also the development of the educational structures within Europe could be explained in a wider context regarding for example the National and European Qualifications Frameworks and other instruments of the Bologna Process and their application.

Literature: 1. BMBF – Internationalisierung des Studiums. Access: 28.10.2007 URL: http://www.bmbf.de/pub/ internationalisierung_des_studiums_2005.pdf 2. ECTS – European Credit Transfer and Accumulation System. Access: 28.10.2007 URL: http://ec.europa.eu/education/programmes/ socrates/ects/index_en.html 3. Mehr deutsche Studierende im Ausland. (12. 09 2007). Access: 18.10.2007. URL: http:/www.laenderkontakte.de/ news/354/14-prozent-mehr-deutsche-studierende-im-ausland.html 4. Mobilität von Studierenden und Hochschuldozenten. Access: 28. 10 2007. URL: http://eu.daad.de/eu/sokrates/programminformation/05362.html 5. The Erasmus Programme. Access: 20.10.2007. URL: http://ec.europa.eu/education/programmes/llp /erasmus/index_en.html 6. Aufgaben des DAAD als nationale Erasmus-Agentur. Access 24. 10 2007. URL: http://eu.daad.de/eu/sokrates/daad-als-nationale- agentur/05356.html 7. Auslands-BAföG / Bildungskredit / Studienkredit. Access 29. 10 2007. URL: www.daad.de/ausland/foerderungsmoeglichkeiten/auslandsbafoeg/00662.de.html 8. Bologna Allgemein. Access: 25. Oktober 2007. URL: http://eu.daad.de/eu/bologna/bologna/06950.html

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9. Bologna Users' Guide. Access: 04. 11 2007. URL: http://eu.daad.de/imperia/md/content /eu/bologna/ects_users_guide.pdf 10. Bologna Users' Guide. Access: 04. 11 2007. URL: http://eu.daad.de/imperia/md/content/eu/bologna/ects_users_guide.pd f, p. 36 11. Bundesinstitut für Berufsbildung. Access: 29. 10 2007. URL: www.na-bibb.de/lebenslanges-lernen 12. DAAD – Stipendiendatenbank. Access: 29. 11 2007. URL: www.auslands-stipendien.de. 13. Das Sokrates/Erasmus Programm. Access: 27. Oktober 2007. URL: http://eu.daad.de/eu/sokrates/05353.html 14. DELF / DALF Prüfung- Institut Francais. Access: 03. 11 2007. URL: http://www.ifcologne.de/index.php?delf.php 15. Die Entwicklung des Bologna Prozesses. Access: 24 2007 . URL: http://eu.daad.de/eu/bologna/bologna/entwicklung/06951.html 16. ECTS - European Credit Transfer and Accumulation System. Access: 22. Oktober 2007. URL: http://ec.europa.eu/ education/programmes/socrates/ects/index_en.html 17. Europäische Zusammenarbeit von Hochschulen. Access 28. 10 2007. URL: http://eu.daad.de/eu/sokrates/programminformation/05361.html 18. Example: Diploma Supplement. Access04. 11 2007. URL: http://eu.daad.de/imperia/md/content/eu/bologna/ds_muster_der_eu_ kommission.pdf 19. Home / Auslandsbafög / Studium innerhalb der EU. Access: 05. 11 2007. URL: http://www.auslandsbafoeg.de/auslandsbafoeg/eu.html 20. Erasmus/Sokrates News Index. Access: 24.10.2007. URL: http://ec.europa.eu/education/programmes/socrates/ects/index_en.ht ml. (kein Datum). 21. IEC - Finanzielle Information. Access: 03. 11 2007. URL: http://www.ieconline.de/generelle-information/finanzierung.html 22. IELTS - International English Language Testing System. Access: 03. 11 2007. URL: http://www.ielts.org/default.aspx 23. Instrumente des Bologna Prozesses. Access: 24.10.2007. URL: http://eu.daad.de/eu/bologna/bologna/instrumente/06952.html 24. International Education Centre. Access: 03. 11 2007. URL: http://www.ieconline.de/ 25. Internationalisierung des Studiums. Access: 05. 11.2007. URL: http://www.bmbf.de/pub/internationalisierung_des_studiums_2005.p df 122 Seventh International HSE Summer School «Baltic Practice» ·2007

26. It's Your World: Student's Guide to Education Abroad. (kein Datum). Access: 10. 10 2007. URL: http://handbook.iiepassport.org/ 27. Konrad-Adenauer Stiftung - Hauptabteilung Begabtenförderung und Kultur. Access: 03. 11 2007. URL: http://www.kas.de/wf/de/42.8/ 28. Lifelong Learning Programme - List of National Agencies. Access: 24.10.2007. URL: http://ec.europa.eu/education/programmes/llp/national_en.html 29. Local Erasmus Initiatives. Access: 27. 10 2007. URL: http://eu.daad.de/eu/sokrates/kontakt/05414.html 30. Lokale studentische ERASMUS-Initiativen (LEI) Access: 28, 2007. URL:http://eu.daad.de/eu/sokrates/infos-studierende/05392.html 31. Mobilität durch Erasmus/Sokrates. Access:10 27, 2007. URL: http://eu.daad.de/eu/sokrates/infos-studierende/05603.html 32. Spiegel-Online: Dank Auslandsbafög nach Hawaii. (02. 07 2007). Access: 24. 10 2007. URL: http://www.spiegel.de/unispiegel/studium/0,1518,488911,00.html 33. Stiftungsdatenbank des Stifterverbandes für die Deutsche Wirtschaft. Access: 03. 11 2007. URL: http://www.stifterverband.de/site/php/foerderung.php?SID=&seite= A-ZStiftungen 34. Stocktaking Report 2007. Access: 29. 10 2007. URL: http://www.minocw.nl/documenten/26282b.pdf 35. Studien- und Berufswahl - Internationales Studium. Access: 04.11.2007. URL: http://www.studienwahl.de/index.aspx?e1=5&e2=0&e3=0&e4=0&e 5=0&e6=0&tn=0 abgerufen 36. Studien- und Berufswahl.de – Förderung. Access: 20. 10 2007 von. URL: http://www.studienwahl.de/index.aspx?e1=5&e2=2&e3=0&e4=0&e 5=0&e6=0&tn=0 37. THE BOLOGNA PROCESS - Towards the European Higher Education Area. Access: 22. Oktober 2007 von URL: http://ec.europa.eu/education/policies/educ/bologna/bologna_en.html 38. The TOEFL® Test Details: Learners and Test Takers. Access: 20. 10 2007 von URL :/http://www.ets.org/portal/site/ets/menuitem.1488512ecfd5b8849a77 b13bc3921509/?vgnextoid=f138af5e44df4010VgnVCM10000022f9 5190RCRD&vgnextchannel=b5f5197a484f4010VgnVCM10000022f 95190RCRD

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CHAPTER TWO. BARRIERS OF THE BOLOGNA PROCESS

Introduction by the group Academic Advisor

The creation of the Europe-wide area of higher education, known as the Bologna process, is leading to the development of common educational standards and comparable curricular for universities in all participating countries. The ultimate goals are to give students the opportunity to study at any university of their liking by ensuring the recognition of grades across universities, and to path the way to a universal recognition of degrees issued by the universities in all participating countries. Russia’s participation in the Europe-wide education area has been rather limited. There are several reasons for this. First, the higher education in Russia is in a transitional state, from the rigid Soviet-era curriculum tailored to the well-defined needs of various state agencies to a necessarily more flexible system that must meet the needs dynamic needs of the private sector in a rapidly changing economy. Alexei Zakharov in a short paper investigates the main challenges facing the Russian education system, and identifies the ways by which the involvement in the Bologna process can help overcome these challenges. The most serious problem seems to be the lack of information at all levels - of the behalf the high school graduates when deciding which school to apply to, on behalf of the schools when forming the curriculum, on behalf of the firms when deciding whom to hire, and on behalf of the fiscal authority when deciding which schools to finance, and under what conditions. Second, there are numerous technical problems: the lack of mutual credit and degree recognition, different semester dates, as well as different numbers of the semesters, and so forth. There are language, psychological, financial, informational, and other 124 Seventh International HSE Summer School «Baltic Practice» ·2007 barriers that Russian students face when planning to go study abroad. In her study of the perception of these barriers by the Russian students, Nadia Morozova conducted two conducted focus groups and two surveys – in Moscow and Nizhny Novgorod – in order to identify the most important barriers. Data analysis showed that the students perceive financial difficulties and differences in the educational program as the most serious obstacle to studying abroad. Difference between students in Moscow and Nizhny Novgorod was not as important. Third, there are the information barriers. Many Russian students are simply not aware that there exist the opportunities to study in Europe. Correspondingly, European students may have difficulties finding information about the curriculum of Russian colleges, course syllabi, and other information needed to make the decision to study in Russia. Tanya Milacheva and Olesya Malinovskaya compared five leading Russian and German universities in how they make available the information relevant to the Bologna process. The basic sources of information for they use are official web sites of universities, articles in periodical media, and interviews with the students. The authors find that, on average, German university students should be better informed about the opportunities to study abroad then their Russian counterparts. These are the problems that our working group was addressing in its work. Alexey Zakharov, economist, assistant professor, HSE, Ph.D

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Alexei Zakharov Russian system of higher education: overcoming challenges through the Bologna process

In this short paper I highlight the key differences between Russian and Western education systems outline the key challenges that the system faces, and suggest how Russia’s involvement in the Bologna process can help to overcome these challenges. The Soviet system of higher education evolved to suit the well-defined needs of the planned economy. The current Russian system of higher education is its descendant, and is much less mobile then the Western system for several two reasons. The first defining characteristic of Russian educational tradition is the lack of academic mobility. Unlike at a Western university, the main source of employment for a department at a typical university is its own recent graduates. For a typical university professor, the entire career - from the first year as a student to professorship – is spent at the home university. The fakultets at Russian universities are subdivided into kafedras – groups of 10-20 faculty members with common responsibilities (such as teaching a certain set of courses, conducting seminars, or directing student theses). The kafedras are organized mainly on the basis of research specialization of its members; the closest contacts of a faculty member are usually with other her fellow kafedra faculty. According to Kuzminov and Yudkevich [1], such system has both benefits and shortcomings compared to the more mobile Western system. The closeness of the system facilitates the formation of scientific schools. A newcomer into the system begins to work with a professor as a student, then as a graduate student, and, finally, as a colleague. The existence of such long-term relationships generates trust and provides more opportunity for 126 Seventh International HSE Summer School «Baltic Practice» ·2007 informal resolution of organizational conflicts. At the same time, such system makes it more difficult (if not impossible) to conduct more formal procedures, such as anonymous peer reviews. One of the reasons why a young college graduate may agree to be employed in academia at wage often several times below that in the private sector is because of the social capital that she already accumulated as a student through the contacts with her future colleagues at her kafedra. As a result, the market for open teaching positions at colleges and universities is either very thin or nonexistent. This gives rise to a more serious problem in the Russian education system – a lack of a unified standard for evaluating the professional competencies a college graduates and faculty. The selection process at a typical university favors local graduates, and is often a mere formality. As a result, universities have an incentive produce graduates who conform to their internal standards only. These standards (and thus the teaching standards at the schools) are prone to deterioration. The curriculum at a typical Russian university is fixed. Once a student is enrolled and assigned to a facultet, she completes a standard set of courses in a rigid succession (with the same classmates). At the start of their third or fourth year, students choose their specialization, and are assigned to kafedras. After that, the curriculum for each kafedra is usually fixed as well. Until recently, there was no division bachelor-master division: a five- year specialist program was the standard. What is more important, all programs should follow (at least, formally) the curriculum approved by the Ministry of Education. Depending on the goal of the student, such system has both advantages and disadvantages relative to the more flexible American system (Kuzminov and Yudkevich[1]). For students who do not plan to remain in academia, the Russian system seems to be more appropriate, but only if they are poorly informed about the type of courses that they need to complete in order to obtain the competencies that they need in order to compete on the job market. According to the same authors, the flexible American system is more appropriate for research-oriented students, who do not have the short-term goal of obtaining the necessary competencies, as a trial-and-error approach to education is helps develop the creativity in the student.

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The Russian system of higher education will be facing additional pressure due to the approaching demographic crisis. The students graduating in 2008 from six and four year programs were born in 1985-86 and 1987-88, respectively. These were the pre- crisis years with relatively high birth rates [4]. In fact, the 20-24 year olds constitute the largest five-year cohort. During the 1990s the birth rates dropped sharply. The total number of people 15-19 years of age is slightly smaller; however, the 10-14 year cohort is only 57% the size of the 20-24 year old cohort. The sharpest decline in the birth rates fell on the mid-90s. As a result, 4-5 years from now there will be a sharp decrease in the number of high school graduates. The shrinking supply of high school graduates will be accompanied by an increase in demand for young employees. The Russian economy is estimated to grow at 7.7% this year, and this trend is likely to continue, as the economy becomes less dependent on oil and gas exports [4]. As a result, the average real monthly wages have doubled over 2000-2006 (even though some experts suggest that this increase is exceeding the growth in labor productivity, and that the labor market is overheated [5]). The increase in wages is followed with some lag in other major cities. The result of these two trends is already felt. Out of the four Moscow masters programs that I taught at, only at one (at the New Economic School) the majority of students do are not part- or full- time employed. When searching for prospective college graduates, some companies look for third-year students, who are usually given opportunity to do some practice at the company, are offered summer internships between their third and fourth year, and are already part-or full-time employed by the end of their fourth year. The rising wages is only partly to blame for the decline in the popularity of masters programs in social sciences. The most significant problem is that the schools do not fully realize what are the competencies that they teach, and how these competencies are valued by the market. Employers, on the other hand, now rely less on the diplomas obtained by the student, but mostly on their own evaluation of prospective students. Explosive growth in the low- quality legal and economics programs during the 1990s contributed to this process [3]. There must exist some generally accepted proxy for the quality of education offered by a university, as well as for the level of knowledge of a bachelor or masters program graduate. In the 128 Seventh International HSE Summer School «Baltic Practice» ·2007

United States, the US News and World Report rates various graduate and undergraduate programs, using a number of criteria, such as the mean starting wage of the graduates mean test scores, professional opinion, and so on. School ratings are prone to inflation (as more capable students enter the more prestigious schools), but otherwise give information to both prospective students and to the employers of the graduates. The additional challenge in devising such ratings for Russian colleges will be to convince the public that the rating is corruption-proof. There must also be a transparent way to measure the abilities of college graduates, similar to the GRE and GMAT tests [2]. The Russian education system thus must overcome several challenges. First, it must be deregulated in order to give the universities greater flexibility in forming their curricula. Second, one must develop the transparent criteria for evaluating the quality of the programs as well as of the graduates. Any additional state funding must be based on these criteria (possibly, with some target levels). Participation in the Bologna process can help Russian universities to adapt more quickly. If students have the opportunity to move between universities (at home and abroad), they can provide additional information to the universities regarding the relevance of the programs that they teach.

Bibliography 1. Y. Kuzminov, M. Yudkevich. Высшее образование: В чем Россия не Америка. Vedomosti 01.08.2007, 08.08.2007, 15.08.2007 2. S. Guriev. Болонский процесс: Катастрофа или панацея Vedomosti 08.10.2007, 169 (1963) 3. E. Livni and L. Polischuck. КАЧЕСТВО ВЫСШЕГО ОБРАЗОВАНИЯ В РОССИИ: РОЛЬ КОНКУРЕНЦИИ И РЫНКА ТРУДА. "Voprosy obrazovaliya", № 1, 2005, с.70- 86 4. Federal Statistics Service. http://www.gks.ru/ 5. D. Denisova. and S Sumlenny. Дорогой наш персонал. Expert. 33(574) http://www.expert.ru/printissues/expert/2007/33/dorogoy_pers onal/

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Nadezhda Morozova Psychological barriers of the international student’s mobility

Bologna process plaуed an important role in the increase of the students’ mobility in European countries. Today, students have a great opportunity to study in different countries and receive marks that are transferred in the same system and can be accepted in the native university. Therefore a student is able to acquire broader experience in her field of study, as well as a wider worldview in general. Certainly this experience is very important for the development of the personality of students and also gives carrier advantages. In this paper I consider the current situation in Russia. According to my literature research and experience, Bologna process hasn’t been suitably implemented in practice. Today, students in Russia can’t freely go abroad and study there. There are isolated cases of such mobility, but I don’t see enough real mobility in order to speak about the process’ impact on the Russian educational system. Hence, I suggest that there are a particular number of barriers that hinder the international mobility of Russian students. Moreover, I claim that such barriers can have a psychological background. This paper investigates the psychological barriers to the students’ mobility that under the Bologna process realization. The main goal of this work is to determine main psychological barriers, structuralize them and the importance of each barrier in the overall structure. In order to speak about such barriers in the overall Russian framework I conduct my research in Moscow and Nizhny Novgorod. For a clearer understanding situation in Russia, I also pay attention to students from the West Country. In my work I use two qualitative methods and several quantitative methods. The first qualitative method was used to determine the psychological barriers that Russian students 130 Seventh International HSE Summer School «Baltic Practice» ·2007 encounter before departure for studying abroad. For this purpose I conducted focus group in N. Novgorod and Russia with students, who have never studied abroad. The second qualitative method is submerged interview. I conduct it in order to clarify the barriers that can exist in the host country. Then I use quantitative methods in order to determine what barriers are vital and can hinder the realization of the Bologna process in Russia, and what barriers aren’t so important. Moreover, I am going to find some connections between the most important barriers. And after it I conducted one more focus group with the highly mobile students from Germany. Previous analysis has shown that the problem of psychological barriers that people face in the home country before departure hasn’t been studied close enough. Therefore I first investigate the problems that emerge in the host country. The most discussible and important problem that can arise in a foreign country is the “culture shock”. Oberg in his works gives the following definition: “Cultural shock is a consequence of strain and anxiety resulting from contact with a new culture and the feelings of loss, confusion, and impotence resulting from loss of accustomed cultural cues and social rules” [3]. According to Taft culture shock derives from both the challenge of new cultural surroundings and from the loss of a familiar cultural environment [7]. Also some authors (Alder, Rhinesmith) distinguish several number of cultural shock stages. Each stage characterized by the different range of psychological difficulties [4]. Another problem that arises in a host country is coping with stereotypes. Adelman M. claims that people, who are going to work and study abroad also face a lot of stereotypes from the both sides [1]. Therefore people should be ready to overcome most of them in order to build good communications. According to Japanese authors, who have paid attention to the adaptability of students abroad, the most important problems that students have to consider are: language barrier, difference of communication style and educational system, motivation and pressure to perfume well and insecure status of students [2]. These problems are considered as important barriers and the authors claim that students before their departure should have special training in order to be prepared. Hence, I pay much attention to these problems in the paper. The problem of mobility barriers and its psychological aspect wasn’t considered in the works of Russian researchers. 131 Seventh International HSE Summer School «Baltic Practice» ·2007

Therefore I claim that this vital problem needs closer and deeper study. I begin my research with dividing all psychological problems in this area into two groups. The first group consists of the problems that exist in the home county, while a student decides whether or not to go to the foreign country for education. The second group involves the problems that a person faces in the host country. Certainly, these two parts of problems are closely connected, as when a student makes the final decision of whether or not go abroad to study she will usually consider such problems together. But this division can help to understand the problems better and to consider psychological barriers closer, moreover, it’s impossible to predict all barriers that can be in the foreign country. In order to understand the psychological problems better that exist in Russia during a student tries to decide whether or not go abroad for education, I’ve conducted two focus-groups of the second year students in the Higher School of Economics in Moscow and in Nizhny Novgorod branch. There were the students who had never educated abroad. It was important for me, because I was going to understand the position of the majority of students in these two universities. And also I’ve conducted one submerged interview with a second year student, who has studied one year in the USA in the 11th grade and now receives higher education in Moscow. These three approaches give the overall picture of psychological problems for different students. Hence, these three groups of students were covered: • Those who didn’t have any experience in education abroad and live in the capital now; • Those who didn’t have any experience in education abroad and don’t live in the capital now; • Those who have experience of education abroad. Now I’d like to present the summary table of all psychological barriers that are considered most important for all types of students and then I’d like to make broadened comments to this table:

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Psychological barriers

In the home country The level of understanding • Risk taking • Private life

• Mobility In the foreign country • Previous experience • Adaptability • Flexibility • Culture shock • Another educational • Self-confidence • Consideration of the program future • Everyday life • Financial problems • Language barrier • The rate of awareness

There were 30 respondents in each group surveyed; there were 39 questions, where each question corresponded to some barrier to study abroad. The student was asked to evaluate each barrier on a 1 to 7 scale, with 1 meaning that the barrier is the least serious, and 7 is the most serious. The survey questionnaire (in Russian) is given in the appendix.

Risk taking Students in both focus-groups paid much attention to this aspect, because they consider that one always bears a risk, when making a decision of whether or not to go abroad to study. Students in Moscow claim that the capital provides a lot of chances for self-realization in studies, science and work. Moreover, students in Russia prefer to combine study and work, and in Moscow as in N.Novgorod they can find good opportunities for it. Students fear the in a foreign country it will be more difficult to combine work and education and find a suitable place. Students suggest that they will “lose” 2-3 years compared to living in Russia, there they can begin their career. At the same time students in Moscow are seemed to be more risk taking and adventurous, therefore they are more ready to bear such risk. 133 Seventh International HSE Summer School «Baltic Practice» ·2007

A survey that was conducted in N.Novgorod and Moscow also shows that there isn’t any significant difference among these two cities in the consideration of the risk taking problem. And the means that are near 3 for N.Novgorod and 2,5 in Moscow reflect the quite low importance of such barrier. But according to the histograms the percentage of students, who consider the risk taking problem as a quite important barrier in Moscow is higher than in N.Novgorod (see Figure 1).

RT_М RT_NN

10 10

8 8

6 6 Frequency Frequency 4 4

2 2

Mean =2,4423 Mean =2,9003 Std. Dev. =1,27442 Std. Dev. =1,07607 0 N =30 0 N =30 2,00 4,00 6,00 2,00 4,00 RT_М RT_NN Figure 1. Distribution of the average scores on the risk taking subgroup of questions for Moscow (left) and Nizhny Novgorod (1-least serious, 7-most serious).

Private life Students in Moscow focus-group are more confident that their private life won’t strongly prevent their decision to study abroad. They rely more on electronic tools of communication and are convinced about maintaining their communication with friends. But in Moscow students are more afraid of the problems with finding new friends in the foreign country. At the same time males in the both groups see their relations with females from the more optimistic side. On the average, a male student states that although it would be difficult for him, he will prefer to study 2 years abroad and come back to his partner in the relationship. Females are less inclined to go abroad if they engaged in a relationship. Marriage is viewed as a very serious obstacle by both sexes. Some family problems, like the illness of a family member, can also postpone going abroad. Personal illness influences the decision too: from respondents’ point-of-view it’s very dangerous to go abroad with some health problems. They consider a lot of 134 Seventh International HSE Summer School «Baltic Practice» ·2007 difficulties in organization of the health care service abroad and some differences in medicine approaches. Some students point out that they get accustomed to life with their parents and it will be very difficult for them to life along, especially in the foreign country. The survey shows that there aren’t any significant differences in the consideration of the private life barrier among students in N.Novgorod and Moscow. The mean isn’t high and reflect the absence of high importance for students. However, the results for Moscow are much more diverse: in N. Novgorod the majority of the students scored near 3-3,5, while in Moscow there is a significant number of students who are worry about private life either too much or too little (see Figure 2).

PL_М PL_NN

10 10

8 8

6 6 Frequency Frequency 4 4

2 2

Mean =2,8617 Mean =3,0223 Std. Dev. =1,61209 Std. Dev. =0,83949 0 N =30 0 N =30 1,00 2,00 3,00 4,00 5,00 6,00 7,00 2,00 4,00 PL_М PL_NN Figure 2. Distribution of the average scores on the private life subgroup for Moscow (left) and Nizhny Novgorod.

Mobility Students seem to be mobile in both cities, they claim that it won’t be an important barrier for them to change the place there they live. At the same time, Moscow students find a lot of positive points in mobility, like learning something interesting about different people, places, and countries. They consider the Bologna process as a good opportunity for finding new friends and relations, broadening their world view. Most students in both groups were of age of 20-25, when personal mobility is very high. The results of my survey (see Figure 3) show also the absence of significant differences in the consideration of mobility barrier. The mean is also quite low and one can’t speak about importance of such a barrier. But the histograms present the higher importance of particular number of students in N.Novgorod.

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M_М M_NN

12 10

10 8

8 6

6 Frequency Frequency 4

2 2

Mean =2,944 Mean =2,6447 Std. Dev. =1,71758 Std. Dev. =0,85704 0 N =30 0 N =30 1,00 2,00 3,00 4,00 5,00 6,00 7,00 2,00 4,00 M_М M_NN

Figure 3. Distribution of average the scores on the mobility subgroup for Moscow (left) and Nizhny Novgorod.

Previous experience Certainly, the level of psychological barriers is closely connected with previous experience. Here one can divide all students into several groups: • Who have never been abroad and lived in one city- for such students it’s difficult to go to study abroad, because the level of stress in this situation is the highest. They don’t know with what kinds of problems they will face, how they should adopt and how to cope with them without any support. • Who have never been abroad, but lived in several cities - it’s easier for them to go abroad, because they can model some situations in new environment. They have received some valuable experience, but also it’s difficult for them to live along, without parents and friends. But this group consists of a great number of risk takers. • Who have never been abroad, but now live in hostel or a flat without parents- they are more psychologically ready to go abroad, because they have experience in living alone and organizing their everyday life. The main problem for them to adopt in the foreign country. • Who have been abroad, but not for a long time and now live with parents- they think that cross-cultural communications aren’t difficult, they have good experience and see such opportunity in a very optimistic light. However, such students consider mostly their leisure and short- run communications. And at the same

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time they don’t pay much attention to the organization of everyday life, because of good experience in hotels or families. • Who has participated in different programs and has lived abroad for a year- this is a quite small group of students, but very interesting for the research. I will consider this group closer a bit later, their experience is important for in consideration of the second part of the table. The survey shows that the biggest number of students in both cities doesn’t have any experience of studding abroad.

Adaptability Adaptability is closely connected with the previous experience, but by students, who don’t have experience in living and studying in another other city or country the problem of adaptability is considered to be very important. In N.Novgorod such problem was evaluated as one of the strongest. The respondents feared that this process would take 3-4 months that could have been used to work and study more productively in the home country. Moreover, students also think that it will be rather difficult to adapt to Russia after education abroad. The reverse adaptation process is also expected to take 3-4 months. To summarize, students expect to lose one half of a year of productive time for adaptation abroad and in the home country due to stress. In Moscow in the focus-group students suggest that the problem of adaptation doesn’t strongly influence their decision to study abroad, because “in our everyday life we have a lot of stress and we are used to overcome it”. But to their point-of-view students should be psychologically ready to force some problems in adaptation. But some students, especially those who live with parents suggested that adaptation will be rather challenging for them. According to the conducted survey there aren’t any significant differences among N.Novgorod and Moscow groups in the consideration of the adaptability barrier. More than that in also has a neutral attitude in the both groups.

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Flexibility In the both focus-groups flexibility was considered as very important personal quality, but in Moscow group students paid more attention to it. They think that the level of our flexibility will also help to overcome “culture shock”. Moreover, Moscow’s students suggest that it will be a real problem to overcome stereotypes from both sides. They think that firstly they would in their communications with the foreign students stick to stereotypes, and respondents were confident that in the host country students also harbor a lot of stereotypes toward Russians. Therefore, they should be very flexible in order to change their opinion and make contacts with foreign students as individuals. Students in N.Novgorod didn’t pay much attention to cultural stereotypes. They suggested that it’s necessary to take some neutral position: not to show Russian mentality and at the same time to stay individual with their values and attitudes. They were confident that it will be possible to find good individual contact with some students. In both groups were discussed the question of Russians identity, whether it is more Western or Eastern, as the conclusion I decide that the middle stage will help to communicate with both Western and Eastern people. The question about flexibility was very important for me, because I mention different situation in N.Novgorod and Moscow focus-groups. My survey proves the results of the focus-group and shows a significant difference. Students in N.Novgorod consider question of flexibility as less important and vital for students, who are going to study abroad. Histograms prove it and show that in Moscow students tend to consider this barrier higher (see Figure 4).

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F_М F_NN

10 10

8 8

6 6 Frequency Frequency 4 4

2 2

Mean =4,0167 Mean =3,425 Std. Dev. =1,19434 Std. Dev. =1,11009 0 N =30 0 N =30 2,00 4,00 6,00 2,00 4,00 F_М F_NN Figure 4. Distribution of the average scores on the flexibility subgroup for Moscow (left) and Nizhny Novgorod.

Self-confidence It’s a very individual characteristic of a person, but I should also take it into account, because only self-confident person can make last decision to go abroad. In the focus-groups students were mainly confident, certainly, only they participate in different activities and try to search some information about the opportunities that Bologna process provides. Self-confidence is closely connected with all aspects that are considered in the left part of the table, and they also influence them. The results of the survey don’t present any significant differences among two students group. And also this barrier has a quite low mean- only 3,39 for Moscow and 3,03 for N.Novgorod.

Consideration of the future Many students in N.Novgorod’s focus-group thought that education abroad wouldn’t give them significant employment advantage at the start of their careers. Moreover, students in both cities doubt about the adaptation of their knowledge in Russian environment, business and science. They doubt whether their financial, time, mental and psychological investments will all be required in the future. In Moscow I saw less of such anxiety, students were confident about the importance of such education in the future, but the benefits of their knowledge of Russian reality are also questionable. The survey shows that the consideration of the future barrier isn’t strong and important enough (2,85 for Moscow and 2,55 for 139 Seventh International HSE Summer School «Baltic Practice» ·2007

N.Novgorod). Moreover the difference in the understanding of such problem isn’t significant. But here I should mention that the group in N.Novgorod more homogeneous and has a peak in the means in 2 and 3. At the same time group in Moscow is more heterogeneous and have very high means in 5 peaks that are in 1, 2,3, 4 and 6. Hence I can say that students in Moscow pay much attention to such barrier and have stable point of view.

C_М C_NN

4 Frequency Frequency

2 2

Mean =2,85 Mean =2,55 Std. Dev. =1,70774 Std. Dev. =1,19878 0 N =30 0 N =30 0,00 2,00 4,00 6,00 8,00 0,00 1,00 2,00 3,00 4,00 5,00 6,00 C_М C_NN Figure 5. Distribution of the average scores on the considerations subgroup for Moscow (left) and Nizhny Novgorod.

Financial problems In N.Novgorod financial problems were considered as most serious, because it’s rather difficult to predict how much money will be needed and what sum can be earned in the foreign country. In Moscow students were more optimistic about money that they could earn in the foreign country. According to the survey the financial barrier is important for students. The mean in both groups is high (4,73 for Moscow and 4,99 for N.Novgorod). And the difference among groups isn’t significant.

Language barrier Language barrier was considered a vital problem in both groups. In N.Novgorod students were more inclined to view this problem as serious. Respondents predict that they would pay much attention to their knowledge of the foreign language before the departure. Students suggest that they should have a very good knowledge and now for them it’s an acute problem.

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At the same time, they don’t care a lot about new special terms that will be used in lectures or seminars, they were estimated to be learned easily abroad. In Moscow students think that their knowledge is quite enough for them, moreover, they can also find friends from Russia or use some nonverbal communications. But they consider it as the big problem to study in foreign language, because of terms and special expressions. The survey shows that language barrier is considered as a quite important barrier and the results in two groups don’t have any significant difference. The mean in N.Novgorod in 3,89 a bit lower in comparison with Moscow (3,95).

The rate of awareness To my point-of-view in both groups it was rather difficult to discuss psychological barriers, because they haven’t paid much attention to them, while they had thought about education in foreign country. And this is the main psychological barrier in Bologna process, because consciously most students are not concerned with psychological problems, they think that it will be easier to overcome some problems with adaptation, stress, “culture shock”, but to my mind unconsciously this barriers also exist and it can proved by the stages of culture shock when after 2-3 weeks a lot of students have depression or some psychological disorders. The more I face this problem in N.Novgorod, when they didn’t see great differences in values, lifestyle in our and western countries. Hence, I’ve decided to discuss problems that students face in a foreign country during education there in the submerged interview with the student, who has educated in the USA during a year. Rate of awareness is considered by the students as very important barrier in both groups and the survey shows a difference near the significance. In Moscow students are more worried about this barrier, but also students in N.Novgorod also have high mean. Also it’s necessary to pay attention to the histograms. I can see that the peak of means in N.Novgorod among 4 and 5. At the same time in Moscow the peak is among 6 and 7 (see Figure 6).

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RA_М RA_NN

10 20

10 Frequency Frequency 4

5 2

Mean =5,3167 Mean =4,50 Std. Dev. =1,77377 Std. Dev. =1,27982 0 N =30 0 N =30 1,00 2,00 3,00 4,00 5,00 6,00 7,00 0,00 2,00 4,00 6,00 8,00 RA_М RA_NN Figure 6. Distribution of the average scores on the rate of awareness subgroup for Moscow (left) and Nizhny Novgorod.

Culture shock In the literature there are considered four stages of culture shock, therefore I’ve decided first to discuss them. The student claimed that she had the same stages and she described them. The first was the honeymoon phase. She was impressed by the USA, everything was interesting, new; she was lucky and funny. All were attractive for her: new school, teachers, and pupils. She was glad to have new contacts and learn as much as possible about the USA, city and the school. For the first couple of days there was a language barrier, but because of her good English knowledge and her interest she overcame it rather fast. The second stage was real cultural shock, she understood that it was difficult to correspond to all norms that were in the family and in the school, it was really difficult to find friends, to organize free time and find something really interesting for her, she was going to come back to home and parents. The third stage was adjustment of the culture. She had found the approach to Americans, suitable topics that can be discussed with classmates and understood how she should correct her behavior and attitudes to some things in order to obey the norms. And the last stage after 3 months was adaptation. She found suitable for that culture lifestyle, attitudes, had friends and good relations with classmates and teachers. During the interview she underlined that before she arrived to the USA, she hadn’t thought a lot about the problems that she could face in the USA and it was a mistake for her.

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But now it’s very interesting for her to go abroad and she wants to educate in the future in foreign country. She sees a lot of positive and valuable aspects in this like the broader world view, good adaptability and flexibility. She is going to know more about foreign countries and cultures, she doesn’t think that psychological problems are more vital for her and as the language barrier. In the survey also were considered the barriers that take place abroad. Despite the absence of experience in studying broad, students were asked about such barriers. I was going to consider the level of understanding of such barriers and their importance for students here. Culture shock wasn’t considered as a very important barrier, it has a quite low mean- 2,63 for Moscow and 2,73 for N.Novgorod. The difference among groups isn’t significant.

Different educational program The problem with another educational approach wasn’t very difficult for her, but in crisis stage it was dominated, because educational system is rather different and she should study them though mistakes. Now she thinks that different education approach in the high education will be not so vital, but she is going to receive all information about it. The results of the survey show that students consider different educational program as an important barrier. The mean for N.Novgorod is 4,43 and 4,35 for Moscow. Also there are different frequency distribution in N.Novgorod and Moscow. In the first group there are two high peaks- 4 and 5. In the second group there is only one peak in 6-7 (see Figure 7).

AP_М AP_NN

12,5

10,0

6 7,5 Frequency Frequency 4 5,0

2 2,5

Mean =4,35 Mean =4,4333 Std. Dev. =2,08918 Std. Dev. =0,66609 0,0 N =30 0 N =30 1,00 2,00 3,00 4,00 5,00 6,00 7,00 3,00 3,50 4,00 4,50 5,00 5,50 6,00 6,50 AP_М AP_NN Figure 7. Distribution of the average scores on the different education program subgroup for Moscow (left) and Nizhny Novgorod. 143 Seventh International HSE Summer School «Baltic Practice» ·2007

Everyday life For the first time she had big problems with cuisine and it was really difficult for her to find suitable menu. Her parents paid much attention to this problem and helped her to find the optimum between her previous preferences and the existed opportunities. And as for her hobbies, she had to change some of her preferences for the spending her free time. It was a bit difficult, but she glad that she had found there new interests. The survey suggests that the barrier of everyday life isn’t very important in both groups- N.Novgorod (2,29) and Moscow (2,34). And there isn’t any significant difference among these two groups.

Correlation and factor analysis In the survey I’ve decided to conduct correlation and factor analysis in order to have more detailed picture about the barriers and their understanding by the students in N.Novgorod and Moscow. Significant correlations in N.Novgorod are the following: Positive: Another educational program and place of living, Everyday life and another educational program, place of living and rate of awareness, rate of awareness and education program, Risk taking and private life, mobility and risk taking, mobility and private life, adaptability and risk taking, consideration of the future and risk taking, everyday life and private life, flexibility and everyday life, adaptability and self-confidence, adaptability and consideration of the future, self-confidence and consideration of the future, Language barrier and adaptability, culture shock and self-confidence, flexibility and everyday life, sex and self- confidence Negative: Everyday life and place of living, Financial problem and culture shock, Language barrier and culture shock, Another educational program and culture shock, sex and language barrier (for man is lower), flexibility and risk taking, rate of awareness and risk taking, rate of awareness and private life, place of living and private life, education and private life, flexibility and consideration of the future, Financial problem and consideration of the future, flexibility and place of living.

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Significant correlations in Moscow are the following: Positive: Risk taking and adaptability, adaptability and private life, adaptability and mobility, Financial problem and flexibility, Language barrier and risk taking, Language barrier and adaptability, culture shock and adaptability, everyday life and adaptability, Language barrier and self-confidence, educational program and adaptability, sex and adaptability, Negative: Another educational program and mobility, culture shock and everyday life, everyday life and educational program, culture shock and sex. There is a quit big number of positive and negative correlation in the groups, therefore I’ve decided to conduct factor analysis in order to underline the main correlation points in the groups.

Factors for N.Novgorod group Fact Psychological barriers(influence) Name of the factor or F1 Rate of awareness(+), place of Goal to study living(+), educational program(+) abroad F2 Risk taking(+), flexibility(-), Culture consideration of the future(+) understanding F3 Private life(+), mobility(+) Family orientation F4 Another educational program(+), Free time everyday life(+) F5 Adaptability (+), financial Feminine type problem(+), language barrier(+), sex(-) F6 Adaptability(+), self-confidence(+), Psychological culture shock(+) maturity

Factors for Moscow group Fact Psychological barriers(influence) Name of the factor or F1 Private life(+), culture shock(+), Social relations everyday life (+) F2 Mobility(+), another educational Achievement program(-) motivation 145 Seventh International HSE Summer School «Baltic Practice» ·2007

F3 Language barrier(+), rate of Preparation awareness(+) F4 Risk-taking(+), consideration of the Confidence in the future(+), educational program (+) future F5 Flexibility (+), self-confidence(+), Muscular type sex(-) F6 Financial problems(+), flexibility Material independence F7 Culture shock(+), place of living(+) Life experience Results of factor analysis show that there are important quality differences in these two groups of students. In N.Novgorod dominate factors that are connected with the low aspiration to prepare for studding abroad and lower person maturity. In Moscow factors present more motivation for preparation for studding abroad and social independence.

German practice In order to understand the existing psychological barriers in Russia better and make a quality comparison with students from a Western country there Bologna process has good implementation, I’ve conducted a focus group with students from Witten-Herdecke University in Germany. During the focus group I understood that we have absolutely different point-of-view about barriers in Bologna process. First of all, one should underline that they were quite surprised to speak about real barriers. They claimed that all students have to become mobile and have good adaptability, because of the globalization. “We will need to travel at our work a lot, hence Bologna process provides a good chance to become enough experience”. Moreover, they are absolutely sure that good companies need students only with suitable background of education abroad and they tend to provide more carrier chances for such students. Problem with losing old friends and finding new abroad isn’t considered as vital and important. They are sure that Internet can help to support connections with friends from the home country and moreover it isn’t a problem to find students from the native country in a host country. As for relations with boy/girlfriend they suggest that this person can also visit this country and also use all appropriate tools of communications. More than that, students from Germany claim that they needn’t study a lot about the culture of a host country, because it 146 Seventh International HSE Summer School «Baltic Practice» ·2007 demands a lot of time. Financial problems are not considered to be too vital. They told that students can in a quite free way take the credit in a bank. Language barrier wasn’t considered as an important aspect in students’ mobility. They need only some basic phrases in the native language of a host country in order to make some communications in everyday life, but for study everyone need only English and they don’t have many problems with this language. Another important aspect that we have discussed was the rate of awareness. German students suggest that as much as possible the information about host country must be collected and studied. Another educational program isn’t considered as a vital aspect, because students in all countries receive the same credits and all works have the basic system of evaluation. The problem of cuisine isn’t very acute for them. They consider that in every country students can find cafes and restaurants with European food. The only important problem is culture shock. Students claim that we need to overcome it and be ready for it. This focus-group shows that Russian students have much more barriers and aren’t ready to consider the very wide the problems that can arise in a host counties and how they will overcome it.

Conclusion

Combining the results of different parts of my survey I make some conclusion statements: 1. All psychological barriers that occur in the international students’ mobility can be divided into two main groups: barriers in the home country and in the host country. In the first group can be included the following barriers: risk taking, private life, mobility, previous experience, adaptability, flexibility, self-confidence, consideration of the future, financial problems, language barrier and rate of awareness. In the second: culture shock, different educational program, everyday life. 2. There only two significant differences among N.Novgorod and Moscow groups in the consideration of psychological barriers- in flexibility and rate of awareness. In both cases Moscow group has a higher means. The overall mean of all barriers is 147 Seventh International HSE Summer School «Baltic Practice» ·2007

near 4. It’s the neutral answer in my questionnaire. The most important barriers in both groups were: financial problem, rate of awareness and another educational program. 3. Correlation and factor analysis show that all psychological problems are highly correlated, therefore such problems must be considered only in the groups. Factor analyses shows that despite quite similar quantitative results in two groups, the quality results are very different. In N.Novgorod barriers are mostly connected with the low preliminary preparation for going abroad and in Moscow with more motivational mousetraps. The most important factor to my mind is opposite type among students- feminine in N.Novgorod and masculine in Moscow. Here one can see the influence of social environment to the psychological ground of the individual. 4. Focus group with German students shows that students’, who are highly involved in Bologna process don’t make much effort to consider all problems that can arise in host countries and feel much more confident. 5. According to the results of the survey I can give some recommendations to the management in Russian universities: • provide students all important and necessary information about Bologna process • conduct series of seminars, where students can discuss with university staff some questions and can receive all information about Bologna process • conduct a series of meeting with students, who have been studied abroad • prepare a psychological training for students, who are going to study abroad and include in such training such activities that will cover all connections of psychological barriers.

Bibliography Adelman, M. Cross-cultural adjustment: A theoretical perspective on social support. International Journal of Intercultural Relations, 12 (3), 183-204. Berry, J. W. Immigration, acculturation, and adaptation. Applied Psychology: An International Review, 46 (1), 1-30. Culture Shock// http://www.kzoo.edu/cip/cultureShock.html

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Culture Shock http://www.uiowa.edu/~uiabroad/predeparture/PREPAREculture_s hock.html Student psychological adaptation in higher schools abroad// http://my.elvisti.com/nayd/publ/4023.htm The stages of cultural adjustment// http://www.ips.uiuc.edu/sao/parents/culture.html http://www.ncat.edu/~oip/cultureshock.htm

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Ulrich Auwärter Psychological barriers of mobility concerning Bologna Process

Introduction When talking about the topic of psychological barriers concerning the Bologna process one has firstly to take into consideration what bologna process in fact is definitively meant to be. Following the definition of the German Ministry of Education and Research „Students and researchers are more mobile, more flexible and more international than ever before. Knowledge knows no national frontiers.“ Considering the theory so far, one should have a closer look at the present situation and find out whether students are already in the position to support a living bologna process or not. Do there exist any psychological barriers concerning foreign studies and if, what are they about? To get a various picture of the present situation I did some data mining and were having yet interviews with four students living under four different conditions at the moment. The students are all about the same age. Every one of them is thinking of going abroad or has even gone to a foreign country yet. The students I interviewed are each in a different situation concerning their international experience. The first person I interviewed still lives at home together with his parents and has little international experience. The second one does so, too, concerning the first attribute but has got a lot of travel experience. The third person interviewed just came back from a one year stay in New Zealand and is thinking of going abroad again for her further studies.

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The fourth and last person interviewed is just coming home to his mother country Italy from a one year trip to Private Witten/Herdecke University and will complete the interview part with a retrospective view. Excepting the last person studying at a private university the other ones interviewed study at statern universities or technical colleges of higher education. After having taken into consideration the four different points of view we will have a summary of the Interview part and try to get as conclusion whether students are really ready for going abroad like bologna process likes to set in motion or not. And as an interesting part of the survey we’ll be able to find out if the disposition of going abroad is contingent on former experience.

Interview part Concerning the interviews I enabled the interview partners to brainstorm when thinking of their upcoming or yet finished stay abroad. In the following part I will sum up the outcome of the four interviews. To improve the summary of the answers I got, I already divided the arguments into those concerning the home country and those concerning the destination country.

First person interviewed Student still living at home with little international experience. Facts concerning the home country: • He is wondering about the situation of his relationship when leaving his girlfriend back in Germany. • He thinks that his chances to get a good job will improve when having been to a foreign country for studies. Facts concerning the destination country: • He’s a little bit afraid of probably not having enough travel experience to get along in the destination country. • He is afraid of the language barrier. • He is wondering whether he will experience some kind of culture shock. • He is unsure of the ability of making friends quite soon.

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Second person interviewed Student still living at home with lots of travel experience. Facts concerning the home country: • He is afraid of leaving behind his intact social network and is wondering about the future situation (when coming back home). • He is uncertain if the year at a foreign university might be the loss of one year at his home university. Facts concerning the destination country: • He is wondering about the capability of habits • One point is the cost of living that can be unbearable high for him • Connected with the last point the question what to earn for a living seems important to him. • One important issue is legal certainty in the destination country.

Third person interviewed Student who has been living abroad for at least one year with lots of travel experience. Facts concerning the home country: • She mentions that she will have a barrier when physically leaving home but is not able to define that further. Facts concerning the destination country: • She is wondering about physical safety in the destination country. • Legal certainty is an important issue for her. • She is afraid of a culture shock. • Sourcing is important for her, too. • Ability of being able to get a scholarship.

Fourth person interviewed Student that has just finished his one year stay at a foreign university. (Looking back) Facts concerning the home country: • Also he says that leaving behind his strong intact social network were important issues when thinking of going abroad.

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• He has been wondering about staying friends with those he left behind at his home university. • One important issue was the acceptance of the courses done in the foreign university at his home university. Facts concerning the destination country: • Clash of cultures. • What to do to earn one’s living.

Summary To have a closer look at the topic I will now sum up the survey’s outcome. To make it easier to focus on the issues I got from the interviews I think it will be the best to not only divide the issues thrown in into those concerning the situation in the home and destination country but also to divide them into “soft facts” and the hard ones. Of course the single arguments are interdependent but it is easier to have a closer look at the topic when being able to assign these to one of the four specific fields. First I want to deal with the facts concerning the home country. soft facts: • family affairs • attitude towards moving • leaving behind social network hard facts: • benefits for studying abroad • take a loss when not attending home university’s lessons • credit gain acceptance Following I will list up the facts concerning the destination country: soft facts: • culture shock • language barrier • homesickness • establishing contacts hard facts: • different educational system • different justice • adaption to other habits • financial background • housing 153 Seventh International HSE Summer School «Baltic Practice» ·2007

• visa After all there are several terms from the list above which I want to describe in the way they have been taken into account in this essay. There are also some arguments with a very clear definition according to my point of view that I will not explain in the following list. • family affairs: Concerning family affairs some of the students are afraid of leaving their families and so not being able to help if something bad might happen. Another important issue is the question whether the boy- or girlfriend will support the moving when going abroad. Will it be possible to support that relationship or will it brake down? • leaving behind social network: Almost everybody asked about psychological barriers lined out how important the question of leaving behind an intact social network is. An important issue concerning that topic were the friends left behind at the home country. The students were wondering if it would be easy or not to stay friends. Internet and mobile communication turned out to be a very important tool to support staying friends. • making friends: Some of the people taking part in the survey were also wondering about the possibility to making friends. Especially the shy were wondering about possibilities of making friends. The problem for them was not only being unable to get in contact with strangers but also to have the possibility to articulate. Again there’s the link to the point “language barrier” which shows that the single points are connected with each other. I couldn’t find any difference between the sexes concerning making contacts. • culture shock: Following the interview and the approach we had at the group work at Summer School 2007, Group Bologna Process, there are five phases concerning this issue. Initially there is a kind of first love when just having arrived at the destination country. At this stage everything seems to be marvelous and is often seen through rose-coloured glasses. It is also commonly called the “honeymoon phase”.

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After these first few days or weeks there’s usually a time when a core culture shock can be located. The students will recognize the differences between their own culture and the one of their destination country. A period of homesickness may cause some difficulties in assimilating to the new habits and customs in the destination country. Following there is the phase when a person gains understanding for the other culture and already is developing routines concerning the same which is no longer “new”. After that period there is the phase when the person will be assimilated and recognizes good and bad things about the different culture. But it’s not only the situation in the destination country that might cause strange feelings for the bologna students. There might be also a kind of shock when having assimilated to the habits of another cultural surrounding and afterwards coming back home. Some of the new customs won’t match with the cultural system of those at the home country or things there may have changed in the cause of time. • language barrier Language barrier fundamentally is part of the culture shock. Although having learned the destination country’s language at university there still might be nuances, accents and special expressions that make it difficult to understand the other language and so to communicate the first time of the stay. • safety & legal certainty Especially concerning Russia I recognized a vital interest about the situation of legal certainty and physical safety. As there are often issues on TV about the situation in Chechnya and the way the Russian government is treating officials as well as members of the opposition students are not sure if their rights would be taken severely into account when getting into trouble. Furthermore there are some questions concerning the situation in daily life. How to handle corruption that is supposed to be omnipresent. Is it prudent to walk around at night? Is there any authority to trust in when having problems of any kind? • another educational programme Especially for those students who have reached a higher level yet and have quite a lot of study – experience the question of the capability of the educational systems in their home- and destination country is very important. Are there really bologna 155 Seventh International HSE Summer School «Baltic Practice» ·2007 agreements clearly defined or similar? Is every course that is possible to take at destination university attributable at home university and especially is it compatible with the home faculty’s programme? Which courses can be taken at the foreign university? Are there any that are restricted to anything special? The question of the capability of credit points turned out to be very important for those who are planning a foreign study. Are there any bologna agreements on that topic? If not, who is the best person to ask when having questions about the capability of credit points? Will one get the same amount of credit points for a special course as at the home university? If not, who will decide what to do about that?

Conclusion Of course this cannot be a final regard because data mining is only able to conclude from a sample to a whole population but it may show a trend regarding the proceeding of bologna process so far. But from the survey I think one can say that students planning a bologna trip to a foreign university are both – prepared but also aware of the fact that there are psychological barriers and that probably not everything will work the first time or maybe the way one would wish that it did. It’s also impossible to distil the fact that the disposition to go abroad is contingent on former experience. As far as I can judge the data mining I can’t see any correlation between being aware of going abroad and former experience in going abroad. Moreover it seems to be contingent on the personal attitude towards moving, adaptability and taking a foreign experience like it is ensured by bologna process. To put it all in a nutshell one can say that students seem to be prepared to support a working, vital and developing bologna process.

Literature 1. Culture shock: http://www.larissa-becker.de/cultureshock.html Zugriff: 26.08.2007 2. Cultureshock: http://edweb.sdsu.edu/people/CGuanipa/cultsho k.htm Zugriff: 26.08.2007

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Tatiana Milacheva, Olesya Malinovskaya Universities of Russia and Germany: Comparing the level of student awareness of the Bologna process

This work compares the levels of students` knowledge of the Bologna process in Russia and Germany. Authors compare five universities in Russia and Germany along five criteria. The basic sources of information for this work are official web sites of universities, articles in periodical media, interviews with students. We find that on average, German university students are better informed. Furthermore, there are works which explore this field. Monitoring of Russian Universities` participation in the Bologna process is being done in the framework of the federal program in education development in 2006-2010 years. Ones of the most complete works, devoted to this theme are the “National Reports, 2004-2005”, by V.Kassevitch, Prof., Dr.Vice-Rector of the State University of St. Petersburg, Coordinator of the Bologna Process and “National Reports 2005-2007” written by Victor Chistokhva- lov, Head of the Centre for Comparative and International Edu- cation, Peoples’ Friendship University of Russia. These works assess the level of introduction of the program as a whole, but not in certain universities. International conference “Councils` participation in the education policy in the context of modern tendencies” in 2006 accented that it’s necessary to create the new system. And this system or special organization must evaluate the level of education and students` knowledge in different universities and countries. There is a lot of international (particularly German) research devoted to the development of the Bologna progress and particular educational system and its effectiveness. For instance, 157 Seventh International HSE Summer School «Baltic Practice» ·2007

Deutcher Bildungs server published the research “Comparison of Germany and other countries. Bologna process: Developments”. But this work is based on the educational aspect and especially government role in its integration and improvement. We did not find the works by German authors in which the universities are compared. German researchers do not pay attention this aspect they delve into different aspects and components of the educational systems. There is no serious attitude to the Internet like an influential source of awareness.

The Bologna Process and its gaps The purpose of the Bologna process is to create the European higher education area. It includes introduction of a three-cycle system (bachelor /master /doctorate), quality assurance of new educational system and recognition of its qualifications. A series of reforms needed to make the system of the education more compatible and competitive, attractive for students from different countries. At May 2007 there are 45 countries that participate in the Bologna process. The authors considered two of them - Germany and Russia. Germany signed the Bologna declaration in 1999 and Russia in 2003. Thus, the Bologna program is crucial for students and it’s very important to analyze their knowledge and opinions. Several criteria were chosen for comparison the level of awareness. In Section 1 we compared information about the Bologna Process at universities official web sites. In Section 2 we consider how internal media cover questions linked with this theme. Section 3 is devoted to conferences, related to the Bologna Process. Students` projects are assessed in Section 4. The research revealed a significant gap between the Russian and German educational systems in their degree of the integration into Bologna Process. It is necessary to emphasize that the German educational system is well-integrated but nevertheless is facing other problems, like some gaps in exchange programs. Authors tried to apply the criteria to German and Russian universities and had selected five universities from each country which represented different levels of the synergy of the Bologna innovations and the established study’s system. 158 Seventh International HSE Summer School «Baltic Practice» ·2007

As for Germany, we chose the further universities. WHU Koblenz` school of management which is considered to be one of the best in management education. It offers different programs for its prospective students: bachelor and Master of Science, company and doctoral programs, MBA. EBS Oestrich Winkel is European Business School which develops leaders through pioneering research and closeness to practice. This university is one of the top business schools in Europe. University of Cologne is large, offering a wide variety of subjects. The University of Cologne is committed to research and development. The many projects being promoted by the German Research Foundation and the European Union at the University of Cologne, underline its reputation on an international level. TU Berlin tries to promote the dissemination of knowledge and to reinforce technological process by adhering to the principles and quality. It has a wide range of faculties and optional activities like research centers and so on. The University of Bremen is the science center of North West Germany. It is place for research for 1.427 scientists (full- time), place of study for some 19.000 students and workplace for 910 employees (full-time). We also looked at four Russian universities. Lomonosov Moscow State University (MSU) is one of the most prestigious and largest education institutions in Russia. It treats the Bologna process with caution (not all faculties have joined the system). MSU`s administration has been critical of most education reforms. State University - Higher School of Economics (SU-HSE) is among the top-three most popular and prestigious universities in Russia. (MSU keeps the leading position). This is the biggest center for socio-economical analysis in Russia. It is the leading center of postgraduate education and professional training. Peoples’ Friendship University of Russia (PFUR) is combining various faculties, departments, lines of study and is also a major research center. Since its creation it has trained a series of academics in scientific, humanitarian and other branches of knowledge. PFUR has numerous international contacts with foreign institutes of higher education and international organizations.

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Saint Petersburg State University (SPSU) is the most popular institution of higher education in this part of the country. It includes more than 20 faculties, like Psychology, Law, Manage- ment, Journalism, International relations and others. The head of this university willingly introduces new standards in traditional educational system. International university of business and new technologies (IUBNT) is the first commercial educational institution in Yaroslavl region. New specialties like Commerce, Commodity research, Information systems in Economics, Linguistics and others appeared for last years. University shows activity, invites foreign specialists and considers questions of student exchange.

The Bologna Process in the Internet The content of a University’s web page has an influence on the level of students` awareness, because the Internet as whole and universities sites especially are important sources of knowledge. We paid attention to the documents, official materials devoted to the Bologna process, articles in the internal media, seminars and conferences which provide some information about European Educational Reform and its history, goals, innovations and shortcoming. Special table can help to assess this criterion. Authors gave 0 point to university if it does not have any information about the Bologna process. 1 point – if the university has 1-10 materials, and, finally, 2 points if the university web site has more than 10 materials, or if the materials available represent all aspects of the question. Authors gave an additional 1 point for a link to materials related to the Bologna Process from the main university page. The authors fall this criterion into four parts. The first one is the mention of the Bologna Process’ regulations and its rules and components. The next one represents documents and official materials which explain the goals of the Bologna Process and draw the whole picture of the development and integration. Also the criterion of the websites’ information includes some information about related seminars and conferences, that’s the third part of analysis by the criterion. Finally, the last one is the number of the references to different materials about the international exchange from the main page. This component lets students get to know more about the Reform from different sources independent on their university. 160 Seventh International HSE Summer School «Baltic Practice» ·2007

1. Germany Every university gives information about the Bologna process but only three universities (WHU Koblenz, University of Cologne, Universitat Bremen) have materials about the history of European Highest Education reforming, its facts and figures separately from their own participation in that. But in spite of it their sites offer a lot of information about the universities’ study programs realized within the bounds of the Bologna process, the educational innovations, they explain Bachelor and Master’s courses, the module system and etc. appealing to the Bologna process (see the table 1). WHU Koblenz reporting on the goals of Bachelor and Master Degrees mentions the “Bologna Declaration”. EBS Oestrich Winkel describes the structure of the educational system in Europe step by step including some details in the intermediate phases between some levels and, furthermore, changes in the former system according to the Bologna process and this university gives detailed information about new Bachelor’s programme in Aviation management which is efficacious because of the Reform . For TU Berlin’s turn this university tells about its own changes in its system of study but everything is based on the innovations. Moreover, the university of Cologne have the detailed information about new system of study, its levels and forms of transferring from one phase to another that. University of Bremen offers a lot of articles telling about the essence and the history the European higher education area (see Table 1).

2. Russia On the Lomonosov Moscow State University’s web page there are different articles about the Bologna Program from federal mass media. These publications usually contain opinions, interviews with the experts of the University about the new way of education. Information about the basic statements it’s possible to find only at the Sociology facility. There is explanation of ECTS, module system, difficulties of introduction the program and other important positions. The most part of information is taken from different sites like: http://bologna.mgimo.ru/. State University - Higher School of Economics has an information portal about the process. It includes articles, detailed reports, documents and descriptions of international programs. News cover the most important questions of international cooperation of SU-HSE. Web visitor can view detailed reports, 161 Seventh International HSE Summer School «Baltic Practice» ·2007 opinions and photos of students participating in different projects, Bachelor and Master’s courses. In the announcement section there are dates of related conferences and meetings. The list of countries and universities, which cooperate with the HSE are in the “International contacts” section. “Organization structure” helps students, who are going to participate in international programs. There are hierarchy of International departments, names and contacts of it heads. The section “Information for students” is meant for all who aspire to participate in international programs. It’s rather easy to find conditions of receiving the “Diploma Supplement” grants, credits and others there. “Information for works of HSE” includes news bulletin, survey of International programs, magazines and references to web sites of Russian, foreign funds and researching centers. This portal vacates to expand International contacts of the University. “Information for foreign citizens” could be interesting for people from former Soviet Union. Details written in Russian and there can be some difficulties for all who don’t know the language. The portal of Peoples’ Friendship University is called “PFUR and the Bologna Process”. It has information about the chronology, basic statements of the program, documents and different materials. There are results of extensive studies of the introduction of the process in Russia. Web visitor can find detailed answers at such questions like “For what we need the Diploma Supplement”, “What is it the academic mobility, the credit system”, and “How the quality of education would change after the Bologna process introduction?” Data at the web site is not update very often, news cover events which were several months ago. There is no relevant information the official web site of Saint Petersburg State University. It’s possible to find information linked with this theme only on the site of the sector of final certification, linked with SPBU. There is electron version of textbook “Organizational basis of education system”. But it’s difficult to find it for common web visitors, and references to some materials don’t work. International university of business and new technologies has detailed information about conferences, which were in this University. But it doesn’t report anything about the program.

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The Documents Seminars References The total regulations and and to grade of the official conferences materials Bologna materials on the Process B.P. from the main page

WHU, Koblenz 2 2 1 1 6 whu.edu– Koblenz EBS Oestrich 1 1 2 1 5

University of 2 2 2 1 7 Cologne, unikoeln. De TU Berlin 1 1 2 1 5 tu-berlin.de Universitat 2 1 2 1 6 Bremen, uni-bremen.de MSU, msu.ru 2 1 0 0 3 SU-HSE, hse.ru 1 2 2 1 6 PFUR, rudn.ru 2 2 1 1 6 SPSU , spbu.ru 0 0 0 0 0

IUBNT 0 0 1 0 1 mubint.ru Table 1. Analysis of web page content. Sometimes you can face an uncomfortable search system. There are references to the materials from the main page only in 3 universities, (except Lomonosov Moscow State University and Saint Petersburg State University). Overall, it is desirable that authors not only translate in Russian some aspects from the Bologna Declaration, but explain it to readers. As a whole, the analysis of web site's content revealed a large gap between German and Russian universities. The German student has much more opportunities to be informed about the opportunities to study abroad. The next disadvantage of the Russian sites is that for the most part they contain information only in Russian.

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Internal media It is very important for universities to deliver information about the Bologna Reform through its own media in facts and figures. We looked over its media searching some articles about this Reform, some interviews about it and we evaluated the quality and the quantity of those. The Internal media cover some conferences, provide some interviews with important people from the university's administration, it can publish information about governmental solutions according to the educational field. Mostly, our grades are based on the quantity of the articles. How did we evaluate this criterion? Having 10 or more articles values scored 2, between 1 and 10 scores 1. If there isn’t uploaded version of newspaper, it didn’t receive any points.

1. Germany Four universities have their own internal media from which only three publish in the Internet. The first one belongs to TU Berlin; it represents the newspaper TU Intern and alumni magazine par TU. Both media have a lot of information devoted to Bologna Process. For example, TU Intern placed the article ‘Discussion about Bologna process’ in which the principles and the main regulations are shown in the process of the evolution. It is worth to emphasize that the TU Berlin’s media publishes a huge number of different articles about Bologna process all the time. (See table 2a). For instance, the BREMER UNI-SCHLÜSSEL (the media by University of Bremen) published the interview with a Bologna- tutor who explained the advantages of the Bologna Process and new opened possibilities for students to improve their knowledge and students’ life. These newspapers (its different issues) offer a big number of articles about some innovations in the educational system and the detailed explanation of the reforms. The second media is made at the University of Cologne; they are SpiriTV and Campus radio. They run news about Educational Reform in every second issue and often give its background. WHU Koblenz has its internal media but it is not uploaded on the site. And moreover EBS Oestrich Wenkel has no media. Thus, we cannot evaluate these universities according to this criterion.

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2. Russia Information about the Bologna program appears in universities media. Students` newspapers in comparison with students` radio stations TV studies pay attention to such theme. A good example is the newspaper of the Higher School of Economics “Vyshka”, which considers it very important to cover such themes. There are many articles about main principals, advantages and disadvantages of the process, reports about Bologna’s seminars, and interviews with students, taking part in international program. Newspaper of the Peoples’ Friendship University of Russia “Druzhba” to a lesser degree cover the events linked with the Bologna process (like an important conference). Serious analytical articles appear in “Vestnic PFUR”. This magazine publishes results of research activities, devoted to Russian and foreign science, written by specialists, scientists, and lecturers. Different faculties the Lomonosov Moscow State University produce several newspapers, like “Moscovscii Universitet”, “Journalist”, “Tatianin den”. It`s possible to see their thoughts about pluses and minuses of new way of education and several articles with mentions of the process (see Table 2). Information on the Internal media. The total grade (issues for 1 week)

WHU, Student newspaper, but it is not uploaded 0 Koblenz on the site.

EBS Oestrich There is no students’ media. 0

University of Campus radio and SpiriTV 2 Cologne, TU Berlin Internal newspaper TU Intern and alumni 2 magazine par TU. Universitat Bremer Uni-Schlussel 2 Bremen, MSU There are several newspapers, which 1 belong to different facilities SU-HSE Internal newspaper “Vishka” 2 PFUR Internal newspaper “Drugba”, “Vestnic 1 PFUR” SPSU There is no uploaded students’ media. 0

IUBNT There is no uploaded students’ media. 0 165 Seventh International HSE Summer School «Baltic Practice» ·2007

Table 2. Analysis of Universities’ internal media. Information about the Bologna process appears from time to time in different brochures and newspapers published by universities. Certainly there can be some difficulties with receiving print materials, so it is necessary to use information on web sites. But here is the other problem. There are electronic versions of students` newspapers only in 6 Universities from 10 (in WHU Koblenz, TU Berlin, Universitat Bremen, MSU, SU-HSE, PFUR). Usually some issues appear after several months. There is no good search system, which can help to find requisite issue at the official web site.

Conferences, devoted to the Bologna Process Science conferences are crucial criteria in our research; it shows their practically involvement in building new simple education area. The authors gave 2 points if the university organizes more than 10 ones per month. And if there were five or more seminars with students-participants, the university was evaluated by 1 point for the criterion ‘Students’ involvement’. Details for ‘Conferences’ (it concerns two parts of this criterion: international and internal ones): 0 – the university does not make its own conferences on the Bologna Process and does not take in such conferences at all. 1 – the university has 1 – 10 conferences per month. 2 – the university provides more than 10 seminars per month. Details for ‘Students’ involvement’: 0 – the university has no conferences with active students’ participation. 1 – otherwise.

1. Germany All universities hold conferences or colloquiums for students on which young researchers share their ideas and can get support for putting them into practice. The universities organize the scientific meetings and their students take part in the conferences. It means that the main goal of the conference to explore some aspects of the Bologna process, its development and problems. TU Berlin has participated in international colloquiums: “Innovations in Engineering Education – Challenges, Concepts and Good Practice”, “Challenges of the 166 Seventh International HSE Summer School «Baltic Practice» ·2007

Bologna process” and “Industry welcomes the Bologna process Industry (FCD programs must lead to employability). “Universitat Bremen” – Comparative and International Education Society, annual meeting Lifelong Learning – Norms and Rationality beyond a functionalistic Paradigm. The University of Cologne makes research in education and special education and etc. But in spite of it the majority of conferences are devoted to natural sciences, economics, management, and so on. In that case, why is it important for us? And how does it show students’ awareness? The answer for this question is quite simple. These conferences have practical purpose (that is provided by the European Educational reform) and, moreover, they are closely related to the new system of study process, for example, Bachelor and Master’s programs and the credits’ system of evaluation and etc. Thus, the major of students-participants know about the process a lot. And the mere fact of holding such conferences convey about the high level of international involvement in the university. For example, WHU Koblenz holds the conference “Downstream Customer Orientation and Supplier-Customer Homophily: Sources of Innovation Performance”. The main focus of this conference is not related to educational reform, but almost every participant knows about the Process a lot. WBS Oestrich Winkel organizes a lot of conferences in the bounds of the Bologna process. For instance, “Category Spend Management - Identifying performance issues in marketing spend management”.

2. Russia The main conclusions of many universities conferences in Lomonosov Moscow State University were, that it`s very important to save the traditional traits of Russian education system. Representatives of university participated in different conferences, for example in the “The second International scientific - practical conference; (November 2004 in Moscow), in the Training “The transition to two-cycle study system in the context of Bologna process” (December 2006, in Dresden). Facility of Sociology produced brochures, which contain lectures from conference “Globalization and Education. The Bologna Process” and others.

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State University - Higher School of Economics takes part in different researches and in international meetings, like “Students` mobility in European space of High Education” (March 2005 in Germany). SU-HSE was the organizer of Russian students` conference, devoted to the problem of students` participation in The Bologna process. It has a special importance, because the most part of conferences is meant for specialists. Peoples’ Friendship University of Russia takes part in different researches and in international meetings, like conference of participants of the educational project of European commission “Tuning Educational Structures In Europe”, which took place in Bruxelles in June 2006. There were several important international and internal conferences like the second International seminar “Russia and the European space of higher education: plans and prospects after the Berlin conference”, on 29-30th October, 2003, “Integration of educational systems into a context of the international cooperation: experience and prospects” on December, 5th, 2003 in Saint Petersburg State University. The International university of business and new technologies organized the International scientific and practical conference “Bologna process: the European and Russian experience universities management" in November, December 2006. In comparison with Germany, the authors consider all conferences devoted to the Bologna process, but not only students (see Table 3). Internatio Students` Internal Students` The total nal involveme conferences nvolvement grade conferenc nt es WHU,Ko 1 1 2 1 5 blenz

EBS 1 1 1 1 4 Oestrich

University 2 1 2 1 6 of Cologne, TU Berlin 1 1 2 1 5

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Universita 2 1 2 1 6 t Bremen MSU 1 0 2 1 4 SU-HSE 2 1 2 1 6 PFUR 2 0 2 1 4 SPSU 1 0 2 1 4

IUBNT 1 0 1 1 3

Table 3. The conferences. For a Russian university, there are usually no links from the main web page to all conferences and seminars in which the University participates. Also, it’s difficult to assess the level of students’ involvement because of the lack of information. No numerous documents at the web sites give some ideas about the meetings. In Germany the number of conferences much in several times, and all information appear in the Global Network. In Russia authors consider all large-scales conferences, but in Germany attention paid only to students’ conferences devoting to the Bologna Process and holding within the bounds of the Reform.

The students’ projects We analyzed the level of students’ international involvement and the best indicator is their own projects in which the students suggest their own ideas for creating simple educational areas, or can realize their own business projects within the European higher education framework. 0 – the students have no own projects. 1– they present 1-5 ones which is mentioned on the web site. 2 – they prepared more than five ones and take part in self- administration.

1. Germany Firstly, students suggest their projects on the colloquiums. Moreover, we have paid attention to their first-hand participation in educational process. Some universities have special students’ groups which can influence the educational process and study system in their university. For instance, WHU Koblenz gives a spur to its students for suggesting changes in the system of teaching. Furthermore, WHU Koblenz is a member of the German 169 Seventh International HSE Summer School «Baltic Practice» ·2007

Federal Association of Liberal Universities, which sets its sights on a liberal higher education policy and representing students’ interests. Thus, this university has its Students’ Council which provides students’ interest and influences the organization of study in their alma-mater. Of course, they take huge part in creating the modern European Educational area. For EBS Oestrich Winkel’s turn this university has recently provided the project which investigates the mutual relationships between owning families and their businesses. But it does not have students’ educational projects and self-administration at all. Students of the University of Cologne protect their research and know-how and their university encourages them and helps to put these projects into practice. TU Berlin has Academic Self-Administration which represents the branchy structure. Firstly, it has “Allgemeiner Studieren- denausschuss” – Students’ Council which solves problems inside the university. The next institution is Studierendenparlament – Students’ Council which deal with questions of university and science politics. Moreover, every faculty has its students-representatives for managing faculty’s work. Besides of their own scientific projects students of Universitat Bremen can take part in Students’ Self-governance and represent their university in ASTA (Students’ German Organization).

2. Russia State University - Higher School of Economics has the survey “Bologna with students eyes” in the context of the project “The monitoring of participation of Russian universities in Bolog- na process”. Also, students participate in publishing scientific works, devoted to the Bologna process. They consider questions which could promote the successful introduction of the program. Peoples’ Friendship University of Russia made Russian variant of glossary terms of the European higher education, but it`s not only students` projects. Facility of Sociology of Lomonosov Moscow State University produced brochures, which contain lectures from conference “Globalization and Education. The Bologna Process” and others. University The total grade

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WHU, Koblenz, whu.edu - 2 Koblenz EBS Oestrich 1 University of Cologne, uni- 1 koeln.de TU Berlin, tu-berlin.de 2 Universitat Bremen, uni- 2 bremen.de MSU 1 SU-HSE 1 PFUR 1 SPSU 0 IUBNT 0 Table 4. Student’s participation. “White spots” appears during considering this criterion. It’s because not all universities have such projects, there aren’t much information at the official web sites. The comparison showed the gap between two countries’ students’ activity in the Bologna process. Russian students are not involved in this process almost at all. But in Germany this part of developing the Bologna process are not excellent too. Both countries should pay more attention to this field.

The conclusions German Universities The total grade Russian Universities The total grade

Universitat Bremen, 16 Higher School of 15 uni-bremen.de Economics

University of Cologne, 16 Peoples’ Friendship 12 University of Russia

TU Berlin tu-berlin.de 14 Lomonosov Moscow 6 State University

WHU, Koblenz 13 International 4 university of business and new technologies EBS Oestrich 10 Saint Petersburg 4 State University Table 5. Final grades. The research revealed that two universities have positive educational highlights in Germany. These are University of Colog-

171 Seventh International HSE Summer School «Baltic Practice» ·2007 ne and University of Bremen which provide for their students by the Bologna process' facts and figures. The worst result is shown by EBS Oestrich Winkel may be because of unsuitable work of administration in the area of media and conferences' organization. According to the criteria State University - Higher School of Eco- nomics is the most successfully participant of the Bologna process. International university of business and new technologies and Saint Petersburg State University should pay attention to web site’s content. Because now official web site is a visiting card of University. The level of students’ awareness about the Bologna process in Russia is lower than abroad. Because, many European countries joined to the program earlier (Russia signed the declaration in 2003), and there are another attitudes to education system. The most part of Russian Universities are not ready for reforms. Extent of the system to be reformed is huge in comparison with Germany. And it’s more difficult to convert Russian traditional Educational system into European area. Factors limiting the participation of majority Russian Universities in the European mobility process are impossibility to finance studies abroad, administrative and infra- structural problems. There is a lot of information about the Bo- logna process in the mass media, on different (not only universities) web sites. But those reports rarely find their addressees. It would be very important to write in internal media. Reports should accent on new opportunities, changes concerned to students` life. Information about exchanging programs, conferences and other important events should appear on corporative web sites. The main reason, which influences the students` knowledge, is a work of administration. Universities` managers as a rule know a lot about different aspects of the Bologna, but it is difficult to say the same about academic personnel. Administrative workers are often acquainted only with basic statements. In the result they can’t comment on some important aspects, answer students` questions. Students’ councils can play an important role in awareness. But in comparison with European countries (for example, Germany) such activities develop slowly in Russia. Presently these organizations at most work with other issues. Though, about 72 % of students would agree to study in European country during the year, but not everybody knows who should pay for education. There aren’t too many students who can recall names of universities which coopera- ted with their educational institution or different conditions of ex- 172 Seventh International HSE Summer School «Baltic Practice» ·2007 change schemes. The level of information depends on different symposium, which universities organize. Participation in seminars can help students to understand the goals of the Bologna process, cover main questions. Most part of conferences is meant for specialists, though some students willingly take part in different projects involved in the Bologna process environment. It will be efficiently to continue such type of work. It’s important to remember that main results depend on manager’s policy first of all.

Bibliography 1. The sociological research “Bologna with students eyes” in the context of the project “The monitoring of participation of Russian universities in Bologna process”, High School of Economics 2006 http://new.hse.ru/C16/C4 /international/default.aspx?view=11.3.1 2. Information from this divisions of web site, Higher School of Economics: Internationals contacts: http://new.hse.ru/sites/projects/bolon/default.aspx 3. http://new.hse.ru/C16/C4/international/default.aspx?view=11.3 4. Information from this divisions of web site, Higher School of Economics: figures and facts: http://d1.hse.ru/figures 5. Information from this division of web site, Peoples’ Friendship University of Russia http://www.rudn.ru/?pagec=640. 6. The International scientifically-practical conference “Bologna process: the European and Russian experience universities management, International university of business and new technologies http://www.mubint.ru/C15/C15/2006/default.aspx 7. “The second International scientific - practical conference; Moscow State University http://www.msu.ru/info/struct/departments/eua/sumconf2.html 8. Training “ The transition to two-cycle study system in the context of Bologna process”, Moscow State University http://www.msu.ru/innovation/news/20061220-1.html 9. THE BOLOGNA PROCESS Towards the European Higher Education Area http://ec.europa.eu/education /policies/educ/bologna/bologna_en.html 10. The council of Europe/ Higher Education and research/ Who participates in the Process? http://www.coe.int/t/dg4/ highereducation/EHEA2010/BolognaPedestrians_en.asp#P117 _13152

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Sergey Efremov Russian system of higher education during its integration into the Bologna Process: tasks and challengers

The major aim of the Bologna Process is the introduction of the two-level system of higher education, supporting the compati- bility of the diplomas, the introduction of the European Credit Transfer and Accumulation System (ECTS), the furthering of the European cooperation in the field of the provision of high-quality education1, the increase of the geographical as well as occupational student, professor and researcher mobility and education throughout life.

The magistracy and the Higher School of Economics (HSE) The introduction of the two-level system of higher education in the context of the Bologna Process supposes the development of two major educational levels, which are the baccalaureate and the magistracy. The first part of higher education should last at minimum three years whilst the second (which may be changed by doctorate in some places) should last one year at minimum – with the consequent acquisition of the doctorate. Definable borders of the degrees as well as the program comparability are to guarantee students’ intellectual flexibility in the international context. The Higher School of Economics is traditionally regarded as the most liberal and innovative university in Russia. The HSE as against other avowed universities has many international links which it develops either on the whole-university level or the

1 Larionova M.V. The European Experience in forming the understanding of the general composition of qualifications and level structure. Competent approach, http://www.iori.hse.ru/tuning/materials/qualifications_structures_degrees.pdf, page 1

174 Seventh International HSE Summer School «Baltic Practice» ·2007 faculty level due to competent actions of each faculty international office. Even the faculties orientated mainly on the “national sphere” such as, for example, the faculty of State and Municipal Management have maintained educational contacts with many foreign analogues in Europe, Asia and in the USA2. However, the HSE still legs a little bit behind the locomotive of the Bologna Process which it may finally join. For example, it is not a rare case to be faced that the students of the magistracy in the HSE taking part in the international exchange programs still cannot acquire double diploma on the return to Russia as they are required to pass the exams for the second time and practically in the same subjects. That inconveniency is supported by the absence of the clear system of credit transfer and program comparability as international diplomas are considered as European or whatever but not Russian. To overcome this problem the student should cooperate with the dean’s office to work out his individual curriculum which will define the courses which will be transferred at the arrival. Nowadays the HSE has the system of credits and each faculty has in its curriculum the marks which tend to resemble the ECTS but still are not recognized in all of the European universities. The transfer of the marks from the Russian evaluation system to ECTS as described it Daniil Borisovich Tsygankov, the Deputy Dean on the Magistracy on the Faculty of State and Municipal Management, in its interview on the Bologna process “tend to be mechanical” and do not fully reflect the real European evaluation patterns. Another problem outlined by Mr. Tsygankov resides in the Russian laws according to which the acquisition of the baccalaureate degree, which is the launching pad for the magistracy is made impossible – the degrees include state management degree, which is of prior concern for the HSE, medical degree and some other degrees of minor concern for the HSE – in which only the diploma of the specialist may only be acquired3. As the result a priori the whole inclusion of the HSE

2 The international links of The High School of Economics, http://new.hse.ru/C16/C4/international/default.aspx?view=3 3 Tsygankov D.B. The interview on the problems of the integration of the HSE into the Bologna Process, the Deputy Dean on the Magistracy on the Faculty of State and Municipal Management, 16.05.2007

175 Seventh International HSE Summer School «Baltic Practice» ·2007 into the Bologna Process in its initial conception is made impossible due to the legislative barriers on the national level.

The HSE educational staff and the international exchange According to the concept of the Bologna Process it is supposed that the intensiveness of the international inter-university exchange of students, researchers and lecturers will increase in high pace. The benefits of the HSE representatives as well as of the other Russian universities which have caved their aims holding to international vector of their development are rather evident as the participation in the Process is the doorway to one of the most ancient educational systems and its heritage. For the representatives of the faculties of the economical and business profiles as well as sociological and psychological ones participation in the process could turn to be a good trigger for the future career achievements4. For others this is the key to the world which is printed in their mentality in bold letters of insouciance. Whatever the reasons of their integration into the European educational system are, the exchange programs suppose according to the term multilateral cooperation – this means that the HSE should provide all necessary conditions for receiving international colleagues in the higher education system. Here we start to face the new barrier which indicates the failure of the system of the past rather than the hardly possible incompetency of only one particular university in the present. This is the “Soviet barrier”. The Russian system of higher education has inherited a good deal of advantages from the soviet system of higher education. Mr. Tsygankov defines this advantage as the “remaining racks of the past system”. The educational system gave rather general knowledge in various spheres which approved it as being effective from the point of enabling its participants fast adaptation to life situations. However, the irreconcilable ideology of the Soviet system failed to provide its citizens with consistent knowledge in foreign languages as well as it failed to recognize the social importance of the humanities.

4 Tulupov V.V. The scientific-cultural magazine, http://www.relga.ru/Environ/WebObjects/tgu- www.woa/wa/Main?textid=95&level1=main&level2=articles, №2 [92] 11.05.2004

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As a result of the ill-considered treatment of the humanities as the secondary subjects in the past, the HSE in particular has to deal with the fruits of that improvidence in the present. The legacy of the composition cannot form the problem for the growing up generation but this is rather a challenge for more robust adult inmates of the soviet system of higher education which partly form the most of the educational staff in Russia. As outlines Mr. Tsygankov, the educational staff of the present, especially if we deal with the one which found its vocation in humanities is “self-brought-up”. Which means that the knowledge they acquired in the sphere comes from the assiduous work in the libraries, the object of which was usually formed of international literature rather than the national one. As a result, the educational staff of the present, the HSE no exception, teaches European knowledge but not national achievements. As a result coming to Russia in the context of the exchange program in the humanities in which the HSE is largely recognized may be of no use for the West European student. Whilst the linguistic incompetency of the plurality of the educational staff possessing only basic linguistic knowledge creates a real obstacle for the HSE on the way of harmonization of its educational system with that of the leading European universities. Housing resources also may worsen the situation5. For example, the international students coming this summer (2007) on the exchange program to the HSE complained about poor living conditions in the teaching staff hostel – which signifies of the state of the student hostels. Statistically, the exchange of students in the HSE is tending to “the export”, whilst thus with the teaching staff – to “the import”. Though the amount of teaching staff sent abroad in 2005 see an almost 520% rise in 2005 (see table 2 – appendix). According to Mr. Chepurenko presentation more than 30% of HSE teaching staff annually takes part in the international conferences – which is already a significant figure reflecting integrity of the HSE with the global educational network. Also 84 of international scientists work in cooperation with HSE teaching staff – processing teaching methodology.

5 Larionova M.V., Shadrikov V.D., Forming the all-European education area, Moscow, SU-HSE, 2004, p.207

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In 2007 HSE back-office heads went on the internship to Germany. Some of the HSE teaching staff uphold a thesis and become PhD abroad. They also go on the internships to the universities-partners. In the HSE there is also the program of cadres reserve going on which supposes financial aid to the teachers, future professors and students. Though the practice outlined in this paragraph isn’t mass practice, it is still developing in a stable pace.

The HSE and the financial structure It often appears that the majority of good intentions meet the insurmountable hassle of budgeting. The integration of the HSE into the Bologna Process is no exception. Speaking about the level of the HSE, the major financing – which includes the creation of European compatible curricula, organization of refresher courses for the teaching staff and other organizational sunk costs, etc. – should come from the state budget as otherwise the deans’ or any other funds won’t be able to surmount the burden of the costs. This kind of budgeting for the HSE is an exogenous variable which hence is beyond the hold of its direct influence. Speaking about European analogues, in Germany these are the lands that finance each the process, in France this is the state itself. In Russia this could possibly be the mix of federal and regional budgeting. However, the problem of financing isn’t that oppressive because the finance of the private sector may be easily used in the aims of the integration as far as businesses are given a clear structure and suggested clear benefits for themselves as a result of their active participation in the process. Competent business and public relations could benefit from the ideas of investment for acquiring Russian brought-up labour capital with international experience after it has received its precious experience abroad. The contracts should be signed business-university campus6. The realization of such programs is favoured by the general recognition of the HSE educational quality and worsened by the fact that the number of activists who could participate in such relations is contracted by the number of students whose opinion traditionally matters little in such type of organizations.

6 Seminar polit.ru, Education: Reform and Transformation, Economic Demand, http://www.polit.ru/author/2006/05/17/tez.html?refresh=1, 17.05.2006

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Though even with the budgeting by the private sector there are still some obstacles to be come through. Firstly, the business should decide if it wants to venture money into basic and general education or more specific one. Secondly, is that the investment in human capital and in education in particular is a long-term investment and the real returns can in general case be reaped only after the 5-6 year period after the investment took place as outlines the dates Mr Tsygankov: “for example, in the case of oil industry the investments may give no returns – consider the oil resources being run out during the return period”. Mr Tsygankov has also named two schools using the business resources and progressed – one by Mr Medvedev and another by Mr Ivanov, though their achievements are still uncertain. Golubinskaya E.V. outlined during her presentation on the Conference on International Relations Management organized by HSE, that the finance of the programs of international mobility in the context of Bologna Process is divided into four piers: external (EU, educational funds, DAAD, etc.), internal university resources (the joint in the armour), individual financing (individual budget, grants and scholarships), and mutual financing (exchange programs).

The HSE and its structure The Higher School of Economics has inherited or it would be better to define – forms the part – of the common type of structure of practically any establishment conceived in Russia. Though it encourages student initiative – which legibly picks out the University on the background of the other Russian higher education establishments – it is still greatly centralized. Mr Tsygankov would say that “the head of a university is Tsar and God”. Whilst in the typical European university the professor is the Sun of the galaxy around which the planets make their trips, in Russia this is the rector who tends to be that sun. Hence, initiative goes from up to down in Russia and vice versa – in Europe7. Though on a particular stage of development centralization is a key to stability and stable development, to success for any

7 Tsygankov D.B. The interview on the problems of the integration of the HSE into the Bologna Process, the Deputy Dean on the Magistracy on the Faculty of State and Municipal Management, 16.05.2007

179 Seventh International HSE Summer School «Baltic Practice» ·2007 establishment aiming to achieve great goals, the organizational diagram of the HSE is still far from the ideals of that of the typical European one. However, here we shouldn’t forget that firstly the HSE hasn’t still celebrated even its twentieth anniversary whilst some of its European counter-parts have just finished celebrating their four hundred’s anniversary, and secondly the HSE was conceived as a institute of higher education attached to the Ministry of Economic Development and Trade – so there is no wonder that the creation has some features of the creator. Hence trying to hold the restructuring in the HSE may not only fail to receive support but also to be inefficient in terms of triggering educational quality development. So the greatest hassle for the HSE during its integration into the Bologna Process may be that the teaching staff even being given a deal of liberty to initiate might not be used to the powers it has been endowed with as it still has got little experience in dealing with that powers. Though this problem might be solved by performing international familiarization exchange programs for the average staff with the consequent refresher courses of familiarization which would form the base for their initiative in the future (and there are some as it was outlined above). Speaking about the ways in which the international cooperation management in the university is organized its worth noticing that the organizational diagram of the HSE on that issue is clearly determined (see diagram 1 in Appendix), however, the informational resource (internet) should be further evaluated because as the interview hold in context of this scientific work has revealed – this organizational chart is not clearly reflected on the official internet-site. It is rather presented by separate working units and their leaders (Chepurenko A.Y., Golubinskaya E.V., Ghelezov B.V., Malin A.S., Malceva I.V. and others). Generally speaking the International Relations Director (Chepurenko A.Y.) and his Deputy (Ghelezov) are responsible for “informing the university administration and the faculty administration of the new achievements and innovations in the educational field”.8 Whilst Education and Methodology Office headed by Malin Anatoliy Sergeevich and the university administration give recommendations on particular integration steps (e.g. ways of working out the ECTS). Usually all innovations

8 Chepurenko A.Y. The interview on the Integration of the HSE into the Bologna process, 23.10.2007

180 Seventh International HSE Summer School «Baltic Practice» ·2007 start being introduced from the masters and then spread to undergraduate and post-graduate programs. At the same time the recommendations are introduced by the dean’s office of each faculty and the Education and Methodology Office itself. At the same time as the innovations may go from up to down, they may also go in the opposite direction. According to Mr Chepurenko “students is the most mobile group – if they exert pressure upon the dean’s office, then it is likely that the programs will be adapted to their interests”. The International academic mobility office headed by Golubinskaya Elena Vitalyevna is responsible for introduction of the innovations and is working in cooperation with the deans’ offices. The office is also responsible for coordinating interfaculty programs. It chooses the institute of higher education for the student going abroad. “The office also provides consultations on receiving international students”9 and sending home students abroad. They give advice on the actions necessary to undertake when dealing with the international relations.

Russia and Bologna Process Russia was always considered a country with a foreordained specific way of historical development in contrast to the European one. The same concerns politics and educational sphere. However, the most recent trends reveal the fact that the opinion is not that irrefutable. The recent law passed in the Russian parliament states that starting from the 1st September 2009 Russian system of higher education will completely be transferred to the standards of the western European one in part that the system will become two- level: baccalaureate plus magistracy. However, in order to complete successfully higher education the students will have to pass the exams twice: first entering into the baccalaureate and then into magistracy. However, comparing the Russian system of higher education to come with that present in Germany – more concern should be given to increasing the international flexibility of our system. Being more precise in Germany the stage of baccalaureate lasts for three years whilst the stage of magistracy varies in its duration from program to program and by the particular university. The stage of magistracy there can last one year, one and a half, two

9 Golubinskaya E.V. the interview on the integration of the HSE into the Bologna Process, 24.10.2007

181 Seventh International HSE Summer School «Baltic Practice» ·2007 years or two and a half years or studying can even be actively alternated with working10. In Russia the baccalaureate stage will last for four years and magistracy for two years in order to further be eligible to continue post-graduate courses. No alternative of the duration period is given in the beginning. However, the law is not that categorical in regard of educational standards. For example, the law preserves the right for a list of degrees TBD to be provided as specialist – potentially these are law, government administration and medicine. Never- theless, the way of a specialist to post-graduate courses still lies through the magistracy which won’t be free for the specialists11. Whatever is the final result of the law this is a great step in furthering the ideals of the Bologna Process in Russian higher education. However, according to the words of Chepurenko Alexey Yulievich - International relations Director – HSE – here we shouldn’t forget that tightly integrating the Russian system of higher education into the Bologna Process “could result in a loss of our ability to control the quality of the educational resources in our country… the Russian strategy in that issue should be flexible both internally and externally”.12 Also on the All-Russian level more concern should be given to increasing flexibility of the procedure of foreign students’ registration – man-hours necessary for the procedure should be diminished. For example, the procedure of the prolongation of the centralized visa for the international students is really difficult to realize.

The real potential on the level of the Higher School of Economics There is the independent International Relations Develop- ment Office in the HSE which has for its aim to prepare the suggestions on the regulation of the processes of international cooperation on the part of double-diplomas, bilateral courses passes,

10 Tsygankov D.B. The interview on the problems of the integration of the HSE into the Bologna Process, the Deputy Dean on the Magistracy on the Faculty of State and Municipal Management, 16.05.2007 11 Bad dream of a student, http://www.mk.ru/blogs/MK/2007/10/06/society/316533/ 12 Chepurenko A.Y. International relations Director – HSE, speech during the conference, International relations management, organized by the HSE, 23.10.2007

182 Seventh International HSE Summer School «Baltic Practice» ·2007 etc. That means that it aims to introduce the prototype of the ECTS in general13. This office could possibly become the leader of the integration of the Higher School of Economics education system into the realities of the Bologna Process. However, probably it would have been useful at least to include the article of the Bologna Process into the statutes of the office and to attempt to make the similar article being included into the innovation program. According to the Communiqué of the Ministers Conference in Berlin 19 September 2003 in order to participate in Bologna process the University should prepare and present the plan of the transition to the Bologna system of Higher Education14. The plan should be conceived by some particular department, for example, by the representatives of the united students committee which may be formed from the initiative representatives of the student environment of the faculties. The creation of such committee under the stipulation that it will be well-structured and will support fair and free representation of the initiatives may play an important part – as the student initiative is what each successful university tends to find and redress – as far as the student institution is the main object of the potentially forth-coming transformations. The idea of the creation of the United Student Committee is better when we think that this can be practicable as there is successful practice in the HSE of the creation of students’ faculty committees, whilst their union can be an efficient managerial step – the idea has clear experimental evidence in the face of some other Russian universities.15 However, the United Committee conception should be realized neatly and strictly as irresponsible treatment of the issue may easily result in failure and the loss of confidence into such kind of organizations. The creation of the internet site on the Bologna Process on the main host of the HSE was an important step in furthering the interests of the integration, though not sufficient as more concern

13 The statutes of support management for international activity- State University High School of Economics, http://new.hse.ru/sites/infospace/podrazd/aup/ozkvir/DocLib3/polozh_UOMD.doc 14 Berlin Communiqué of the Minister Conference on Higher Education - Provisions, Berlin, 19 September 2003 15 The introduction of the ECTS system in the Russian institutes of higher education, http://bologna.mgimo.ru/

183 Seventh International HSE Summer School «Baltic Practice» ·2007 should be given to the development thereof as surveys clearly recognize the importance of the role the world web takes in acquiring useful information – especially when the educational field is concerned. More notice should be given to the renewing of the content, website design and its positioning in the first ranks of the search systems – as this will effectively provide the well- recognized face of the movement for the Bologna Process in Russia. Another problem which is frequently outlined by international colleagues of HSE and hence should be solved immediately is the imperfection of the English version of the official HSE internet site. The English version contains incomplete information and is rarely renewed. As a result prospective international students cannot understand the composition of the educational and academic programs available in the University, whilst English becomes the international scientific language as it was with Latin in its best times. Another problem is the uncertainty of the legal position of the student going onto international programs for a period exceeding 1 semester. The solution to this could be the working- out of the individual curriculum of the student before his departure. Here – as Mr Chepurenko has outlined during the above-mentioned conference – the student should write the letter of motivation to the dean’s office and should agree on the courses which would be accounted on his arrival. Also speaking about the All-Russian level, the International Relations Director outlined the importance of the fact that the academic council should accept the courses of the partner-university. Here, we should argue that the foreign university partner should in its turn accept the Russian courses. For example, as Mrs Golubinskaya – Head of the Department of International Student programs in HSE – has outlined during the interview, there is “quite a big practice when the international students coming to HSE in the context of international programs are given here an approved list of courses passed, hour-load and marks assigned and the foreign partner then transforms these marks according to the provided information into

184 Seventh International HSE Summer School «Baltic Practice» ·2007

ECTS or whatever system of credits – making it unnecessary assigning foreign credits in HSE”16. However, though there are many attempts to integrate more and more HSE into the Bologna Process and to create convergence in regard to the western universities, I still think that the initiative should be taken on the level of a particular faculty who will develop in its interests the international contacts with other universities. Such process goes on in the Higher School of Economics really successfully which distinguishes in its profitable the HSE from some other conservative universities. Such contacts later may probably be the forcible argument in favour of the HSE when it might further be integrating into the Bologna Process. For example, in the HSE double diploma programs exist with: • UK: LSE, Manchester University, Leeds University • France: University Paris-I-Panteon-Sorbonne, University Paris-X-Nanter, Paris-XII Val-de-Marne, ESCP-EAP • Holland: University Erasmus, INHOLLAND University • Germany: Humboldt University This is not taking into account the partners of the faculty of Economics, Sociology, Global Economics, Psychology, Govern- ment and Municipal Administration, Management, Business-Infor- matics, Law, Political Science, and Philosophy.17 All in all the HSE has 36 contracts on double-diploma programs, 5 are in the development stage. During the 5-year period (2000-2005) 140 of ICEF (The International College of Economics and Finance) students have acquired double-diplomas with the London School of Economics and Political Science. The dynamics of the amount of students and post-graduates passing the double-diploma programs you can find in Table 1 of the appendix.18 The amount of HSE masters taking part in the international programs on the faculty of Economics and Management is given in Table 3 (see Appendix).

16 Golubinskaya E.V. Head of the Department of International Student programs in HSE, interview on the integration of the HSE into the Bologna Process, 24.10.2007 17 International cooperation, http://d1.hse.ru/figures/ 18 International cooperation, amount of students passing the double-diploma programs , http://d1.hse.ru/figures/

185 Seventh International HSE Summer School «Baltic Practice» ·2007

All in all 2,2% of HSE students take part in the programs of student mobility in context of the Bologna Process. Another really ponderable advantage of the HSE during its integration is the concern which it gives to adopting students, masters and post-graduates to the scientific work. This is realized by the Scientific Fund of the HSE which gives grants to finance joint scientific research of scientific advisers and students, masters and others young starting researchers. One of the most famous grants conceived for this aim is the grant “Teacher-Student”, which finances scientific research if it is approved by clear methodologi- cal concept, scientific reserve, well-determined aims and mechanisms of research. As the result of the grant students should present several scientific publications, conferences, teachers should organize special courses, etc.19 This is important as global educational network gives much concern to scientific work throughout educational process. Also according to Mr Chepurenko the HSE invests considerable resources into conducting workshops, conferences – with the participation of international partners and organizations, foreign scientists are invited – from the starting one to the Nobel Prize laureates. The Middle-Term Concept of the Development of the HSE foresees the HSE as the leader of the integration. The European programs are formed in the context of TACIS and with the help of the HSE partners – 3 Universities in Sorbonne, the Erasmus University, Humboldt University, and LSE&PS – so that the HSE keeps up with the pace of the program development. Whatever will be the result of integration into the Bologna Process, the Higher School of Economics still stays the most innovative and liberal university in Russia. It is the member the European University Association and it fully corresponds in the principals of the Bologna Declaration on the following points: 1. Curriculum 2. Match of the economics, finance and management programs 3. Technologies of the educational process.20 The HSE status can only be supported if it continues to hold to the vector of flexible development which means that the HSE

19 Scientific Fund of the HSE, http://new.hse.ru/C13/C18/rf/default.aspx 20 Chepurenko A.Y. International relations Director – HSE, presentation during the conference, International relations management, organized by the HSE, 23.10.2007

186 Seventh International HSE Summer School «Baltic Practice» ·2007 shouldn’t only level at European colleagues but also at the American and probably in the near future Australian one. This will speak most effectively for the status the HSE possesses on the international market of educational service.

Appendix Table 1

Table 2 Amount of 2003 2004 2005 students/years International students on the HSE programs on 30 63 98 the chargeable basis HSE students studying abroad on double-diploma 348 458 562 programs on the main educational programs (under- 187 Seventh International HSE Summer School «Baltic Practice» ·2007

graduates and post- graduates)

International teachers invited to 40 59 47 HSE HSE teachers going 26 14 85 abroad

Table 3 (The amount of HSE masters taking part in the international programs on the faculty of Economics and Management)21 Holland 70 Germany 26 France 44

21 Chepurenko A.Y. International relations Director – HSE, presentation during the conference, International relations management, organized by the HSE, 23.10.2007

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Diagram 1 (the structure of international relations management in the HSE)

International Relations Director and the Deputy

Deans and deans’ deputies

International International academic activity office mobility office

The department of The department of The informational The CIS The department of secondment monitoring department cooperation international provision department student programs

Bibliography 1. Bad dream of a student, http://www.mk.ru/blogs/MK/2007/10/06/society/316533/ 2. Berlin Communiqué of the Minister Conference on Higher Education - Provisions, Berlin, 19 September 2003 3. Chepurenko A.Y. International relations Director – HSE, presentation during the conference, International relations management, organized by the HSE, 23.10.2007 4. Chepurenko A.Y. International relations Director – HSE, speech during the conference, International relations management, organized by the HSE, 23.10.2007 5. Chepurenko A.Y. The interview on the Integration of the HSE into the Bologna process, 23.10.2007 6. Golubinskaya E.V. Head of the Department of International Student programs in HSE, interview on the integration of the HSE into the Bologna Process, 24.10.2007 7. International cooperation, http://d1.hse.ru/figures/ 8. Larionova M.V. The European Experience in forming the understanding of the general composition of qualifications and 189 Seventh International HSE Summer School «Baltic Practice» ·2007

level structure. Competent approach, http://www.iori.hse.ru/tuning/materials/qualifications_structure s_degrees.pdf, page 1 9. Larionova M.V., Shadrikov V.D., Forming the all-European education area, Moscow, SU-HSE, 2004, p.207 10. Scientific Fund of the HSE, http://new.hse.ru/C13/C18/rf/default.aspx 11. Seminar polit.ru, Education: Reform and Transformation, Economic Demand, http://www.polit.ru/author/2006/05/17/tez.html?refresh=1, 17.05.2006 12. The international links of The High School of Economics, http://new.hse.ru/C16/C4/international/default.aspx?view=3 13. The introduction of the ECTS system in the Russian institutes of higher education, http://bologna.mgimo.ru/ 14. The statutes of support management for international activity- State University High School of Economics, http://new.hse.ru/sites/infospace/podrazd/aup/ozkvir/DocLib3/ polozh_UOMD.doc 15. Tsygankov D.B. The interview on the problems of the integration of the HSE into the Bologna Process, the Deputy Dean on the Magistracy on the Faculty of State and Municipal Management, 16.05.2007 16. Tulupov V.V., The scientific-cultural magazine, http://www.relga.ru/Environ/WebObjects/tgu- www.woa/wa/Main?textid=95&level1=main&level2=articles, №2 [92] 11.05.2004

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CHAPTER THREE. INNOVATION POLICIES COMPARISON

Introduction by the group Academic Advisor

Themes of technological breakthrough and active innovation policy needed to reach leading positions in the world economy are very popular in the today's political agenda in Russia. Annual President’s addresses to the Federal Assembly clearly demonstrate increasing political significance of this issue1. During the first presidential term Mr Putin mentioned this topic only sporadically, and the tone of these references is far from optimistic. In the address for 2000 year which was a kind of first “stock-taking” report, Mr Putin notes that “we lose in the competition at the world market which is oriented more and more toward innovation sectors, toward new knowledge-based economy of high technologies”, and here he transferred to other problems that seemed more actual for that time. President’s address for 2002 year mentioned on “potential in the scientific and technical sphere” only to criticize the government which does not active measures for use this potential. It was only message for 2003 year when the first encouraging notes appeared: information technologies are developing, “new economy” is growing at 20-30 percent per year, a number of people who use cell phones and the Internet are increasing rapidly. It was a joy about grows which occurred mostly “by itself”, without any serious government’s activity in this sphere. There was practically noting about this issue in messages for 2001, 2004 and 2005 years. During

1 Addresses to the Federal Assembly // Internet site “President of Russia” (http://www.kremlin.ru/eng/sdocs/speeches.shtml?stype=70029)

191 Seventh International HSE Summer School «Baltic Practice» ·2007 last two years we see detailed and expanded review with clear priorities: modern power engineering, communications, medical equipment, space exploration, aircraft construction - and, certainly, nanotechnologies, new “magic word” that became very well known in Russian. Nanotechnologies “become a key trend in actual economical development and science <…> Scientist’s estimations show that new products made by means nano-technologies will be a part of everyone’s life, without any exaggeration”, Mr Putin says in 2007. Not only declarations appear, but real political and economical decisions also. Since 2004-2005 government offers news mechanisms and tools to support economic growth: special economic zones (technical zones, industrial zones, port zones), technical parks, the Russian Venture Company, the Investment Fund. New state corporations are created, “Rosnanotech” (“Russian Corpora- tion for Nanotechnologies”) and “Rostechnologii” (“Russian Cor- poration for Technologies”) called to become “growth loco- motives” for new economy based on high technologies. Federal authorities learned that “nano-technologies need mega-money2” and is ready to invest. Claims are too serious to treat it as more than just another political campaign. The present solutions, by whatever motives they were caused, will have the very significant effect on the future development of Russian economy. In this context it is clear, that in order to fulfill those ambiti- ous tasks, a serious look into he experiences of other countries is greatly needed. This is why our group is consentrating on this subject. Alexey Titkov, assistant professor, HSE, political geographer

2 Sentence from acad. Vladimir Fortov’s (director of the Institute of Extreme State Thermophysics, Russian Academy of Sciences) interview for Argumenty I Fakty weekly, June 26, 2007

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Alexey Titkov Innovation policy in Russia: internal and external economic context

Governmental Long-term program for the socio-economic development until 2020 (project, published in July 2000)1 suggested that Russia have to enter into the first five of the leading countries of world on the production of gross domestic product, but also to became specialized in high technologies and advanced researches and developments. Russian share at world market of hi- tech goods and services will have at least 10 percent on 4-6 or more positions. The main hope rests on the next round of technological progress: nanotechnologies, optoelectronics, biotechnologies, hydrogen and fusion engineering. Rate is done to the fact that in these directions Russia lags behind the leading countries not so much, in some direction even kept pace with most advanced ones; therefore it will be able to break forward, and the previous delay in the technologies will by then no longer relevant. As a background to start new innovation policy we see rapid growth in the raw sectors of the economy, caused by the unusually favorable situation of prices of oil, gas, coal, non-ferrous metals on world markets. Most evident consequences of such growth are dramatic increase of free resources available to the state budget, and, it goes without saying, even the more expressed, than earlier, general raw specialization of the economy. The share of mineral production in the gross domestic product for five-year period 2002- 2006 grew one and a half times from 6,0% to 9,1%. In the commodity structure of Russian export share of mineral products increased from 40,4% in 1995 to 67,5% in 20052. Worsening problems and the appearance of free funds to resolve these

1 The concept of long-term socio-economic development of the Russian Federation until 2020 / Ministry of Economic Development and Trade (www.economy.gov.ru). - 2007. – July 24 (in Russian) 2 Federal State Statistics Service’s data (www.gks.ru).

193 Seventh International HSE Summer School «Baltic Practice» ·2007 problems is the most appreciate combination of incentives to ponder new strategy and to begin its implementation. Successful development of raw sector is at time the engine and brake for lifting innovative sectors. The choice for further increasing raw sector is already made, at least for 1,5-2 decades forward. Survey of major investment projects, carried out by the Institute for Regional Policy3, found that almost half of all declared investments for the period until 2020, accounting in five - Sakhalin region, Krasnoyarsk territory, Sakha (Yakutiya) republic, Yamal-Nenets autonomous district, Irkutsk region. All of this, for the most part, are regions with specialization in primary industry, they require significant expenditures for initial construction under the complex natural conditions. There need expenditures both from the side of particular corporations, and from the state budget. The development of innovative industries cannot come out as alternative to the accelerated development of primary industries, it can only became a compliment to it, more or less meaningful one. This state of affairs acknowledges is recognized in governmental Long-term strategy which defines a desirable “scenario of innovation development” through “the growth at the expense of the implementation of competitive advantages in traditional Russian economy (energy, transport, agrarian sector) as well as in new-technology industries and in knowledge-based economy”. Meanwhile our studies are concentrated in two problematic points that are meaningful understanding the prospects for innovation policy. The first relates to the assessment of the current state of innovation sector and selected areas of innovation policy in comparison with the experience of other leading world actors. Each of selected examples (the European Union, China, USA) and Russia has important similarities and essential differences – both important for understanding of whether to borrow tools and mechanisms of innovation policy, created in other countries, and how they can work in the Russian context. The second is to study the current situation in inter-national economic cooperation, to evaluate, does it enhances or constrains for innovation sector the development. We chose, as example, North West region of Russia,

3 Industrial Framework for Russia Development. Moscow: Institute of Regional Policy, 2007. (in Russian).

194 Seventh International HSE Summer School «Baltic Practice» ·2007 the traditional object of the study in schools under the HSE’s “Baltic Practices”. Its characteristic features are developed international links, caused, mostly, by proximity to Europe, good conditions for investment projects both in primary industry (shelf oil and gas, ports, pipelines) and in knowledge-based “new economy”. Thus, all the major issues and trends, which working group was interested in, are expressed here may be stronger and more obvious than in other parts of the country.

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Daria Chizhikova, Olga Dovbysh, Julia Litvinova, Victor Kovalkov Innovation policy in the European Union, China and the United States: Lessons for Russia

The economy of the 21st century will be the economy of knowledge base and high technology. It will not benefit those who have more natural resources, as someone who knows how to use them better, to find new approaches and decisions. All leading countries move in this direction, each of them takes into account its strengths and weaknesses, historical and geographical special features. For today’s Russia, understanding the experiences of other countries and regions is important for evaluating its capabilities and prospects for innovation economy development. The European Union, China and the United States, which are reviewed there, are important for Russia not only as a major economic partners, but also as guidelines for their own innovation policy.

A. European Union The European Union is in situation of severe competition with the United States and Japan, with swiftly growing China and India, other new strong actors in world markets. To stay competitive, to use science and technology for economic growth, create new jobs, improve the quality of life and address social problems is the main challenges for modern Europe. The European Union clearly realizes the decisive role of innovation and is constantly looking for ways of their advance. Proclaimed in "Lisbon initiative" (2000) the charge to make the European Union by 2010 into the most competitive space in the world economic, set a course for promoting research and development. According to this strategy, in 2010 the share of investment in research and development should grow to 3% of the total GDP of the European Union, and the share of the private sector in R&D increased from 56% in 1999 to 67%. Hopes for a new economic 196 Seventh International HSE Summer School «Baltic Practice» ·2007 miracle, for a powerful new push, which are reflected in this strategy, has been severely undermined by the spring of 2000, when the collapse occurred on world stock market in the sector of Inter- net technologies. The world economy entered a phase of crisis, whose consequences most strongly affected the EU countries. Nevertheless, the choice for innovative development remains before. It depends on innovative industries, whether Europe will be able to stand on the world market, without damaging the level of social and environmental protection achieved there. The priorities of today's European policy of supporting innovation are defined in the7th Research Framework Program, FP7, the largest for all years. 50.5 billion € are assigned to its realization in 2007-2010, it is for 40% more than to previous FP6. Basic objective of this framework program is to organize international and interdisciplinary projects in four areas: "Cooperation" (34.3 billion €): joint researches in the fields of medicine, food, agriculture, fisheries, biotechnologies, information and communications technologies, nanotechnologies, new industrial technology, energy, environment, transport, aeronautics, space exploration, security, social and human sciences. "Ideas" (7.5 million €): establishing European Research Council to support advanced research. "People" (4.9 million €): training of young researchers, promoting talented scientists, making ties between researches and industries, between scholars of the European Union and other countries. "Opportunities" (4.1 billion euros): creating of infrastructure for research, supporting regional research clusters, research for the benefit of small and medium enterprises, international cooperation and coordinated policy for supporting researches and developments. The European Union usually paid up to 50% of expenditures for researches, while grants to small and medium enterprises can cover up to 75% of expenditures; priority innovative researches can be paid completely. Agreements on cooperation with the countries which are not members of the European Union allows to participate in projects FP7 for scientific institutions and business companies from those countries also. Adoption in May 2007 two joint technology initiatives, ARTEMIS Initiative and the Innovative Medicines Initiative, indicates the transition to new principles of financing innovative 197 Seventh International HSE Summer School «Baltic Practice» ·2007 researches. Within the framework initiatives not individual projects are supported, but large-scale long-standing research programs that will make European research sector more sustainable and consistent. The European experience of supporting innovation differs from one country of the European Union to another. Conditions and possibilities for this policy varies, first of all, between the leading countries of "old" Europe (for example, in Germany) and the new members of the European Union. For Russia with its great internal variety and rapid faster social and economic changes both experiences are interesting.

Germany Germany is an example of a country with an advanced and reasonably successful innovation policy. According to innovation activity indicators Germany belongs to the first seven countries in the world. The high competitiveness of German products due to the smooth implementation of the system of R&D results in the industry, by scale expenditures on basic and applied research, including the private sector and international cooperation1. The problems hindering further growth of the innovation sector, in Germany are called inadequate quality of the education system and a shortage of skilled workers, difficulties in launching start-ups for small and medium businesses, sectoral imbalances in research and development and other forms of innovation activity, accounting for a large portion of e on the automotive sector, possibly at the expense of other industries. Innovation policy in Germany managed, basically, by the Ministry of Economics and Technology (BMWi) and the Ministry of Education and Research (BMBF). Strong side of the German system of government innovation is a thoughtful strategic decision- making system that includes a thorough analysis and forecasts, deliberations with stakeholders and expert community, as well as the established system of information exchange. The main disadvantages are superfluous complexity, especially in federal- level organizations, and intersections in spheres of responsibility by ministries. The A. Merkel’s new coalition government (2005),

1 Share of foreign companies’ branches in Germany in total R&D spending is almost a quarter. Private companies funded by more than 12% the cost of studies in the universities.

198 Seventh International HSE Summer School «Baltic Practice» ·2007 decided to change responsibilities distribution between them in order to get rid of such duplication. The results so far speak sooner. For the future, Germany plans to further increase investment in R&D, which in 2010 should compose 3% of GDP, as in the EU as a whole, according to "Lisbon Initiative". Main national priorities are information technology, telecommunications, bio- technology and pharmaceuticals, energy. For increasing innovation activity, federal government will act in three directions: simplification of the system of taxes and bureaucratic procedures for private companies, which carry out innovation; financial aid for such companies; an improvement in the quality of education, retraining for companies personnel. Technological clusters and regional innovation groups will be established and developed, small and medium-sized enterprises involved in research and development will be promoted. Another main goal is improving the quality of R&D, increasing their commercial efficiency. Special measures designed to support innovation in the East Germany, which as before lags on the level of economic development behind western lands. Special programs for “new lands” include: InnoRegio stimulates knowledge exchange and technologies transfer, regional and international cooperation in education, research and development: regional innovative growth poles are to support joint R&D enterprises, research organizations, universities, which are oriented for implementation their development in industry and for their market promotion; NEMO establishes and supports for regional innovation networks, which help middle and small businesses in innovative developments, in market promotion for their product; InnoWatt: grants for medium and small enterprises with a high innovation potential, which already had the experience in commercially successful innovation projects; InnoMann: consultation service on the practice in innovation for small and medium-sized enterprises. The experience of East German programs implementation can prove to especially useful for Russia. Many problems caused by the legacy of the socialist economy and the subsequent crisis and recession upon transition to the market economy are general for Russia and East Germany. Financial opportunities for federal

199 Seventh International HSE Summer School «Baltic Practice» ·2007 governments in Russia also became, gradually, comparable with the German.

Central and Eastern Europe Hungary, Czech Republic, Poland are serious rivals for Russia in the competition for foreign investment, for deployment on its territory of branches of leading Western companies. Investors prefer to run here a number of industries, oriented toward Russia and the CIS markets - in particular, automobile and consumer electronics factories. The advantages of these countries are macroeconomic stability achieved as early as 1990, good level of infrastructure, qualitative legislation, high qualifications of workers. Special features of Hungary, Czech Republic and Poland in 1990, has become a boom rapid privatization with the participation of foreign companies, who brought with them skills in new technologies. In Czech Republic in mid-2000es almost half of biznes-investments in R&D are subsidiaries of foreign firms. In this case foreign companies (such as automotive) adjust cooperation with local universities and research laboratories. The part of investments, which could be sent to Russia, "take away" also to the Baltic states (Estonia, Latvia, Lithuania). Russia has roughly the same set of competitive advantages, such as the countries of Eastern Europe. The proposal and relatively cheap skilled professionals, such as in the development of software for scientific or engineering tasks of any complexity, Russia took a front line often is a problem that the Russian side opportunities became known potential Western partners. Matters concerning with the infrastructure for innovative industries – here delay is noticeable, large efforts are necessary to overcome it.

The lessons and opportunities for Russia Europe and Russia have chosen a similar strategic course for developing innovative sectors of the economy. In this case European countries have shown a far greater variety of tools and mechanisms to support innovations. In Russia mechanism of support for innovation business, including small and medium-sized companies through a system of venture funds, rather declared than begin to act properly. Links between R&D and industry (business) it is necessary to build practically anew. This could help European (including German) experience in establishing business incubators 200 Seventh International HSE Summer School «Baltic Practice» ·2007 as important component in cooperation between scientific community (institutions, universities), business and government. Thus far yet is not solved problem with coordination, adjusting connections between companies in innovation sector. More precisely to say, it solved now, but, basically, only one way - by establishing large public entities like corporations "Rosnanotech" and “Rostechnologies”. European and German experience proved much more flexible in this part. Direct way to mastering European experience in innovation policy connected with cooperative programs the European Union as a whole and with individual countries f the Union. Role of such cooperation for innovative development in Russia does not need overestimated, a lot of serious restriction exists there. European countries are interested in cooperation with Russia primarily as a source of raw materials. For example, in the structure of Russian exports to Germany, share of manufactures is only 7%, share of machinery and equipment is slightly more than 1%, a little percent, raw materials and semi-finished products predominate: oil products, wood, iron and scrap iron, steel. Innovation support programs taken by the European Union assume cooperation with non-member countries, but priorities chosen in these programs are important mostly for the EU2. Possibilities and needs of the partner, if taken into account, it is clearly not in the first place. Nevertheless, opportunities for the development of innovative sector Russia exist, and they need to be used. In the context of Pan-European programs, participation in European Strategy for Space looks promising for Russia.. The Strategy for Partnership in Innovations and Development between Russia and Germany highlighted, as priorities, areas of health, education, tourism, alternative energy, transport, agro-industrial complex, electronic commerce. German companies propose to realize in Russia their projects in the field of optics, electronics and microelectronics, medical equipment etc. The Memorandum on Cooperation in Regional Policy, signed with the European Commission in May 2007, assumed European experience applications in establishing mechanisms of innovative development support in Russia, especially in border regions.

2 Priority areas of cooperation with the CIS countries in FP6 were environment protection, health, intellectual property protection, certification, technology transfers.

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Active policy to promote Russian projects on the external market is required for the successful competition with Central and Eastern European countries. The system of support to external economic activity, established in Germany, can serve as a role model. Here are well-developed mechanisms of export credits, insurance for investments abroad against economic and political risks (especially for small and medium-sized businesses); unions and industry associations work actively, information and consultation agencies (AiF, Intec.net, PRO INNO II, NEMO ) to help business information on the opportunities and risks that exist in different countries. Outside the country are created representation of German industry, German commercial houses, other similar institutions (as, in particular, Ost- und Mitteleuropa Verein that acts in Russia also), promotional publications, such as magazine “Ost-West Contact” issued. The need for such an extensive and Russia are actively working foreign institutions suffices even more noticeable in the coming years, in proportion to the growth in Russian economy as well as in innovative industries.

B. China The model of innovation support in China can prove to be especially helpful for Russia. China is a country of the overtaking modernization, as well as Russia, with large large internal regional differences. China in early 1990 solved a lot of problems with the lack of scientific personnel, low wages for researchers, which are significant for today Russia. China in the recent decades shows impressive economic growth. The entry of China into the WTO in December 2001 has an additional impulse for development: after reducing customs duties into the country the largest world corporations arrived. The problem for China is that the old sources of growth gradually stop working. China can no longer rest on cheap production as their main competitive advantage due to the increase in value of the resources and labor costs (labor in the coastal cities which are main centers or growth, ceased to be cheap). The innovation way had chosen by China that intends to become one of the leading world's centers of science and technology. For several years, the output of high-tech products grew at times, and by the amount of investment in R&D China now the second in the world after the United States. The state law on innovation policy, adopted in China, in 2002, assumes three implementation stages: 202 Seventh International HSE Summer School «Baltic Practice» ·2007

creation of the innovation system by 2010; achievement to the world level for eleven fundamental directions of scientific and technological progress, the world leadership in three-five directions by 2020; creation of the knowledge-based economy, by 2050. Now China declared five-year plan for "independent innovative technologies", that assumed large-scale expansion of research, aggressive patent policy, priority in using local innovation. These are radical reform in science institutions, wages of scientific workers was appreciably increased (up to 500-3000 dollars per month, depending on qualifications and the importance of sending work); a system for assessing the work of scientific institutions for a quantity of implemented innovative projects, on the participation in key public and academic problems solution (on the sum of estimation budget fund they are redistributed from ineffective institutions to successful ones); promotes education in foreign universities (currently more than half a million Chinese students studying abroad) with the help of Chinese diaspore, China business community and specialized funds. Innovative development requires decentralization in decision-making; therefore the government of China passes from direct intervention in enterprises activity toward policy of making good environment for investment and competition, to provide resources for priority directions. China has already attained much in the innovation sphere. Total amount of investments in high technology in 2005 were 87 billion dollars, by 17% more than the year earlier, mostly by increase in domestic demand for hi-tech products. Yearly a quantity of scientific articles published by Chinese scientists in international periodicals grows by 15-20%. Number of claims into world patent offices from Chinese inventors was doubled since 1997. Engineering personnel, prepared in China (every year to 450 thousand professionals issued), competent and relatively cheap, prove to be attractive for the foreign companies which open there research laboratories and design offices. Innovative projects and the introduction of high technology in industry give more than 30% of total increase in the Chinese economy. The proportion of high- tech products in the Chinese exports are already approaching 30% and growing each year. Serious problems appeared which impede for innovation economy development. Culture of patenting in China is still far 203 Seventh International HSE Summer School «Baltic Practice» ·2007 from forming, there is no effective system of protection of intellectual property. Too little attention is paid to the mastering of acquired technologies, adaptation and improvement: expenditures for these objectives are no more than 10% of the total spending for import of technology (in South Korea it is 75%). Mechanisms for attracting investors are quite diverse in China. Their forms first are tested in some one province, and then, in the case of success, they apply to entire country. The variety of types of investment zones helps the government of China to carry out flexible local-level, innovation policy. Investment zone are examined also as one of the methods of reducing disparities in the social economic development of regions. Geographic differences in China are quite large-scale. The most favorable conditions for innovative industries were formed in South-Eastern provinces. At the same time Chinese government supported the poles of growth for a number of investment industries (pharmaceuticals, electronics, etc.) in old-industrial regions of the Center and North-East, in the underdeveloped Western provinces. The most common types of investment zones are following: - Free-trade zones (bond areas) in the major ports of the East Coast or close to them, one-and-a-half dozen zones total. Free trade zones are considered locating beyond the limits of Chinese customs boundary, their basic activities is connected with storing and export. - Special economic zones, five cities in the Southern China (Shenzhen, Zhuhai, Shantou, etc.) with its own legislation on economic issues. Companies working in the special economic zones pay income tax on the decreased rate 15% (in the conventional areas - 33%). Special economic zones are the closed formations constitute a private education with a strict regime of permission. - Areas for economy and technology development are in many respects similar to the special economic zones, but more focused on innovative technologies development. Located across the country in second-third rank cities (a total of about thirty zones), they offer a good level of infrastructure and services at reasonable prices foreign investors. - High-tech development areas (technical parks) are created to attract new technologies and to develop knowledge-based industries, with such selected priorities as pharmaceuticals, 204 Seventh International HSE Summer School «Baltic Practice» ·2007 agriculture, etc. Among the benefits that may be provided to investors are low-rent (for example, company Intel pays for the rental one dollar per year in one of the technical parks), free transfer of funds abroad, lower tax rates. Providing incentives are within the competence of the Ministry of Science and Technology. International technology parks are another type of special areas which is oriented for attracting foreign technologies. International technology parks invite scholars from abroad, who work in a free regime, almost without obligations before the Chinese side. Because of this the impact of the international technology parks work is not always high, but this form of work allows Chinese scientists to participate in the development of international science, to learn skills and habits of their foreign colleagues. Universities are arranged frequently in technology parks or next to them. There are about fifty universities at the first Chinese technical park "Beijing Experimental Zone for New technology". Government encourages creation in technical parks business incubators for helping companies in the early stages of development (start-ups): consulting, training, administrative and information support. Today in China there are more than four hundred technology parks located throughout the country, although the main focus of it still in the South, where the main ports and where infrastructure are better developed. Their indexes of effectiveness vary, but their general contribution to the economy of China is already well noticeable. Revenue from their activity in 2005 exceeded 350 billion dollars, yearly almost by a quarter. The government of China government is investing in technology parks annually on average 15 thousand dollars to each researcher, by 2010, this figure should grow by nearly a third. Technology parks which attract the best of Chinese and foreign experts, should become a key source of innovation in China in the next decade.

Conclusions for Russia Much of the Chinese experience can be applied in Russia. Government can grant to regions more freedom in the selecting methods to support innovation, and then extend successful experience to other regions. Entrance to the domestic market for companies working in the innovation sphere have to be simplified. Actual rules on establishing technical parks and special economic 205 Seventh International HSE Summer School «Baltic Practice» ·2007 zones rather hamper innovative growth than encourage it. This rules should be made more simple and open, then there will be more and technological parks will be to attract more investors in the high-tech industry. Reforms in science should include differentiated system of financing payment with bonuses for advanced researches and for successful organizations. Studying abroad and inviting leading foreign scientists to work in Russia must be practiced wider than now. The errors, committed in China, also should serve as a lesson: it is necessary to think in advance about the reliable protection of intellectual property rights and increase expenditures for technology transfers and for new technology refinement.

C. United States of America. The United States, like other developed countries, drew great attention to the development of science, innovation projects, supports research and development. Government supported venture funds, R&D companies: favorable conditions are established for companies carrying out state orders on priority areas of research. Innovative research supported by a number of organizations financed by both public institution and private companies: American Science Foundation, American Association for the Advancement of Science, National Academy of Engineering, etc. Russia, where issues of innovative developments becomes relevant again, is interested in transferring best practices of leading countries. Main problems that prevent developing of new technologies are well known. These are weak innovation support infrastructure (technology parks, business incubators, etc.), undeve- loped venture financing mechanisms3, barriers between science and education, between researches and actual economy needs. Measures, which are necessary to improve situation, are under- standably, in the first approximation: simplifying bureaucratic procedures (including new products licensing), information support for new developments, partnership between companies-developers and companies-users, etc. Difficulties connected with lack of prac-

3 In Russia now works only thirty venture funds, granted in 2006 1,5 billion dollars in total; only 5% of this amount was given for innovation companies. In the United States, the number of venture funds is several thousands, the volume of venture support is hundreds of billions of dollars. Venture financing helped to rise for a lot of leading companies such as Hewlett Packard.

206 Seventh International HSE Summer School «Baltic Practice» ·2007 tical skills in solution of similar problems. The Soviet experience of innovation policy can not be automatically transferred into the new context. Western experience requires attentive preliminary estimation, what could be useful there. It is clear that Russia for its financial, material, personnel opportunities in scientific researches and development is markedly fall behind the United States, so it hardly possible to copy the American experience directly. The task became more complicated because of the fact that actual task for Russian innovation sector is not simply running after the leading countries but to go around them on a new turn of technological progress. Probably more productive way is to study innovation policy the experience in the United States not at the national level, but based on some local-level project cases. This approach is important, first, because it shows the American experience in its diversity, which increases possibilities for selecting suitable models. Second, innovation development in Russia also will be local, in separate “points of growth”. So, knowledge about such local experiences should be useful. The famous Silicon Valley where works the large part of companies - worldwide leaders in innovation, information, high- tech companies (140 companies, including Intel, Google, Hewlett Packard), and where a great number of new inventions occurs4, grew, in a considerable degree, due to venture financing, due to private enterprise in R&D in general. Originally, significant push on scientific institutions and laboratories in this region were military orders, especially during the Second World War and the first post-war years, but contemporary Silicon Valley, such as it they know, was created, largely, by venture capital. The history of partnership between venture business and innovation business rises from here in 1960es. Risky but profitable business venture is still attractive for the private capital, and it provides scientists with the necessary financial resources for research and development. "Intellectual capital plus venture capital" - that is the formula of Silicon Valley’s success.

4 It is only San Jose, one of the two dozen Silicon Valley’s towns, were 3.9 thousand patents was registered in 2006.

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Massachusetts, where is located also well-known area Route 128, is an example of active government policy for support innovation and high technology, which was able to solve economic crisis in this region. Basic slogan of innovation policy here is "Public enterprises aid for market": innovative companies adapt to competitive environment with the help of state funding. Massachu- setts Office of Business Development (MOBD) was established with large credentials to solve problems in R&D sphere, which works with innovative companies for a "one window" principle, which is quite convenient and considerably reduces bureaucratic procedures. Emerging Technology Fund provides guarantees on loans for innovative companies. Massachusetts Technology Deve- lopment Corporation (MTDC) works as a venture fund for finance- ing hi-tech companies. Creating a system of tax credits for investments in R&D, for purchase and leasing equipment research projects, and reforms in labor laws (compensating rewards to workers and unemployment insurance payments were reduced) which allows business to save additional funds to invest in high- tech projects, were another significant measures in encouraging hi- tech industry in this area. North-West region of Russia, especially St. Petersburg and the Leningrad region, should be one of the main centers of innovation branches raise in Russia. Concentration of research institutes, both of fundamental studies and applied researches, universities, enterprises of military-industrial complex, workers with high qualification, relatively developed infrastructure, suitable geographical location – all this factors give possibilities for making here, in St. Petersburg agglomeration, “Russian California” in hi- tech, sphere. Or, by nevertheless, to became “Russian Massachusetts”, because of large role of proactive state policy which supports, first of all, large public corporations. In the future, probably, more place should be found for private enterprise. Cases with Route 128 and Silicon Valley show how it is important for innovative growth.

Literature, sources. Blagonravin M. Ot Kharkova do Kharbina I obratno. In: Innovatsionnoe buro “Ekspert” (www.inno.ru). – 2006. – June 17. Gromov G. Kremnievaya dolina. In: Internet: Innovatsionniy proekt i informatsionnie tehnologii (www. wdigest.ru). 208 Seventh International HSE Summer School «Baltic Practice» ·2007

Domnich E. Analiz razvitiya vysokotehnologichnyh otrasley Kitaya: rol’ prostranstvennogo I tehnologicheskogo factorov. In: Institut ekonomicheskih issledovaniy DVO RAN (www.ecrin.ru). Emel’yanov S. SShA: gosudarstvennaya politika stabilizirivaniya innovatsionnoy konkurentosposobnosti amerikanskih proizvoditeley. In: Menedzhment v Rossii i za rubezhom (www.mevriz.ru). – 2002. – N 3. Kovalchuk N. Nantehnologii dayut nashei strane shans vyiti v lidery. In: Rossiyskoe expertnoe obozrenie (www.rusrev.org). – 2006. - N 3 (17). Kozlovskiy E. Krasniy plod Dunguana. In: Vokrug sveta (www.vokrugsveta.ru). – 2006. – N 8 (August). Koshkarov A. Vnutrennee razvitie cherez globalnuyu ekspansiyu. In: Ekspert. – 2006. – N 46 (December 11). Kustarin I., Fedorov I. Massachussetskie yastreby. In: Vestnik innovatsiy (www.respublika-vi.ru). Markov D. Otkrytie regiony Kitaya. In: Informatsionniy server Belorusskoy torgovoy palaty (www.cci.by). Opyt razvityh stran v podderzhke innovatsionnogo biznesa. In: Analitika malogo predprinimatelstva (www.giac.ru). Perviy v mire tehnopark. In: Ekspert Ukraina (www.expert.ru/ukraine). – 2006. – N 9 (March 6). Porunov A. Kitay. Ot stadii investitsiy k stadii innovatsiy. In: ChinaPRO (www.chinapro.ru). – 2006. – June 1. Putilov S. Vencurniy biznes: missya nevypolnima. In: Finans (www.finansmag.ru). – 2003.- N 29 (September 29). Syroi S. Kitay nameren patentovat’ “agressivnee I ispolzovat’ mestnie innovatsii. In: Techlabs (www.techlabs.ru). – 2006. – April 28. Tehnoparki. Ekonomika. Biznes (www.technopark.al.ru) Titarenko M. Kitay sdelal stavku na nauku i innovatsii. In: Poisk (www.poisknews.ru). – 2006. – July 27. Ekonomika Kitaya. In: Torgovoe predstavitelstvo Rossii v Kitae (www.russchinatrade.ru).

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Anastasia Belonogova, Thomas Kreuer, Maria Turikova International cooperation and innovation projects in the North- West Russia

North-Western federal district is a territory of great economical and geopolitical importance for Russia. Here are combined extensive and dense transport network with access to the seas, strong industrial and scientific potential, stable political situation. National government as well as foreign business (which is ready to participate in large-scale projects in its territory, if support and assurances from the Russian side were provided), are strongly interested in this region. Main interests there are connected actually with oil and gas exploration projects at Barents sea shelf and with transport infrastructure: seaports St. Petersburg, Ust-Luga and others. Northern European gas pipeline (Nord Stream) becomes a present day symbol of European – Russian collaboration in resources and infrastructure areas (see Appendix with analysis of this project from European point of view). Recently, foreign investors in the Northwestern district has also shown interest in high-tech innovation and the production of high value added products. The development of such industries, both for domestic consumption and for export, is strategic interests of Russia, in long-term outlook. Cases of such cooperation are so far few, but they are important for Russian economy modernization. Proximity to the European market is one of the key features of North-Western Russia. Not surprisingly, it is European countries, including close neighbors on the Baltic region, which have more tight cooperation with North-Western regions of Russia. On the other hand, it is understandable that international cooperation cannot be limited by only one European direction. In relations with

210 Seventh International HSE Summer School «Baltic Practice» ·2007 other world regions (North America, China, Southeast Asia), the main trend is the same as with Europe: raw materials and transport in the first place, but potential for joint projects in innovative industries also exists. Variety in possible patterns of cooperation showed there based on cases of two significantly different economic partners: these are Europe and China.

Priorities of Russian North-West and partnership with Europe Important features of the North-West are high scientific potential and proximity to the European market. Both conditions are important for increasing competitiveness of this region and for adjusting cooperation, including with the Baltic and Scandinavian neighbors. Significant competitive advantage of the North-West is high scientific potential which makes this region one of the most important centers for developing high-tech industries in Russia. Trends in recent years enhance this development. Demand on leading technical universities increase, in comparison with the past decades, their graduates attempt to work no longer only in foreign companies and their branches, but in domestic companies also: proposals from that side became better. Research institutions in the North-West, with the condition of provided sufficient public and private funding, are capable to take a leading position in the market of high-tech research and development not only in Russia but also, at least, in the Baltic region of Europe. Priorities in innovative development, which are determined by federal government, are refined in regional level according to local special features and opportunities. • authority at the regional level refined depending on the local characteristics of each region of opportunity. In Leningrad region, for example, selected priority areas are: • new technologies in energy and resource economy; • biotechnologies and new technologies in agro-industrial complex; • ecology and environmental management in accordance with regional of social and economic objectives; • new technologies in medicine and medical equipment; • new information and telecommunication technologies, microelectronics; 211 Seventh International HSE Summer School «Baltic Practice» ·2007

• new technologies for industry modernization; • precision and nano-metric technologies. Program for nanotechnologies promotion is one of the most significant initiatives of federal government in sphere of innovation policy. New Nanotechnologic complex, established by federal government on the base of the Central Research Institute of structural materials "Prometheus" will be one of directing agencies in federal program on nanotechnologies in Russia. This Complex will coordinate the work of 18 businesses in the North-Western federal district, prepare specialists in structural nanomaterials. Financing for St. Petersburg center will be is 1.5 billion rubles of the total 30 billion rubles granted to the entire four-year program for developing nanotechnologies. Private companies are interested in innovative industries because of their assumed commercial benefits. Evgeny Novitsky who is a president of United Financial Corporation AFK Sistema" (telecommunications, microelectronics) examines innovations as new technologies that can provide increase in 20-30% a year with usual increase in 5-6%. Potential application of high-tech development can be very diverse; case of Group "Tranzas” confirms it. “Tranzas” apply technologies, which elaborated for maritime and aviation trainers, at mass entertainment market. The first two entertainment-education sets "Trans-Fors" have been set up in St. Petersburg; in subsequent years company management wants to set a network of such facilities in Russia (Kazan, Krasnodar, Novosibirsk, etc.) and abroad (first foreign package should to be opened in Spain in the Canary Islands). For Western corporations their interest in high technologies market in Russia is connected, largely, with opportunities to engage local engineers and programmers, who are of high skills and relatively, by Western standards, low wages. Demand for Russian specialists grew especially after the opening in St. Petersburg R&D offices of such world famous companies such as Intel, SUN Microsystems, Siemens, Motorola, Alcatel. According to Valentin Makarov, president of Russian Association of assessment software developers "Russoft", growing interests in Russian projects is, moreover, because of Western companies’ certain disappointment in partnership with Indian and Chinese companies – it turned out to be rather difficult because of inevitable culture barriers. Asian programmers “interpret business relationships quite peculiarly” and "demonstrate less flexibility and 212 Seventh International HSE Summer School «Baltic Practice» ·2007 innovativity than Russian specialists”, Mr. Makarov says. The next important factor for Western business is rapid growth in Russian domestic market of telecommunications and information technologies – it grew, from 2003, at25% annually. Difficulties and constrains for develop innovative industries in the North West are, in general, the same as in the country in whole. These include lack of infrastructure, lack of skilled workers (specialists with the technical education, in particular), strict and confusing customs legislation. Some of these problems (first of all, infrastructure) can be solved in the framework cooperation with European countries, especially with Scandinavian neighbors, which play a role of trail-blazers and intermediaries there. In joint projects with Finnish and Swedish new infrastructure for high-tech business is created; further it became attractive for other international companies, for example, from the South-East Asia. Scandinavian countries are characterized by developed high- tech sector in domestic economy. According to Nordic Information Society Statistics research center, the average information and telecommunication technologies industry turnover in Sweden and Finland is around 10 billion dollars, that is nearly 1/10 of GDP in these countries. Companies Sony Ericsson (Sweden) and Nokia (Finland) were among the first who have started to cooperate with Russia, other big and medium companies from this region began to came following them to the Russian market. Together with hi tech companies, Scandinavian banks and investment groups (Handelsbanken, HansaBank, SwedFund, EastCapital) go to the Russian market too; they are ready to invest in high technologies there. SITRA and Norwegian Bank (Den Norske Bank) are founders and principal shareholders of the foundation for direct investments "Norum", which manages for share fractions in several Russian IT companies and in the Russian technology fund. “Reksoft" IT company in St. Petersburg obtained financing from Martinson Trigon Venture Partners that is venture investment fund with Estonian and Swedish shares. Cooperation with Finland is the most advanced. Special Russian program for 2004-2007 years is elaborated in the National Fund for Research and Development (SITRA), it helps for Finnish companies promotion at Russian market. Finland government and business assume that that Russia is the most dynamic market in the neighborhood with Finland; Finnish exports to Russia increase by 30% annually. Expansion to Russian market is the main business 213 Seventh International HSE Summer School «Baltic Practice» ·2007 solution for many Finnish companies. Finnish national consulting company FINPRO that is responsible for supporting Finnish business at international markets, Finnish Institute of International Trade (FINTRA) which organize corporate training for Scandina- vian companies, work in Russia and help Finnish companies to adapt in Russian context. National Research Center of Finland (VTT) and State Fund for Technology and Innovation (TEKES) also intended to open their offices in the North-West Russia. Strategy of trade and economic relations with Russia "From Trade to Partnership", prepared by SITRA in 2005, calls high technologies as one of the most promising areas, along with the forest industry, logistics and construction. Russia prove to be interesting for Finnish hi-tech companies due to fundamental researches in physics and mathematics, as well as nano- and biotechnologies, information technologies. For Russian side collaboration should be profitably in the fact that it obtains gets access to technology Finnish companies. Big activity in Russia demonstrates Finnish company "Technopolice", which designed projects for technological parks at special economic zone “Neudorf-Srelna” and next to Pulkovo airport, IT-park at Bonch-Bruevich State University for Telecom- munications. Another useful experience in infrastructure building should be "Sheksna Industrial Park” in Vologda region, section in the 2 thousand ha, located at 10 km from the federal roads Vologda - St. Petersburg. First turn of this industrial park scheduled to be open for the second half of 2009. The most important Russian investor there will be “Severstal” company; between first foreign investors there is Finnish company “Koskitukki". Privileges on transport tax, income tax and property tax will be done for five-years term will be done for resident companies which work in this park, as well as industrial and communal infrastructure. "Sheksna Industrial Park" have a possibility to became a positive experience in creating new hi-tech area beyond the limits of nearest attraction zone of St. Petersburg, which subsequently will be used in other regions of the North-West.

North-West in Russian-Chinese cooperation The most close regional-level economic links in Russia – China relations are between Chinese north-eastern provinces (Heilongjiang, Jilin) and Russian regions of Siberia and Far East. 214 Seventh International HSE Summer School «Baltic Practice» ·2007

Specially, by this fact, regional collaboration in Russian–Chinese were understood as, first of all, trans-border coordination. Priorities in Russian–Chinese regional cooperation are determined in Agreement on principles of cooperation between the administrations (governments) of the Russian Federation’s subjects and Chinese provincial governments, signed in 1997. These are ordering of trans-border trade (including border commercial complexes), transport infrastructure in border territories, improvement in bank system, insurance, arbitration, cooperation in environment protection, coordination for boundary and migration services, law enforcement bodies. In the goods traffic through Chinese–Russian boundary predominates, from Russian side, woods and petroleum products, whose export increase at 10 million tons annually (only rail transportation). Import of Russian chemical fertilizers (about 1.5 million tons per year) also enlarged in China because of steady growth in agriculture. Share of high technology production in Russia's exports to China declines, while? on the contrary, in Chinese exports to Russia it increase, especially due to motor vehicles of different classes (pick-ups, passenger cars, trucks, passenger buses). Projects in high-technology and knowledge-based areas are timed, essentially, in the European part of Russia. These are, for example, a number of joint projects with enterprises of aviation complex in Ulyanovsk. St. Petersburg and Leningrad region are quite significant for Chinese partners in this sphere. Chinese Consul-General in St. Petersburg Tian Erlun explains big interest of Chinese business in Leningrad region by: "advantageous geopolitical position, tax breaks and open-minded regional leadership". These definitions can be also attributed to St. Petersburg, the main center of Russian-Chinese cooperation in the North-West Russia, and, with some reservations, to other parts of the North- West. Chinese business interested in opportunities for projects in construction, telecommunications, fuel-energy complex, forestry. Chinese companies have been declared, at the and of 2006, no less than 25 large investment projects in various industries: wood processing, pulp and paper production, nuclear energy and power machine building, metallurgical equipment, food products, etc. Partnership with China became a significant component for St. Petersburg’s economic. To the end of 2006, China was a second trade partner with turnover in 2.6 billion dollars. 215 Seventh International HSE Summer School «Baltic Practice» ·2007

Major Chinese companies such as Shanghai International Group of Companies (trade), "Tin Ye" (tobacco, noodles, other foods), “Chengdu” export company (manages paging company BBJ Communications), etc. work in St. Petersburg. Main “residency card” of participation in St. Petersburg’s economy now is a project of administrative- and accommodation complex “Baltic Pearl” (35 thousand people, 400 thousand square meters. commercial premises) with Shanghai Industrial Investment Company (China) as strategic investor with 1,25 1.25 billion dollars. Cooperation in science and high technologies is very important for both sides element in Russian – Chinese relation at the North-West. Among the joint projects with St. Petersburg’s universities and research institutes has great promise, for example, the work of the Chinese - Russian laboratory for intellectual information management, created the Computer Research Institute of the Academy of Sciences of China, with the participation of Insti- tute of Informatics and Automation of the Russian Academy of Sciences, Research Institute of Information and Communications of the Russian Academy of Sciences, Institute of software RAS.

"Administration" as a model of partnership of cooperation with China The essential role of state administration in the Chinese economy, as well ass in today Russia, means that role of influential political leaders and officials is requires for successful promotion large business projects. For example, a St. Petersburg governor Valentina Matvienko tells about “Baltic Pearl" project: "The Shanghai Investment Company is a state enterprise. So that, to attract this investor, for me it was necessary to mount the highest- level political resource so that this would be supported at the government level in China”. Interest of North-Western federal district were represented in China by St. Petersburg Valentina Matvienko and President’s plenipotentiary Ilya Klebanov who visited China, in May 2005, and in October 2006. Mr. Klebanov’s visit was timed to the opening of the Days of North-Western federal district in the People's Republic of China within the framework of Year of Russia in China. During this visit a number of contracts between Russian ("LOMO", "Electronics" bank, "Pantikapei" investment

216 Seventh International HSE Summer School «Baltic Practice» ·2007 and construction corporation, etc.) Chinese companies to the total amount of 1.5 billion dollars were signed. Much of the St. Petersburg business ties with China develop in the framework of relations with sister-city Shanghai. Trade center "Shanghai" was established in St. Petersburg in 2002, and Trade Bureau of St. Petersburg in Shanghai was founded in 2004. Russian-Chinese technological parks created in St. Petersburg and Shanghai are products of these centers activity. The model of attracting investors with the help of political, administrative capacity in recent years has become a characteristic feature of St. Petersburg government. Such policy in a attitude to t Russian companies such as "Gazpromneft", "Transaero", "Sovcom- flot" and others is, ultimately, "zero-sum game" which doe not bring additional income to the country. In relations with China who is one of the main economic partners for Russia, such measures can prove to be more justified - or, at least, more understandable to Chinese partners. They do additional effect for Russian economy, including sphere of high technology.

Literature, sources: Golubev E. Traditsii zhivy, kogda im sleduyut. In: Sankt- Peterburgskiy Universitet Magazine (www.spbumag.nw.ru). – 2005. – N 26-27 (December 15). Innovatsii na eksport. In: Ekspert Severo-Zapad.–2007.–N 9. Innovatsii po nanotehnologiyam. In: Ekspert Severo-Zapad. – 2006. – N 46. Kitayskiy informatsionniy Internet-tsentr (http://russian.china.org.cn/) Larin V. Dalniy Vostok Rossii v fokuse kitayskoy politiki. In: Vestnik DVO RAN. – 2000. – N 2. Liningradskaya oblast. Investitsii, biznes, partnerstvo. Regionalniy profil. – St. Peretsburg, 2007. Makarov I. Ekspansiya po-sosedski. In: Ekspert Severo- Zapad. – 2006. – N 41. Medovnikov D., Rytsareva E. Venchur na mikronah. In: Ekspert. - - 2004. - N 13. Na puti k partnerstvu. In:Ekspert Severo-Zapad,-2006.–N 41 Ovchinnikova E. Doroga v park. In: Ekspert Severo-Zapad. – 2007. – N 20. Svoimi silami. In: Expert Severo-Zapad. – 2006. – N38. Xinhua Information Agency (www.russian.xinhuanet.com). 217 Seventh International HSE Summer School «Baltic Practice» ·2007

Posolstvo Rossii v Kitae: Rossiya i Kitay (www.russia.org.cn). “Shanghai” Trade Center in St. Petersburg (http://www.shtc.ru/). Tsentr razvitiya sotrudnichestva s Kitaem. Torgovoe predstavitelstvo Sankt-Peterburga v Shanhae (http://consult. allchina.ru/).

Appendix. North pipeline: a view from Germany In late 2005, the President of the Russian Federation Mr. Putin and the Chancellor of Germany Mr. Schroder, signed an treaty enabling the building of a gas pipeline running from Russia through the Baltic Sea directly to Germany. The pipeline will change the European gas supply and has an impact on European energy security and on the countries, which are currently crossed by land-based pipelines. The aim of this chapter is to analyze the effects of the planned pipeline upon Germany. The structure of the German primary energy consumption between the beginning of 1990 and mid-2000-x gradually changed. Consumption of natural gas rose, while the consumption of coal declined. The overall consumption in 2005 is 101 bn m. in total, the share of gas coming from Russia is 35 %. The share of Russian gas rose during the last years and is likely to rise even more in the future, since domestic gas production has seen its climax and is declining further. The role of Russia in the field of natural gas is so important, because Russia has the biggest gas reserves worldwide. The relative political stability in Russia compared to other gas-rich countries like Iran makes Russian gas even more attractive. To combat the climate change, Germany is seeking ways to consume more environment-friendly energies like natural gas instead of coal. As a result, you can see the share of “other energies” increase, showing mainly renewable energy. Due to the political decision to switch off all German nuclear plants by 2020, there will be an increasing need for other resources, mainly gas and other energies. Europe needs more natural gas every year. Predictions are, that the consumption of natural gas in 2015 will be one third higher than in 2005 and the share of imported gas will increase to 75 % compared to 57 % by that time3. We can conclude, that natural gas is an irreplaceable source of energy for

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Germany and is likely to become even more important in the next decade. The pipeline, called “Nord Stream”, is a 1200-kilometre- long off-shore natural gas pipeline stretching through the Baltic Sea from Vyborg, Russia, to Greifswald, Germany. It is scheduled to start operation in 2010 with one pipeline, having a transmission capacity of around 27.5 billion m. per year. A second pipeline will be completed in 2012, doubling the transmission capacity to around 55 billion cubic m. on from 2013. That amount would cover almost 60 % of the total German consumption in 2005. Total investment in the off-shore pipeline is estimated to be about at least 5 billion Euros. The existing on-shore pipelines are crossing the Baltic States, Belarus and Poland. The building costs of land-based pipelines are comparatively low, but operating costs are higher because of transit charges, leakage and theft. In conclusion, the investment might pay-off long term, although the initial investment costs are enormous. On 8th September, 2005, Gazprom, BASF and E.ON signed a basic agreement on the construction of a North European Gas Pipeline. On 30th November, 2005, the North European Gas Pipeline Company (later it was renamed “Nord Stream AG”) was incorporated in Zug, Switzerland, which is known to be a tax haven. Nord Stream AG is a Russian-German joint venture established with the purpose of planning, constructing and operating the planned gas pipeline. Gazprom holds a 51% stake in the joint venture, and Wintershall and E.ON Ruhrgas hold 24.5% each. The majority of stakes belongs to Gazprom, which itself is controlled by the Russian Government. E.ON Ruhrgas holds a 6,5% stake in Gazprom. The shareholders’ committee of Nord Stream is chaired by former German chancellor Gerhard Schroder. The pipeline would link Russia.s biggest export market, Germany, directly with Russia. The advantages for Germany are that there would be no affection in gas supply by possible crises in transit countries and that Germany would become a distribution centre of Russian gas in Western Europe. This could bring jobs and know-how to Germany. In the long run gas from that pipeline might even get cheaper for Germany than gas coming from on-shore pipelines, because of savings in the transit charges and a reduced theft/loss rate.

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Just days before the German general election in 2005, Schroder and Putin signed the final accord on the pipeline. Only a few weeks after losing the election to opponent Angela Merkel and stepping down from chancellery, he accepted a job offer to chair the Nord Stream Company. When the German media heard of that “scandal”, they began to face Schroder with a lot of criticism. A commentator of the renowned newspaper “Die Suddeutsche” wrote: "The problem is that the ex-chancellor not only provided for Germany's warm future, but in the process, apparently, looked out for his own. If he profits from a project which he massively supported, the suspicion arises that he's pocketing dividends from his own political decisions." Most of the newspapers went in that direction, accusing Schroder of profiting financially from decisions he made when he was chancellor. The criticism in Germany concentrated mainly on the role of Gerhard Schroder, not so much on the pipeline project itself. The soaring dependence on Russia and ecological apprehensions were among other topics further discussed. Germany.s official position is supportive of the pipeline. A representative poll conducted in Spring 2006 by Forsa, a German polling institute, revealed that 75% of Germans believe that construction of the pipeline through the Baltic Sea will contribute to enhancing security of supply in Germany. This view is also expressed by German Foreign Minister Frank Walter Steinmeier, who stated in July 2007 that „the planned Russian-German pipeline is vitally important for energy supply of Europe and does not pose major environmental risks“. Different from the criticism faced in Germany, the international echo to the project was more diverse. Many Baltic- bordering countries such as Sweden see mainly ecological threats in the project, whereas the Baltic States, Poland and Belarus also fear that they might be deprived of the revenues earned by transit charges from the existing on-shore pipelines. Some warned, that the Kremlin could shut off the existing pipelines and exert political power on Eastern European countries while still providing the more lucrative Western European market with gas. Gazprom tries to soften these fears by stating that the off-shore pipeline is for additional use only and will have no effect on existing pipelines. As a conclusion, to build the pipeline is a strategic decision to secure energy supply for Germany and the European Union in the long-term. It is a fact that Germany and the whole of Europe 220 Seventh International HSE Summer School «Baltic Practice» ·2007 will need more natural gas in the future, so additional pipelines are needed. For Germany it is very comfortable to have a direct connection to the vast Russian reserves and, through economic partnerships and becoming a potential distributor of gas in Europe, even have substantial financial benefits. Russia, on the other hand, will have direct access to the lucrative German market without having to worry about theft or leakage in transit countries. The price for this are the enormous investment costs, that can only pay back over a long period of time. From the perspective of the European Union, it is important that the “political” fears of the member states Poland, Lithuania, Latvia and Estonia and the ecological threats posed by the project are openly addressed and subsequently solved, that the secure supply of gas can be guaranteed to Germany and Europe.

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Philipp Muhlbauer The German business in Russia: investment looking for innovational potential

1. Introduction The German business in Russia, investment looking for innovational potential, implements, that there exists on the one hand the willingness by German companies and investors to invest their money in Russia and besides suggests the required innovational potential to be waiting for investment. In the following I will ask the question if the specific connection between economical growth and an appropriate innovation policy can be established and by which means it might be guided into a successful future for both participants. Furthermore I want to point out three steps that need to be taken in order to align Russia both from innovative and entrepreneurial point of view. From the investment point of view, is it attractive to explore the Russian economy being a foreign investor? Looking for above-average return investors all over the world mostly claim, that China and India fit best. It is clear, that these two populous countries, being in a dynamic economical growth process, play a major role for the state of most of the markets. In this consideration the pretensions of Russia, the third member of the so called BRIC-STATES (Brazil, Russia, India and China) seems to be forgotten. Fact is that Russia does not provide as many inhabitants as either China or India, which implements, that there is not as much demand for products, thus Russia offers many advantages that the common M&A countries do not. The richness of commodities and the geographical and cultural contiguousness are important figures, which guide German investors into a deeper analysis of Russian economy.

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2. Russia’s economic potential 2.1. Demographic structure After the downfall of the Soviet Union the Russian administration was entirely revolutionized and the Russian Federation was proclaimed. This Federation contains 21 Republics, seven regions (Kraj), 49 departments (Oblast), two cities with federal standing (Moskau and St. Petersburg), seven autonomic districts and one autonomic department. In order to regain and reinforce the control on the regional rulers, President Vladimir Putin cumulated these administrative districts into seven Federal districts1. The Federal districts are, North-Western, governed by St. Petersburg and with borders to Finland, Estonia, Latvia und Belarus. In southwest direction the Central district is located with Moscow as metropolis and borders to Belarus and Ukraine. The region around the Black Sea is the federal district Southern. In the geographic centre of Russia lies the district Volga Basin. In the east, the district Ural going from Kazakhstan to the Kara Sea closes the border to the East Asian continent. Finally the two biggest districts, at the same time, almost sparsely populated or uninhabited, Siberia and Far East border to China and Mongolia2. Despite of the rather big population, the world’s largest country is merely sparsely populated. There is a strong connection between the economic and demographic structures in Russia; both are irregularly allotted over the country. The economic activity is concentrated on the metropolises, which therefore attract more and more people from the rural regions. The largest city in Russia is Moscow, gathering 10.4 million citizens, which is at the same time the political and governmental capital of the former Russian Republic. The figures suggest that Moscow is the leading city, in terms of living conditions and household income. The economical potential of Moscow’s household lies three times above the Russian average, around 42000US$

1 Kertman, G., 2000 2 UNDP Russia, 2007

223 Seventh International HSE Summer School «Baltic Practice» ·2007 compared to 12200US$ GDP per capita (PPP)3. Referring about Moscow, one has to state, the Millionaires Fair, which attracted 38500 people in 2006 and offers all kinds of luxury goods to the well situated Russian society people. Russia is home to 33 billionaires and 90000 millionaires, of which one third lives in the Russian capital Moscow. By these figures Moscow domiciles more rich people than New York City4. The second major city of Russia is St. Petersburg with 4.6 million inhabitants. In addition to those economic centres, more and more rural regions start to develop a growing economy, at the same time the number of Russian departments, which struggle with stagnation from the economic point of view decrease.

2.2. Economical growth The OECD states, that the average real economical growth of the year 1999 until 2005 was 6.7%, whereas the export was had a played a major role. The increase of the export revenues mainly founded on the commodity trade benefited by the increasing demand and price level, which lead to an increasing consumption rate for all of Russia. The per capita income almost tripled from 2001 until 2005 (comp. chart1)5. Since the revenues from illegal sources, the so called “grey economy” is not part of the published figures; one can estimate them to increase the average incomes substantially. Experts state that the figures could double, considering the “grey economy” as realistic part of the entire economy. The increasing purchasing power is enchanted by these effects and leads to an increasing consumption rate. The chance for Russia is to develop such consumer goods industries, this industry represents one of the leading and fastest growing sector in all of Russia’s economy. From the sociological point of view the growing wealth of Russia creates an income gap, which expresses itself in the GINI-Index with 0.45. Germany along with most of the western European countries has a GINI-Index of 0.286. When adding the figures from the “grey economy” the diversity of income must increase on a more critical level. Alike the Chinese

3 CIA, 2007 4 Danilova, 2007 5 Ahrend & Tompson, 2005 6 CIA, 2007

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(0.41) and the Indian GINIIndex (0.52) show, that there is a major gap in the income insufficiency amongst the population of those rapid growing economies. It is self-evident, that, if there will not be any actions taken in order to improve the social stability in Russia and other countries alike, sooner or later the permanent threat for the social stability of those countries will not only keep investors from exploring those market, but weaken the economy from the inside and damage the most important resource an industry obtains; the people. 1. Facts about Russia78

3. M&A in Russia 3.1. Economical structures With the 90s, aligned by the new established privatization the M&A wave hit the Russian Federation. After the early euphoria and while there had been several losses for foreign direct investors the investments would not decrease until, at the end of the 90s, a major financial crisis hit the Russian economy which merely led to an short-term stagnation of the investment climax. After this crisis the entire Russian Economy was restructured and developed into the now existing system. The wealth of the so called oligarchs has its origin during that point of time. Today Russia focuses on its main industries and is in the process of renationalization, which attracts investors and M&A movement in general. The particularities of Russia’s economy are at the same time reason for chances and risks concerning M&A activities in the former Russian Republic. As Russian economy is situated in a

7 Information and publishing centre of Russia, 2007 8 Ahrend & Tompson, 2005

225 Seventh International HSE Summer School «Baltic Practice» ·2007 transformation process from socialistic command economy into - an as of now state directed – market economy, it obtains two divergent influencing factors. On the one hand it is the aim to establish full market economy, with all of the benefits, whereas on the other hand the Government and the political rulers do not want to lose their control and power. Hence consequently the government has a major impact on the core industries, such as gas/oil, Railways, electricity, automobile and aircraft construction. Moreover many other industries like the metal industry, mobile telecommunication, engineering etc. are fragmented amongst; an elite of big global players, whom have a very good relationship to the responsible branches of governmental controlling. A true market economy is defined by full competition and the market forces; those are entirely or at least mostly suppressed. Amongst the Russian enterprises, the most popular ones are those accepted, protected and moreover controlled global players by the government, directed by the so called oligarchs such as Gazprom, Lukoil, Norilsk Nickel or Rusal. Due to the enormous earnings those companies morphed into strong conglomerates which are expanding and investing in foreign production capacities, in order to expand to those markets. That raises the question if it should be tolerated, that Russian state-directed companies expand to European markets without any restrictions or at least burdens in order to fully access the European markets, but this is not the theme in this paper. The SMB which is the basis of Germany’s economy develops very slowly and weak. The SMB of Russia contributes merely 20% to the GNP, whereas Germany’s SMB deliver the double with 40%. Basically the not existing medium-sized businesses sector is a problem for the economical growth in Russia, because other national economies implement the important standing that SMB has for the backup of an economy. In addition these branches are fairly fragmented because of their socialistic heritage and that is why most of the suppliers are operating only on a regional basis. Despite of the problems that exist in Russian economy the fact that most of the companies are privately owned is an important issue. This draws an optimistic picture of the future investments that can be made in Russia and points out why the competition within the markets is so important. By restructuring the markets investors and companies alike have better chances in a growing global economy. 226 Seventh International HSE Summer School «Baltic Practice» ·2007

2. Russia's big listed corporations9

3.2. Capital Flow In order to create an appropriate basis for further remarks it is important to illustrate the rough capital flows that characterize the Russian M&A markets. Since 2002 the foreign direct investments into Russia increase constantly. While the foreign direct investments into the Russian economy in 2001 were around 4 bn. US$, in 2005 the amount tripled to 13 bn. US$.(comp. 3 Foreign investments in Russia) The majority of the investments come from western countries, such as Germany, the United States of America, the United Kingdom, the Netherlands, France, Italy and Sweden. Alike other parts of Russian economy the M&A markets are also tangible by the “grey economy”, which leads to recirculation from Oss-Shore- Centres such as Cyprus, Luxemburg, the Virgin Islands and the Bermudas. Foreign corporations focus mostly on the oil, nutrition, beer, tobacco, car accessories, wholesale and telecommunication branch. Nevertheless more and more foreign SMB enter the Russian markets, in first occasion as venture partners of established, internationally operating corporations.

9 Kommersant. Publishing House, 2005

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The Russian markets are very attractive, although it is no secret one cannot estimate, if the foreign investments will decrease in the near future.2001 2002 2003 2004 2005 3. Foreign investments in Russia10

3.3. Russian Investments in Germany During the last years Russian direct investments on the German Market rose constantly with its peak in 2006 and declining in 2007. Evaluating this information it is important to look for the reasons, which bring Russian investors to Western Europe and especially Germany. Stephan Dertnig, Managing Director of the Boston Consulting Group bureau in Moscow gives a brief summary of the Russian intensions: “Russia has many engineers, but there is a lack of technology and management Know-How. The corporations buy Know-How in the West in order to fit their businesses international standards11.”

4. Chances and risks of M&A in Russia 4.1. Particularities From Germany’s point of view investments in Russia are very interesting. In the last months the political relationship between Moscow and Berlin has improved more and more12, which gives Germany the chance to become Russia’s biggest western commercial partner. For German corporations the chances of establishments in Russia lies in the fast growing consumer goods market, the rising household income, the low price level for

10 Information and publishing centre of Russia, 2007 11 Schaudwet, "Einen Russen bitte", 2007 12 Auswartiges Amt, 2007

228 Seventh International HSE Summer School «Baltic Practice» ·2007 energy and resources, the geographical position, the well developed production and labour capacities and last but not least in the due governmental investments that need to be made in all of the Russian infrastructure. Hence there exist many opportunities for cooperation and trade most notably in the rural regions. The risks can be reduced to the most onto the governmental factor. Insecurity in Russia correlates most of the time with the legislative, judiciary and the executive. The risk of investments is located in most of the companies’ opacity. When starting the Due- Diligence it is important to analyze the investment object entirely and on the ground. For foreign financial auditors it is almost impossible to analyze the on ground circumstances and the correct financial management ratios. Thus not only the numbers are of interest but also the human resources that represent the potential investment objects.

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4. Foreign Investments in Russia13

5. Example of a SEZ – Shenzhen As stated before Russia has several governmental restrictions and regulations that constrain a real market economy. In order not to break out of the system a testing area, a think tank, a place for innovative ideas needs to be established – an special economic zone (SEZ). Looking across the Asian continent, the region does not appear to have a lot in common with Russia. Thus the second look reveals the real potential that lies in the comparison of both China and Russia. In 1979 the Chinese government established its first SEZ in the city of Shenzhen, which is located on the northern border of Hong Kong, and belongs to mainland China. At the beginning Shenzhen was a fishing village with approximately 30.000 inhabitants. Tax, financial and economic incentives were granted to investors from all over China but also from foreign countries. Today Shenzhen is home to more than 11 mln. people and is the fastest growing city in mainland

13 Thomson Financial, 2007

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China. During the year 2001-2005 the economy grew by 16% p.a. Shenzhen is synonym for the technological centre of China, most of China’s so called High Tech Corporations are located in Shenzhen, to rank first the iPod Village14. In 2006 Shenzhen accumulated a GDP of 57 bn. US$. Within 25 years Shenzhen developed itself into an economics incubator which is still leading in China and which should be role model for many other national economies. In the following I want to develop a concept for a new Russian innovation process.

6. Transfer into the Russian innovation process At the moment the regions Moscow, St. Petersburg, outer Moscow, Khanty-Mansi Autonomous Okrug, Sverdlovsk, Nizhniy Novgorod and Samara obtain the most investment potential within Russia15. The Russian Federation should establish a SEZ alike Shenzhen in either one of the above mentioned regions in order to develop an own innovative culture. How can they find the innovative incubators? Science always needs strong entrepreneurs in order to gain the most out of new innovations and techniques. 5. Pro and contra SEZ in Russia

As stated before Russia is home to more than 90.000 US$ millionaires, whereas Moscow claims to inhabit 33.000 of them. This massive potential should not be unused. In the western countries such as the United States of America and Germany Business Angel Networks are one of the main reasons why start- ups and new founded corporation grow really fast and strengthen the national economy. That goes hand in hand with the desperate need to narrow the market for venture capital, private equity and alternative ways of entrepreneurial finance. The goal must be to establish a Russian Business Angel Network, which not only

14 Manager Magazin, 2006 15 Midural.ru, 2000

231 Seventh International HSE Summer School «Baltic Practice» ·2007 attracts foreign founders, investors and start-ups, but more important strengthens the countries new generation of entrepreneurs and managers. It is important to develop an entrepreneurial culture, which is accompanied by the important field of corporate governance, protecting share- and stockholder.

7. Protection of intellectual property rights The Russian scientists, management potential and labour force is in good state which is significant in order to build up a strong Russian economy. Thus Russia does not possess a true innovational corporate culture, which comes along with an entrepreneurial culture. The aim should be to adopt those institutions from western countries and at the first place with Germany. As the protection of property, intellectual and physical wise, is very poor in Russia, a cooperation with Germany the precursor of intellectual property rights, representing 18.9% of the worldwide annual registered patents, could improve and guide the Russian innovation process on the right track. Currently over 4 mln. patents are registered adding 800.000 each year16. The Russian minister of economic and trade affairs, German Gref, explained how Russia will deal with the protection of intellectual property rights and the security of foreign investments in an Interview with the German Wirtschaftswoche: “No doubt there are quite a lot of problems with the transformation of our economy. But who is actually being robbed of its own intellectual property rights? You have to disregard the Yukos affair in this evaluation, which is an issue of its own. There have not been any other similar issues in Russia. We do everything in order to take influence on the judicial system to benefit the SMB. The property rights became stronger. Surveys amongst SMB show, that property rights and investment protection are no longer part of the TOP five concerns of the middle-sized businesses.“

8. Conclusion Russia offers the right amount of chances and risks within its economy. For foreign investors Russia, as biggest east European market and major supplier of mineral resources must be the focus for inter European investments. Thus the analysis of each

16 Deutsches Patent- und Markenamt, 2007

232 Seventh International HSE Summer School «Baltic Practice» ·2007 investment and the questioning of each business model are important process into finding the suitable investment in this emerging market. Russia is to be guided by its government during the next decades into a free market economy with more and more privately owned companies. During this process a simulation of an innovation incubator, the SEZ, could be easily established and attract investors alike innovative potential. Approximately in 2050 the natural oil reserves will be exhausted and Russia will have to focus on diverse industries such as the service industry. The example of the USA and mostly EU shows, that a modern economy develops itself towards a service economy in the long run; Russia has to learn from these countries in order to be well prepared for the future. Although Russia has not the best standing facing the future challenges it will be able to succeed with strong, reliable partnerships and unions. Russia will be one of the leading future markets and it is on track establishing the principles of a free market economy17.

Bibliography 1. Ahrend, R., & Tompson, W. (2005, October 1). COUNTRIES «Non-OECD» Russia. Retrieved September 10, 2007, from OECD - Observer: 2. http://www.oecdobserver.org/news/categoryfront.php/id/93/Ru ssia.html 3. Auswartiges Amt. (2007, Februar). Alle Lander A-Z: Russische Foderation. Retrieved September 10, 2007, from Auswartiges Amt: 4. http://www.diplo.de/diplo/de/Laenderinformationen/Russische Foederation/Bilateral.html 5. Bettner, H., & Sarodnick, S. (2003). Business-Guide Russland. Deutscher Wirtschaftsdienst. CIA. (2007, September 7). CIA - World Factbook - Russia. Retrieved September 10, 2007, from World Factbook: 6. https://www.cia.gov/library/publications/the-world- factbook/geos/rs.html#Econ 7. Danilova, M. (2007, November 2006). NCTimes.com - Archives. Retrieved September 10, 2007, from North County Times - The Californian:

17 Bettner & Sarodnick, 2003

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8. http://www.nctimes.com/articles/2006/11/05/business/news/15 _35_5611_4_06.txt 9. Deutsches Patent- und Markenamt. (2007, Januar). Deutsches Patent- Markenamt. Retrieved September 10, 2007, from Deutsches Patent- Markenamt: www.dpma.de 10. Information and publishing centre of Russia. (2007). Statistical Yearbook of Russia. Moscow: Rosstat. 11. Kertman, G. (2000, September 19). The Public Opinion Foundation: Seven Federal Districts. Retrieved September 10, 2007, from The Public Opinion Foundation: 12. http://bd.english.fom.ru/report/map/kertman/ed002129 13. Kommersant. Publishing House. (2005, September 5). 300. The Largest Companies of Russia. Retrieved September 10, 2007, from Kommersant - Russia's Daily online: 14. http://www.kommersant.com/p- 7155/300_The_Largest_Companies_of_Russia/ 15. Manager Magazin. (2006, Oktober 11). Manager Magazin:Life:Reise:China. Retrieved September 10, 2007, from Manager Magazin: 16. http://www.manager- magazin.de/life/reise/0,2828,441741,00.html 17. Midural.ru. (2000, December 22). Investment Potential of the Oblast Development. Retrieved September 10, 2007, from Midural: 18. http://www.midural.ru/ek.en/doc/3_1_GeneralInformation/3_1 _9_InvestmentPotential/Default.htm 19. Schaudwet, C. (2007, Juni 4). "Die Abkuhlung ist virtuell". Wirtschaftswoche , p. 48. 20. Schaudwet, C. (2007, September 24). "Einen Russen bitte". Wirtschaftswoche , pp. 102-104. 21. UNDP Russia. (2007, September 10). GENERAL INFORMATION. Retrieved September 10, 2007, from The United Nations Development Programme: 22. http://www.undp.ru/index.phtml?iso=RU&lid=1&pid=38

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CHAPTER FOUR. CORPORATE SOCIAL RESPONSIBILITY

Introduction by the group Academic Advisor

As we move forward into the twenty-first century, the interest in corporate governance and research in this field is at an all-time high. The failures associated with fraudulent activity of many high profile corporations in North America, the transformation of the world economy into, in many ways, one great market place for goods and services, and the transition in many countries of economies from a command to a market form – has led to calls for changes in, or development of, new and better forms of corporate governance. Moreover, not only is there a need for change, but the nature of the changes and the reforms that are needed vary in a great extent from country to country. Indeed, the variations in approach to solutions to corporate governance problems throughout the world is so great that one might well ask if there is any such thing as a general field of study as corporate governance? Is there any underlying theme or set of principles that can be studied under the broad term “corporate governance”? The answer is, we believe, yes. Indeed, we think that study of the fundamental issues involved in corporate governance is essential in any country that wishes to achieve strong economic growth with the resulting higher standard of living that such growth over time surely brings. Some possible topics for research are analyzed in this section of papers. Olga Melitonyan, vice-director of the Corporate Governance Center, HSE, Ph.D

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Olga Melitonyan, James Gillies Corporate Governance and its International Context

1. Corporate Governance: what it is about Corporate governance as a broad concept has developed and evolved primarily since the mid-sixteenth century when it became clear to astute observers that great economic gains could be achieved by individuals pooling their capital to fund single ventures – such as explorations. Ever since then, with the development of the concepts of division of labor and economies of scale, far-sighted businessmen have recognized that great increases in productivity could be achieved by accumulating capital to finance their operations. By the end of the nineteenth century it was self evident that the joint stock company with limited liability for investors was the greatest form of organization ever developed for bringing about the accumulation of capital – the basis for real economic growth. As a result, throughout the world the “joint stock company” or corporation has become the major type of business organization for the production of goods and services. The corporation, however, did not develop without both external and internal costs and problems. Joint stock companies grew in efficiency and expanded in size as they attracted more and more capital from more and more individual and institutional investors. As a result people who managed corporations became less and less well known to those who owned them. Consequently, corporate growth was accompanied by an ever widening separation between ownership and control of assets. Clearly, this was an untenable situation since obviously people who gave their funds to someone else to use needed to have some way to monitor the activities of management. As a result, a process developed, in practice and law, whereby the people who put up the capital elected representatives to monitor the management of the enterprise to assure that the capital was used in an honest and, 236 Seventh International HSE Summer School «Baltic Practice» ·2007 hopefully, effective fashion. These representatives became known as directors, and through the years a body of law has evolved which outlines quite clearly the responsibilities and authority of the directors both to the corporation and to the investors. As corporations became larger and more complex so did the law governing the role of the directors, as well as the laws governing the activities of corporations. In their entirety these body of laws and practices – they differed from country to country – began to be summarized under the name “corporate governance.” Corporate governance is, therefore, seen by many professionals as a by-product of the corporate form of organization for the production of goods and services. As a conclusion, they argue that where there is no corporate form of organization, i.e. where there is no pooling of capital by a large group of people, there is no such thing as “corporate governance.” And, since the state of the development of the corporate form varies throughout the world, the nature of corporate governance varies from country to country. There are, as well, numerous alternative views of the corporate governance concept, for instance, according to one of them, corporate governance presumes not only an existence of the corporate form of organization for production but also a certain level of corporate culture, business ethics, set of best business practices that a company follows; this view observes corporate governance as a certain philosophic concept of running business. This observation has very much to do with the modern concepts of corporate social responsibility and corporate citizenship. Going back to the fact that there is such a variation in the extent of corporate governance from country to country and economy to economy, we should emphasize that it does not mean, however, that neither principles nor underlying features associated with governance exist. The reverse is true. There are a number of characteristic features about corporate governance that are universal, and gaining an understanding of these features sets the agenda for research about corporate governance. The agenda will vary greatly from country to country depending on the state of economic development, the market and the legal system of the nation. However, within the framework of their state of economic development, the nature of their markets, their culture and history, all countries seeking high levels of economic growth, as well as high standards of business practices, should search for the most

237 Seventh International HSE Summer School «Baltic Practice» ·2007 effective way of bringing about the same consequences of good corporate governance. In short, corporate governance is necessary because of the existence of the corporate form of organization. And the corporate form of organization is based on two concepts – the pooling of capital and limited liability. The corporate form has had, and continues to have great popularity in much of the developed world since it has proved to be an effective and efficient manner of bringing together great amounts of capital which in turn has led to rapid and spectacular economic growth. The high level of growth, in turn, has resulted in a very high standard of living for the populations of nations where joint stock companies have been developed and prospered.

2. Overview of the papers presented in the Corporate Governance section If the goal of a nation is real economic growth, then public policy that encourages the development of the corporation makes eminent sense. Legal system in the field of corporate governance, i.e. “corporate law”, is also growing in its importance. If economic growth is to be stimulated through corporate growth, there must be rules and regulations enforcing good corporate governance practices. It is quite difficult to compare currently existing corporate legislation in Russia with extensively developed and well-functioning examples of Western legal tradition. In the meantime, we find the pace with which Russian system of corporate law integrates best elements of Anglo-Saxon and German legal practices, along with modern global trends, rather amazing. When Dmitry Kuschin and Margarita Pugacheva, participants of this year’s Summer School, came up with the idea of undertaking a comparative analysis of corporate law in Russia, and the UK, this topic at first sounded a little unfocused but then, as we started to explore the idea, it became clear that taking precisely these two countries as objects for profound analysis could bear an unexpected meaning in terms of their political and economic cooperation. Talking about economic growth, we should remember that the capital formation is its fundamental condition. In an economy it mainly comes from savings. Without savings that individuals or institutions are willing to pool to provide managers with the capital necessary to combine land, labor and capital in the most efficient 238 Seventh International HSE Summer School «Baltic Practice» ·2007 way possible to create goods and services, there can be no corporations. Increasing the volume of savings in the economy, however, will not lead to the development of corporations, if individuals and institutions are not prepared to invest their savings in the shares of joint stock companies. Consequently, effective research may well be needed to determine the optimum methods and policies for encouraging investment in shares. There is little likelihood that individuals, institutional investors, domestic or foreign, will buy shares of companies if they harbor any belief that the money they provide to the joint stock company, through share purchases, will be misused. This statement opens a wide field of discussions regarding issues of corporate governance and trust within a particular national economy. It can be argued that in a certain extent any national corporate governance system is based on trust that members of the national society either feel or not feel towards; • each other (personal trust); • institutions (banks, courts, state, corporations – institutional trust) • symbols (national currency, flag etc. – symbolic trust) Analyzing the current situation in Russia, we came to an interesting conclusion - in our society high level of personal trust prevails, along with a low level of institutional trust. Going further, in the United States of America one can see an opposite picture with an extremely high level of institutional trust, and a lack of confidence in personal social relationship. Two situations described have an obvious influence on the level of enthusiasm with which Russian, or American citizens consider an opportunity of investing their savings into national companies. Needless to say that most Russian corporations still do not look safe for the majority of potential individual investors (let alone the fact that their shares are not available for individual purchase anyway). In our opinion, one of the key premises for achieving high level of institutional trust in Russia is putting together a strong set of rules and regulations enforcing good corporate governance practices, and guaranteeing shareholders’ rights. Such practices, needless to say, must be based on the sanctity and enforceability of contracts in society in general and must ensure that: • there is transparency in the operations of the corporation so that the shareholders know how their resources are being used;

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• there is accuracy and honesty in the accounting system; • the rights of minority shareholders are respected and protected; • directors recognize and fulfill their fiduciary obligations to shareholders; • directors are able to fulfill their duties of selecting and monitoring the activities of management; and • directors are elected by the shareholders in a fair and honest fashion. The manner in which these practices are mandated and fulfilled vary greatly from country to country depending upon a country’s history, culture and state of economic development. Galina Shatilova, another participant of the Corporate Governance group at the Summer School, made a successful attempt to summarize efforts of European and Russian professionals in this field. Decades ago a new concept rushed into the Western community of corporate governance theorists and researchers. Initially neglected and for years regarded as a function of company’s public relations, the corporate social responsibility concept has re-established itself as an essential part of corporate governance. Being part and parcel of strategic planning and company management, these activities are reflected in the system of economic, environmental and social indicators of sustainable development, and are implemented by means of a constant dialogue between business and society. The essence of this approach is that all commercial and economic decisions are taken with due regard for their social and environmental implications both for the companies themselves, and other social agents. This approach turns CSR into a powerful factor of strategic development, improves business image and competitiveness of corporations thus increasing their market capitalization. In fact, CSR and sustainable business development are being viewed as “two sides of a coin”1. Corporate forms of organization along with their critical role in the process of a country’s economic growth, have also been seen as social institutions that justify their existence by their overall

1 “Russia: the Evolving Corporate Responsibility Context”, Alexey Kostin //

240 Seventh International HSE Summer School «Baltic Practice» ·2007 contribution to the society. Specifically they must serve a balanced set of stakeholders2. However, in the beginning of 2000s one group of these stakeholders, the shareholders, seemed to have muscled out all the others. For years a group of chief executives of America’s 200 largest corporations, calling themselves the Business Roundtable, promoted the balanced view of the corporation, including a sense of corporate social responsibility. In 1981 their Statement of Corporate Responsibility stated: “…Balancing the shareholders’ expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concern of other constituencies (employees, customers, communities, and society at large) also must have the appropriate attention…. Leading managers believe that by giving enlightened considerations to balancing legitimate claims of all its constituents, a corporation will best serve the interest of its shareholders…”3. Then, in 1997 their report on Corporate Governance announced an about-face: the paramount duty of management and of boards of directors is to the corporation’s stockholders4. In one of her books Marjorie Kelly5 [5], a business entrepreneur, compares the privileges of today’s shareholders of Western companies with those of feudal aristocrats. Why should one group, she asks, particularly a group so distant from operations that may have added nothing for years, lay claim to such a large share of benefits? Are the workers like the peasants who toiled the land to produce these benefits yet could be removed at the whim of the owners? Kelly’s is a provocative argument with more that a grain of truth. Are issues of CSR essential to new-born, though extremely fast developing Russian corporations? One Russian oligarch in the end of 1990s has already expressed the general attitude of his time: “…For us corporate social responsibility means making enough

2 “Beyond Selfishness” (Working Draft), Henry Mintzberg, Robert Simons and Kunal Basu // www.henrymintzberg.com 3 The Business Roundtable: Statement on Corporate Responsibility, October, 1981 4 The Business Roundtable: Statement on Corporate Governance, September, 1997 5 “The Divine Right of Capital: Dethroning the Corporate Aristocracy”, San Francisco, Berrett – Koehler, 2001

241 Seventh International HSE Summer School «Baltic Practice» ·2007 money to pay dividends to our shareholders, monthly salaries to our employees, and taxes to the federal budget…”. Luckily, this vision of a subject is slowly but steadily changing. However, Russian companies have yet to make sufficient efforts to reach international standards in social and environmental responsibility. Some have already realized that they need to embrace the concept of sustainable development and socio-environmental responsibility – choosing partners and forums that are most suitable for them, including the most basic ones, such as thematic sections in their annual reports, as well as specifically reporting on social and environmental challenges Throughout the world, the issue of non-financial risks is becoming increasingly important for companies, and Russia is not an exception. These risks are increasingly viewed by investors as an important factor. And it is precisely the reports on CSR which fill this “information gap” for investors by demonstrating that a particular company pays due attention to environmental and social aspects of its business, thereby reducing the risks of internal and external social conflicts and environmental sanctions. This is a clear indication that CSR in Russia is set to gradually become the basic ideology of corporate governance and management – just as it happened in many developed countries. Importantly, the implementation of corporate social responsibility (CSR) in Russia does not yet involve small and medium-size enterprises (SMEs). These actors have so far preferred to confine themselves to charity work at a local scale, viewing it as the main form of their social engagement. In the mean time, within the European Union small and medium-sized companies, along with majors, form a central driving force in the process of creation of a CSR concept derivate – the Corporate Citizenship concept. Our German colleague Matthias Naumann, who showed himself as an extremely active and bright participant of group discussions and plenary sessions of this year’s Summer School, chose this concept as a field of profound analysis that he reveals in his paper. Finalizing an overview of the corporate governance section of this set of publications, it is necessary to send special thanks to all the members of the Summer School Corporate Governance group, and especially to Kathrin Hamm from the German side (the University of Witthen/Herdecke), and to Ilshat Yanmurdin from the Russian side (State University – Higher School of Economics)

242 Seventh International HSE Summer School «Baltic Practice» ·2007 for their helpful comments and suggestions during our group work sessions in Witten. Their insights made these papers immeasurably better.

3. Conclusion As the economies of the world become more inter-related, it is possible to predict that the rules, regulations and practices with respect to corporate governance will become more and more similar in every country. In that far distant time it is possible to imagine that a prospectus offering shares for sale by a Russian company on a Moscow exchange will be acceptable in many countries that have the same rules and practices. However, given the different stage of development and practices with respect to corporate governance across various countries that time is, indeed, far away. In the interim, each country must develop its own goals with respect to corporate governance and put in place the rules and regulations that lead to the fulfillment of those goals. Doing so has never been an easy task which is well demonstrated by the fact that since the inception of the joint stock company and private markets, there has been great bubbles of investment, great scandals in the sale of shares, and an apparent never ending search for policies and practices, which assure that individuals and institutions buying shares in companies can automatically expect to be involved in fair and honest transactions. As recent experience in the United States (where the most fully developed capital market and corporate governance practices in the world exist) has shown, there can still be serious breakdowns in governance and markets – breakdowns that cause the loss of millions of dollars by shareholders. The search for the perfect system is still going on. In spite of the problems that the beset markets over the past centuries, history has shown that the corporate form of business organization operating in free and open markets provides the most efficient manner of accumulating capital to finance economic growth. Within this general framework each country must develop the rules, regulations and institutions that fit its history, culture, and state of economic development. The only way that they can do so is through an understanding and analysis of past experiences – through research. Some issues that may well be worthy of exploring as Russia continues its rapid transformation from a “command to a market economy” are outlined below. 243 Seventh International HSE Summer School «Baltic Practice» ·2007

Dmitry Kuschin, Margarita Pugacheva, Galina Shatilova Corporate Governance and Corporate Law: comparative analysis of different countries practices

Corporate law in a broad difinition means a system of rules and norms that are elaborated and accepted in an organisation that could be seen as a union of individuals and their portions of capital. These rules and norms reflect the will of company’s owners and employees, and act as regulators of different activities of the organisation. Corporate law could also be seen as internal company law. Any organisation that unites individuals and their capitals, has a clear mission of its existance, is free to elaborate its own set of rules that will help to maximize the efficiency and effectiveness of its performance. In the United States and in Canada. as well as in some other countries of the world, a narrow understanding of corporate law is quite common. According to it, corporate law is almost equal to the system of norms that regulate activity of a joint stock company. Corporate law in Russia is a complex branch of legislation, it influences the national law system in a great extent. The system of corporate law in Russia includes institutes of constitutional, international, civil, labour, tax, administrative, and financial legislation, as far as those institutes are involved in the regulation of corporate relations. At present numerous changes are introduced into the Russian system of corporate law, it happens in most cases because of the great need of minority shareholders protection; shareholders’ rights are growing in its importance, and they could be secured and guaranteed only if a company is open and transparent, and this policy of transparency and disclosure is shared by its top-managers and board members.

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Part 1. Comparative Analysis of the UK and Russian Experience in this Field Corporate law in Russia is a new, though fast-growing sphere of law, which is very important for economic reality we live in. Every day hundreds of companies are created, all of them would like to achieve success in their activity and to act according to the legal standards. Standards of corporate governance are aimed at the protection of shareholders’ interests, no matter how many shares each of them owns. The higher is the protection, the greater investments a company can attract, and this equation affects national economy as a whole. This part is focused on the comparison of the UK Corporate law and Russian Corporate Law systems and their compliance to the main principles of corporate governance. We will also observe the influence of EU Corporate Law on the UK Corporate law. First, we should explain, why we decided to choose this particular topic and these countries to be compared. For the last 15 years an obvious transformation of the private sector role in economic development and workplaces creation took place everywhere in the world. Russia and the UK are not exceptions. Despite the fact that Russia and the UK have different legislation systems, these two countries have a lot in common. For example, London Stock Exchange (LSE) is the second popular stock exchange among Russian companies (after MICEX in Moscow). Being listed at the LSE is very prestigious nowadays, this fact indicates high liquidity of the company’s shares, its openness for investment, its informational transparency, and business reputation. The next reason, which explains why we have chosen UK as the country for comparison, is the fact that many Russian companies are incorporated in free economic zones (British Virgin Islands is a good example), where British legislation dominates. That is why UK norms of corporate law, and principles of corporate governance, grew in its importance for the managers and shareholders of Russian companies. At the same time, the United Kingdom is a state where corporate legislation was finally reformed and codified not long ago. In Russia, the government undertakes efforts of creating a well-functioning system of market economy, private corporations are paid special attention because they form the basis of living standards, and country’s welfare. Private corporations create workplaces, pay taxes, thus participating in the formation of the 245 Seventh International HSE Summer School «Baltic Practice» ·2007 state budget, they produce wide range of goods and services for consumers’ use, manage our savings, and secure our pensions. And in the context of growing importance of private sector, issues of corporate governance are essential. Corporate governance is a set of processes, customs, policies, laws and institutions affecting the way in which a corporation is managed, and controlled. The sphere of corporate governance also covers relationship among numerous players involved in the company’s activity (so called “stakeholders”), strategic goals and mission of the corporation in the society. The principal actors of corporate governance are shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, financial institutions and other investors, regulators, environment and community as a whole.1 Moreover, for our point of view corporate governance is also a set of arrangements which are established to ensure that the directors and senior managers of a public company exercise their power while running a company according to the interests of shareholders and the broader community (stakeholders). Such arrangements need to incorporate appropriate 'checks and balances' upon the power of the chief executive, for example, by splitting the roles of chairman and CEO, strengthening the power of board audit committees and providing a greater role for other members of top- management team. ORGANISATION FOR ECONOMIC CO- OPERATION AND DEVELOPMENT has introduced a written act, which summarizes main principles of corporate governance. *** First of all, we should mention the international level of regulation. There are OECD Principles of Corporate Governance, which are the basis of every national legislation in the sphere of corporate governance. Although those principles are mostly seen as recommendations, they still have power of a basic source of corporate regulation in every country. This document includes: - provisions for shareholder’s rights; - equal attitude to shareholders; - role of shareholders in corporate governance; - board of director’s obligations; - information disclosure and transparency.

1 Source: Wikipedia

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Companies can take into consideration some points of these principles while adopting their company codes. Nowadays the main source of corporate law in the United Kingdom is Companies Act 2006. In addition, companies’ operations are affected by some other regulations such as Employers' Liability (Compulsory Insurance) Act 1969, Health and Safety At Work Act 1974 and Sale of Goods Act 1979 .But before analyzing Companies Act 2006 we should examine the background of corporate law in the UK in order to understand how its main points are applied to modern business relations. As we know, before an act becomes a law, it normally exists as a bill. Thus, before becoming an Act, the Companies Bill 2006, which was formerly called Company Law Reform Bill, received Royal Assent on the 8th of November, 2006. In the official press release from this date, State Secretary of the Department of Trade and Industry, Alistair Darling, mentioned that all parts of the Act will be brought in force by October 2008. He further stated that the provisions regarding shareholders’ communications including provisions facilitating electronic communication will be the first to take effect from January 2007. This is because of its perceived immediate benefits to the businesses. It is expected that the majority of the provisions of the Act will be brought into force by October 2007. The Department of Trade and Industry completed a fundamental review of the British company legislation in 1998, which led to the composition of the Companies Bill that overhauls case law governing the creation, operational management, and termination of companies. Before that corporate directors had too much power and not enough liabilities regarding protection and security of shareholders’ rights. So it meant that the corporate law had a certain “defect”. That is why the Companies Act 2006 brings in many new duties and obligations for board members, and we will see it further. Talking about the Companies Act 2006 and its great importance in the field of corporate law in the United Kingdom, we must emphasize that this Act is a comprehensive code of company law. It restates and replaces most of the Company Law provisions of the 1985, 1989 and 2004 (Audit, Investigations and Communities Enterprise Acts) and also introduces a wide range of changes to a number of areas such as formation of an entity, directors’ duties and liabilities, shareholders’ rights, share capital maintenance and so on. The Companies Act covers a wide field of 247 Seventh International HSE Summer School «Baltic Practice» ·2007 corporate law in the UK, and corporate governance principles are reflected in the statements of this act. The Act 2006 includes 1,264 clauses, which undoubtedly will change the way companies are set up and run, it will also affect the relationship that corporate directors have with their firms. Moreover, the Act provides a reform of English corporate law partially based on the OECD principles of corporate governance. The Act introduces reforms in a number of areas which will have a significant impact on directors, auditors and shareholders of private and public companies. Here we can point out key proposals : • - a statutory statement of directors’ general duties, which means the existence of a statutory requirement for directors to have regard to a specified list of factors in exercising their duty of good faith; • - extended shareholders’ rights that presume a right to sue a director for negligence, and other defaults, it also includes the right to bring derivative claims on behalf of the company under certain circumstances; • - an easy, more accessible regime for running private companies which can be achieved through measures such as simplification of capital maintenance provisions, abolishing of the prohibition on financial assistance for private companies purchasing their own shares; • - extended rights for portfolio investors, which means the promotion of shareholders’ engagement and a culture of long-term investments through enhancing the power of proxies and enfranchising indirect investors; • - ability of auditors to agree with companies that wish to limit their liability regarding the audit; • - a new criminal offence for deliberate or reckless inclusion in audit reports any data or conclusion which is misleading, false or deceptive; • - greater use of electronic communications; • - right of the government to oblige institutional investors to disclose the information regarding their voting process; • - simplifying the process of company formation including abolishing the requirement for authorized share capital; Now we would like to compare the process of regulation before and after adopting the Companies Act 2006. 248 Seventh International HSE Summer School «Baltic Practice» ·2007

Before adopting the After adopting the Companies Companies Act 2006 Act 2006 -all companies were -the Act provides that private required to have a corporate companies no longer are required secretary; to have a corporate secretary2 ; -the requirement of holding -the absence of such requirement Annual General Meeting (to simplify the decision-making (AGM); process of private companies) -written resolutions must -the Act provides that the normal have had unanimous con- rule for special and ordinary sent of the board members; resolutions will apply to written resolutions; in other words, a simple or 75% majority of votes will be enough to pass a written resolution.

We should stress, that one of the most important changes, according to the Companies Act 2006, was the introduction of an obligation to promote success of a company which has a board of directors that takes into account environmental risks, staff, customers and local community interests, along with those of an investor. Directors that fail to pursue these provisions could become embroiled in shareholder actions. For the first time shareholders can pursue a "derivative action" on behalf of a company if they believe the board has failed to fulfill its duty. Here we see the force of shareholders’ influence on directors’ decisions, and thus, to the future of the corporation. The main point of change in director’s duties is that now the implementation of corporate governance principles is becoming a tough requirement in the United Kingdom.

2 The Corporate Secretary is a senior corporate officer with a wide range of responsibilities, he/she serves as a focal point for communication with the board of directors, senior management and the company's shareholders, corporate secretary occupies a key role in the process of critical corporate matters’ administration. However, if a private company decides to appoint a corporate secretary, then the authority of a corporate secretary in the private company will be the same as that in a public one. Therefore, the fact of appointment of a corporate secretary in a private company should be mentioned to the registrar of companies and recorded in the company’s register of secretaries.

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Directors must also avoid conflicts of interest and decline inducements or "benefits" offered by third parties, usually in order to win a contract from a company. Company reports should become more detailed and cover all sorts of factors that might affect the company’s performance Very important implication to the company law in the United Kingdom and also to the UK’s business environment is that certain changes introduced in the Act will bring £250 million of business savings annually for businesses including £100 million for the small businesses as it was expected by Alistair Darling, the State Secretary of the Department of Trade and Industry. Returning to the case of Russia, we should mention that on the federal level of regulation we have «The code of corporate conduct». Nowadays only 1 per cent of all registered in Russia companies have introduced their own corporate codes. But after adopting the code of corporate conduct in 2002, process of passing such codes in companies has been developed. This paper (set of rules) became a model document for working out proper corporate governance code. This code has been recommended to companies of Russian Federation with the aim to improve their corporate governance practice, secure rights and legal interests of shareholders, provide informational transparency. Code of corporate conduct is not an Act, as for example the Companies Act in the UK. Codes which have been adopted since 1990-es could be divided into 2 groups. The first group includes codes adopted before 2002. They usually contain only main principles of corporate governance (2-3 pages), nevertheless they were rather innovative at the time they were passed. The second group includes codes, adopted by companies after 2002. Most of them have the same structure as the Code of corporate governance, which means that they contain 10 of its 10 parts. Codes of some companies still include provisions which are default or irrelevant. It can be explained by the fact that people who put them together often do not have enough knowledge about companies and their individual specifics etc. Development of the market economy calls for improvements in the legal system of corporate relations and corporate governance. It is also important to highlight the fact that the main direction of the evolution of corporate legislation in Russia is changing nowadays. Securing property rights and major shareholders' interests becomes the main priority for the lawmakers. Heads of federal departments have to admit that the 250 Seventh International HSE Summer School «Baltic Practice» ·2007 current state of the corporate law can be characterized by a significant number of out-of-date norms and standards, as well as internal contradictions. Deep-rooted corruption is another premise for hostile takeovers in different industries. Foreign investors also expect further improvement of corporate legislation and legal reforms which will help to protect their rights. As to the confidence in the Russian court system, it remains relatively low. Some corporate governance experts believe, that it is necessary to make further corrections and to fill the loopholes in the existing legislation regulating such aspects as corporate disputes, reorganization of companies, mergers and acquisitions, dividend policy, usage of the internal information, as well as the vast spectrum of relations between the majority and minority shareholders. In mid-December 2004, the Ministry of Economic Develop- ment and Trade established an Expert Council on corporate governance, its main purpose is to work out the concept and model of corporate legislation reform. This advisory board of directors unites senior experts from various professional backgrounds - regulators, investors, auditors and academics from the Law School of the Moscow State University, Private Law Research Center under the Office of the President of Russian Federation, US- Canada Institute of Studies. Andrei Sharonov, Deputy Minister of Economic Development and Trade, was appointed as a Head of this Council. In May 2005, the Expert Council submitted for consideration a draft of the concept of corporate legislation development for the upcoming 3-year period. The authors of this document argue that provision of equal rights to majority and minority shareholders, both residents and non-residents, form one of its basic principles. Mentioning the measures aimed at preventing businesses from hostile takeovers and unfriendly acquisitions the authors offer to make several amendments to the Federal Law "On Joint-Stock Companies" that would prohibit compulsory withdrawal of shareholders' register, and consider illegal all decisions made at shareholders' general meetings conducted without a consent of the board of directors. Expert Council recommends to make amendments to the existing set of laws, according to which any extra general meeting of shareholders can be called by the 10%-shareholder, but only

251 Seventh International HSE Summer School «Baltic Practice» ·2007 after verifying in the court the legal lightness of the Board of Directors in canceling such a meeting. The concept includes a set of recommendations on modernization of the corporate governance practice. One of the most important recommendations is to limit the number of executive directors in boards. In short, board of directors should keep a considerable distance from the company's management. Moderation of companies' reorganization is one of the long- standing problems in Russian legislation. Today we witness a confusing situation on the national economic landscape when major "blue chip" companies listed at the international stock exchanges, and small enterprises with a dozen of employees often have the same form of ownership - open joint-stock company. During the period of privatization of 1990s many small firms were forced to transform themselves into open joint-stock companies in order to meet legal requirements. However, the majority of them are not able to become public, raise market funding and meet established corporate governance standards. Nowadays, the number of open joint-stock companies in Russia is over 157,000 as compared to 900 in Germany. Probably, the LLC form of ownership would be more appropriate for the small firms in Russia. No doubt, the level of corporate governance in Russia still remains below international standards. However, according to a widespread opinion among foreign investors, while corporate governance is improving at the company level, there is still a risk that governance on the federal level is getting worse. Today corporate governance in Russia is developed in an evolutional step- by-step way. Nevertheless, investment climate in Russia has slightly changed for the better. However, so far Russia has been able to attract portfolio investors from Western countries, but not strategic ones. As Ira Millstein said at the International Conference on Corporate governance in Moscow in June, 2004, "Russia has been extremely resistant to invasions ever since the beginning of time. You have been invaded by almost everybody I can think of - the Germans, the French, the Turks, the Swedes ... Russia has been successful in resisting invasions over many hundreds of years. There is one invasion that I don't think you can resist. That is corporate governance and the spread of the need for capital around the world. It is a universal requirement … It applies to everybody. 252 Seventh International HSE Summer School «Baltic Practice» ·2007

If Russia wants to add to the global economy, ... and if Russia wants to attract capital from all over the world,... you are going to have to play the game the way everyone else plays it. And these are the rules, which everybody has to live by to compete successfully, and to attract capital to Russia". We hope, all he said, is true. And Russia will find a way not to resist European countries in the process of development and spreading corporate governance culture. Situation in corporate regulation in Russia today is very difficult. We should be guided by international principles, or probably even codes, but we also have national codes of corporate conduct, which have been worked out especially for Russian economic system, taking into consideration conditions of Russian policy, environment, and business practice. On the other hand, if we look at the situation in the UK , the Company law Reform in the increasingly global marketplace of the United Kingdom is reflected in changes of regulatory conditions – for example the move towards global convergence of accounting standards, so that ultimately companies are able to run their financial books and records on a unified basis, no matter where in the world they are listed. The reform also finds its reflection on the level of the United Europe, where there is already a large pool of European legislation. On this level the EU Commission Company Law and Corporate Governance Action Plan are focused on fostering the global efficiency and competitiveness of EU businesses, strengthening shareholders’ rights and third party protection and rebuilding the confidence of investors. We have already mentioned the Action Plan. In our opinion, it should be briefly described. The Action Plan is a document issued by the European Commission on Modernizing Company Law and Enhancing Corporate Governance in the European Union. The Plan is designed both to improve the operation of the European Single Market and address concerns regarding the issues of corporate governance and some recent corporate collapses (like Enron, Parmalat and others). The UK supports the Action Plan, above all, as a platform for action to promote competitiveness and raise corporate governance standards across Europe. The Government supports the Action Plan, and regards it also as a platform for action to remove barriers for the efficient market performance, to set up cross-border operations, extend investment opportunities for investors and improve access to the capital, and 253 Seventh International HSE Summer School «Baltic Practice» ·2007 its availability across Europe. In the UK, the plan is seen as facilitative and enabling enterprise and entrepreneurship to flourish. Now, we suppose, it is time to give a description of the OECD Principles of Corporate Governance which we have also mentioned in the beginning of this paper, OECD Principles are the main part of the international corporate regulation. These Princip- les were originally developed in response to a call from the OECD Council Meeting on April 27-28, 1998. There was a need to develop a set of corporate governance standards and guidelines in conjunction with national governments, other relevant international organizations, and the private sector. Since the Principles were approved in 1999, they have formed the basis for corporate governance initiatives in both OECD and non-OECD countries. Moreover, they were adopted as one of the Twelve Key Standards for Sound Financial Systems by the Financial Stability Forum. Accordingly, they form the basis of the corporate governance component of the World Bank/IMF Reports on the Observance of Standards and Codes (ROSC). Returning to the Company Act 2006, we can argue that the Act can be seen as part of European corporate legislation. Official authorities of the Department of Trade and Industry of the UK consider that the EU activity regarding company law and corporate governance is fundamentally important to the UK. Right steps will make it easier for British companies and investors to operate across national borders, and will help to improve the ability of EU capital markets to keep up with international corporate requirements. Ways to improve business efficiency and competitiveness by cost reductions and flexibility increase form one of the central issues of the Action Plan. Recent Commission pronouncements have also emphasized its commitment to better regulation, and the simplification and modernization of existing legislation. The Commission also tries to establish close communication with business community, and other stakeholders. The UK, along with other EU member-states, plays an active role in shaping the development of the Action Plan in ways that benefit United Europe. It is well known that companies have scarce resources, and numerous alternatives to use them, and under these conditions they have to build their businesses and set priorities. As a result of the EU countries’ in general, and the UK in particular, a strong 254 Seventh International HSE Summer School «Baltic Practice» ·2007 framework for future business activity in Europe can be shaped. These efforts should help to promote wealth creation and compete- tiveness of the UK businesses. We believe that Russia should take into consideration all the work done in Europe, and especially in the UK, and create an appropriate model of corporate governance and relations that will reflect specific features of historical, cultural, economic and social background that our country has. Also, it is obvious that the legislation in the sphere of corporate governance in Russia is still quite weak, which means that considerable efforts should be undertaken in order to develop it. We mean that the only substantial regulator of corporate relations is “The code of corporate conduct” which is not even a statutory act and is just a code of practice. Of course, in our opinion, that is not enough.

Part 2. Shareholders Rights from OECD Principles: Adaptation to Russian Practice. Why They Do not Work? Rights of any origin are quite important for their owners; “shareholders’ rights” presume rights of an investor (either institutional or individual) that emerge in connection with his/her property invested in capital assets of any business entity organized in a form of a joint stock company. The issue of shareholders’ right is in a large extent an issue of trust, i.e. trust to the institution of corporation that, once an investment is made, will have freedom to use it for a variety of purposes. At the same time, once an investment is made, a set of obligations and duties emerges for the corporation. Whether or not a company fulfills its duties and obligations towards its shareholders (i.e. acts according to their rights) will determine if people or organizations (institutional investors) will leave their investments within this company, as well as stimulate their positive decisions for additional investments in the future. It is often argued in the literature that good corporate governance is the key to bringing down economical barriers and further developing trade and investment ties. As we can see, in Russia nowadays exists a major economic barrier, which is a lack of trust in business and social institutions. The number of joint stock companies is growing from year to year but if we look at the list of their investors we will surely see that citizens are quite un-enthusiastic about numerous opportunities of investing their personal funds, or savings, in private (or state- 255 Seventh International HSE Summer School «Baltic Practice» ·2007 owned) entities within the national economy. Institutional investors are prevailing in such majors as Vimpelcom, Gazprom, Sibneft, this situation might be explained by the lack of information, lack of investment culture, lack of knowledge regarding the process and order of investments; as well as by the lack of trust in corporations as institutions that are able to guarantee the rights of individual (i.e. minority) shareholders. So, what are the legal sources of regulation of shareholders’ rights in Russia? There is a Stock Company Law3 that addresses corporate governance issues quite extensively. We also have the Civil Code4 and the Corporate Code. These two sources provide detailed regulation for more significant issues of shareholders’ rights. But I would like to analyze an international model that the OECD5 introduced in 2004. Being participants of the Baltic Summer School 2007, we had an opportunity to understand the importance of international models in the context of developing cooperation between European Union and Russia. This model is quite attractive given cultural, economic, and social context of Russia, Great Britain, Germany, and some other European countries, and in my opinion, we should follow it as far as we are able to. The OECD model is a set of recommendations for members-countries that they should follow along with their national legislation, it seems to be quite important for growing relations between European Union and Russia. Given the topic of my research, I want to focus on one side of the OECD model, i.e. on shareholders’ rights. This topic is observed in the first chapter of the OECD Principles. Shareholders’ rights include a complex of rights regarding company’s management and performance. Here are the basic ones: 39. Providing an adequate method of ownership regulation. 40. Free transferring of shares 41. Participation in companies’ profits 42. Receiving information on a regular basis 43. Participation in general shareholders’ meetings and voting

3 The Stock Company Law (26.12.1995 N 208-ФЗ) 4 The Civil Code (30.11.1994 N 51-ФЗ( 21.10.1994) 5 The Organization for Economic Co-operation and Development

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But these standings are often broken in the business practice of Russian companies. Below I would like to bring some examples.

The register failures There are many details in the process of shares’ registration and exercising the right of ownership. We want to give a short brief of the most common cases. Rejection of registration, authority transfer between shareholders; secondary registration of share transactions; illegal change of share’s type from common to preferred with an aim to deprive a shareholder of his/her voting right; direct and oblique (indirect) control of managers under registrars of shareholder’s property rights.

Breaking the law by issuing shares without Annual General Meeting One of the key rights of shareholders is to be informed regarding fundamental corporate changes. Under fundamental changes are usually meant amendments in the corporate chapter, authorization of additional shares, and other activities that result in assets’ changes. In Russia these rights are poorly defined and minority investors are often prone to abuse by managers who control shareholders. The YUKOS case is a good example in this respect: a substantial group of minority shareholders was excluded from the Annual General Meeting (AGM) and subsequently not allowed to participate in the increase of capital that the AGM decided to undertake There are different gaps in the process of shares’ authorization process. One of them is the issuance of corporate bonds converted into shares with an aim to wash out shares held by minority shareholders.

Failures associated with the voting rights These failures include blocking shareholders’ participation in an AGM. It is important to notice that the right of participation in a decision-making process is the key right of a shareholder. The right to vote at the AGM is regarded as a way to exert influence on the company’s corporate strategy and performance. The OECD Principles state the importance of supplying shareholders with sufficient information regarding the date, exact location and an agenda of the general meeting. This statement does 257 Seventh International HSE Summer School «Baltic Practice» ·2007 not always work because of different negative factors. The failure to provide shareholders with necessary information mentioned above, blocks them from realizing their preemptive rights, at the same time there is no sanction in the law against such a failure. In order to ensure active participation of investors in the meetings, some OECD countries have extended the ability of shareholders to submit items to the agenda by simplifying the process of filing amendments and resolutions. The OECD Principles do not take a position on whether institutional investors should be obliged to vote or to have an active position. But the fact that the issue is raised in the Principles is an indication of the growing importance of these investors in the corporate governance context. In Russia, an active policy by these institutions is even more essential, due to the low liquidity of the market. Also, it is rather important to support maximum transparency in the sphere of voting rights’ distribution among different categories of shareholders. On the other hand, the OECD Principles recognize that many countries with liquid and efficient markets could leave all decisions regarding the capital structure of companies to their discretion and to the assessment (through disclosure) of sophisticated shareholders. Thus, the Principles do not take a position on the rule «one share/ one vote» for common stock, but, they note the support of this concept by institutional investors and shareholder associations. It is also important to say that one share/one vote is often a listing requirement, even when it is not officially required by law. In Russia, the Company law has a “one share/one vote” provision. However, there have been reported cases when company charters provided differently weighted majority requirements for certain issues that might undermine the thrust of the law. There are numerous cases in Russia, when procedure requirements of the voting process during general meetings are not observed, and shareholders are prevented from voting through representatives and voting in absentia. Two last failures are caused by the dishonest behavior of directors. Through these failures we can see the routs of other problems, given the fact that voting rights form the basis of decision-making process.

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Non-payment of dividends Payment of dividends is not always a company’s obligation. Moreover, there are several conditions, under which it is prohibited to pay dividends. Normally the decision regarding dividends’ payment is made at the Annual General Meeting, but in many cases it favors the will of majority shareholders to direct finance to company’s strategic development. In Western practice, only 5 % of public companies, like for example, Microsoft, do not pay dividends. In Russia up to 90 % of public companies do not pay dividends at all, or at least do not pay full amounts.

There are cases of breaking the principle of equal treatment for different groups of investors All shareholders including minority ones and foreign investors should be treated equally. There have been blatant violations of foreign investors’ rights which resulted in locking them out of the AGMs, not providing them with necessary information, or not allowing them to vote. A widely known example: a German construction company found itself unable to exert control over a Russian firm, the major share of which it owned, because local authorities in Krasnoyarsk refused to recognize decisions of the Federal Court, and instead issued a statement regarding re-nationalization of the factory. A similar case surfaced in St. Petersburg (a porcelain factory was re- nationalized) . In a well known case of YUKOS, its foreign investor that owned 14% of the company’s capital, along with other foreign shareholders, was locked out of the AGM, and not allowed to vote; the company’s position was justified by court decisions that clearly discriminated a shareholder.

There are significant problems with adjunction and enforcement Shareholders should be very attentive and should actively participate in the “life” of a company. The Principles call for providing shareholders with the opportunity to obtain effective redress for violation of their rights6. Many countries with weaker

6 concerns the rights stated in legal sources

259 Seventh International HSE Summer School «Baltic Practice» ·2007 judicial systems have found that alternative settlement procedures, such as administrative hearings, or arbitration procedures organized by securities regulators, or other regulatory bodies, provide efficient methods for dispute settlement, at least at the first instance. The Russian Company Law offers a number of legal solutions that might help minority shareholders. These solutions include an appeal against a resolution adopted by the AGM, the possibility to seek the annulment of a large transaction, and a suit seeking the invalidation of a transaction involving a conflict of interests. Meanwhile, in the Russian system of corporate legislation there are still many formal procedures, and gaps. Courts admit only documentary evidence, which is barely available, given the fact of limited information disclosure by the majority of national compnies. Moreover, in Russia there are cases, when a shareholder that sues a major company, losses at the trial court level, because of the combination of the local court bias and the judicial corruption. Of course, a persistent shareholder has an opportunity to receive a favorable judgment on appeal. But pushing a case through three levels of appeal may take years. As a positive factor, we have state protection of shareholders’ rights, and the example is the Federal Financial Market Service’s activity7. This institution can initiate court proceedings on behalf of an individual shareholder, or the state (as a shareholder), when their rights have been violated. In practice, the FCSM has won about 80 % of such cases. Corporate governance evolution is an important step in the reformation of the Russian business sector. Corporate law is developing dynamically in our country but we still are far away from having solid Russian traditions of corporate culture. It is difficult to compare Russian and European corporate legislation given the differences in their historical background, and specific features of national economies. Being a minority shareholder in Russia, an investor faces not only usual business risks but also risks of losses from unfair management practice, and lack of information about the nature of these risks. While Russian corporations are not aware that improvements in the field of corporate governance are actually for their benefit,

7 Federal Financial Market Service - http://www.fcsm.ru

260 Seventh International HSE Summer School «Baltic Practice» ·2007 they do not seem to be motivated for such improvements. The experience of some Russian companies, such as Vimpelcom, that managed to raise external funds, being in the center of the financial meld-down of 1998, proves an existence of a market premium for good corporate governance, especially when the market and country risks are low. Improvements in the field of corporate governance will not take place if there is no transparency and public availability of court decisions; if the requirement to justify opinions of lower courts is not fulfilled, if more significant action on judicial corruption is not undertaken. Even a developed legal system with detailed regulation practice faces a problem of exercising its norms, when there is no governance body free from bureaucracy and corruption. I would like to mention several global trends aimed at improvement of corporate relations: • Stimulation of transparency and disclosure; • parallel strengthening of board of directors’ competence and control from shareholders; • expansion of judicial control on company’s activities; • development of the legislation aimed at protection of minority shareholders’ rights; • toughening the regulation of shares’ emission, as well we changing charter capital; • limitation of opportunities for increasing net income at the expense of charter capital. In conclusion, we would like to draw your attention again to the fact that the issue of exercising shareholders’ rights is a key point in building a properly functioning system of corporate governance. Failing to guarantee shareholders’ rights, poor representation of minority shareholders in Russia is not only a specific feature in the process of adopting international experience, but the reason of sick development of investment policy, and economic stress. That is why we have to put issues of shareholders’ rights on a priority position within a range of critical problems, we have to solve in the process of establishing national system of corporate governance regulation.

Literature 1. The Stock Company Law (adopted 26.12.1995 N 208-ФЗ) 2. The Civil Code (adopted 30.11.1994 N 51-ФЗ) 261 Seventh International HSE Summer School «Baltic Practice» ·2007

3. The Corporate Code 4. Corporate Governance – Harmonization of Russian and EU Standards (EU – Russia Roundtable March 22, 2006 Goldsmith Hall, London) M., 2006. 96 pages. Editor-in-chief: Alexander Astapovich 5. APCIMS-EASD Corporate Governance Committe Shareholders Rights a legal comparison complied by TELFA (october 2002 published by APCIMS-EASD) 6. www.fcsm.ru 7. www.oecdmoscow.org/ 8. www.corp-gov.ru 9. http://www.elitclub.ru 10. http://www.epfsf.org/ 11. http://europa.eu/index_en.htm 12. http://www.consultant.ru/

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Sarah Poranzke "Trust is good - control is better". The development of Corporate Governance in Germany

Scientific papers, one can find in the field of corporate governance have one thing in common, and that is what at the same times makes them so essentially different regarding their implication: nearly every author starts his work with the attempt of a definition of corporate governance.1 The complexity of corporate governance and hence the coexistence of various definitions can be explained by a diverging previous understanding of corporate governance and different roots of its development caused by its global occurrence including different legal, cultural, ownership, and other structural differences. The theories that have affected the development of corporate governance should always be viewed in combination with the legal system, capital market development and the ownership structure2. The term corporate governance first emerged in the Anglo- American context from two main streams: the Anglo-American legal terminology and the Anglo-American capital market. The definitions take a different approach of the topic and hence deviate from each other considerably. The Cadbury Report defines: "Corporate Governance is the system by which companies are run […]" or "Corporate Governance is the system or matrix of responsibilities of directors

1 Cf. SCHNEIDER, 2000, Corporate Governance - Grundsätze, p. 2413; KNOLL/ RASINGER, 2002, Corporate Governance zwischen Anspruch und Wirklichkeit, p.117; NIPPA, 2002, Alternative Konzepte für eine effiziente Corporate Governance, p. 8. 2 MALLIN, 2004, Corporate Governance, p.34.

263 Seventh International HSE Summer School «Baltic Practice» ·2007 by which companies are governed and controlled"3. Hence, in the Anglo-American legal terminology corporate governance is understood as the legal organisation of decisions: it is the framework which defines the role of the Management Board and the Supervisory Board including their set of tasks and responsibilities. In contrast, the definition of corporate governance in the sense of the Anglo-American capital market is the sustainable perception of the shareholder's interests as investors of capital. Hence, the relation between the organisation as a whole and the capital market is brought into focus. Within that concept the close circle of shareholders is often extended by further stakeholders like employees, suppliers and customers and auditing firm. The Hampel Report states in this context: "Good Governance ensures that constituencies with a relevant interest in the company's business are fully taken into account"4. Thus, the approach of the Anglo- American capital market is not primarily considering the legislation in force, but the actual reality in the marketplace. Laws are utilized to force the management not to follow their own objectives, but perform management dedicated to the long term enhancement and retention of shareholder value.5 No more than 10 years ago, the term corporate governance, coinciding with a discussion about it, entered Germany. The same two streams that developed in the Anglo-American context can be found in Germany. SEMLER defines corporate governance in the Münchener Kommentar zum Aktiengesetz as "Materielle Unternehmensverfassung”6. In the context of the German legal terminology corporate governance thus is understood as the system of competencies, the rights and duties of the management board and the supervisory board and their relation to each other. In the understanding of the capital market a widely accepted definition of corporate governance is the "enhancement and retention of the shareholder value through a responsible and

3 Cadbury Committee, 1992, The Financial Aspects of Corporate Governance. 4 Hampel Committee, 1998, Final Report, January 5 Cf. SCHNEIDER, 2000, Corporate Governance - Grundsätze , p. 2413; KNOLL/ RASINGER, 2002, Corporate Governance zwischen Anspruch und Wirklichkeit, p. 117; NIPPA, 2002 Alternative Konzepte für eine effizienteCorporate Governance, p. 8. 6 SEMLER in Münchener Kommentar zum Aktiengesetz, 5th edition.

264 Seventh International HSE Summer School «Baltic Practice» ·2007 transparent management”7 as stated by BECKER. Though, the definition and the resultant practical consequences of the key terms responsible and transparent management are not left on the company's own devices. In fact, they are part of the system of obligatory and optional governmental provisions: laws, regulations, standards and recommendations build the framework for the company's practice of corporate governance.

The international context There are now 47 different corporate governance codes in Europe.8 These display a remarkably high degree of agreement, even though company law in the individual member states continue to be characterised by significant differences. In particular, the practical solutions are similar and indicate a distinct trend towards convergence. However, there are no plans for a standardised European corporate governance code as such.9 It goes without saying that the German corporate governance debate is, and always has been, influenced predominately by developments in the Anglo- American territory. Current developments in the United States reflect the implementation of the Sarbanes-Oxley Act of July 2002. This act was the legislators' response to the accounting scandals of the preceding period. It focuses on two main aspects, namely the oversight of auditors and corporate governance at listed companies. In the United Kingdom, the Cadbury Code was published back in 1992 in response to the financial collapses of the late 1980s and early 1990s and was the starting point for the continuous development of UK corporate governance. Principles for appropriate management compensation were set out in the Greenbury Report of 1995/96. The Hampel Committee revised and updated the Cadbury Code in the 1998 "Combined Code", setting the standards for good capital market oriented corporate governance. The principle of "comply or explain", which plays a

7 BECKER, 2006, Die Haftung für den deutschen CG Kodex, p.15. 8 Cf. CROMME, 2004, Status and Development of Corporate Governance in Germany, p.12 9 Cf. CROMME, 2004, Status and Development of Corporate Governance in Germany, p.15.

265 Seventh International HSE Summer School «Baltic Practice» ·2007 key role in the German debate today, stems from the implementation of the Combined Code.10

Historical Review of Corporate Governance in Germany So far we have stated that up until 10 years ago, corporate governance issues were of only secondary importance in Germany, hence the term of corporate governance was poorly defined. But what are the reasons for that diagnosis? And further, what were the key drivers for the far-reaching development of corporate governance in Germany? The answer to those questions can be seen in the conditions that were present in the German marketplace: companies still had two main sources of funding – retained earnings and loans. "[This] led to a close intermeshing of industry and banks and earned our country the label of Corporate Germany, or Deutschland AG"11. The effect was reinforced by a stock corporation law strongly oriented towards the protection of creditors, while stockholders were rather neglected as providers of capital. As a result, calls from the Anglo-American side for more protection for investors, rather than creditors, customers, suppliers and employees, fell on deaf ears for many years. In the 1990s all this changed rapidly. In the wake of the advancing globalization of the economy and competition, as well as the liberalization of the financial markets, Continental Europe and Germany as part of it discovered the international capital market as a source of funding. At the same time as privatization became more widespread, banks and governments began to withdraw from corporate funding. However, international investors initially found Germany and German companies to be less attractive. This was partly, if not entirely, due to the German understanding of corporate governance, which was deemed underdeveloped and lacking in transparency. Although many corporate governance aspects had long been incorporated in legislation, they were widely dispersed

10 Cf. BAUMS, 2001,Bericht der Regierungskommission; CROMME, 2002, Status and Development of Corporate Governance in Germany, p.8. 11 Cf. CROMME, 2004, Status and Development of Corporate Governance in Germany, p.19.

266 Seventh International HSE Summer School «Baltic Practice» ·2007 and therefore difficult to grasp.12 Whilst Germans were mostly aware of the legislation in force and knew where to find the regulations, people outside Germany were not necessarily familiar with the German system. Moreover, in transparencies cause mistrust and wariness among international investors. Hence the German corporate governance practices had to be made transparent and easy to understand for foreign investors. This was the starting point for an intensive corporate governance debate in Germany.

Development of the Legal Environment in Germany The German Stock Corporation Law is characterized by a very strict and small meshed legislation that practically doesn't contain any exceptions or compromises concerning its structure.13 Due to its enormous economic importance the German Stock Corporation Law is embossed by not only large reforms but also individual changes and adjustments to national and international standards. Many aspects of the corporate governance debate emerging from the Anglo-American background had already been regulated in the German Stock Corporation Law.14 This is due to the tradition that in Germany cooperative relationships among banks, shareholders, boards, managers and employees in the interests of labour peace and corporate efficiency have always been emphasized. In contrast to the Anglo-American system, the corporation is not seen as a shareholder value creating device, but rather an independent economic entity consulting a coalition of various participants.15 The stock market plays a less important role in the German system compared with the Anglo-American system, and an active external market for corporate control is almost nonexistent. This can be explained by the fact that companies are very densely held. The OECD16 approximates that the five largest shareholders in German corporations hold on average 41 % of the shares. This stands in contrast with the US and the UK where about

12 Cf. LUTTER/KRIEGER, 2002, Rechte und Pflichten des Aufsichtsrats, No. 4.Summer School Publication 13 23 Paragraph 5 Stock Corproation Law. 14 Cf. SCHÄFER, 2000. Corporate Governance in den USA und in Deutschland, p.7. 15 ZIEGLER, 2000, Corporate Governance and the politics of property rights in Germany, p.199. 16 Cf. WEIMER/PAPE, 1999, A taxonomy of Systems of Corporate Governance, p.23

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10 % is the comparable number. About three powerful groups and influential stakeholders can be identified in the German corporate governance: block holders, employee and/or union representatives, and banks.17 Discussing the conditions for corporate governance in Germany it is further important to take into account its system of organizing companies. Germany has a two-tiered board system; a management board and a supervisory board. All public limited companies18 and private limited companies19 with more than 500 employees have by law a management and a supervisory board.20 The management board is responsible for independently managing the corporation. Its members are jointly and responsible for the management of the corporation. The main task of the supervisory board is to advise regularly and supervise the members of the management board.21 The management board and the supervisory board have to cooperate closely to the benefit of the corporation.22 The management board informs and discusses issues of fundamental importance to the corporation with the supervisory board on a regular basis, i.e. the corporations strategic approaches, transactions of fundamental importance, risk situation, takeover offers etc.23 The supervisory board is composed of employees and shareholders that can influence managerial decision making.24 The corporate governance debate in Germany first found its way into legislation in 1996, with the introduction of the law on control and transparency in business, the so called KonTraG.25 The law was covering key corporate governance issues such as risk management26 and strengthening the rights of supervisory boards27.

17 Cf. HACKETHAL et al., 2005, Banks and German Corporate Governance: on the way to a capital market-based system? 18 Gesellschaft mit beschränkter Haftung (GmbH) 19 Aktiengesellschaft (AG) 20 Cf. KORT in Großkommentar zum Aktiengesetz, 4th edition, No 23. 21 Cf. SEMLER in Münchener Kommentar zum Aktiengesetz, § 111, No. 83. 22 Cf. WEIMER /PAPE, 1999, A taxonomy of Systems of Corporate Governance, p.35. 23 Cf. HOMMELHOFF/MATTHEUS, 1998, Corporate Governance nach den KonTraG. 24 According to § 91, paragraph 2 of the German Stock Corporation Law the management board has to implement a risk management system to circumvent a development that would endanger the going - concern of the organisation. 25 Cf. LUTTER/KRIEGER, 2002, Rechte und Pflichten des Aufsichtsrats, No. 52. 26 Transparenz- und Publizitätsgesetz, TransPuG

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Its introduction into the German Stock Corporation Law represented the start of an intensive and far-reaching modernisation process for German corporate governance regulations including the company transparency and disclosure law28 in 2002 and the introduction of the German Corporate Governance Codex (GCCG)29 in 2003 as an act of business self-organisation. Up until know it can be stated that the GCCG has made a major contribution to developing corporate governance in Germany and continues to do so.30 First and foremost it serves as a guideline to both German and international investors, clearly setting out the particularities of the German business world in the language of the capital market and matching them to international standards. The key objective of the GCCG is thus to enhance confidence in the management of German companies. Within that concept, creating transparency is a key function. The GCCG is a voluntary act of self-regulation by businesses itself. It does not contain mandatory rules, but is based on recommendations; companies are required to declare once a year whether they comply with these recommendations.

Future Outlook It is of course important that a legal system provides the threat of effective sanctions in the case of major mismanagement. A potential threat could bring about greater discipline in the exercise of good corporate governance. But a tightening of liability law should not lead to greater legal regulation of company management. Nevertheless, the subject of the future development of corporate governance in Germany is very likely to be the issue of enforcement. As the German saying states: "Trust is good, control is better" there is always an underlying need of having an assurance about the compliance with the actual regulation, even though the initial intention for the GCCG has been self-regulation is still the promoted term and legal tendency.

27 Published: http://www.ebundesanzeiger.de 28 Cf. CROMME, 2004, Status and Development of Corporate Governance in Germany. 29 Cf. LUTTER/KRIEGER, 2002, Rechte und Pflichten des Aufsichtsrats, No. 99 30 Cf. MONKS/MINOW, 2001, Corporate Governance, p.23

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The Sarbanes-Oxley Act guaranteed its intention to help prevent balance-sheet manipulation and restore investor confidence, by implementing an enforcement process. The implementation of a similar enforcement process in Germany might worth discussing about. First, one could consider the establishment of a new private enforcement institution to randomly monitor the accounts of listed companies and examine irregularities. Second, the Federal Financial Supervisory Authority could come into place, but only if necessary to enforce the appropriate measures, meaning the company concerned does not cooperate voluntarily. However, a key function of an enforcement institution has to be prevention, hopefully stopping any criminal balance-sheet manipulation before it starts. In establishing such a private enforcement institution, the central tenets of the Corporate Governance Code, i.e. that greater emphasis should be placed on the self regulation of industry, and state intervention limited to the necessary minimum, could be realized.

Reflection "Corporate governance is a term describing good, efficient management and supervision of companies on the basis of internationally recognised standards in the interests of the company's owners and its social environment”31. In today's information society, corporate governance includes making corporate decision-making transparent, as this enhances investor confidence and greatly contributes to more efficient company management. Beyond creating transparency, through the mechanism of "comply or explain" of codices a focus is put on the self responsibility of companies. Analysing the corporate governance structures in German companies it appears that establishing long-term relationships seem preferable in the German corporate governance, due to sizeable and stable shareholdings by non-financial corporations and banks, similar to the institutionalised influence of employees. Furthermore, it is important to stress that the German corporate governance system is dominated by the role played by the

31 Cf. CROMME, Corporate Governance in Germany and the German Corporate Governance Code, 2005

270 Seventh International HSE Summer School «Baltic Practice» ·2007 supervisory board32 which coincides with the German saying "Trust is good - control is better". Nevertheless it can be stated that the GCCG is today widely accepted among German Companies.33 A look at the corporate governance principles of German stock enterprises shows that companies are already complying with the GCCG's recommendations to a very large extent. However, the GCCG is an instrument of self-organisation for industry, providing assistance with statutory choices and remaining areas open to interpretation. It helps avoid new outside legal regulations and thus preserves freedom of entrepreneurial action.

Bibliography BAUMS, Theodor. Bericht der Regierungskommission für Corporate Governance, 2001. BECKER, Thorsten. Die Haftung für den deutschen CG Kodex, Studien zum Handels-Arbeits- und Wirtschaftsrecht, Danner-Lieb/ Hopt/ Westermann (Ed.), Band 106, 2006. CROMME, Gerhard. Status and Development of Corporate Governance in Germany, at the 3rd German Corporate Governance Code Conference on June 24, 2004 in Berlin CROMME, Gerhard. Corporate Governance in Germany and the German Corporate Governance Code, Volume 13 Issue 3 Page 362-367, May 2005 HACKETHAL, A., SCHMIDT, R. and TYRELL, M. Banks and German Corporate Governance: on the way to a capital market- based system? 2005, Corporate Governance, Vol. 13, No.3, pp. 397-407. HOMMELHOFF, Peter and MATTHEUS, Daniela. Corporate Governance nach den KonTraG,AG 1998. KNOLL,Leonard and RASINGER, Wilhelm. Corporate Governance zwischen Anspruch und Wirklichkeit,Steuer- &Wirtschafts-Kartei,19/2002. pp.117-121. KORT, Michael. Großkommentar zum Aktiengesetz, Band 4, 4th edition, Hopt/Wiedemann (Hrsg.), De Gruyter Recht, Berlin.

32 Cf. MALLIN, 2004, Corporate Governance. 33 Cf. CROMME, 2004, Corporate Governance in Germany and the German Corporate Governance Code, 2005.

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LUTTER, Marcus and KRIEGER, Gerd. Rechte und Pflichten des Aufsichtsrats, 4th edition, Otto Schmidt Verlag, 2002, Köln. MALLIN, С Corporate Governance, Oxford University Press, 2004, United States. MONKS, R. and MINOW, N. Corporate Governance, Blackwell publishing, 2001, 2nd edition. NIPPA, Michael. Alternative Konzepte für eine effiziente Corporate Governance in: Corporate Governance, Nippa/ Petzold/ Kürsten (Ed.), Heidelberg, 2002, pp. 3-15. SCHNEIDER, Uwe. Kapitalmarktorientierte Corporate Governance-Grundsätze in: Der Betrieb, Heft 48, Fachverlag der Verlagsgruppe Handelsblatt GmbH 2000, p. 2413. SEMLER, Johannes. Münchener Kommentar zum Aktiengesetz, Band 5, 2nd edition, Kropff/Semler (Ed.), C.H. Beck/Verlag Franz Vahlen, München 2004. WEIMER, J. and PAPE, J.C. A taxonomy of Systems of Corporate Governance, 1999, Corporate Governance: An International Review, Vol. 7, No. 2, pp. 152-166. ZIEGLER, Nicholas. Corporate Governance and the politics of property rights in Germany, 2002, Politics & Society, Vol. 28, No. 2, pp. 195-222.

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Kathrin Hamm Corporate Social Responsibility in Germany. Putting Regulations before Responsibility

1. Introduction

„We live in an unlimited world – unlimitedly dependent on the responsibility of others” Klaus Töpfer, UNEP. The debate about the responsibility of companies is already as old as entrepreneurship itself. But under the condition of a changing, complex, globalising world competency and distribution of responsibility gets lost. The roles of responsibility are not regulated anymore in the way it had been at the beginning of the industrialisation process. World-wide manufacturing bases, international suppliers and a global market diminish a clear attribution of responsibility. Therefore the discussion of social responsibility or Corporate Social Responsibility (CSR) gains more importance in conjunction with the request of regulations and control. Germany is often perceived as white spot within the European CSR landscape.1 After the increase of white-collar crime of 7,5 % within Germany and the accuse of 18 out of 30 DAX companies in 2006, voices get loud that blame companies for rigor profit maximisation and the escape of responsibility.2 The escape of responsibility is a phenomenon which has already occurred in the bible, named through the fratricide, where Kain tried to neglect his responsibility for his action in front of god.3 The term responsibility is firstly named in the 15th century. It derives from

1 See Habisch, A. (2006) 2 Tenbrock, C.(2007) 3 The Bibel, Genesis 4, 1-24

273 Seventh International HSE Summer School «Baltic Practice» ·2007 the judiciary and means to justify in front of a justice court, whereas at that time the significance was to justify in front of the tribunal of god. While in a social market economy, like in Germany, the justification and regulation of companies takes place in front of the judiciary, scholars criticise the decline of the nation state and the execution of its regulatory tasks.4 As a result the state loses its cutting edge in ordering transnational relations. This includes the strengthening of international law, cross-national regulators and Codes of Conduct. Therefore companies are even more in the responsibility to react self-regulating and to build own Codes of Conducts as well as ethical regulatory frameworks to instil social responsibility into their strategy and operations. This paper aims to give an overview about the actual CSR status in Germany by drawing on the historical perspective as a reason for the lack of CSR and highlights the question if regulations need to be put before responsibility.

2.Social Legislation The social legislation of Bismarck also sustained the Weimar time and remained nearly unmodified and even flags the German social system today. On the initiative of Bismarck the parliament adopted the health insurance law for workers on 15th June 1883. The difference to already existing company health insurance funds existed in the right to maintain benefits, when changing the workplace.5 One year after the implementation of the “health insurance law” the “accident insurance law” was abolished in 1884. Subject to contributions were only entrepreneurs. First the

4 See Schachter, O., (1997): Global enterprise and communication networks will continue to produce rules and procedures for transnational activities, many of which, like the lex mercatoria, will have only a limited link to national and international law. We can expect a greater mix and overlap of public and private international law with the line between them rather blurred. Movements toward democracy—liberal or populist—manifested through civil society will also influence international responses and add to human rights law and to principles of collective recognition. There will probably be new international “persons” and new conceptions of property and equity entering into international law. State may be declining in power, but the horizons of international law continue to expand. 5 Ritter, G. (1991): S.85 - 87

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“accident insurance” was only applied with fabrics, mines and quarries. Later it was also transferred to forestry and agriculture. The adoption of the “old age insurance” was continuously adjourned. Not until the 24. May 1889 the parliament abolished under the pressure of striking workers the “old insurance law”. The “old insurance” could be accessed after 30 payments and the age of seventy.6 After the discharge of Bismarck in 1890, imperator Wilhelm II., introduced further protection for workers. This comprised the restriction of child labour, regulation of Sunday rest and the agreement of a maximum of eleven working hours per day. Through the process of industrialisation business ethics was more and more regulated and common element of a developing economic and social policy. Through the manifested presence of the state, companies tend to interpret social responsibility as philanthropy, which is based on moral duties. A systematic coherence with the entrepreneurial daily business is rarely seen.

3. CSR Definition The first definition of Corporate Social Responsibility was given by H.R.Bowen in 1953: ‘[...] the obligation of businessmen to pursue those politics, to make those decisions, or follow those lines of action which are desirable in terms of the objectives and values of our society.’7 This definition also implies the question of values of a society. Since 1980 this kind of questions moved to the focus of the scientific attention and considers business ethics as independent field of research.8 The first framework, which also contains recommendations for enterprises, came out in the nineties and contains the components: 1.) economic 2.) social and 3.) environmental. This concept was further developed to the „Tripple Bottom Line“, which gained wide acceptance within enterprises through Ellington’s definition `People, Planet, Profit`9. A further definition obtains the environmental theorem through the Brundtland report in 1987 with its sustainability concept "… [Sustainability] meets the needs of the present without compromising the ability of future generations to meet their own

6 ibid 7 Bowen, H. (1953): cited in Carroll 1999, p.269 8 See Waddock, S. (2004): p. 5- 42 9 See Elkington J. (1997): cited in van der Putten (2005), p.3

275 Seventh International HSE Summer School «Baltic Practice» ·2007 needs.“10 Thereby the basic components for sustainable development: (1) environmental protection (2) economic growth and (3) social equity are named. Despite the approval and the orientation of enterprises to these theorems, the primary addressee was still the political layer. The „normative“ stakeholder theory by Freeman gives further contributions to the CSR development.11 The relationships between companies and internal and external groups and their interests are classified. According to this the responsibility only exists for internal and closely related groups and not for the society as a whole. Legitimated stakeholders are shareholder, employees, suppliers and communities. The status of non primary groups remains unclarified. Another issue can be seen within the distribution of company resources between the interest groups, because the stakeholder theory makes no proposition about the prioritization of interest groups. This illustrates CSR ,not only as a conflict within enterprises, but rather as conflict, which comprises the whole social system and leads to questions about equitable distribution and democratic values. The contrary opinion about CSR is based on profit maximisation. The exploration between CSR and profit maximisation started in the early sixties. Precursor of the theorem was Friedman with a focus on shareholders and the responsibility of enterprises to maximise profits. Later research expanded Friedman’s theory of profit maximisation and focuses on „long-term profit maximisation“ as duty of enterprises.12 Thereby it is implicated that interests of all stakeholders need to be considered and that not only shareholders interests are part of enterprises responsibility. It remains questionable to what extent social aspects and environmental aspects are part of the definition of „long-term profit maximisation“ because in 1970 when the study was launched those aspects have not been subject to further research. Research at this point of time was focusing on specific company aspects with a strong focus on Marketing.13 Even though managers act in the

10 Brundtland Report (1987) 11 See Freemann, R. and McVea, J.(2002), p.12 12 See Garriga, E. (2004): p.51-71 13 See Abt, C. (1974): in Melvin C. Ahnsen, p.92-127

276 Seventh International HSE Summer School «Baltic Practice» ·2007 sense of „long-term profit maximisation“ and consider different stakeholders within their decision process, the time horizon of companies has diminished since 1990. Englander explains that CEO’s have won power in comparison to the other board members, whereas a shift from salaries to stock options has taken place.14 Profitability indicators are considered in shorter cycles and also shift CSR into a short-term perspective. The strongly varying approaches within the CSR debate haven’t made it possible to generate a generally accepted definition. Scientific works however largely agree that CSR should go beyond binding laws and regulations. The compliance with laws alone thus does not meet the criteria of being a responsible enterprise. Further opinions add that the social engagement should go beyond the interest of the company.15 Taking into account the Marketing and Image effect, which CSR holds, makes the examination of this criteria difficult.

4. Historical Corporatism Within the German tradition the state is seen as the architect of the political order, which mediates the interests of the corporatist groups and limits social conflicts. 16 During the development of the state from the Bismarck Empire to an intervention state, Corporatism was the central attribute of the economy, which emerged again at the end of the 19th. Century as Ludwig Erhard’s free economy liberalism found its limitations. Closely linked is the paradigm shift of business associations and interests groups, which developed from the representation of particular interests in the seventies to well-regulated enduring relationships between business associations and the state.17 A direct involvement of business associations into governmental decision-making processes leads to a load removal of the state, but also to concentration of interests and monopolies of representation.18 The equal co-determination complicates the participation of non- institutionalised groups, and the tertiary

14 See Englander, E. (2004): pp.404-450 15 See McWilliams, A. und Siegel, D. (2001): p. 117-127 16 See Lehmbruch. G. (1969): p. 735 - 751 17 german original translation: Verbände-Staats Beziehungen 18 See Lompe, K. (1987): p. 185

277 Seventh International HSE Summer School «Baltic Practice» ·2007 sector. Therefore these groups can not sufficiently contribute to the political order. Companies have always profited from the “state- agent”, for example through the rapid growth of the population and the social system. The task of the companies to produce public goods for the society is thereby deeply manifested into the concept of social market economy. The dual apprenticeship is an example for the integration of company engagement into the state system. Although the education takes place within the companies, the provision of this good is perceived by the public as mere service of the state.19 Beyond this the historical development of Germany has formed an environment which is characterized by small and medium enterprises (SME’s). With a fraction of 99,3%20 they provide comparatively the most workplaces, but elude themselves to a large extent from capital markets regulations through non listing at the stock exchange. This does not only affect Corporate Governance, but also CSR activities.

5. Corporate Governance Regulations Already in 1930 the discussion embraced within the US American jurisprudence, if managers are only obligated towards the owners of the company or moreover if their role also inherits social responsibility.21 Within the eighties also the European focus of attention shifted to CSR, because hostile take-overs had rapidly increased at that point of time, through the growth of investment funds. The divestiture of established production-structures was more and more perceived with anxiety and the expression of unsocial entrepreneurship by the public.22 The German reaction to unsocial entrepreneurial behaviour was strongly shareholder focused. Thus Corporate Governance contains „the process of control and administration of assets and employees of a corporation in the interest of the owners“ .23

19 See Habisch, A. (2005): p. 113 20 ibid. 21 See Von Stange, G. (1994): p.461 – 467. 22 See De Carlo, L. (2004): p.9 23 Hess, G. (1996): p.10

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The German Corporate Governance Codex24 states in the preamble the need of responsible management.25 A concrete approach of social responsibility independent of transparency for the owners, however is missing. The aim of the codex is to build up trust of different interest groups. The public thereby is limited to an inferior position. The American Law Institute on the contrary argues: "[e]ven if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business … [m]ay devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes."26 The social responsibility towards the society is clearly named. The rational profit maximisation is clearly separated as it is in the UN Global Compact regulations.27 Whereas European neighbours use „Soft Law“ to build Public-Private-Partnerships between the state and companies to drive social initiatives ahead, there is still no such development in Germany.28 A study of the „Center for Corporate Citizenship“ states, that a CSR engaged Company can claim fiscal advantages. This incentive system however is considered marginal for companies and is not crucial for the implementation of a CSR-system. In general there is a climate of non appreciation of CSR within Germany, which leads to the aspect that Germany lies behind its European neighbours in terms of corporate social responsibility.

24 regulated through § 164 AktG. 25 DCGK (2002): Der vorliegende Deutsche Corporate Governance Kodex (der „Kodex“) stellt wesentliche gesetzliche Vorschriften zur Leitung und Überwachung deutscher börsennotierter Gesellschaften (Unternehmensführung) dar und enthält international und national anerkannte Standards guter und verantwortungsvoller Unternehmensführung. Der Kodex soll das deutsche Corporate Governance System transparent und nachvollziehbar machen. Er will das Vertrauen der internationalen und nationalen Anleger, der Kunden, der Mitarbeiter und der Öffentlichkeit in die Leitung und Überwachung deutscher börsennotierter Gesellschaften fördern. 26 American Law Institute (1994): Principles of Corporate Governance, Analysis and Recommendations 2.01(b) 27 Annan, Kofi (1998): World Economic Forum Davos: “We have to choose between a global market driven only by calculations of short-term profit, and one which has a human face.” 28 See Morsing, Mette, (2005): Denmark: Inclusive Labour Market Strategies

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6. Reactions of Business Associations In 2001 the EU Comission provided their definition of “By stating their social responsibility and voluntarily taking on commitments which go beyond common regulatory and conventional requirements, which they would have to respect in any case, companies endeavour to raise the standards of social development, environmental protection and respect of fundamental rights and embrace an open governance, reconciling interests of various stakeholders in an overall approach of quality and sustainability”29 Meffert goes beyond this and defines CSR as condition for a companies success from an economic perspective.30 The „Bundesvereinigung der Deutschen Arbeitgeberverbände“ (BDA) and the „Bundesverband der Deutschen Industrie“ (BDI) developed the internetportal CSR Germany to represent companies CSR interests31. The portal emphasizes on the voluntariness of CSR and arguments against governmental regulations.

29 EU Kommission (2001): p.4 30 Meffert, H. (2000): p.145 31 CSR Germany – deutsche Unternehmen übernehmen gesellschaftliche Verantwortung und stellen sich den ökonomischen, sozialen und ökologischen Herausforderungen der globalisierten Wirtschaft. Basis für dieses Engagement ist der wirtschaftliche Erfolg der Unternehmen. Nur wettbewerbsfähige und wirtschaftlich gesunde Unternehmen sind in der Lage, ihren Beitrag zur Lösung gesellschaftlicher Probleme zu leisten. Gleichzeitig bedeutet für ein Unternehmen ökologisch und gesellschaftlich verantwortliches Handeln die Sicherung seiner Zukunftskompetenz und Innovationskraft. Die beiden Spitzenorganisationen der deutschen Wirtschaft, Bundesvereinigung der Deutschen Arbeitgeberverbände (BDA) und Bundesverband der Deutschen Industrie (BDI), stellen der Öffentlichkeit dieses Internetportal zur Verfügung, um das umfangreiche und vielfältige Engagement der Unternehmen darzustellen, ein Netzwerk der CSR-Akteure zu schaffen und den Erfahrungsaustausch zu fördern. Besonders kleine und mittlere Unternehmen erhalten anhand praktischer Beispiele Anregungen für ihre eigenen CSR-Aktivitäten und können sich mit ihren Initiativen präsentieren sowie vertiefende Informationen erhalten. BDI und BDA flankieren das Engagement der Unternehmen durch die politische Interessenvertretung auf nationaler, europäischer und internationaler Ebene. Bei dieser Interessenvertretung gilt das Leitprinzip: Unternehmen sind die Gestalter von CSR. Je nach Branche, Größe und geographischem Umfeld sind sie es, die die für ihre speziellen Bedürfnisse geeigneten CSR-Strategien freiwillig entwickeln und dafür stehen, dass die von ihnen gesetzten Grundsätze zur Nachhaltigkeit im Umwelt- und Sozialbereich an ihren Standorten in der Welt eingehalten werden. Das Internet-Portal CSR- Germany soll diese politische Argumentation der Verbände und Unternehmen unterstützen.

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These are only examples of initiatives, which aim to raise Corporate Social Responsibility in Germany and educate Corporations. But they mainly consist out of proposals without judicial regulations or direct incentives.

7. Conclusion The historical overview has shown that the industrialisation of the 19th century has influenced the political environment until today. The distinct relationship between business associations and the state is still valid and does not leave much appreciation for a new role model between society, state and enterprises. The corporatist structures have a negative effect on Corporate Social Responsibility. So far an explicit theoretical construct of CSR does not exist. Existing methodologies can not evaluate if a company is socially sustainable or if its initiatives contribute to a socially sustainable development. The reason for this is the lack of distinct criteria, which define the result of social sustainability. The focus of CSR is still not all-embracing and is very limited to environmental aspects within Germany. There are no quantifiable reporting standards, which hinder stakeholders to observe the monetary bases of CSR initiatives as well as which interest groups benefit from the initiatives. The lack of non-quantifiable Datasets makes it difficult to evaluate the admeasurements and the effectiveness of the initiatives. Companies should be requested to have their CSR initiative evaluated by shareholders and their ethical interests. Thereby it is important that also NGO’s are involved. Another critical issue is the insufficient linkage of CSR and Corporate Governance. Whereas in the Anglo-American system ethics is a binding part into regulatory frameworks, in Germany the Corporate Governance Codex doesn’t include ethical behaviour or CSR into its frameworks. Management and control go without regulated ethics and social responsibility in Germany. One solution to establish an effective linkage could be the introduction of a CSR cost position within the balance sheet. This presupposes a change of law on the part of the state and also implies additional regulations to German enterprises. Additional regulations represent the opposite of the by German companies proposed and demanded voluntariness of social responsibility. Nevertheless should laws and regulations have the highest priority in a globalised, by a market economy dominated world. Voluntary activities can only be effective, as long as they are based on regulated frameworks. If 281 Seventh International HSE Summer School «Baltic Practice» ·2007 social responsibility can be voluntarily or must be seen as a rigour duty of an enterprise, can not be solved within the scope of this paper. Nevertheless, it can be stated that CSR in absence of defined criteria and control mechanisms degenerates to an unsubstantial lip service, which can not be controlled by the stakeholders and the tertiary sector. The request of voluntary CSR without binding regulations leaves the accusation of rigor profit maximisation and the escape of responsibility unacknowledged and leaves Germany in its corporatist structures and behind its European neighbours.

Bibliography Abt, Clark C. (1974): ‘The Social Audit Technique for Measuring Socially Responsible Performance’, in: Melvin C. Ahnsen ed., Managing the Socially Responsible Corporation New York, pp.92-127. Bassen, A., Meyer, K. and Schlange,J. (2006): The influence of Corporate Resonsibility on the Cost of Capital, an empirical analysis. University of Hamburg. Carroll, Archie B. (1999a): 'Corporate social responsibility: Evolution of a definitional construct', Business and Society 38/3, pp.268-295. De Carlo, L. (2004): Corporate Social Responsibility: Möglichkeiten zur Unterstützung durch die deutsche EZ, Deutsches Institut für Entwicklungspolitik, Bonn. Englander, Ernie, and Alan Kaufman (2004): ‘The End of Managerial Ideology: From Corporate Social Responsibility to Corporate Social Indifference’, Enterprise & Society 5/3, pp.404- 450. Enquete-Kommission des Deutschen Bundestages, (2002): Endbericht der Enquete-Kommission “Zukunft des bürgerschaftlichen Engagements”. Opladen: Leske & Budrich. EU Commission (2001): Promoting a European Framework for Corporate Social Responsibility, Green Paper, p.4, Brussels, 18.7.2001. Garriga, Elisabet, and Domènec Melé, (2004): 'Corporate Social Responsibility Theories: Mapping the Territory', Journal of Business Ethics 53, pp.51-71. Griffin, J. und Mahon, J., (1997): The corporate social performance and corporate financial performance debate. Twenty- five years of incomparable research, Business and Society,36 (1), 5-31. 282 Seventh International HSE Summer School «Baltic Practice» ·2007

Habermann, G. (2005) Korporatismus als Reformhindernis? Das Beispiel Arbeitslosenversicherung, Symposium Stiftung Marktwirtschaft und der wirtschaftpolitischen Gesellschaft von 1947 e.V. Frankfurt. Hess, G. (1996): Corporate Governance – Zum Stand der Diskussion in den Vereinigten Staaten, in: Feddersen, D./ Hommelhoff, P. / Schneider, U.H. (Hrsg.):Corporate Governance: Optimierung der Unternehmensführung und der Unternehmenskontrolle im deutschen und amerikanischen Aktienrecht, S. 9-24. Habisch, A. (2005): Corporate Social Responsibility across Europe, Berlin pp111-132. IÖW & future e.V. (2004): Paper presented at the Multistakeholder-Workshop, Berlin. Lehmbruch, G. (1967): `Der Beitrag der Koporatismusforschung zur Entwicklung der Steuerungstheorie´: Politische Vierteljahresschrift 37, pp735-751. Lewis, D. (1969): Convention, A Philosophical Study, Cambridge, Mass. Harvard University Press. Lompe, K. (1987): Sozialstaat und Krise, Frankfurt am Main - Bern - New York, S. 185. Luijk, Henk van (1999): ‘Business Ethics in Europe: A Tale of Two Efforts’, in: Robert E.Frederick ed., A Companion to Business Ethics, Cambridge, MA: Blackwell, pp.353-365. Matten, D., and Crane A.,(2003): 'Corporate Citizenship: Towards an extended theoretical conceptualization' (research paper, Nottingham: Nottingham University Business School), ww.nottingham.ac.uk/business/ICCSR. McWilliams, A. and Siegel, D. (2001): Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26: S.117-127. Meffert, H. (2000): Marketing, Grundlagen marktorientierter Unternehmensführung, Konzepte- Instrumente – Praxisbeispiele. 9.Auflage. Morsing, M., (2005): Denmark: Inclusive Labour Market Strategies: in Habisch, A. (2005): Corporate Social Responsibility across Europe, Berlin. Ullmann, H., (1991): Organisierte Interessen im deutschen Kaiserreich, in: Helmut Rumpler, Hrsg., Innere Staatsbildung und

283 Seventh International HSE Summer School «Baltic Practice» ·2007 gesellschaftliche Modernisierung in Österreich und Deutschland: 1867/71 bis 1914, Wien. Ritter, G. A., (1991): Der Sozialstaat: Entstehung und Entwicklung im internationalen Vergleich, München, S. 85 - 87. Schachter, O., (1997): The Decline of the Nation-State and its Implications for International Law, 36 Colum. J. Transnat`LL. 7,23. Schmitter, P., (1974): Still the Century of Corporatism In: Review of Politics, vol. 36, pp. 85-131 . Tenbrock, C., (2007): DIE ZEIT 11.10.2007 Nr. 42 S.12. ThyssenKrupp (2006): Magazin Verantwortung 2006, S.23. Von Stange, G. (1994): Corporate Social Responsibility through Constituency Statues: Legend or Lie?, Hofstra Labor Law Journal 11 (2), pp 461 – 467. Waddock, S. (2004): Parallel Universes: Companies, Academics, and the Progress of Corporate Citizenship’, Business and Society Review 109, pp.5-42.

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Matthias Naumann What are the Principles of Corporate Citizenship, how do they coincide in Europe and Germany and how is cooperation affected by it?

1. Introduction Thirty-seven years ago, Milton Friedman wrote a famous article for The New York Times Magazine, and its title summed up its main point: "The Social Responsibility of Business Is to Increase Its Profits.” In other words, “the business of business is business.” The intensive discussion of the relevance of the shareholder- value concept in the past has partly hidden the contrary perspective on a companies´ role and responsibility in today’s world. According to Peter F. Drucker, the ´father of scientific management´ a company's primary responsibility is to serve its customers and to provide goods and services, which the company exists to produce. Following this idea, profit is not the primary goal, but rather an essential condition of the company's successful existence. Other responsibilities, e.g., to employees and society, only exist to support the company's continued ability to carry out its primary purpose – to serve the society”.1 Great changes and developments have taken place in the past decades bringing the world out of balance in many ways. The big picture on global changes shows an extending gap between developed and developing countries with ongoing poverty and population growth in developing countries where by 2025 7billion people will live. Today already more than 3billion people survive on under 2$/day, 1.2billion of them with less than 1$/day.

1 Drucker quoted in Sackmann S.A. - 2004

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The world witnessed massive ecological changes with earths and child starvation especially in the 3rd. world, where diseases like HIV/AIDS are becoming a major problem on current and future societies with 8,500 people dying and 13,000 others newly infected with HIV every day. By 2010, more than 25 million children will be orphaned by AIDS worldwide, which will have a severe overall economic impact on the situation of these countries. In a world where 20% of the population in developed nations already consumes 86% of the world’s goods and the poorest 20% of the world’s population only consumes 1.3%, especially the role of businesses changed.2 Of the 100 largest economies in the world, 51 are corporations; only 49 are countries, based on a comparison of corporate sales and country GDPs. The rising influence and power of the private sector can be stated looking at a economic situation where the top 200 corporations’ combined sales are 18 times the size of the combined income of 24% of the total world population and Multinational Corporations (MNCs) account for a quarter of global economic activity.3 Due to these and further developments such deregulation and globalization, rapid advances in communication technology, and consumer and the civil society’s rise in power, issues of Corporate Social Responsibility have moved to the foreground of public concern and debate. The expectations towards businesses changed radically with stakeholders still expecting business leaders to achieve economic growth (17%) while closing the gap between poor and rich (16%), protecting the environment (14%) as well as restoring trust, reducing wars, fostering human rights, eliminating poverty, overcoming aids, reducing organized crime etc.!4 This situation of complex requirement profiles and the evidence of the importance of goodwill and corporate philanthropy for the companies (or brands) reputation and market capita-

2 Source: World Bank Institute 2007 3 Source: Ranking based on corp. revenue data from Fortune Magazine, October 1, 2005; and GDP data from World Bank World Development Indicators (WDI) Report 2005. 4 source: WEF, Voice of the People Survey 2005

286 Seventh International HSE Summer School «Baltic Practice» ·2007 lisation5,6 brought CSR to prominence in many corporate boardrooms and leaders recognized that corporation is at the centre of these changes and that there is no way to avoid a discussion of its roles and responsibilities. If In the past boardroom attention was focused on enhancing shareholder value, now the focus is on engaging stakeholders for long-term value creation. This does not mean that shareholders have lost their importance, or that profitability is not vital to business success anymore, instead, it means, that in order to survive and be profitable a company must deal with a range of stakeholders whose views may vary greatly. So the concepts related to social responsibility and sustainability are gaining recognition as essential elements in business management, corporate governance and corporate strategy. The core of the CSR concept is formed by an idea, that companies are accountable for their actions not just formally to their owners but also, in less-defined ways, to a group of wider stakeholders. The reasons are clear: business institutions are important to society, and their benefits and costs are so substantial, that societies cannot function without serious thinking about the role of the global business community. As we enter the 21st century, the role of corporation in the society is once again under debate. The historical dialog between business and society has been reshaped in recent times and has altered our common understanding of corporate responsibility. Transparency, disclosure, and corporate responsibility are becoming universal expectations, essential for managing the risks imposed on communities. Towards the middle of the 1990´s, the term “Corporate Citizenship” (CC) emerged as a new way of addressing the social role of the corporation. At the World Economic Forum (WEF) in New York in January 2002, CEOs from 45 of the world’s largest multinational corporations (MNC´s), among them major European companies such as ABB, Deutsche Bank, Diageo, Philips, Renault and UBS, made a joint statement on ´Global Corporate Citizenship – The Leadership Challenge for CEOs and Boards which emphasized the

5 Source: Interbrand/Citibank league table, 2001: The table shows the ratio of stock market value (smv) – net book value (nbv) - and goodwill (g) (which is based on reputation); e.g. General Electric: $499bn (smv) - $23bn (nbv) - $476bn (g) 6 Corporate Responsibility & Risk Management, Sustainability, 2005

287 Seventh International HSE Summer School «Baltic Practice» ·2007 emerging thinking in contrary to Friedman’s classic liberal laissez- faire ideas.7 Supporting this self- conception, in 2006 the director of Global Agenda, expressed at the World Economic Forum, (WEF) that “Business is in a unique position to play a leading role in helping to shape the global agenda, and can provide government and civil society with the tools and capabilities to better adapt.”8

2. What is Corporate Citizenship? One might ask why this new concept of Corporate Citizenship emerged and indeed, why the existing terms of ´corporate social responsibility´ and ´business ethics´ were apparently perceived as inappropriate.9 What distinguishes Corporate Citizenship from other ideas of corporate social responsibility is the fact that it adds some substantially new elements to the traditional view on corporations in the society according to Crane.10 The field of Corporate Citizenship encompasses many issues: human rights, the environment, economics, work-family, philanthropy, community relations and more. Increasingly corporations are finding that they are bound together with civil society in their quest for wealth creation. – They are seeing themselves as citizens, with rights to trade freely and with responsibility to behave appropriately towards employees, customers, business partners and local communities. According to Crane ´Citizenship´ has a rather different connotation for business – the corporation sees its legitimate place in society with whose members the corporation forms a community along with the firm itself. So citizenship focuses on rights and responsibilities of all

7 Laissez-faire, (French phrase „let do“) capitalism is a system based on four "laws of nature." (a. personal interest; b. competition; c. private property; d. freedom) the role of government has to be limited to the protection and reinforcement of private property and freedom. Rational individuals seeking their own personal interest and competing against one another will ultimately lead the economy to "equilibrium." Being away from the "equilibrium" position means that the government failed to guarantee private property and freedom. Under laissez-faire capitalism, unemployment is voluntary because rational individuals prefer leisure to the "disutility" of work. 8, Schmidt, Jonathan Director, Global Agenda: World Economic Forum, WEF, Annual Meeting, Jan. 2006 9, 10, 11 Crane, A.; Matten, D. – page 62-77, 2003

288 Seventh International HSE Summer School «Baltic Practice» ·2007 members of the community, who are interlinked and interdependent in many possible ways.11 In the past decades Corporate Social Responsibility´ was simply seen as profitability plus compliance plus philanthropy. Now responsible Corporate Citizenship means companies being more aware of and understanding the societies in which they operate. This means that senior executives and managers are required and so should be able to deal with a wide range of issues including greater accountability, cases of the human rights’ abuse, strategies of sustainability, corporate governance codes, workplace ethics, stakeholder consultation and management. As the Boston College Center for Corporate Community Relations put it ´Corporate Citizenship, on a global level, then, is the process of identifying, analyzing, and responding to the company’s social, political, and economic responsibilities as defined through law and public policy, stakeholder expectations, corporate values and business strategies.12 According to the UK based Corporate Citizenship Company13, the Corporate Citizenship debate is focused on three key components. They are, 1. Basic values, policies and practices of businesses owned by a company at home and abroad; 2. Management of environmental and social issues on different stages of value creation (value chain) by business partners, from raw material production to product disposal; 3. Voluntary contributions made by a company for the community development around the world.

12 The Boston Centre has been working with over 350 major US and foreign companies for years and under its Director, Brad Googins, has acquired the reputation of a leading think tank in Corporate Citizenship matters. 13, The London based Corporate Citizenship Company is a consultancy working in the for-profit sector specialized in helping companies succeed as commercial entities by being active corporate citizens and so meeting the aspirations of their diverse stakeholders and the wider society of which they are a part in. With a wide-range of major corporate and NGO clients, The Corporate Citizenship Company is the leading consultancy in the field offering experience at local, national, regional and international levels.

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By this Corporate Citizenship involves both actual results (what corporations do) and the processes through which those results are achieved (how they do it). When looking at corporations as citizens (ćitizen equation´) the general question arises which ćontribution for achievement´ they bring to the society in response to using its resources while pursuing their business strategies. These various societal resources include employees, which had been brought up and educated in public kindergardens and high schools, but also they presume attractiveness of a production location, capital availability, infrastructure and information are crucial factors which are influenced by the environmental pollution or even the cultural supply. So each company’s individual ćontribution for achievement´ towards the community includes workplace maintenance, social commitment through projects and real activities; it also should come in balance with consideration of a certain work- family-private-life-balance for employees and executives of the company, as Sackmann outlines it.14 With the major aim of businesses to successfully improve theirs situation in a very competitive context, a healthy society is the prerequisite to economic success. In the modern society successful companies will increasingly be those that recognize that they have responsibilities to a range of stakeholders that go beyond compliance with the law, so they must create new strategic opportunities, including stakeholders engagement. Businesses are citizens, whether or not they want to admit this – they can choose to be active or passive in their behaviour, and constructive or destructive in their relationship to society. According to Djordjija Petkoski, Head of Business, Competitiveness & Development at World Bank Institute, it is crucial that businesses must move from reactive behavior to strategic measures in the field of Corporate Citizenship.15

3. The principles of Corporate Citizenship For corporations and theirs executives there are many questions arising when trying to deal with the issues, possibilities and responsibilities of their Corporate Citizenship role. Given the

14 Sackmann, S.A.: 2004 15 Petkoski, Djordjija: - “The Role of Business in Development through Multi-stakeholder Partnerships” – presentation at World Bank Institute, April 2007

290 Seventh International HSE Summer School «Baltic Practice» ·2007 imbalanced situation of the world and its social and ecological problems on a global scale as outlined crucial questions are: What can a company do on its own to help solve issues such as fighting poverty, respecting human rights, fighting against child mortality, climate change, or illiteracy? A genuine approach to these global problems, for which there is no simple solution, does not just confront every single individual with the impact of his or her actions, it also requires businesses to look for new models of organisation, communication and management, which may help address these problems by means of entrepreneurial action. Ultimately, corporations need to answer the concerns how, and to what extent, everyone can participate in generating social welfare under conditions of globalization. There is consensus that Corporate Citizenship is not a selfless act of philanthropy, but a matter of business practice: A “business case”. The essence of this concept - and the reason for its socio-political appeal is a systematic linking of corporate interest and the common good. Properly understood, though, Corporate Citizenship is no selfless act of charity, but a method of strategic corporate management.16 The way a company and its employees behave regarding communities with which they do business is no longer a peripheral consideration. The company’s behaviour will shape the way, a company is perceived, and ultimately determine whether the business is welcomed with enthusiasm, favourably, or not welcomed at all. Against the background of rapidly changing business practice and rising public concern, active Corporate Citizenship can become an integral element, and a differentiating feature, of successful corporate strategy. Despite the course their leaders chart, corporations will be judged for what they do and how they do it. While this is especially true for large, visible companies, the business principles on which this proposition rests, could be applied to firms of all sizes including small and medium-sized companies which form the backbone of European economy.17

16 Lang, S., Solms-Nebelung, F. 2005 page 2 17 There are around 23 million small and medium-sized enterprises (SMEs) in the European Union – that is 99% of all enterprises. SMEs provide over 100 million jobs in Europe and in some sectors

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So, the challenge, that many companies face, is how to demonstrate that they care about various stakeholders, and how to choose which principles of Corporate Citizenship to follow? Communities have long been considered legitimate stakeholders of the corporation.18 Local communities bear the risks, and receive some sort of benefits, from a company’s business operations, so community relations have always been an essential part of Corporate Citizenship. Communities require that companies manage risks and prepare for emergencies. They expect companies to obey laws, abide by regulations, and participate in activities aimed at improvement of community life. They encourage companies to treat community as a partner in meeting its goals, though communities, in their turn, undertake actions that facilitate business success (e.g., tax relief, traffic planning, and so on). As we move into the 21st century, the “citizenship equation” is becoming more complex and subtle.19 After J.E. Post, the “citizenship equation” today is a far cry from the simple rules of earlier times. It reflects what most observers consider the core elements of modern Corporate Citizenship: awareness of corporate impact, imaginative use of state-of-the-art management tools and techniques, as well as innovative thinking regarding the role of a corporation in the community. The German foundation Bertelsmann Stiftung, compiled best practice cases of various companies committed to Corporate Citizenship activities.20 All featured companies share the same self-conception and understanding of their responsible role as employers and active members of the society. Their engagement is

account for more than three-quarters of all jobs. SMEs therefore make up the backbone of Europe’s economy. Source: European Commission 18 e.g. with reference to German traditions dating back to the 19th century, where medium-sized enterprises did lasting service to their communities, based on the established socio-ethical motivation of “do good, but don’t talk about it 19 Post, J.E.: 2000, page 3 20 In keeping with the longstanding social commitment of its founder, Reinhard Mohn, the Bertelsmann Stiftung is dedicated to serving the common good and encouraging social change. The work is based on the conviction that competition and civic engagement are essential for social progress. In accordance with its articles of incorporation, the Bertelsmann Stiftung functions exclusively as a private operating foundation; it carries out its own project work and does not make grants or support third-party projects.

292 Seventh International HSE Summer School «Baltic Practice» ·2007 reflected in a range of various internal and cross-company activities. The self-conceptions of a Corporate Citizen (source Bertelsmann Stiftung) 4. High sense of responsibility towards society 5. Maintenance and creation of workplaces 6. Promotion of security, health and environment protection at the workplace 7. Provision of Equal opportunities (offensive) 8. Family compliant conditions of employment 9. Cross Company engagement in the society • Memberships in various CSR-oriented NGOs (e.g. UN Global Compact) • CCC Projects • Foundations • Sponsorship • Awards This underlines that Corporate Citizenship is both a process and a set of results - Corporations are, what they do. So, a mixture of individual, corporate, and collective actions will be required to meet the community challenges.21 Five steps to become a ´good corporate citizen´ are recommended by Brad Googins, the president of Boston College Center of Global Corporate Citizenship. • First, senior managers in companies should assess the importance of the company’s citizenship profile to its corporate strategy. • Second, leaders must decide on the dominant focus of the citizenship efforts. • Third, a company must develop a strategy of its Corporate Citizenship that contributes to business results on a regular basis. • Fourth, company strategists should conceptualize and design a citizenship program that has local, national, regional, and global components. • Fifth, alignment of the business model and citizenship model should be thought of as a continuing process. Good citizenship and good business go together.

21 Post, J.E.: 2000, page 6

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Rigorous (Regular?) evaluation, improvement, and innovation are keys to a sustainable and successful journey toward meeting the challenge of global Corporate Citizenship. The great variety of business and community factors involves making impossible a “one size fits all” model of Corporate Citizenship. The more appropriate goal is to design a “citizenship model” that is aligned with the company’s “business model” — i.e., one that fits the industry, the issues, and the communities involved. This continued development if the business case in Corporate Citizenship is seen as a crucial success factor since business will only show long term and large-scale community commitment, if it benefits their own interests.

Source: Googins 2002, p.20 Brad Googins offers a scaled view which relies on the step- by-step establishment and extension of Corporate Citizenship programmes. (3-Step-Modell above). According to him, it is immaterial if a company has not yet reached the highest stage of Corporate Citizenship. What matters instead is that this business gradually develops its own Corporate Citizenship culture, on the basis of its own business areas, strategies, objectives and values, and continually measures such activities against the business case – always supposing the company wishes to learn and develop, jointly with its employees, a customised programme and is willing to spend the necessary 294 Seventh International HSE Summer School «Baltic Practice» ·2007 resources on the concept and the systematic evaluation of such a programme.22 Focusing on delivering tangible outcomes through a mix of efforts has got a title the ´Corporate Citizenship Mix´, it includes: e.g. Corporate Giving, Cause Related Marketing Corporate Foun- dation, Social Lobbying, Venture Philanthropy, Community Joint Venture, Social Commissioning, Corporate Volunteering, Social Sponsorship. To facilitate a systematic approach to Corporate Citizenship in the sense of a linked business and societal benefit, academia and practioneers suggest to use a typology of community oriented corporate practices; i.e. to differentiate between Corporate Giving and Corporate Volunteering.23 Corporate Giving is a collective term used to describe monetary activities, covering everything from a donation for purely altruistic reasons, via social sponsoring used as a marketing tool down to company-own foundations, such as the Robert Bosch-, Körber or Bertelsmann foundation in Germany, to name but a few of the better known ones. Apart from gifts of money for charitable purposes, which is a kind of donation with a long tradition in Germany, there are also newer, more innovative types, such as companies adding an appropriate amount to donations made by employees, the so-called matching grants, or giving in-kind donations such as computers or other work-related equipment. Corporate Volunteering in turn means using staff resources for activities of common import. Corporate Volunteering can take the form of, for example, regular volunteer days or days of service, where employees go out into the community for a day of helping in projects such as building a playground, or renovating a school, or supporting a social services facility. Sometimes it refers to a longer-term cooperation between a company and a social service facility or other type of non-profit organisation with corporate employees supporting the partner organisation on a regular basis, either through working with schoolchildren, or caring for the needy, either by transferring organisational and/or technical skills, or by more unusual types of commitment such as providing sports opportunities for young people, as demonstrated by Nike

22 (Lang, S., Solms-Nebelung, F. 2005 page 10) 23 (Lang, S., Solms-Nebelung, F. 2005 page 3)

295 Seventh International HSE Summer School «Baltic Practice» ·2007 employees in some of Berlin’s problem neighbourhoods. They get a number of hours off every week to provide training.24 Both observers and protagonists of the US American development, consider the increasing prevalence of Corporate Volunteering, which emerged in the 1980s, to signify the crucial breakthrough to Corporate Citizenship in the modern sense.25

4. The European Corporate Citizenship Development The US is the undisputed champion of Corporate Citizenship. Any temptation to measure Europe Germany against the US-American situation and attempt to translate the American experience to ´the old world´ environment should be resisted all the same, referring to various authors.26 Despite the apparent closeness, the US are dealing with another social and economic system, with a different culture of civic engagement and a different social contract than the European context. Civic engagement is one of the cornerstones of the US- American culture, forming an essential in the way American society regards itself: as far as possible, people settle their own affairs on the basis of self-organisation. The reverse side of the medal of the strong culture of citizen commitment is a state with minimum regulatory powers and with a minute amount of social security. Individual freedom is valued higher than collective solidarity, particularly when it comes to government-provided and publicly redistributed forms of solidarity and welfare. Major US companies in particular have always been accustomed to providing a range of services, which in a German context would be called “welfare” services, e.g. in the field of child care. They are also used to negotiate stakeholder groups’ demands and expectations in direct dialogue, without input from the state.27 In Europe, especially in Germany, the situation is looking different. Here the state is acting both as legislator and moderator or enabler or networking agent, and is therefore a not insignificant partner for industry’s CC/CSR policies. According to Lang, in the European welfare state the mere existence of a human being confers an

24 Definitions and examples from Lang, S., Solms-Nebelung, F. 2005 page 3 25 Backhaus-Maul 2003; Googins 2002, p. 93 quoted in Lang, S., Solms-Nebelung, F. 2005 page 4 26 Lang, Solms and Heuberger et al 27 Heuberger, W.F., et al 2005 – page 3

296 Seventh International HSE Summer School «Baltic Practice» ·2007 entitlement to social civil rights; in the US, by contrast, one is expected to show oneself worthy of receiving charity.28 In addition the high degree of self-responsibility American people is expected to shoulder in issues of social responsibility is set off by the traditionally low expectations of the state.29 In short, the fundamentals of Corporate Citizenship are dealing with a model which is the exact opposite of the German social contract, with all the attendant pros and cons. A common sense among observers indicates a flourishing culture of Corporate Citizenship, though, the US American situation apparently offers more favourable conditions: a company’s willingness to be involved is both demanded and promoted, under conditions of fewer regulations and services, but imbued with a culture of taking (corporate) volunteering as a given. Corporate Citizenship committed businesses in Europe usually look for likeminded partners for peer-to-peer learning processes, thereby contributing to the emergence of a critical mass ready to form viable networks. These networks in their turn hold great appeal, thus promoting other company’s willingness to be involved. Both these factors, committed companies and viable networks, together form a civil society-minded (expert) public, motivating companies to become active corporate citizens, sensitising consumers and inspiring civil society organisations to attract partners from the world of business. The most important and oldest European organisation for Corporate Citizenship is the UK based ‘Business in the Community (BITC)’ (www.bitc. org.uk) with over 20 years experience. Another positive example is the Danish ‘Copenhagen Centre for Corporate Citizenship ’ (www.copenhagencentre.org) based on a kind of national contract between government and business and yet another model is provided by the equally exemplary development on the Netherlands or by the supranational institutions, in particular the Global Compact sponsored by the Secretary General of the UN, Kofi Annan (www.unglobalcompact.org). The European network ‘CSR Europe (www.csreurope.org) is yet another positive example. These organisations are essential as forums for exchanging views or for knowledge transfer or just for publicity-

28 Lang, S., Solms-Nebelung, F. 2005 page 9 29 Backhaus-Maul 2003, p. 87 quoted in Lang, S., Solms-Nebelung, F. 2005 page 9

297 Seventh International HSE Summer School «Baltic Practice» ·2007 effective communication. As observers agree on even these organisations can only complement, but never replace a company’s own activities and experiences in the area of Corporate Citizenship.

4.1 Specific Situation of German Corporate Citizenship Experts have been known to complain more than once that in matters of Corporate Citizenship Germany is lagging behind. This concerns the quantity and quality of corporate activities, as well as a support infrastructure such as a network for the exchange of experience between involved businesses and the communication of best practices etc. In Germany in particular, observers state a precariously little knowledge about Corporate Citizenship. For the time being, Corporate Citizenship remains an enigmatic catch-all phrase for any community-oriented activity by business and covers traditional donations, the simple payment of taxes, or, going further, even entrepreneurial success.30 With some exceptions, the current German debate on Corporate Citizenship is dominated by programmes, best practice presentations and sustainability and/or CSR reports of the major players and transnational companies according to Heuberger.31 Given the different historical and current situation in Germany and the US it is obviously true that “volunteerism” is one of the most basic traits of the US American culture of civic engagement while there is nothing comparable in German tradition. Citizens – no less than companies – are more likely to call for government intervention in a situation crying out for collective action, instead of relying on the ability of civil society to resolve problems.32 In Germany’s institutional landscape, in other words: in the German social contract, companies are traditionally given little room for manoeuvre in the social arena whereas in the Anglo-Saxon countries, particularly in the US, the state only claims a minimum of control. In Germany by contrast, there is a broad-based social consensus in favour of a strong welfare state with considerable powers to redistribute wealth, large regulatory powers and a comprehensive range of services. In terms of social

30 Lang, S., Solms-Nebelung, F. 2005 page 3 31 Heuberger, W.F 2004 – page 1 32 Googins 2002, p. 93 quoted in Lang, S., Solms-Nebelung, F. 2005 page 4

298 Seventh International HSE Summer School «Baltic Practice» ·2007 involvement, the other sectors of society were and are clearly subordinate vis à vis the welfare state.33 Compared to the situation in the US / UK German companies can be said best case to be going through the process of catching up on this development of a contemporary Corporate Citizenship -culture, particularly because the systematic integration of employees into their company’s community activities is still very much the exception rather than the rule or as Lang put it, the majority of German corporate citizens exhibit a more or less unsystematic approach to charity work.34 Community involvement on the part of companies in Germany is still primarily done through donations and sponsoring, though, tentative first steps towards a more sophisticated type of Corporate Citizenship can be discerned according to observers of the situation. Further development in this direction will hinge above all on finding customised access to Corporate Citizenship. German companies cannot simply imitate and copy the approaches taken in other countries since every country needs to develop its own culture of Corporate Citizenship, based on national characteristics, national business structure and culture, and last but not least on the relationship between state, business and society. Even thinking of an approach appropriate for the whole of Germany constitutes the kind of generalisation which is not without problems. Swabian medium-sized enterprises, for example, have a very different tradition of involvement to Hamburg’s upper classes with a more Anglo-Saxon-style approach.35 In short; there are regional variations in both the quality and quantity of Corporate Citizenship. It is also worth looking at this from the pint of view of different industries. H. Backhaus-Maul identifies business sectors and regions which are Corporate Citizenship - intensive. Special attention should be devoted to the automotive industry, the consumer goods and pharmaceuticals sectors, as well as financial services, business consultants and trade in general. Areas in Germany where Corporate Citizenship is particularly strong are primarily the prosperous metropolitan areas of and around Cologne

33 Lang, S., Solms-Nebelung, F. 2005 page 12 34 Lang, S., Solms-Nebelung, F. 2005 page 3

35 Lang, S., Solms-Nebelung, F. 2005 page 14

299 Seventh International HSE Summer School «Baltic Practice» ·2007 and Düsseldorf, the Rhine/Main-region around Frankfurt, Munich, Stuttgart and, to an extent, even the area linking Leipzig – Jena – Halle.36 In Germany the role, the rights and the responsibilities of civil society are clearly undergoing a sea change according to Lang. 1. Civil society has made its demands for codetermination something which could not be ignored ever since the start of the new social movements of the 1970s and 1980s and their “participatory revolution”. Attempts at modernisation, such as the so-called “citizens’ municipality” (Bürgerkommune) and other methods of civic participation reflect this development in the debate concerning local and general administrative reforms. 2. In addition, the quality of the services provided by the state is limited – and the welfare state “customers” realise this and begin to take responsibility for their own life style and are becoming co-producers of customised social services. According to Lang and Solms the Corporate Citizenship ´ movement has led to a debate in the very basics of the social contract in Germany. Therefore, broad-ranging discussion within the society is required to look at the rights and obligations of Corporate Citizens.37 So the issue of a division and redistribution of responsibility between state and civil society has reached the wider public debate. The current change in the routines of our welfare state and corporatist establishment creates opportunities which might help Corporate Citizenship in Germany to genuine breakthrough. The financial constraints of the public sector, though, also make a highly ambivalent environment in which to operate: Nothing has a more disheartening effect on the willingness of both individuals and companies to show civic engagement, than the suspicion of being a convenient stop-gap for a welfare state in crisis as authors underline. According to Lang and others, German approaches to Corporate Citizenship still suffer from the burdensome fact that the original calls for making CC an issue did not come from

36 H. Backhaus-Maul 2004, p. 28 quoted in Lang, S., Solms-Nebelung, F. 2005 page 3 37 Lang, S., Solms-Nebelung, F. 2005 page 2

300 Seventh International HSE Summer School «Baltic Practice» ·2007 companies themselves or their various associations, but from the political arena.38 Corporate Citizenship initiatives are no substitute for public services at state or community level, they complement them. This is due to their selective, case based structure and to the fact they are dependent on both business cycles and the fashion for this or that issue.39 And yet, despite all the differences in the culture of involvement, there are lessons to be drawn from the American experience which can benefit Germany as well according to Lang.40 Two aspects in particular are of paradigmatic importance. One is a continued development if the business case in Corporate Citizenship – business will only show long term and large-scale community commitment, if a persuasive case can be made out for the benefit this involvement can add to the genuine interest of the company. The other lesson concerns the impressive Corporate Citizenship programmes showing US companies. These are not usually of the cuff projects but are the results of a continuous process of development, evaluation and learning. Also the UK based ´Business in the Community´ offers a plethora of examples and learning processes which are also ideally suited for Germany to adopt as Lang points out. At an event in Berlin 2002, BITC’s Executive Director, Julia Cleverdon, emphasised three points for the German audience which had been particularly important lessons in the British context:41 The most important lesson after twenty years of networking in the UK are: 1. Leadership is crucial – values and normative direction need to come from the top 2. Money is important but isn´t everything. More important are time, energy, contacts – in short “the muscle of business” 3. Corporate Citizenship processes should not be initiated by the public sector but grow out of private commitment

38 Backhaus- Maul 2004, p. 26 quoted in Lang, S., Solms-Nebelung, F. 2005 page 7 39 Lang, S., Solms-Nebelung, F. 2005 page 7 40 Lang, S., Solms-Nebelung, F. 2005 page 9 41 “Business in the Community – Companies in Society., The British Experience – Perspectives for Germany”, held on June 12, 2002 at the British Embassy, Berlin quoted in Lang, S., Solms- Nebelung, F. 2005 page 12

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Businesses active in the community will wish not only to assume obligations for the sake of society at large, they will also demand rights in just how to shape it. The same rule apply for corporate citizens as for individual citizen´s volunteer work: those who lend a hand want to have a voice in how things go. ´Demand and promote´-more Corporate Citizenship has led to a debate in the very basics of the social contract in Germany. Therefore, broad- ranging discussion within the society is required to look at the rights and obligations of corporate citizens. Company-own foundations, such as the Robert Bosch-, Körber or Bertelsmann foundation, to name but a few of the better known ones, strongly support this development. In addition the CCCD – Centrum for Corporate Citizenship Germany42, - an education (and further education) institution offering a wide range of qualification courses for executives and leadership personnel of companies which either are a good corporate citizen already or strive to become one soon is also a research institute providing user-focused research on different aspects of Corporate Citizenship and offers a network serving as a centre for member companies.

5. Examples of Corporate Citizenship In Europe there are more than 20million small and medium sized enterprises which already contribute largely to society through their everyday business activity. The power of a SME business to affect society lies in the vast cash flow that includes its revenues and expenses, its creation of work places, the production of goods and services offered to society and taxes paid to the state according to the Corporate Citizenship Company.43 Being focused on their development, Small and Medium-Sized Enterprises (SME) in Europe, as well as big corporations, have been practicing Corporate Citizenship successfully over the last few years. At the moment being a good corporate citizen has become a part of some companies’ identity. They support their employees’ passion to bring lasting, positive change to communities; they belong to, and

42 The Center is the German partner of the Boston Center for Corporate Citizenship 43 The London based Corporate Citizenship Company is a consultancy working in the for-profit sector specialized in helping companies succeed as commercial entities by being active corporate citizens and so meeting the aspirations of their diverse stakeholders and the wider society of which they are a part in.

302 Seventh International HSE Summer School «Baltic Practice» ·2007 bring the same principles of high performance that they apply to their work with clients and customers to their efforts in the field of Corporate Citizenship. Business in the Community (BITC) can be seen as a European Highlight in this field. Over 700 corporate members, including 80% of the British top 100, make Business in the Community (BITC) the largest as well as the longest running European corporate network. Established in 1982, against a backdrop of a historical situation where the social capital of Britain was shrinking dramatically: unemployment was extremely high, there were riots in the cities, in short: social cohesion was crumbling noticeably, making some clear-sighted companies realise that the social resources for entrepreneurial success were getting scarce. These companies then started an organisation to create community-focused alliances between the private and the public sectors, as well as civil society organisations, in order to work jointly on social problems. The development process and the methods of BITC as an organisation are paradigmatic examples for civic self-activation among members of a national economy. BITC identifies current problems and opens up a variety of different areas and project lines for member companies to start tackling them. One example concerns a programme to combat the national education emergency in British primary schools, where more and more children are not able to read or write – in 2002 there were 25,000 illiterates among eleven-year-olds. BITC members have committed themselves here, providing a total of 20,000 “reading volunteers” in the primary schools of problem neighbourhoods. Also the problem of homelessness, which BITC was only able to suggest as an area suitable for corporate activity after conducting a survey on which social problems were to be tackled. A poll among businesses had ended with homelessness rated in 10th place, while the BITC survey ended with customers putting homelessness in second place. Companies paid attention to the customers’ views and are now involved in reintegrating homeless people into the labour market, supported by the BITC.44 Many companies in Europe and Germany understand the correlation between successful business strategy and Corporate Citizenship and have implemented effective programs. For,

44 www.bitc.co.uk

303 Seventh International HSE Summer School «Baltic Practice» ·2007 example, according to a study by Ernst & Young45 the engagement of innovative high-growth companies from Germany (small and medium sized companies) in community and society relations is above average. Among the 100 fast-growing German SME´s which were chosen in the final round of the competition „Entrepreneur of the Year 2006“ - 94% were engaged in educational projects or caritative facilities, organizing environmental projects and/or supporting sports, science and culture on a sustainable level. According to this survey only 54% of all SME´s companies in Germany are engaged in a larger area for the community interests – which underlines the special role innovative high-growth companies fulfill in society. They support a wide spectrum of projects which are often initiated by them, as, for instance, the study "With responsibility to success - Corporate-Citizenship- Strategies for German SME´s 2007" conducted by Ernst & Young indicates. The evaluation of several studies in Corporate Citizenship in Europe provides a further insight of how companies are engaged in different areas of society The following overview subsumes the most important results of four studies on Corporate Citizenship and its state in Europe and Germany as compiled by the Austrian Federal Ministry of Agriculture, Forestry and Environmental Affairs:46 Some relevant findings are summarized as follows: • Over industries, European SMEs are more engaged in CC activities than larger corporations • A north-south divide on citizenship engagement can be seen in Europe – from 33% of French SME´s to 83% of Finnish SME´s. • Predominantly corporate clients from the retail or service industry are engaged in CC activities

45 Ernst & Young „Small and medium-sized business barometer 2007“ 46 These studies are „The State of Corporate Citizenship in the United States: 2003“ – state of the Art in the US. „Corporate Citizenship : Between Idea and Business“ study on the state of Corporate Citizenship in the US and Germany 2002 „European SME – Social and environmental-related responsibility.“ 2002 „Corporate Citizenship : The Corporation as good citizen“ 2002

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• overall 81% of Small-Sized companies, 58% of Medium Sized ones, and 49% of the major corporations have been supporting from 1 to 5 charitable / non-profit organizations

5.1 Key areas of corporate citizens’ engagement The key areas mostly supported by CC-programs in the US are education (59%) and health (51%), whereas in Europe those are sports (47%), in Austria community health and welfare services (70%) are favoured by companies. According to this study, the type of support is mostly characterized by donations (93%) and donations in kind (85%) in addition with the formation of a non- profit foundation (66%). According to the Austrian Federal Ministry of Agriculture, Forestry and Environmental Affairs a comparison of these studies show that SME´s are preferably engaged in local community projects while internationally-active companies are engaged in international CC projects (42%). The information containing in these studies and edited by the Austrian Federal Ministry of Agriculture, Forestry and Environmental Affairs, shows a major difference between US und European Companies with regard to the design of CC programs. While most of the SME´s are rather occasionally and in many cases with no strategic motives get to be engaged in CC projects serving the public good, the Corporate Citizenship concepts are much more profound and sophistically integrated in the business strategy within American companies. Specialized board committees and similar departments proof this development.

6. Why does Corporate Citizenship make sense? According to experts Corporate Citizenship can prove beneficial to the company in a variety of different ways:

1. Improve the Image Corporate Citizenship assists in achieving greater public awareness: “If you are concerned to be seen you must be seen to be concerned“. Reputation has a financial value in many companies. A firm’s “brand name,” for example, represents value to customers and potential customers. Consumer products businesses, in particular, treat brand names as assets to be managed for growth and profit. Moreover, in an economy where 70% - 80% of firm’s 305 Seventh International HSE Summer School «Baltic Practice» ·2007 market capitalization comes from hard-to-asses intangible assets such as brand equity, intellectual capital and goodwill, organizations are especially sensitive to anything that damages their reputations.47 Corporate Citizenship is directly linked to reputation and brand name.48 Since in this information age, the ramifications of not addressing best practices in environmental protection, workplace, marketplace and community could range from bad press coverage to complete market failure.

2. Having an Edge in Attracting and Retaining Customers Critical consumers do not only buy goods but values at the same time. Decisions to purchase are frequently made on the basis of a manufacturer’s social and ecological performance. 70% of all European consumers take the socially responsible behaviour of a corporation into account when buying a product or service.49 Executives know the importance of good reputation – firms with strong positive reputation attract more customers. These businesses are perceived as those who provide more value, which often allows them to get a premium from the market. Their customers are more loyal and buy broader ranges of products and services. For the reason that the market believes that such companies will deliver sustainable wages, and future growth, they have higher price- earnings multiples and market values, and enjoy lower costs of capital.

3. Employee Motivation and Qualification – Corporate Citizenship Creates and Unites Human Capital Even today, U.S. and UK business are aware that in the race for the highest qualified employees, these sought-after candidates frequently ask about Corporate Citizenship programmes and assess the desirability of a potential employer on the basis of, among others, the company’s social and conservationist record. The

47 Robert G. Eccles, Scott C Newquist, Roland Schatz p.104 48 Source: Interbrand/Citibank league table, 2001: The table shows the ratio of stock market value (smv) – net book value (nbv) - and goodwill (g) (which is based on reputation); e.g. General Electric: $499bn (smv) - $23bn (nbv) - $476bn (g) 49 CSR Europe/MORI 2000 as stated by Lang, S., Solms-Nebelung, F. 2005 page 5

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German labour market is presumably not sufficiently developed for Corporate Citizenship to play such a crucial role. But even in Germany, civic engagement can make a significant contribution to HR development: community-involved employees develop and deepen increased key capacities, such as being able to work in a team, being flexible, creative and self-responsible. As a rule, these people also show above-average motivation, commitment and flexibility in the workplace. According to Post,50 Corporate Citizenship activities contribute to the firm’s human capital in two distinct ways. First, citizenship activities add to the knowledge base of the firm’s employees. Learning occurs as a company becomes involved in community issues; the learning transforms into knowledge, which can be used in numerous ways by company personnel.

The second way in which citizenship adds to human capital, is by supporting causes, commitments, and community involvement that employees value.

4. Corporate Citizenship Creates Social Capital A functioning market depends on non-market prerequisites: natural and social standards of living, stability in the social order, legal certainty etc. In short: a functioning market economy needs social capital, and the success of every single player in the market to some extent depends on non-economic factors. Authors like Lang like to refer to Corporate Citizenship as „the art of giving back to the community“, thus implicitly appreciating that the community in return is contributing considerably to business success. In other words: Corporate Citizenship is an investment in social capital, an intangible asset that could be reflected in the organization’s ability to engage other organizations, individuals, and segments of society in ways that might be beneficial to the firm. From the angle of a market player this equals investing in the non-economic prerequisites of economic success.51 Observers agree that one of the strongest arguments for firms to invest in Corporate Citizenship activities is the growing importance of

49, 50,51 Post, J.E.: 2000

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“social capital” to business. Corporate Citizenship contributes most directly to the firm’s social capital by building public esteem and enhancing social legitimacy with political leaders (at all levels) and the community at large. As Fukayama and others have observed, trust is a precious asset in the modern world. Those organizations that build trust are creating a “relational asset” with the potential to be valuable and important in the future.52

6.1. Critical Views on CC and a wrong misconception According to Crane there are several criticisms of Corporate Citizenship which will be briefly outlined.53 One is the issue of control- and measuring instruments, as the Ernst & Young SME survey has disclosed. Even if the majority of participating companies defines CC as part of their business strategy and factor of success, there is a lack of interest and instruments to prove how CC influences operational methods, or final products, or adds to an improvement of a company´s image as well as innovative knowledge transfer. Another critical point expressed is that corporate philanthropy is done at the expense finally of the state and so, at the expense of all citizens, since this sort of corporate expenses reduces the taxable earnings of the companies. Opponents of the critique however argue that the modern social welfare state cannot fulfil many of its original tasks due to the budget deficits and to the fact, that the company´s citizenship activities hence multiple countervail the tax deficits. While conducting a European wide study in collaboration with Deloitte & Touche in 2005 Prof. Dr. Habisch54 and his colleague Rainer Kirchhof compiled a ranking of highly profitable companies which deal with social, ecological, cultural and humanitarian concerns. Surprisingly 4 of the top 5 companies were British. The explanation for that is based on a misconceived ethical self- conception among German corporations, which support the following attitude, ´Who does good should do that without any

53 Crane, A.; 2003 (p. 61 - 74) 54 Prof. Dr. André Habisch - Professor for Social Ethics and Social at the Catholic University Eichstädt / Germany

308 Seventh International HSE Summer School «Baltic Practice» ·2007 other interests´. From the point of Prof. Dr. Habisch this doesn´t make any sense at all – as for most of the British companies ranked – since there are many ways to reconcile social needs with economic interests. They argue that a company has to make profits to secure its long-term existence – a logic which applies to all stakeholders of a company including the community and social engagements. Charity in this consideration is as well a competitive factor and unique features which must not be done at the expense of other corporate interests, as they outline.55 An understanding also shared by the German pharmaceutical producer Betapharm, whose success with Generica is broadly based on their good reputation resulting from their pioneering and long-term social engagement in the field of after medical care of chancer patients.

6.2 Win-Win Situation The contribution business can make to civil society constitutes a huge potential – in more than financial terms. The transfer of knowledge from business to civil society is becoming steadily more important: increasingly sophisticated technology, more complex communication technologies, increasingly complex management demands, more subtle organisational issues, higher demands for qualifications for those actively engaged in the community, in short: a greater number of competences needed by an ever growing number of civil society organisations. Systematically linking community and corporate interests as characteristic for Corporate Citizenship implies that businesses – rightly – wish their community involvement to generate some economic benefit as well. According to Lang, Corporate Citizenship in its proper sense has nothing to do with an altruistic exercise of ‘Love Thy Neighbour’; the underlying motivation is and should be a tangible business interest on the part of the company showing civic engagement, a properly defined business case.56 From the same point Prof. Dr. Habisch argues that Corporate Citizenship Activities are not about charity or a “CEO´s wife-syndrome”. Based on a mixed sense of corporate responsibility, a clear calculated self-interest and a pursue of business strategies the activities accomplished by corporations

55 Holzknecht, S. : “Win.Win. – Corporate Citizenship ” Private Wealth 03/2006 p.38-42 56 Lang, S., Solms-Nebelung, F. 2005 page 4

309 Seventh International HSE Summer School «Baltic Practice» ·2007 acting as good citizens serve all parties concerned If one follows the motto ´do good and benefit from it´, then, an emerge of win- win-situations between corporations and its social environment is possible! Using potential corporate benefit as a guideline is yet another typical feature of Corporate Citizenship modern style, as opposed to the old style traditional kinds of corporate charity as experts diagnose a shift in emphasis: Those concerned are less interested in altruistic public commitment; as corporate citizens, their objective is to establish a successful and strategic link between company goals and the common good. As stated by BITC (Business in the Community) there are wins for both sides - businesses are achieving a competitive advantage by understanding that a benefit for the community also means a benefit for business. It´s been shown that companies that put responsible business behaviour at their core and conduct social engagement on a sustainable level thereby innovate and develop new products and services, get access to new markets, decrease fluctuation of employees, recruit more diverse and talented personnel taking advantage of their good employer-reputation and are better placed to minimise risk. Business leaders who recognise the importance of responsible business understand that a value-based company that operates with integrity does not inhibit growth or the creation of wealth, but underpins it, and thereby, finally increase its profits. To establish WIN-WIN constellations, Corporate Citizenship activities have to be conducted on a professional basis with clearly set strategic objectives, resources and monitored execution! Corporate Citizenship activities are no substitute for state services at the national or local level; they act as a complement and can never be an alternative, because they will always and inevitably remain selective and limited to specifics. Above all, though, businesses do not wish to act as stop gaps, plugging the holes others left gaping, they prefer to act and structure things independently57. So when globalization redefines the way a company makes money (its business model), and forces changes of corporate stakeholder relationships, it also forces a redefinition of how the company addresses its responsibilities regarding those stakeholders.

57 (Lang, S., Solms-Nebelung, F. 2005 page 1)

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In other words, the company should renovate its citizenship model as well as its business model and build a link between them. In this context, building relationships through Corporate Citizenship is an investment which allows to grow an asset of high importance to the firm’s future success. As Bradley Googins, the president of the Boston Center of Global Corporate Citizenship globalisation its future role and importance: „Corporate Citizenship is not how a company gives away its money; it´s about how it makes its money.” Irrespective of all the differences in the cultures of civic engagement in Europe and Germany, a systematic integration of employees in concept and practice of Corporate Citizenship is required to prepare the ground for the full realisation of its economic, communicative and social potential58.

Literature 1. Heuberger W. Frank: - “Transnational Trendsetters: Communicative Rationality and Ethics as success factors for Corporate Citizenship ”, 2004 Debatte Center für Corporate Citizenship in Deutschland) 2. Lang, S.; Solms Nebelung, F.: – “Responsibility as a Business Strategy- the Business Case in Corporate Citizenship –“ 2005, Friedrich Ebert Stiftung 3. Heuberger W.Frank, Oppen M., Reimer S.: - “Der deutsche Weg zum bürgeschaftlichen Engagement von Unternehmen. Thesen zu “Corporate Citizenship” in Deutschland 2005. 4. Petkoski, Djordjija: - “The Role of Business in Development through Multi-stakeholder Partnerships” – presentation at World Bank Institute, April 2007 5. Crane, A.; Matten, D.: – “Business Ethics. A European Perspective” Oxford University Press 2003 (p. 61 - 74) 6. Sackmann, S.A.: - “Erfolgsfaktor Unternehmenskultur” Bertelsmann Stiftung / Gabler Verlag 2004 (p. 222 – 227) 7. Holzknecht, S.: “Win.Win. – Corporate Citizenship ” Private Wealth 03/2006 p.38-42

58 (Lang, S., Solms-Nebelung, F. 2005 page 4)

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8. Brugmann, J.; Prahalad, C.K.: - “Cocreating Business´s New Social Compact” Havard Business Review 02/2007 p. 80-90 9. Bradley K. Googins: Corporate Citizenship Resources. Readings, References & Web Sites. The Center for Global Corporate Citizenship at Boston College 10. Post, J.E.: - “Meeting the Challenge of global Corporate Citizenship”. Boston College Center for Corporate Community Relations 2000 11. McIntosh, M.; Waddock, S.; Kell, G.: - “Learning To Talk: Corporate Citizenship and the Development of the UN Global Compact” Greenleaf Publishing 2004 12. McIntosh, M.; Andriof, J.: - “Perspectives on Corporate Citizenship ” Greenleaf Publishing 2001 13. BITC. Business in the Community.: Win.Win. Issue 01 / 2006. 14. Schrader, U.: - “Corporate Citizenship - Die Unternehmung als guter Bürger” Logos Berlin; Auflage: 1. 2003)

Quellen 1. Corporpate Citizenship in Nordrhein-Westfalen: Unternehmen und soziale Verantwortung (Ministerium für Wirtschaft und Arbeit NRW) 2. Ernst & Young „Small and medium-sized business barometer 2007“ 3. Corporate Citizenship Austria (http://www.ccc- austria.at)

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CHAPTER FIVE: RUSSIAN FINANCIAL MARKETS

Introduction by the group Academic Advisor

The recent foreign policy of the Russian Federation (the RF) provides for comprehensive integration with the world community. The key idea of integration process lies in the necessity of financial, social and economic development of Russia in line with the most progressive states of the World, namely – in Europe and North America. In a globalizing world, effective integration practices always require - inter alia – a certain degree of legal, economic and in certain cases even political unification. In this sense, the world community as a whole or certain groups of countries tend to adopt so-called international standards for national regulations over various ranges. Since the degree of standards approbation pretends to determine state’s position and reputation in transnational intercourses, Russia’s adoption of international standards appears to be essential with respond to further development. In addition, accession of Russia to the World Trade Organization (the WTO), which provides a plenty of obligatory standards, corroborates the letter thesis. However, every international standard do not perennially perform the obligatory force. That does not hinder their de facto compulsory role confirmed by the estimation of the world community members. Within the framework of present publication, our research teem attempts to envelop both legally binding and legally non- binding standards of regulation and possible problems of their implementation in Russia. A range of the investigation covers international and Russian domestic guidelines of the financial markets relations (including stock markets, insurance markets and 313 Seventh International HSE Summer School «Baltic Practice» ·2007 banking services markets), which are believed to be one of the essential pillars of Russia’s economic wellbeing. With a glance of comprehensive study, members of the team present the articles of different academic fields below. Let us briefly trace the scope and bounds of presented investigations. In accordance with academic common practice, the detailed analysis shall be forestalled by the general theoretical overview. Then, the analysis touches upon international standards for the administrative regulation of the activities of financial market participants. The legal, part of this study is carried out by Anna Klimova, Ramil Faiziev and Nikita Danilov. Further, general matters of international commerce standards for the financial markets burst upon the eye. In this sense, an article of Stanislav Rumyantsev externalizes key problems of Russian consumer protection law educed by comparative analysis of European standards and Russian legislation. Furthermore, researches of Olga Chaykovskaya attend to enucleate inside trade and collective investment standards. Finally, we presume to establish economic-sociological approach to the financial markets integration, due to the determinative role of people’s behaviour in the financial development of any state. Consequently, we expect the scientific research demonstrates main problems of international standards implementation in Russia and outlines some effective ways of solving them. Despite our analysis does not pretend to be an entire embracive study, we hope it may be deemed as an essential scientific work and fair basis of prospective explorations.

Yuriy Fogelson, Professor of Law School, HSE, PH.D

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Stanislav Rumyantsev Consumer protection in the financial markets: EU standards and Russian legislation

Headnotes Binding force of the European Union legislation applies only to its Member States. All other countries of the world are not obliged to follow them. Meanwhile, integration of the Russian Federation (the RF) into the world community and, in particular, its accession with the World Trade Organization, intends Russia to take into account international standards for financial markets regulation. Thus, Russia's acceptance of the international standards becomes indispensable for the further integration with other countries. So, we are speaking about the institution of «the soft law» which includes international standards of legal regulation. Despite it is neither explicitly written nor enforceable by state compulsion, cooperation of countries requires the soft law anyway. Furthermore standards of the soft law prevent irresolvable collisions in business with foreign partners caused by differences in national legislation. So far as such collisions may provoke an economic isolation of state, international standards of legal regulation may forestall it. That is why the mutual economic integration (especially in the field of financial markets) appears to be possible only under condition of similar law regulation of market participant’s activities. Relevant laws and rules should be provided by developing international standards of legal regulation. In our opinion, some consumer protection legal institutions of the EU may become international standards of the soft law for Russia. In this case, it seems to be necessary to take into account these legally non-binding (for Russia) standards to avoid possible conflicts between foreign residents and Russian entities connected with Russia’s accession to the WTO. In this wise, the following questions arise. What institutions do the European standards for consumer protection on financial 315 Seventh International HSE Summer School «Baltic Practice» ·2007 markets include? And how do they correspond with Russian national legislation? As is known, increased protection of consumers (in our case – nonprofessional participants of the financial markets) maintains the equal rights of parties in trader-to-consumer relations. Equality of the parties, in turn, is recognized as one of the main civil law principles and an indispensable condition of civil relations legitimacy attached, inter alia, financial services granting.1 Undoubtedly, both Russian and European law systems have a set of certain legal tools customized for consumer protection in business-to-consumer relationships. However, could Russian consumer protection provide the level of legal safeguard reached by European law? The answer, obviously, conceals in comparative analysis of some European standards and Russian legislation. Let us mention that the comprehensive comparative analysis is outside the purpose of present work and does not even fit its bounds. That is why we should focus on some EU law institutions which may become international standards of the soft law for Russia during the process of its financial and economic integration into the world community. We should also point out that both Russian and European legislations contain a few specific acts regulating consumer protection in financial markets. For example, there are Directive 87/102/ЕЕС2 (consumer credit) or Directive 2002/65/ЕС3 (distance marketing of consumer financial services). Basically, consumer protection legal institutions regulate multiple consumer relationships and called institutions of general legal regulation. Whereas relations concerning financial services quite often provide inequality of consumer and trader, such general regulation turns out exclusively important for the financial markets. Furthermore relations in the financial markets are exactly very intricate and therefore appear to be vague for the majority of consumers. We believe it is reasonable to focus our research exclusively on rules of general regulation. There are no sufficient reasons for analysis of specific legal rules, which must be more important for Member States than for Russia, on this stage of Russian economic cooperation with the Occident. Nevertheless, the

1 In Russian law this principle is constituted by art.1 (1) of the Civil Code, 30.11.1994 №51-ФЗ 2 Official Journal C 235 , 13.08.1996 3 Official Journal L 271/16 , 9.10.2002

316 Seventh International HSE Summer School «Baltic Practice» ·2007 further integration of Russia with the world community, in our opinion, will require analysis of the specific law institutes. So the latter should be paid priority attention in future researches. Consequently, we are going to review some general private law norms in the framework containing regulation of the financial markets. So far as the stage of notional toolkit formation is required for the further study, it shall be a preliminary stage of the scientific research in the form of comparative analysis. Therefore a little, but conceptually important comparative analysis of notions of terms ‘consumer’ and ‘trader’ in the European and Russian legislation shall become a preliminary stage of this article.

Notion of consumer and trader: European and Russian concepts Above all, let us bring to notice one principle feature belonged to the comparison of terms below. As far as Russian legitimate notion is stated by domestic legislation and European one – by international acts, the commensuration of notions of consumer and trader in Russian and European law seems to be a commensuration of unequal categories. This indicates the EU law and domestic legislation aim different goals which results in Russian law better orients on casus, while European one prefers more abstract way. That is to say norms of EU Directives intend to harmonize law in Member States, which are able to pass national acts. This is not the goal of Russian legislation, as it regulates certain social relations in the country. That is why, comparison of Russian and European notions of consumer and trader in view of their correspondence sounds rather better than comparative analysis of equivalent definitions. Despite the reviewed terms are situated both in European and Russian law, their notions are at variance. Thus the way of understanding them limits the invocation of consumer protection legal system and should be regarded as its theoretical base. First of all, we should analyze the notion of consumer in European law. A comparison of a plenty European Directives indicates the existence of an "established" definition of this term.

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For instance, art. 2 of the Directive 93/13/EEC on unfair terms in consumer contracts4 defines the consumer as "any natural person who, in contracts covered by this Directive, is acting for purposes which are outside his trade, business or profession". The interconvertible definitions can be found in the Directive 97/7/EC on the protection of consumers in respect of distance contracts5, the Directive 98/6/EC on consumer protection in the indication of prices of products offered to consumers6, the Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market7 etc. An akin definition is also provided by the Directive 85/577/EC to protect the consumer in respect of contracts negotiated away from business premises,8 though here the legislator seems to be more watchful as he passes the following norm: " 'consumer' means a natural person who, in transactions covered by this Directive, is acting for purposes which can be regarded [italics supplied] as outside his trade or profession". There are also a few Directives (for example, Directive 90/314/EC)9 stated specific definitions, although they seem to be exceptions from the general rule. In virtue of mentioned norms, a typical three-link definition structure could be built easily. So then, 'consumer' means 1. A natural person 2. who is acting in legal relations 3. for purposes which are outside his craft, trade, business, professional activities and interests.10 Now we shall review some Russian legislation concerning meaning of consumer. According to preliminary statement of Russian Consumer Protection Act11, 'consumer' means " a person who either intends to obtain or obtains goods (works, services)

4 Official Journal of the European Union L 95, 21.04.1993, art. 2 (b) 5 Official Journal of the European Union L 44, 04.06.1997, art. 2 (2) 6 Official Journal of the European Union L 80, 18.03.1998, art. 2 (e) 7 Official Journal of the European Union L 149, 11.06.2005, art. 2 (a) 8 Official Journal of the European Union L 372, 31.12.1985, art. 2 9 Official Journal of the European Union L 158, 23.06.1990 10 A resembling structure is suggested in EC Consumer Law Compendium: comparative analysis by Hans Schulte-Nölke, Christian Twigg-Flesner, Martin Ebers. - Univeraität Bielefeld, 2007.- page 673. But in this book the question is about two-link structure, which in our opinion fits worse to the present search than a three-level one 11 №2300-1, 07.02.1992

318 Seventh International HSE Summer School «Baltic Practice» ·2007 exclusively for personal, family, home and other needs not related to conducting his business". This corresponds with art. 492 (1) of Russian Civil Code: "under the contract of retail purchase and sale, a seller engaged in entrepreneurial activity for the sale of goods at retail is obligated to transfer to the buyer the goods meant for personal, family, home, or other use not connected with entrepreneurial activity [italics supplied]". Consequently, the consumer in the notion of the Consumer Protection Act is presumed to be closely connected with retail purchase and sale relations. Hence, the definition of the Act corresponds well with the following Civil Code's representation of consumer work contract (art.730(1)): "a contractor engaged in the respective entrepreneurial activity is obligated to fulfill, on order of a citizen (the customer), defined work meant to satisfy the customer and other personal needs of the customer…". However in case of contracts of providing of services the definition becomes embarrassing. The problem is the cornerstone of examined definition of term ‘consumer’ is exactly objecting of acting that means satisfaction of personal, family, home and other needs, which are not connected with business. It seems to be obvious the legitimized definition is unable to emphasize all the consumer’s interests. Meanwhile, as mentions M.I. Braginsky: “the multiplicity of services covered the individual and collective requirements shall be undisputed”.12 Consequently, uncertainty of kinds of consumer services caused by vague legal formula of consumer seems to be serious and very likely the most important defect of analyzed definition. Now, we may compare definitions of ‘consumer’ in Russian and European legislation.13 Russian Consumer Protection Act states what purposes of goods obtaining corresponds to the consumer status. In contrary, the abovementioned EU formula brings attention to purposes which should not be pursued by consumer. In other words, European legislation defines the consumer as if from contrary and this way helps to avoid the recital of consumer needs.

12 Брагинский М.И., Витрянский В.В. Договорное право: договоры о выполнении работ и оказании услуг.- М.: Статут.-кн.3, стр.219 13 See Фогельсон Ю.Б. Конституционные проблемы страхового права

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In contrast to European law, Russian one traditionally tends maximum to casuistically specification of legal norms. Though the recital of consumer appears to be lame in the view of legal technique. Possibly, such legal method fits well to retail purchase and sell relationships, but hardly be implemented to define consumer in much diversified private-law institutions. Exactly, this incorrect Russian definition ‘compels’ the Supreme Court of the Russian Federation to decipher the recital in Resolution of the Supreme Court Plenum “About court practice on consumer cases”.14 Conforming to logic, it could hardly state all the multiple relations, in which a weak party needs to be protected. Thus, the recital of consumer needs predetermines significant and may be even exhaustive judicial discretion as it has not been still constituted in an exhaustive way. Moreover, the phrase ‘…the other use…’ in our opinion devaluates the importance and benefits of the notion of consumer stated by the Consumer Protection Act. Some comparative analysis of European and Russian concepts from a new perspective should help us to corroborate this thesis. It is well-known that old edition (of 09.01.1996) of the Consumer Protection Act of Russian Federation formulates the notion of consumer in the following specific way: “ ’consumer’ means a natural person who either intends to obtain or obtains goods (works, services) exclusively for personal (everyday) needs [italics supplied] which are not profit-oriented”. It seems to be unwarranted to review the ban for profit-oriented acting of consumers, because of this question has been already discussed in the law literature.15 In case of this research formulation ‘personal (everyday) needs’ becomes a cloud of the definition. Note that the present notion of consumer probably attempts to concretize the utmost meaningful old formulation ‘personal (everyday) needs’ by enacting the recital ‘personal, family, home and other needs’. Then, the notion of definition consists in contrasting of consumer and business needs. Consequently, in this viewpoint the Russian

14 Постановление Пленума Верховного Суда РФ от 29.09.1994 №7 "О практике рассмотрения судами дел о защите прав потребителей" 15 For example, see Селянин А.В. Защита прав потребителей.- М.: Юстицинформ, 2006

320 Seventh International HSE Summer School «Baltic Practice» ·2007 notion presents a likeness with European one except the latter avoids usage of abstract terms such as ‘everyday’, ‘personal’ etc. This reasoning could be correct if only the absence of words ‘other needs’ implied a plenty of different relations (from retail purchase and sale to bank deposit) in the legal definition. In other words, in contrary to formula ‘everyday (personal, family, home) needs’, which contrasted consumer and business necessities, the recital ‘personal, family, home and other needs’ is an endeavour to state the notion in casuistic way unsuitable in this case. The research of European and Russian concepts needs to remark one more point closely confirmed to the notion of trader. Russian definition of consumer opposed consumer’s activity only to business one. In the EU, in contrary, purposes of consumer are outside not only business, but also profession and craft. Furthermore, consumer opposes to trader (in some Directives – supplier, vendor, seller etc.). Though it should be observed there is no unified term ‘trader’ in EU law. Sometimes trader means ‘any natural or legal person who… is acting for purposes relating to his trade, business, craft or profession’.16 On the other hand, some Directives (for instance, the Directive 2002/65/EC) constitute that trader (supplier, vendor, etc.) acts in his professional capacity.17 According to Martin Ebers, this definition points out that the term ‘professional capacity’ presupposes that the business is acting on a more regular basis and in a capacity for which it requires payment.18 We presume the opposition of consumer and trader and the ban for professional purposes of consumer’s acting point out the unprofessional (‘lay’) legal qualification of consumer’s activities. Article 5 of the Directive 1993/13/EEC and article 7 of the Directive 2005/29/EC indirectly corroborates this opinion. Russian definition of consumer does not bring attention to this nuance which makes inferior to European one. Russian legal definition of trader is closely connected with contractual relations in which his is participated. Moreover, it is established that they should be only sole proprietors or legal

16 art.2 (b) of the Directive 2005/29/ЕС \\ Official Journal of the European Union L 149, 11.06.2005 17 Official Journal of the European Union L 271/16, 09.10.2002 18 Hans Schulte-Nölke, Christian Twigg-Flessner, Martin Ebers. EC consumer law compendium: comparative analysis.- Universität Bielefeld, 2007.- page 691

321 Seventh International HSE Summer School «Baltic Practice» ·2007 entities.19 Such position does not attend to the nature and the purposes of their activity that arose a serious question about the protection of consumer-to-consumer transactions by the Consumer Protection Act. As it is known the abovementioned Resolution of the Supreme Court answered in negative. However, the unambiguous criticism of Russian concept and ‘eulogy’ of European one could be hardly valid. For instance, we shall remind that despite EU Directives, Russian Consumer Protection Act concerns to the domestic legislation. Consequently, the adoption of these acts pursues different purposes which caused distinctions in concerned concepts. The EU definition creates a general trend of development of consumer protection system by defining the limits of its application and the circle of appropriate subjects. Meanwhile, Member States enjoys the right of adoption domestic consumer legislation. But how does this system work out in practice? Let us provide an example. The Consumer Affairs Act of the Republic of Malta reproduces the definition of the Directive 1993/13/EЕС with some improvements. In the issue Maltese notion of ‘consumer’ includes both natural persons mentioned in the EU Directive and “any other individual not being the immediate purchaser or beneficiary, and whether or not a member of the consumer’s household, who having been expressly or tacitly authorised or permitted by the consumer, may have consumed, used or benefited from any goods or services provided to the consumer by a trader…”.20 Moreother, according to part1 of the Act, any natural or legal person may, from time to time, be designated as consumers by regulations of Minister responsible for consumer affairs. This "free" interpretation of the Directive 1993/13/ЕEС indicates that the unified European concept of terms ‘consumer’ and ‘seller’ has not been still completely generated. For example, despite the unequivocal notion provided by the Directive 1993/13/EEC (only natural person may be designated as consumers), some other Member States besides Malta (Denmark,

19 the preliminary statement of Закон РФ "О защите прав потребителей", 07.02.1992, №2300-1 20 Consumer Affairs Act, Cap. 378, 23.01.1996, part.1 art.2

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Greece and others) vest the consumer status to legal entities.21 In this case, European Court of Justice has even stated that the term "consumer" should be interpreted solely in referring to the natural persons.22 However this direction of European Court has not affected the mentioned Act of Malta and legislation of some other EU countries yet. Russian jurisprudence also has raised this question. Though national legislation excludes any “subterfuges” owning to the unequivocal understanding of the term ‘consumer’.23 There are some other problems of European concept of consumer. Particularly, law scientists often criticize the characteristic of consumer as an unprofessional subject (from the standpoint of absence of special knowledge) in the interpretation of the EU. For example, Dutch professor Ewoud Hondius wrote: «The consumer the legislature [of Member State] had in mind was not necessarily the man on the Clapham Omnibus, but rather a weak person, hardly able to read a contract, and in need of information about every conceivable item. But this is not the consumer notion in the European directives, and especially not in the case-law of the European Court of Justice. Their consumer is the well-advised citizen who wishes to make full use of the internal market».24 Moreover European law has not still clarified whether consumer must prove that purposes of his activities are outside his business or professional interests and craft. It is not clear, should a person, who simultaneously acts both for personal interests and business, professional and trade purposes, be treated as a consumer? Nevertheless the European concept of terms ‘consumer’ and ‘trader’, from our point of view, seems to be more logical and well considered than Russian one. Obviously, the latter needs serious improvements as it outlines the sphere of consumer legislation regulation. The European concept, in our opinion, should be regarded as an international standard of ‘the soft law’ for Russia.

21 Hans Schulte-Nölke, Christian Twigg-Flessner, Martin Ebers. EC consumer law compendium: comparative analysis.- Universität Bielefeld, 2007.- page 683 22 Cape Snc v Idealservice Srl (C-541/99) and Idealservice MN RE Sas v OMAI Srl (C-542/99) 23 For example, see Корнилов Э. Закон о защите прав потребителей \\ Законность.- №12, 1999 24 Ewoud Hondius. The Notion of Consumer: European Union versus Member States \\ Sydney Law Review.- p.94

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Consideration of it may promote adaptation of Russian legislation to the further economic integration with the European countries (especially with the members of the WTO) and improve quality of consumer protection on the financial markets and in other consumer relations. The afore-cited analysis will help us in the subsequent research of European standards for consumer protection. That is why the study mentioned above appears to be a necessary condition of comparison of European and Russian consumer protection institutions in context of financial markets. Within the borders of our research we shall pay attention to already mentioned Directive 93/13/ЕEС and Directive 2005/29/ЕС.

Unfair conditions of trader-to-consumer relationships on the financial markets As noted above, neither Russian, nor European law contain special consumer protection norms regulating relations on financial markets. Therefore general norms are applied to these relations. So, European standard of consumer protection is based on such general norms. In this sense, what is the conceptual idea of consumer protection in the European Union? The two European Directives will help us to answer this question. First of all, we are speaking about the Directive 93/13/ЕEC concerning unfair terms in consumer contracts. The Directive pays priority attention to the contracts of adhesion, which are known as widespread on financial markets and dangerous for consumers legal instrument. Secondly, let us briefly review some rules of the Directive 2005/29/ЕС concerning business-to-consumer commercial practice on the internal market. So in contrast to 93/13/EEC the Directive 2005/29/EC regulates extra-contractual relations. Despite the differences in nature of mentioned relations, the Directives have the same purpose of legal regulation. This purpose is the provision of parties’ equality in trader-to-consumer relations. The maintenance of equal positions is an essential attribute of European financial services business (for example, banking or insurance). In Russian law the provision of parties’ equality is not only a basic civil law principle, but also a serious legal problem raveled with intervention of foreign companies.

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The priority measure of the equality maintenance is obviously the legislative support of the consumer as far as he appears to be the weakest party of relations. That is why the legislator tends to establish several protective legal norms, which cover inter alia prohibitions of unfair contractual activities. A review of these prohibitions shall become the beginning of the present part of research. As is known, the regulations of the Directive 1993/13/EEC cover only business-to-consumer contracts (‘consumer contracts’). Financial services includes, for instance, following consumer contracts: contract of bank deposit, consumer credit contract, some insurance agreements, etc. Under the Directive 1993/13/EU, a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer. So, terms of any consumer contract, which has not been individually negotiated, may be deemed unfair as well as conditions of contract of adhesion. The Directive also provides several criteria of unfairness. Thus, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and all the circumstances attending the conclusion of the contract. Moreover, the legal fairness depends on circumstances of preliminary negotiations, particularly, of the position of parties and expected benefit of consumer. Art.5 of the Directive also states that written terms should be drafted in plain, intelligible language. Since difficult terminology is traditionally used in the financial markets, this statement plays an important role in the financial relations. Thus, in view of an abstract scope of legal norms, the admission of their unfairness generally depends on judicial discretion. However the Directive (annex 1) provides a recital of terms which, in any case, should be deemed unfair. For instance, the recital includes: inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations; providing unreasonable penalties for non-representation of consumer’s obligations; enabling the seller or supplier to alter 325 Seventh International HSE Summer School «Baltic Practice» ·2007 unilaterally without a valid reason any characteristics of the product or service to be provided, etc. Hence, the Directives perform two main rule-making methods of unfairness prohibition: 4. Establishment of legal definition and peculiarities of unfair terms; 5. Establishment of a “black list” of unfair terms. While the first method implies judicial discretion, the second one provides a casuistic legal regulation. The first method is connected with the concept of unfairness in interpretation of the Directive. The second method seems to solve the problem of admission of unfairness. Natheless, according to the Report from the Commission on the implementation of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, the latter may spur the courts disregard the conception of unfairness and justify their decision only on the annex 1.25 The Member States are obliged to provide that unfair conditions may not bind the consumer, in spite of the validity of other terms of contracts. The rules mentioned above, tend to provide the equality of parties and, consequently, protect the consumer interests. Though, extra-contractual relations are outside the ambit of these rules. That is why, the scope of Directive 2005/29/EC established in 2005 includes consumer protection in such relationships. The Directive covers business-to-consumer commercial practices. The term means any act, omission, course of conduct or representation, commercial communication including advertising and marketing, by a trader, directly connected with the promotion, sale or supply of a product to consumers. Obviously, the term ‘products’ extensively implies also services and, inter alia financial services. In our opinion, this ambiguous wording complicates the notion that makes law-enforcement difficult. European lawyers also share this opinion and points out that the definition makes it easy to adjust the nature of different relation under unfair commercial practice.26 According to general rule, the unfair commercial practice is prohibited in the EU. A commercial

25 COM (2000) 248 final, Brussels 27.04.2000 26 Howells G., Micklitz H., Wilhelmsson T. European Fair Trading Law: The Unfair Commercial Practicies Directive.- Ashgate Publishing, 2006.- p.54

326 Seventh International HSE Summer School «Baltic Practice» ·2007 practice shall be unfair if: (a) it is contrary to the requirements of professional diligence, and (b) it materially distorts or is likely to materially distort the economic behaviour of consumer. The art.2 (h) defines the ‘professional diligence’ as the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers, commensurate with honest market practice and/or the general principle of good faith in the trader’s field of activity. European law doctrine sometimes similizes professional diligence with the common law institution of ‘duty of care’. Though, professional diligence has obviously much more extensive notion.27 The institution of unfairness also includes another interesting institution which called ‘average consumer’.28 This is an aggregate dimension which characterizes trader’s target group of consumers. The European Court of Justice states that ‘average consumer’ means a consumer who is ‘reasonably well informed and reasonably observant and circumspect’.29 As is obvious, the criteria of the unfair commercial practice, as well as the criteria of unfair contractual terms, are not detailed by legal norms. Though, with a glance of main purpose of this regulations (harmonization of Member States legislation and establishment of unified international standards), the legislator’s position appears to be well-logical. EU law covers several forms of unfair commercial practice shown on the scheme below:

Scheme 1

Unfair commercial practice

Misleading practice Aggressive practice

Action Omission

27 See, Abbamonte G. The Unfair Commercial Practices Directive and its general prohibition \\ Swedish studies in European law.- Hart Publishing, 2007.- vol.1.- p.22 28 The yearbook of consumer law 2007 | edited by G. Howells.- Ashgate Publishing, 2006.- p.168-170

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‘Misleading practice’ means activities traders carry out in the promotion and sale of products. The Directive states 3 following criteria of the misleading practice: (1) commercial practice is based on false information; (2) trader’s activities tend to mislead consumers; (3) commercial practice causes the consumer to take a transactional decision that he would have otherwise not taken. In case of omission, trader does not provide to consumer any information which the latter needs to make an informed choice. Omissions often take place in the financial markets. For instance, banks may provide to borrower inexhaustive information about the credit. When a broker does not represent to a client full information about stocks in the stock market, he performs the omission either. Aggressive practice is a new form of unfair commercial practice recognized by EU legislation. The practice is considered aggressive, if a trader brings pressure to bear on a consumer for compel him to make an unfavorable decision. Besides mentioned forms of unfair commercial practice, the Directive provides a ‘black list’ of actions which are deemed to be unfair in any case. The ‘black list’ covers withholding of documents which makes consumer unable to enjoy his rights; promising of free of charge delivery of products connected with subsequent unilateral alteration of terms by the trader, etc. The forgoing rules preventing unfair terms and practices have binding force in all the Member States. We have intentionally avoided the comparison of European and Russian legislation until this moment in purpose of explicit description the EU standards. In this sense, our following discourse needs some comparison of European and Russian norms. However, so far as deep scientific-theoretic research is outside the present article, we shall not attempt to provide a comprehensive comparative analysis below. The aims of Russian legislation development demand some analysis useful at least in law practice deflection. Thus, in our opinion, the following stage of the research should seek to find principal differences between European and Russian legislations in the issue of consumer protection against the unfair relations.

29 Case C-210/96, Gut Springenheide GmbH and Rudolf Tusky v Oberkreisdirektor des Kreises Steinfurt – Amt für Lebensmittelüberwachung \\ European Court reports, 1998.- p. I-04657

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Well, then do the institutions of unfair terms and practices correspond to Russian legal regulations? As shown at the beginning of the research, Russian law includes some consumer protection institutions and inherent notions of ‘consumer’ and ‘trader’. Nevertheless, there is no the concept of fairness in Russian law, that is the base of consumer protection in the EU. As may be seen with half an eye, unfairness is the main criteria of prohibited contractual terms and commercial practices. In spite of Russian law has not still established any analogous concepts, in some cases statutes mention the term ‘unfairness’. Though, this fact indicates neither a well-developed institution nor even a legal definition of fairness. Whereas both Russian and European lawyers have already produced some fundamental researches of fairness concepts, we shall not provide the same analysis in present article.30 In this wise, let us focus on some peculiarities of the reviewed norms connected with fairness. First of all, the Directives 1993/13/EEC and 2005/29/EC prescribe certain criteria of unfairness. Furthermore, the EU has obviously developed an inherent conception of fairness which may have not regarded to Member States’ national legislations. For example, before enacting of the Directive 2005/29/EC, some Member States (Denmark, Belgium, etc.) had produced their national concepts, while others (Ireland, Italy, etc.) had not developed their laws in that way.31 The Green Paper concerning consumer protection mentions the need of national concepts harmonization and development of criteria of unfair practice with an eye to exclude possible diversification of national laws on this issue.32

30 The issues of EU institutions of fairness are described here: Howells G., Micklitz H., Wilhelmsson T. European Fair Trading Law: The Unfair Commercial Practices Directive.- Ashgate Publishing, 2006 или Coteanu C. Cyber consumer law and unfair trading practices.- Ashgate Publishing, 2005. The matters of fairness in Russian law: Новицкий И.Б. Принцип доброй совести в проекте обязательственного права \\ Вестник гражданского права. - 2006.- №1.-т.6.- стр.124-181. and Фогельсон Ю.Б. Оговорка о добросовестности в договорном праве России 31 . G. Abbamonte. The Unfair Commercial Practices Directive and its general prohibition \\ Swedish studies in European law.- Hart Publishing, 2007.- vol.1.- p.22 32 COM(2001) 531 final, Brussels, 02.10.2001.- p.13

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One more important matter is that the Directive 1993/13/EEC and the Directive 2005/29/EC differ the criteria of unfairness. Consequently, the notion of fairness depends on certain relations. Thus, whereas (7) of the Directive 2005/29/EC prescribes that established legal norms (includes the rules of fairness) cover only commercial relations and pay no attention to the morals of Member States. The provision certainly limits the scope of application of fairness principle. However, in any case courts practically would pay some attention to national morals rather than base their decision solely on legal criteria. Now let us turn to Russian legislation. Despite the absence of well-developed legal construction of fairness, Russian Civil Code (art.10) states that fairness is the characteristic of the process of exercising the rights. That means fairness is the characteristic of entity’s legal behaviour. Furthermore, despite an absence of general duty of subjects to operate fairly, some acts none the less contain a proviso of fairness. Particularly, art.3 (2) of the Federal Law ‘On the stock market’ demands broker to execute client’s assignments fairly.33 In any way, that provision could hardly pretend on establishment of general civil law principle of fairness. Art. 10 (3) of the Civil Code only deprives unfair entities from legal protection. In contrary to Russian law, European norms directly prohibit any behaviour which may cause unfair consequences (see art.5 (1) of the Directive 2005/29/EC). One more key point is an absence of bifurcation of unfair business-to-consumer relations on unfair contractual terms and unfair commercial practice in Russian law. Moreover the latter does not even recognize commercial practices. Nevertheless, some similar contractual terms regulations could be found in Russian and European acts. It will be reminded that, art.3 of the Directive 1993/13/EEC regulates standard conditions. So, standard conditions are not individually negotiated and contained in any contract. In contrary, the Civil Code provides such conditions only for the contract of adhesion. According to art.428 (2), even if the contract pro forma responds to the legislation, it may be terminated or altered in the view of following conditions:

33 The Federal Law ‘On the stock market’ of 2.04.1996 No. 39-FZ

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1. contractual terms deprive the party’s rights, which are usually granted by such contracts; 2. contractual terms exclude or limit the responsibility of the other party for the violation of the obligations; 3. the contract contains other terms, clearly onerous for the affiliated party, which it would have rejected, proceeding from its own reasonably interpreted interests, could it have taken part in defining the contract terms. Since these conditions indicate unfair, unequal result of transactions, they may be deemed as de facto Russian criteria of unfairness of adhesion contract. As far as such activities are, in fact, unfair, they could not be deemed as unfair in legal practice due to an absence of legal institution of unfairness. It seems to be also significant that the Directive 1993/13/EEC regulates exactly contractual terms and Russian Civil Code (art.428), in contrary, points out the unfair result of transactions that means unfair contract. Unfairness of contract is undoubtedly connected with unfairness of its conditions. Hence, the reviewed Russian and European legal constructions have very similar concepts. On the other hand, they have an important difference too. EU construction of legal regulations pays attention to the unfairness of each contractual term. That illustrates an inductive logic of the law-making: moving from specific (the contractual term) to general (the whole contract). Contrariwise, Russian law draws on deductive logic: moving from the general (the whole unfair contract) to specific (the unfair term). We give preference for the European concept because of following reasoning. The art. 428 of the Civil Code does not discriminate between conditions for termination and condition for alteration of contract. In some cases this problem may cause unreasonable reinforcement of consumer’s position affected the equality of parties. In this sense, the Directive 1993/13/EEC (art.6 (1)) declares invalidity of unfair conditions aside from validity of other conditions and the contract in whole. Under the Directive only essential conditions may cause nullity of contract. Let us now compare some conditions of unfairness \ nullity provided by international standards of the EU and Russian law. Firstly, we shall focus on conditions of art.428 (2) mentioned above. Although they are believed to be drafted in an abstract way, they seem to be rather concrete in correlation with 331 Seventh International HSE Summer School «Baltic Practice» ·2007

European ones. While the Directive grants the recognition of unfairness to court discretion by establishing some general criteria, Russian conditions have a lot of similarities with rules of annex 1 of the Directive. For instance, norms concerning unreasonable exclusion or limitation of liability appear to be akin with provisions stated by sub-points a) and b) of the annex. The condition, which incorporates deprivation of rights usually granted by such contracts, in our opinion, also correlates with EU position of this matter. In spite of the absence of akin norm in European law, this condition may be regarded as a traditional one for Occidental law. Particularly, it corresponds to the doctrine of reasonable expectations protection.34 Though, the third criterion seems to be the most interesting. The formula ‘other terms, clearly onerous for the affiliated party, which it would have rejected, proceeding from its own reasonably interpreted interests, could it have taken part in defining the contract terms’ makes the recital contained in art.428 uncompleted. European law enables to negotiate some terms in this situation, under condition that it would not suffer the nature of standard contract (the art.3 (2) of the Directive 1993/13/EEC). The comparative analysis shall also cover one more issue. Contrariwise to the EU, Russian law does not prescribe to expound the contractual terms in a plain, intelligible way. The rule state by the art.5 of the Directive is a reflection of a transparency principle well-known in Europe. Consequently, the practice of misleading of the consumer by using difficult terminology and small fonts has got implanted in our financial markets. Thus, the transparency seems to be especially urgent in insurance relations. Relations concerning establishment of contractual terms and regard of reasonable expectations in business-to-consumer transactions are also regulated by the Directive 2005/29/EC. That means they are included into commercial practice. Despite Russian law does not recognize the commercial practice, some rules of the Civil Code aims to regulate relations correlated with the latter. We shall remain that the unfair commercial practice in the EU is connected

34 For example, US law provides the ability of weakest party to pretend on reasonably expected benefit. In this case, reasonable expectations are based on the information about the res and may even contradict contractual terms. See: Фогельсон Ю.Б. Оговорка о добросовестности в договорном праве России

332 Seventh International HSE Summer School «Baltic Practice» ·2007 with ignoring of professional diligence provisions and breaching consumer interests. The Civil Code does not include demands both for professional diligence and fairness. On the other side, art. 451 (2) seems to have provisions related to the professional diligence institution. In any case, this institution still has not been well- developed. The second criterion of unfair practice (breaching consumer interests) partly connected with Russian provisions that prohibit abuse of rights. Consequently, despite the absence of unfair practice institution in Russian law, the legislation contains several prohibitions and limitations akin to commercial practice in Europe. For example, art. 178 of the Civil Code states nullity of misbelief transaction (compare with EU misleading practice). Art.7,8 and 9 of the Consumer protection act demands the provision of information to consumer for the purpose of prevention of misleading practices. Prohibition of aggressive practices corresponds to art. 179. Thus, it prohibits transaction concerning with fraud, violence, threat malevolent agreements difficult conjuncture, etc. Hence, Russian law tends to prohibit transactions appears to be a result of unfair commercial practice. This is the main limitation of unfair behaviour. So, activities of an entity may be deemed unfair, if they result in unfair contract. As is shown, this concept has a lot of similarities with European legal regulation, which also pay attention to the result of transactions. We shall point out an absence of any systematization of legal rules similar to commercial practice in European law. That also illustrates an absence of developed appropriate legal institution in Russia. Therefore, European consumer protection system, in our opinion, appears to be much more versatile rather than Russian legal norms. That is why, EU law provides better consumer protection, than Russian legislation.

Summary Let us resume our research. Firstly, the majority of Member States are members of the WTO. Russia will become a member of the WTO in the nearest future. That means Russian financial markets will move closer to European ones in the nearest future while the standards of market regulation have been still different. 333 Seventh International HSE Summer School «Baltic Practice» ·2007

That is why, European standards reviewed above, in our opinion, will become standards of the soft law for Russia. Despite Russia is not legally obliged to follow them, the comprehensive economic integration depends on the standards anyway. Thus, harmonization of national legislations and, particularly, consumer protection laws is required. The present research is focused on the most important provisions, which form the basis of consumer protection. So, we reserve a vastitude of issues for further research. However, the above reasoning gives us a ground for a summary. Nowadays Russian consumer protection legislation is not as developed as European one. The comparative analysis shows us the need of improvements of consumer notion and some cornerstone legal institutions. This point is very important, but it is not the main summary of the research. The main summary is following. As shown above, both Russian and EU consumer provisions are burdened by abstract categories. For instance, they are: fairness, professional diligence, professionalism, reasonable expectations, etc. No one monocracy has not avoided application of these terms yet. Though, the EU successfully establishes its legislation contained abstract terms with regard to judicial discretion. The criteria and methods of application of terms and concepts mentioned in the research and provided by the Directives form an international standard of consumer protection. Obviously, this standard plays an important role in financial market regulation. Russian legislation contains abstract terms as well. However Russian laws do not provide comprehensive criteria for them. This matter results in absence of systematization of law and decrease or even absence of consumer protection in the financial markets. It also sophisticates Russian legal practice. Meanwhile, a well-known theoretical thesis states that effective legal regulation of social relations depends on the systematization of law provisions. Finally, we shall take into account and partly adopt European experience in consumer protection for the purpose of avoidance of collisions between Russian and European entities. In our opinion, it may assist the development of Russian legislation. However we do not encourage a total replication of European legal norms. Nowadays they exactly form the minimum standard of consumer protection, which Russian law system should attempt to aspire by developing its legal institutions. 334 Seventh International HSE Summer School «Baltic Practice» ·2007

Nikita Danilov Principles for financial supervision and financial systems activities: solvency, transparency, financial stability, accountability

Significance of the principles and their legal sources Present-day international financial bodies lay down principles for financial supervision and financial systems activities. In this work four main principles will be analyzed: solvency, transparency, financial stability, liability. These principles are established by such bodies as The Basel Committee on Banking Supervision, International Organization of Securities Commissions (IOSCO) and International Association of Insurance Supervisors (IAIS). It is necessary to mention that the main aim of establishing such principles is implementing in national law systems. For its turn, the aim of such implementation is dual. From one hand, it is improvement of national financial systems. From another hand, it is securing of international financial markets. As stated in the document “Core principles For Effective Banking Supervision” (worked out by The Basel Committee on Banking Supervision), weaknesses “in the banking system of a country, whether developing or developed, can threaten financial stability both within that country and internationally. The Committee believes that implementation of the Core Principles by all countries would be a significant step towards improving financial stability domestically and internationally and provide a good basis for further development of effective supervisory systems”. What is the significance of the principles for development for national law systems? From one hand, the principles are basic references for national supervisors and financial institutions and should guide public bodies while drafting legal documents, whether normative or not. So, the principles have a mediated influence on development of the law system. From other hand, such principles may be used directly. To my mind, such principles 335 Seventh International HSE Summer School «Baltic Practice» ·2007 are analogous to constitutional principles that are at length detailed in special legal acts, but also have a direct action in a law system. It is essential to say that the principles are detailed in analyzed documents: international financial organizations while working out documents are guided by a commonly admitted law principle of formal certainty and form a possible set of concrete possibilities. The principles are also significant for the subjects of law. Firstly, realization of the principles leads to supporting interests of different individuals and legal entities (insured persons, investors, depositors etc.). Realization of principles can raise adequate provision of information used by financial services consumers, minimize financial and other consumers’ risks. Such realization can help the consumers to forecast potential results of financial activities, that is, for example, “very important at long-term life insurance”1. Secondly, realization of the principles should in a positive way influence the activities of state formations. Transparent and stable functioning of financial institutions is a way of opportune and profound in payments into budgets of all levels and off-budget funds; such functioning also helps to monitor financial systems (i. e. investigate and control accumulation, disposal and usage of financial assets), take reasoned administrative and economical decisions concerning coordination, improvement, stimulation and management of financial systems and institutions (for example, concerning elements of taxation in accordance with the level of benefits). It is obvious to emphasize that Russian law system in many aspects correspond the four principles. But, unfortunately, realization of legal norms by public bodies and officials is not adequate. Principles of international financial organizations could play a role of leading light in the sphere of Russian Federation incorporation into international financial area; in other words, the principles could play a role of an additional incentive leading to formation of stable and transparent financial system of Russia, integrated into international financial markets. So it is possible to make an important conclusion that observance of international financial standards is a means of entry into international financial markets; skipping of them doesn’t cause

1 Цыганов А.А., Быстров А.В. Основы организации страхования в Интернете: М., «Анкил», 2005. С 17.

336 Seventh International HSE Summer School «Baltic Practice» ·2007 any legal consequences, but excludes a country from mainstream financial activities.

Transparency According to principle 21 of “Core Principles for Effective Banking Supervision” supervisors “must have a means of collecting, reviewing and analyzing prudential reports and statistical returns from banks on both a solo and a consolidated basis, and a means of independent verification of these reports, through either on-site examinations or use of external experts”. According to principle 22 (that is closely connected with principle 21) supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with accounting policies and practices that are widely accepted internationally, and publishes, on a regular basis, information that fairly reflects its financial condition and profitability”. It is necessary to emphasize that activities of supervisors is to be based on the principle of transparency. This is stated in principle 1 (Objectives, independence, powers, transparency and cooperation). Principle 14 of the document “Objectives and Principles of Securities Regulations”, worked out by IOSCO, states: there should be “full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions”. Also principle 27 states: regulation of secondary markets should promote transparency of trading. Commentary to this principle contains the definition of transparency: transparency may be defined as “the degree to which information about trading (both for pre-trade and post-trade information) is made publicly available on a real-time basis. Pre-trade information concerns the posting of firm bids and offers, in both quote and order-driven markets, as a means to enable investors to know, with some degree of certainty, whether and at what prices they can deal. Post-trade information is related to the prices and the volume of all individual transactions actually concluded”. In the commentary it is said about the significance of transparency on the secondary market: ensuring “timely access to information is a key to the regulation of secondary trading. Timely access to relevant information about secondary trading allows investors to better look after their own interests and reduces the risk of manipulative or other unfair trading practices”. 337 Seventh International HSE Summer School «Baltic Practice» ·2007

Insurance Core Principle (ICP) 4 of the document “Insurance Core Principles and Methodology” stated that the supervisory authority “conducts its functions in a transparent and accountable manner”. So this principle sets transparency only for supervisors, not for the whole insurance system. In the explanatory note to this principle it is said that the “public’s knowledge of and appropriate consultation on the supervisory process is important to the effectiveness and credibility of the supervisor. Accordingly, the supervisor should make available to the public written information about its organization and activities”. ICP 26 “Information, disclosure & transparency towards the market” establishes the transparency principle concerning activities of insures: the supervisory authority “requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed”. The explanatory note comments this principle: public disclosure “of reliable and timely information facilitates the understanding by prospective and existing stakeholders of the financial position of insurers and the risks to which they are subject, regardless of whether they are publicly traded or not”. “Supervisory authorities are concerned with maintaining efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders. When provided with appropriate information markets can act efficiently, rewarding those insurers that operate effectively and penalizing those that do not. This aspect of market discipline serves as an adjunct to supervision”.

Financial stability Financial stability is, from one hand, a condition of company’s financial resources and, from other hand, methods of accumulation, disposal and usage of financial resources; such condition and methods are to guarantee stable long-term excess of profits in comparison with losses and to guarantee solvency during the company’s existence. An important criterion of financial stability is that stable successful activities of a company should be provided with a law level of risks. Briefly financial stability may be defined as a possibility to secure a stable solvency. Solvency, in its part, is a possibility to satisfy all the financial obligations. Consequently, solvency is a short-term phenomenon and connected

338 Seventh International HSE Summer School «Baltic Practice» ·2007 with a possibility to provide lump sum payments. Contrary to solvency, financial stability is a long-term phenomenon. Financial stability of banking systems should be secured by different instruments. One of them is licensing of banking activities. Principle 3 – (Licensing criteria) of the “Core Principles for Effective Banking Supervision” states that the licensing authority “must have the power to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the ownership structure and governance of the bank and its wider group, including the fitness and propriety of Board members and senior management, its strategic and operating plan, internal controls and risk management, and its projected financial condition, including its capital base. Where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained”. Principle 9 (Problem assets, provisions and reserve) states that supervisors “must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating the adequacy of provisions and reserves”. Principle 14 (“Liquidity risk”) states that supervisors “must be satisfied that banks have a liquidity management strategy that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control liquidity risk, and to manage liquidity on a day-to-day basis. Supervisors require banks to have contingency plans for handling liquidity problems”. According principle 24 of “Objectives and Principles For Effective Banking Supervision”, there should be “a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk”. Financial stability in the sphere of insurance is provided by ICP 18 (“Risk assessment and management”). According to this principle, “the supervisory authority requires insurers to recognize the range of risks that they face and to assess and manage them effectively”. In the explanatory note it is pointed that an insurer “should identify, understand, and manage the significant risks that it faces. Effective and prudent risk management systems appropriate to the complexity, size and nature of the insurer’s business should identify and measure against risk tolerance limits the risk exposure of the insurer on an on-going basis in order to 339 Seventh International HSE Summer School «Baltic Practice» ·2007 indicate potential risks as early as possible. This may include looking at risks by territory or by line of business”. According to ICP 19 (“Insurance activity”), since insurance “is a risk taking activity, the supervisory authority requires insurers to evaluate and manage the risks that they underwrite, in particular through reinsurance, and to have the tools to establish an adequate level of premiums”. In the sphere of insurance financial stability is guaranteed by the rules concerning shutdown of insurers and their withdrawal from a market. ICP 16 (“Winding-up and exit from the market”) establishes: the legal and regulatory framework “defines a range of options for the orderly exit of insurers from the marketplace. It defines insolvency and establishes the criteria and procedure for dealing with insolvency. In the event of winding-up proceedings, the legal framework gives priority to the protection of policyholders”. In an explanatory note it is said: an insurer “may no longer be financially viable or may be insolvent. In such cases, the supervisory authority can be involved in resolutions that require a take-over by or merger with a healthier institution. When all other measures fail, the supervisory authority should have the ability to close or assist in the closure of the troubled insurer”. When analyzing “Insurance Core Principles and Metho- dology” we may conclude that the instrument of financial stability guaranteeing is an adequate and effective risk management. Minimization of risks leads to minimization if losses; this process influences financial stability in the sphere of insurance.

Solvency The principle of solvency is closely connected with the principle of financial stability. Thus, for example, Principle 3 (“Licensing criteria”) of the “Core Principles for Effective Banking Supervision” states that the licensing process, at a minimum, “should consist of an assessment of its projected financial condition, including its capital base”. Principle 9 (“Problem assets, provisions and reserves”) states that supervisors “must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating the adequacy of provisions and reserves”. Sometimes the principle of solvency is named separately from the principle of financial stability (which is more general). Principle 6 (“Capital adequacy”) of the “Core Principles for 340 Seventh International HSE Summer School «Baltic Practice» ·2007

Effective Banking Supervision” states that supervisors “must set prudent and appropriate minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses”. According to Principle 22 of the “Objectives and Principles of Securities Regulations” there should be “initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake”. In the commentary to this Principle it is affirmed that the protection “of investors and stability of financial systems are increased by an adequate supervision of ongoing capital standards. “Capital adequacy standards foster confidence in the financial markets and should be designed to allow a firm to absorb some losses, particularly in the event of large adverse market moves, and to achieve an environment in which a securities firm could wind down its business over a relatively short period without loss to its customers or the customers of other firms and without disrupting the orderly functioning of the financial markets. Capital standards should be designed to provide supervisory authorities with time to intervene to accomplish the objective of orderly wind down. A firm should ensure that it maintains adequate financial resources to meet its business commitments and to withstand the risks to which its business is subject. Risk may result from the activities of unlicensed and off balance sheet affiliates and regulation should consider the need for information about the activities of these affiliates”. A capital adequacy test should address the risks faced by securities firms judged by reference to the nature and amount of the business undertaken by the firm. ICP 23 (“Capital adequacy and solvency”) of “Insurance Core Principles and Methodology” states: the supervisory authority “requires insurers to comply with the prescribed solvency regime. This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses”. A sound solvency regime is essential to the supervision of insurance companies and the protection of policyholders. Capital adequacy requirements are part of a solvency regime. A solvency regime should take into account not only the sufficiency of technical provisions to cover all expected and some unexpected claims and expenses but also the sufficiency of capital to absorb significant unexpected losses - to 341 Seventh International HSE Summer School «Baltic Practice» ·2007 the extent not covered by the technical provisions - on the risks for which capital is explicitly required. It should also require additional capital to absorb losses from risks not explicitly identified. According to the document, in order to protect policyholders from undue loss, “it is necessary that a solvency regime establishes not only minimum capital adequacy requirements, but also a solvency control level, or series of control levels, which act as indicators or triggers for early supervisory action, before problems become serious threats to an insurer’s solvency”. The form of the solvency control level may be based on capital levels or other financial measures related to the solvency regime of the jurisdiction. “Insurance Core Principles and Methodology” establish essential criteria for defining whether the principle of solvency is observed or not. So, the solvency regime should address in a consistent manner: valuation of liabilities, including technical provisions and the margins contained therein; quality, liquidity and valuation of assets; matching of assets and liabilities; suitable forms of capital; capital adequacy requirements.

Principle of liability Before analyzing the principle of liability it is necessary to remark that in some contexts the term “liability” is absolutely synonymous to the term “accountability”. But, from the position of theory, “accountability” means monetary liability or obligation to provide somebody with accounting. In the introduction to “Insurance Core Principles and Methodology” it is stated that the supervisory authority “must operate in a transparent and accountable manner”. It is also stated that the supervisor “must recognize that transparency and accountability in all its functions contribute to its legitimacy and credibility, and the efficiency and stability of the market”. In such a way a mediated objective of the liability principle is stressed: guaranteeing of appropriate financial markets functioning. ICP 3 (“Supervisory authority”) of “Insurance Core Principles and Methodology” establishes that supervisory board “is operationally independent and accountable in the exercise of its functions and powers” and “treats confidential information appropriately”. In the explanatory note to this principle it is stated that “independence, accountability, transparency and integrity interact and reinforce each other. Transparency is a vehicle for 342 Seventh International HSE Summer School «Baltic Practice» ·2007 safeguarding independence, ensuring accountability, and establishing and safeguarding integrity”. ICP 4 (“Supervisory process”) establishes that the supervisory authority “conducts its functions in a transparent and accountable manner”. Explanatory note imparts that the supervisory authority “must be accountable for the actions it takes in fulfilling its mandate to those who delegated the responsibility - the government or the legislature - as well as to those it supervises and the public at large. It should provide the rationale for decisions taken”. Valuable realization of supervisory bodies’ liability assumes a complex of measures and approaches, like “legislative and executive oversight, strict procedural requirements, and disclosure”. In addition “the supervisory authority establishes internal processes for ensuring it is meeting its objectives and complying with legislation”. Essential criterion of the ICP 4 is that the administrative decisions of the supervisory authority “can be subject to substantive judicial review”; the process to appeal supervisory decisions should be “specified and balanced to preserve supervisory independence and effectiveness”. According to Principle 1 (Objectives, independence, powers, transparency and cooperation) of “Core principles For Effective Banking Supervision” each supervisory authority should possess be accountable for the discharge of its duties According to Principle 2 of “Objectives and Principles of Securities Regulations” the regulator “should be operationally independent and accountable in the exercise of its functions and powers”. In the commentary to this principle it said that The capacity of the regulator to act responsibly, fairly and effectively will be assisted by: a clear definition of responsibilities, preferably set out by law; strong cooperation among responsible authorities,13 through appropriate channels; adequate legal protection for regulators and their staff acting in the bona fide discharge of their functions and powers.

Realization of principles in Russia It is necessary to mention that in Russia the analyzed principles have a half-to-half realization. Thus, for example, some experts suppose that minimal authorized capital for insurers (capital is established by legislation) is not sufficient – now it amounts 30 million rubles (about 900 000 euro). So, the interests 343 Seventh International HSE Summer School «Baltic Practice» ·2007 of insured are not guaranteed at a sufficient level, and the principles of transparency and financial stability are not provided. In Russia the principles of liability and transparency are realized at the lowest level. According to the Conception of insurance developing in Russia (approved by Russian Government), informational insufficiency on an insurance financial market causes problems for potential insured people in the process of searching an insurer. The Conception tells about the problem that is so far relevant: insured do not have an access to sufficient information concerning insurers. In Russian legislation we may find a lot of losses concerning transparency of the insurance supervisor. According to the Law “About organization of insurance affairs in Russia” (clause 32.6) the only cause of constraint or suspension of license may be avoidance of Federal Authority for Insurance Supervision injunction. In this law an exhaustive list of reasons for injunction is established. From one hand, this list is exhaustive. From other hand, vague statements are used in the list. These statements presume some freedom when making an injunction2. According to the Law, “Injunction may be issued in the case of insurer’s misuse of legislation rules concerning formation and allocation of insurance funds and other funds that guarantee insurance payments”. “Injunction may be issued in the case of “misuse of requirements concerning correspondence between assets and entered obligations, other requirements concerning financial stability and solvency. So, uncertain statements cause groundless bureaucratic misuse3. Such situation is contrary to the principle of transparency – the criteria for injunctions are not concrete. It would be interesting to mention about comparative research of web-sites of different central banks (the research was made by Plekhanov4). According to the research, the web-site of Russian Central Bank in comparison with central banks of other countries provides sufficient statistical information, but do not

2 Никифоров А.В. Некоторые правовые проблемы ограничения, приостановления или отзыва лицензии // «Юридическая и правовая работа в страховании», 2005, N 4. 3 Никифоров А.В. Некоторые правовые проблемы ограничения, приостановления или отзыва лицензии //«Юридическая и правовая работа в страховании», 2005, N 4. 4 www.icss.ac.ru/publish/analysis/am120.pdf

344 Seventh International HSE Summer School «Baltic Practice» ·2007 provide sufficient information concerning monetary accommodation and Bank’s researches. Another significant information is kept into Webranking, a research that is provided annually by Swedish consulting company Hallvarsson & Hallvarsson (H&H) and Financial Dynamics agency. According to this research (that involved 30 important Russian companies), only 2 issuers disclose financial information by the usage of Internet in accordance with European standards.5 The principle of supervisory bodies liability is not adequately provided into Russian law system; the problem of liability ambiguity and absence of practical realization of liability measures is general for Russian Federation. Decision of Superior Arbitrary Court N 5234/95 of 21 November 1995 is indicative, regardless of the fact that it was admitted quite a long time ago. This Decision shows us a good example of law enforcement practice. In cause of wrongful retainer of monetary assets (a tax body lawlessly charged off the sum of association’s understated profit and financial sanctions) legal entity sued a tax body for uncollected profits. Inferior courts answered to a claim, referring to Article 395 of the Russian Civil Code. But Superior Arbitrary Court reversed the judgment of inferior courts and stated that it is not possible to use civil legislation when privity is based on administrative relationships, including tax and another financial relationships (if different is not provided by legislation). Also (it is necessary to emphasize on this point) Superior Arbitrary Court stated that the plaintiff didn’t present documents proving that the plaintiff took adequate measures, made necessary preparations concerning profits receiving, didn’t prove absence of debts, didn’t prove the possibility of reality of potential profits receiving and the amount of these profits. Any entrepreneur or director of legal entity would arrive at an idea that it is quite impossible to present documents which are listed in this paragraph and to prove all the preparations. Another problem is connected with difficulties concerning levy of monetary assets from public formations in cause of lawless actions (inaction) of supervisory boards and their officers. Thus, for example, Clause 2 of Article 242.2 of Budget Code states that receiving order (that gives you a right to exact damages from

5 РБК daily, 21 august 2007 г., № 154 (223). P. 1.

345 Seventh International HSE Summer School «Baltic Practice» ·2007 budget, provided that damages were caused by unlawful activities of public body or its officials) is to be carried out in 3 months. But there is no liability for a financial body (that is responsible for exacting) in cause of delay. It is necessary to mention positive moments concerning Russian integration into international financial and economical area. Thus, in the research “Banking Supervision. European Experience an Russian Practice”6 (the editor – Michael Olsen) that was prepared in the framework of collaboration program “Russia – European Union”7 states that in the process of regulation Bank of Russia directs his attention toward the best international banking standards, first of all “Core principles For Effective Banking Supervision” by The Basel Committee on Banking Supervision. As experts of International Monetary Fund and World Bank think, at present time regulation of Russian banking sector is to a great extent correspond with Basel principles.8 In conclusion it is necessary to emphasize that implementation and observance of rules of recommendation (i.e. rules of soft law) are a pledge of Russian incorporation into international financial and economical area. A lot of recommendations still have not been reflected into Russian legislation; law enforcement is at a down level.

6 www.banks2ifrs.ru/cgi-bin/get.cgi?file=1400 7 http://www.banks2ifrs.ru/ 8 www.banks2ifrs.ru/cgi-bin/get.cgi?file=1400

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Anna Klimova, Ramil Fayziev International Financial Standards and practices of Russian banking and financial sector

General view on international standards We suggest that notion of international standard should be studied thru new financial architecture (NFA). Under new financial architecture we mean bulk of rules, agreements and principles that regulates international financial relations, as well as various institutions, which are empowered to establish and execute them. It is quite clear that under new circumstances, when macroeconomic stability can not secure stable functioning of financial system, global revise of some theoretical principles and wide range of reforms is required. Main vectors of such reforms were worked out and agreed by international institutions, i.e. International Monetary Fund, World Bank, Group of 30, Institute of International Finance Inc. These vectors are listed below: • Transparency; • Strengthening the control over financial systems; • Active participation of international financial institutions and agencies in financial crisis prevention; • To get involved bodies of business establishment; • Regulated liberalization of capital markets; • International standards elaboration; • Making researches on offshore financial systems. We suggest that principles mentioned above are closely tied to each other. For us it is quite clear that international financial standards should be established as guiding policy for countries, which develop their national systems in order to integrate with international economics and finance. Currently, international standards are not obligatory. We call them “soft” law. Nevertheless, there is no contradiction with the fact that majority of standards are presented in international acts and multilateral international treaties. Speaking about “soft” law 347 Seventh International HSE Summer School «Baltic Practice» ·2007 we discuss execution methods of international standards, because nowadays there is no universal way of enforcement of them for all countries as a keystone of national financial legislation1. In the Forum concerning the international stability worked out next definition of international standard: “In standards generally accepted principles, methods and policies of any sphere, are stated”. Significance of international standards rises. The main reason is permanent crisis caused by the means of adverse selection and moral hazard. In financial sphere international standards are estimated as recommendations and regulations, which help to consolidate and upgrade national financial systems. International standards are promulgated not by separate countries but groups of specialist from international financial-political institutions. That’s why these recommendations are widely practiced. Nevertheless standards have no binding force until national act on their base is adopted. So we can obtain that promulgation of international standards is original preparatory stage for national legislation, as well as international standards act as working material for legislator. As we mentioned there is no enforcement mechanism of international standards but inobservance usually causes financial shock. Generally the only effective remedy is apprehension to lose reputation of state. Thru this, international standards are intended to convert into rules of international law, even though it takes long time. The main target of international standards elaboration is harmonization of relations in the selected areas, as well as determination of financial guideline. And the main tasks of standards are consumers’ and investors’ protection, integral global market, effective global financial system. We note that in order to be effective, international standard has to be actual and meet modern requirements. Standards are intended to be revised after period of time.

1 I.I Lukaschuk, “Mezhdunarodnoe publichnoe i chastnoe pravo” Journal, 2007, N 1.; I.I Lukaschuk, “Mezhdunarodnoe publichnoe i chastnoe pravo” Journal, N 2, 2002.

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Main characteristics of international standards, their analysis criteria As we mentioned above, standards are principles and methods presented in the international documents. Legal theory suggests that international rules are mandatory or non-mandatory if we speak about obligation, and in primary or derivative form. Foreign scientists note that standards generally stated in “soft” law, as well as in primary and derivative documents. According to this we obtain first characteristic of international standard. International legal principles suggest that standards have to be presented in the international legal documents, codes and treaties (representation in international documents, codes and agreements). There are several requirements to international documents. International law sources establishing standards are required to be promulgated by international agency or stated within multilateral agreements. Rarely some regular non-official rules of international relations are adopted as a legal practice. It is obvious that such documents are in written form, translated into working languages of agency as well as into national languages, and registered. There are no standard in the form of gentlemen agreement. Nowadays international standards are gradually codified. We suggest that international standards would commence on national legislation. So, some federal standards of USA, for example US GAAP, should be considered as international standards. Absence of assurance report that meets US GAAP requirements usually causes drop in companies’ stock price. It indicates that several US financial standards establish international order of financial assessment. The second characteristic of international standard is its legal enforcement mechanism. Peter Nobel2, Switzerland, considers that the only enforcement remedy of standards generally stated in “soft” law is fear to stain state’s prestige. Nevertheless he also notes that some kinds of international standards presented in the symbolic treaties (Basel I, II) or elaborated by international agency having imperative power are mandatory for all bodies of global financial system. Russian scientists, for example professors Lukaschuk and Talalaev, as well as Tomáŝ Tőzser from Slovakia, suggest that the only mode to enforce international standards is to incorporate them

2 Peter Nobel, Swiss Finance Law and International Standards.

349 Seventh International HSE Summer School «Baltic Practice» ·2007 in national legislation as general rules and principles of national legislation. Tomáŝ Tőzser notes that many countries act in this way in order to sustain financial stability. We consider that both points of view are notable, moreover they supplement each other. It is obvious that some states have enough political weight to neglect international financial principals. For example Switzerland has original point of view on many questions of global financial system. But no state wants to lose it face; therefore importance of state’s prestige in standards’ enforcement process is priceless. Second thesis is based upon general legal theory, which suggests that in order to be enforceable international legal regulations should be incorporated in national legislation or constitutional charter. But there are some objective difficulties because wide range of the international documents regulates relations between international legal entities. National legislation is not empowered to regulate such relations. That’s why we note that this thesis requires further studying. The next characteristic of international standard is its relevance in international law, i.e. significance in regulation of financial relations. It is clear for us that significant international documents establishing new system of financial standards are usually adopted after destructive crisis. Researches on this subject suggest that the main target of standards elaboration is to prevent financial depression. According to facts mentioned above we distinguish primary and derivative standards. Primary standards are the ones which establish fundamental principles of global financial system, affecting financial relations of all countries and resolving irreconcilable contradictions. They are stated in Bretton Woods conference documents, General Agreement on Trade in Services, etc. Majority of primary standards has mandatory power, and so non-observance leads to serious penalty or exclusion from global financial system. Derivative standards advance principles, stated in primary standards3. Usually they do not contradict each other, but there is no hierarchy of standards. Sometimes they are called as “patches”4,

3 Louis Grumet. The importance of financial transparency//The CPA Journal 4 Louis Grumet. The importance of financial transparency//The CPA Journal

350 Seventh International HSE Summer School «Baltic Practice» ·2007 which “patch up” lacunas in financial relations regulation. Generally they have high importance, although applied locally. As an example, EC directives containing specific financial regulations and resolutions of temporary commissions should be named. We suggest that the forth characteristic of international financial standard is universality. As we mentioned above standards are promulgated by groups of specialist from international financial-political institutions and usually take into account national peculiarities of involved states. In contradiction with it they establish common order and regulation of similar financial relations, as well as common requirements. This is the mean of standards adoption. International financial standards help national governments to create system, where global principles are useful. At the same time universal financial efficiency assessment system is introduced. By the mean of such system temporary crisis might be predicted. The universality of standards is displayed in situations, when application of them leads to the certain results. The last notable characteristic of national standards is portliness of the countries upholding financial standards. Under portliness we understand aggregate macroeconomic indicators and unit weight of national economics. We know that macroeconomic stability is the first cause of the financial stability, even though Asian crisis at the close of 90s had seriously examined mentioned thesis. Nevertheless macroeconomic indicators have great importance in the performing of financial policy. Thus requires the elaboration of standards which have to be sustained by states, whose net macroeconomic and financial indexes are significant. No doubt, group of “small” economics is capable to work out the effective mechanism of financial regulation, but only support of 10-15 leading countries lays it down as the international standard. Resuming our research we should note there is no single universal position of scientists regarding notion of international standard and its characteristics. This important problem requires further careful studying. Our work is a tremendous try to work out some objective criteria for standards assessment. As a result we obtained five characteristics of international standards, i.e. representation in international documents, codes and agreements, legal enforcement mechanism, relevance in international law, universality and portliness of the countries upholding financial standards. We suggest that the principles and the regulations

351 Seventh International HSE Summer School «Baltic Practice» ·2007 meeting these five requirements are intended to be international financial standards. A crucial factor for the progress and stability of the banking system in a country is the efficiency of its banking industry supervision. Herewith, the efficient regulatory principles should be applied to all industry players, including the supervisory authority itself. By the moment, a number of international principles for banking regulation have been worked out to form a general framework, which is essential for the efficient banking regulation. These principles are fixed in the document “Core principles for effective banking supervision” approved by generally recognized international organization that operates in the sphere of banking system regulation – Basel Committee on banking supervision (hereinafter – “Basel Committee”). In present work was executed the research on the question how these international principles are observed in Russian banking sector. The major banking supervision authority in Russia is its Central Bank (The Bank of Russia) (hereinafter – “CB”). However, in addition to its function to supervise the provision of banking services by Russian credit organizations the CB also has to conduct the monetary policy in Russian Federation (i.e. to control the stability of rubble and Russian payment system, to issue cash money and etc.). The execution of the fundamentally different powers by the single body (CB) has brought on agenda the idea of the possible separation of the banking supervision authorities from CB’s authorities5. However, at present moment the execution of such a reform still looks like a matter of remote future. According to the articles 3 and 56 of the Federal Law “On the Central Bank of Russian Federation” the main purposes of regulation and supervision executing in the banking sphere are: • Evolution, consolidation and maintaining of the banking system stability; and • Defense of the depositors and creditors’ interests.

5 Proposals to separate banking supervision powers from CB's authorities and to transfer it to specialized federal agency arose few years ago and were fixed in the Act of Russian Government in 2006. Nowadays a bill for creation of mega-regulator as a self-regulating organization (which has powers for banking supervision) is under consideration of State Duma of RF. But still this idea doesn’t have a general approval because of lack of proofs that such organization will be operating efficiently.

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Let us analyze how are the Basel Committee’s “Core principles for effective banking supervision” applied in Russia. For that we’ll examine 3 main principles for the activity of banking supervisory authority: financial stability, transparency and liability. Also in the research the principle of financial stability will be discussed in regard to the business entities (banks and other credit organizations) as the other one of the Basel fundamental principles. Firstly let’s disclose the principle of financial stability. It is directly connected to the principle of independence of the banking supervisory authority, because with no financial resources there will be no opportunity to perform the supervision in the banking sector (Principle 1 of the Core principles). In compliance with the Federal Law “On the Central Bank of Russian Federation” the CB must have the minimum registered capital in amount of 3 billion rubles (article 10) and also it has a right to make profit from the banking operations and bargains connected with the performance of the CB functions (article 11). Article 2 of the Federal Law also declares the next norm: “The Bank of Russia undertakes the expenses for account of its own income”. This norm is confirmed by the next: in the annual federal Russian budget there are no expenses provided for the Central Bank activity (for instance, in the Appendix 10 “Departmental structure of expenses of the federal budget for the year 2007” to the Federal Law “On the federal budget for the year 2007”). Analyzing the problem of the financial stability principle observance in Russia I can say that it is observed regarding the supervision authority in RF due to the absence of dependence on the budget assets that are allocated to the federal bodies and the sum of which can be changed every year. Great amount of authorized capital of the CB that stated by law is also important for the financial stability of the CB. But must be mentioned that Basel principle of financial stability of the supervision body is exercised in Russia mostly because of the Central Bank other powers except to the banking supervision that mostly provides its income. Possible types of income of the CB from banking activity are defined in the article 46 of the Federal Law “On the Central Bank of RF” (for example, purchase and sale of state securities, providing of the credits and banking guarantees and etc.). Receipt of income from such activities guarantees to the CB independence in money question and provide its solvency, but this income comes not from the banking supervision authority of the Central Bank, but from its other powers. 353 Seventh International HSE Summer School «Baltic Practice» ·2007

The principle of financial stability must also be analyzed in regard to the business entities in the banking sector (banks and other credit organizations). The international principle of financial stability of the banks is based on many requirements that have to be observed by credit organizations during the different periods of their activity. Before starting the activity (before receiving a license) and during rendering of banking services requirements for bank assets compliance to the authorized ones (minimal amount of assets, correlation between the different forms of the assets, necessity of the asset assessment and others)6 have to be executed. Principle 3 of the “Core principles for effective banking supervision” of the Basel Committee defines the financial stability principle and establishes the necessity of assets structure assessment, of presence of risk management system and of the financial development prospects for the receiving of license for banking activity. Principle 6 “Capital adequacy” also describes that banking supervision authority has to adjust minimum capital for a credit organization by taking into account the present risk for rendering a particular banking services. According to the article 11 of the Federal Law “On the banks and banking activity” the minimum authorized capital for the banks is equal to the 5 mln. euro and 500 thousand euro – for the non-banking credit organizations. In distinction from the regulation of the Core Basel Principle 6 the amount of minimum capital is established in Russia not by the acts of CB, but by the Federal Law. But the control of the execution of this license requirement is performing by the CB as a supervision authority that has a power to issue licenses for banking activity. Another form of the financial stability control by CB also fixed under the paragraph 4 of the article 11 of the Federal Law “On the banks and banking activity”: the CB establishes the maximum amount of property (non-monetary) share in the authorized capital of the credit organization and list of permitted property that can be deposited as a share to the authorized capital. In addition it is established that credit organizations in Russia must have minimal amount of its own assets equal to 5 mln euro (under the article 11.2 of the Federal Law “On the banks and banking

6 Execution of these assets requirements also correlate to the principle of solvency. However, close connection and goals crossing of the solvency and financial stability of credit organizations principles allow to examine requirement to the assets as a crucial part of financial stability.

354 Seventh International HSE Summer School «Baltic Practice» ·2007 activity”). Acts of the CB established other requirements for the credit organizations for the purpose of their financial stability observance7. The observance of financial stability principle in Russia is based not only on the requirements to the assets of the organizations, but due to the sanctions for the breach of the principle. Under the article 20 of the Federal Law “On the banks and banking activity” the CB not only have a right, but must recall the license (that gives to the organizations the right for banking activity) in cases of stability principle breaking (for instance in the case of noncompliance between bank assets and its registered capital). Moreover all cases of the obligatory recall of licenses link only to the stability principle breaching, while other cases of license recall are optional due to the right of the CB. Such position established in Russian legislation regarding financial stability principle depends on its importance and special aims. The principle is directed to the defense of the 3 parts of banking sector: banks – from the bankruptcy, consumers – from losses of its money, which they deposited into the bank that meets bankruptcy process, and the state – from the economic fallings. It marks out the importance of the financial stability principle. In conclusion of the analysis of Russian regulation it can be said that financial stability principle regarding credit organizations that are active in the Russian banking sector is observed. Let’s go on to the analysis of the next principle of transparency. It is established as one of the first standards in the “Core principles” and consisted in the requirement of the transparent processes of the banking supervision (i.e., of decisions making). The idea of the transparency is also disclosing in Core Principles 19 and 21: an effective banking supervisory system requires clear understanding of supervisor’s operations by the individual banks and banking groups and requires informing the community by the supervisory authority about its day-to-day work. The requirement to inform a number of unspecified persons means

7 Let’s introduce some of these acts: Instruction of the CB № 110-I “On the obligatory operating standards of the banks” (16.01.2004), Regulations of the CB № 255-P “On the obligatory required reserve for the credit organizations” (29.03.2004) and № 232-P “On the order of reserves creation by the credit organizations in case for potential losses” (09.07.2003).

355 Seventh International HSE Summer School «Baltic Practice» ·2007 for the supervisory authority not only to present the information, but also to clarify, to ground its actions and decisions. But let’s answer to the question whether this principle is observed in Russia. Despite of the absence of this principle in the Russian legislation it takes action in Russia because of special norms and practice of application. According to the chapter 5 of the Federal Law “On the Central Bank of RF” a reporting of the Central Bank is represented as information with public access and presents annually to the State Duma of RF (including the official publication on the CB e-page). Under the article 77 of this Federal Law a duty of the CB to give answers on requests of credit organizations in the limited term (during a month) is established. Also the CB has a duty of consultation with industry players concerning the most significant activity matters. But in spite of above said the transparency principle is not observed in Russia. Under this principle the supervision authority has to motivate its decision, especially the decisions regarding the restriction and termination of the right for the banking activity. Some articles of the Federal Law “On the banks and banking activity” state duties of the CB to clarify its “negative” decisions against credit organization. For instance, refusal of CB to register a credit organization and to give a license for banking activity has to be motivated (article 16). However, under article 208 the CB is not obliged to clarify its decisions to recall the license for banking activity at all. It brings us to the situation when every CB’s decision to recall license has no motivation parts. In Bank of Russia Decrees on the recall of license only references to a paragraph (each paragraph is one of reasons for recall) of article 20 of the Federal Law “On the banks and banking activity” are presented. For example: “due to non-observance of federal laws in sphere of banking activity and of normative acts of Central Bank, essential invalidity of reporting, delay for more than 15 days in presenting of reporting and in view of multiple administration of supervision sanctions, guided by article 19,

8 There are no regulations that make the CB to clarify its decisions to recall a license not only in the Federal Law “On the banks and banking activity”, but in the normative acts (for example, in the Bank of Russia Provision № 264 of April 2, 1996 “On the recalling of a license for banking activity in RF”).

356 Seventh International HSE Summer School «Baltic Practice» ·2007 subparagraphs 3, 4, 6 of paragraph 1 of article 20 of the Federal Law “On the banks and banking activity” it is hereby ordered to recall license”9. Herewith a particular breach (as a reason for recall of license) by certain credit organization has never been disclosed. So the CB states only the norm of law as a reason for recall, but doesn’t ground the motives of the refusal, and doesn’t disclose the circumstances that had influence on the refusal. The necessity for clarifying of supervision authority decisions is a crucial component of the principle of transparency. And it has to be observed for the purpose of understanding of supervisor’s motives by industry players. But in practice this component has no real legal background and is not observed by the CB. It was illustrated on the example of recall of a license. This non-observance leads to the situation in which nearly every credit organization tries to challenge these recalls of a license. The real application of the principle will allow avoiding in many cases of bringing suits by means of which credit organizations are trying to protest unmotivated decisions of the CB. If the principle of transparency will be working it will be possible for credit organizations to estimate lawfulness of decisions and, thus, its chances for court victory. And without the observance of transparency principle in Russia there will be no trust between Central Bank and credit organizations. The last of discussed Basel principles is the principle of liability of the supervision authority (Core Principle 1). It consists in the fact that the efficiency of the banking supervision directly depends on the reality of the supervisor’s liability. Absence of supervisor’s liability in practice leads to the abuse of authorities, to the lack of uniformity in assessment of credit organizations. These facts can be a reason banking system crisis because of unpredictability of supervisor’s actions and of its mistrust on the part of industry players. Herewith the liability principle means not only restitution of violated rights (for instance, declaration of voidness of refusal to give a license), but also the duty of banking supervisory body to bear material responsibility (to reimburse losses) for its violations of the norms and its unlawful decisions.

9 Refer Bank of Russia Decree № OD-191 of April 15, 1998. Similar statements of reasons for a license recall can be found also in other CB Decrees: № OD-590 of December 12, 1998; № OD-190 o April 20, 2006; № OD-205 of April 26, 2006; № OD-230 of May 10, 2006 etc.

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In spite of the existence of the legal norms that allow challenging actions and inaction of the Central Bank, actually in practice there is no liability of the CB at all. In most cases when the CB issue unlawful “negative” decisions regarding credit organizations and then after litigation such decisions state as void there are no direct losses. But it is almost impossible to prove the presence and the amount of lost profits due to certain Russian legal norms. Under present Russian legislation (articles 15 and 393 of Russian Civil Code and article 65 of Russian Arbitration Code of practice) a plaintiff has to prove the fact of rights violation by a defendant, cause-effect relation between such violation and losses and an amount of losses. Without all these proofs a plaintiff will lose an action. But the source of impossibility to reimburse lost profits is in paragraph 4 of article 393 of Civil Code. It states that the plaintiff has to prove not only the existence and amount of lost profits, but also the undertake measures directed to lost profits receipt. Thus the reimbursement of lost profits will be executed by a court only in case of initial statement of decision to recall of a license for banking activity voidness. But in Russia there are plenty of examples of such statements without reimbursement of lost profits (for the period of unlawful prohibition of banking activity). In some cases such period of limitation or prohibition of activity lasted for a year or more. But arbitration courts always have the same reasons for refusal in lost profits reimbursement – an absence of proofs that the plaintiff undertook measures directed to lost profits receipt. Thus, only written rejections of consumers to contract with a credit organization with recalled license will be proper proofs for courts. But consumers will not apply for services rendering to the bank without license because the contract with credit organization with recalled license will be void. Therefore the regulation of article 393 of Civil Code leads to absolute impossibility for credit organizations to make the CB to reimburse lost profits. So it has to be concluded about complete absence of the liability of the CB for its actions and decisions that entailed losses of credit organizations. International core principles of the Basel committee are already reflected in Russian legislation, although they are stated in the norms not directly but impliedly. But in practice only the principle of financial stability of supervision authority and credit 358 Seventh International HSE Summer School «Baltic Practice» ·2007 organizations is observed. But there is no actual observance of the principles of transparency and liability. That’s why the correctives in the system of banking supervision are necessary for the purpose of real observance in Russia of the Basel requirements.

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Fahd Hajji Russian Outward Investments into Commonwealth of Independent States

Abbreviations Bn Billion CBR Central Bank of Russia CEE Central and Eastern Europe CIS Commonwealth of Independent States EU European Union FDI Foreign direct investments FMCG Fast moving consumer goods GDP Gross domestic product Ibid. Latin: short for ibidem: "the same place” IMF International Monetary Fund M&A Merger & Acquisition OFDI Outward foreign direct investments UN United Nations UNCTAD United Nations Conference on Trade and Development U.K. United Kingdom U.S. United States

1. Introduction Recently, Foreign Direct Investment (FDI)1 out of Russia has been accelerating in number and volume. According to Central Bank of Russia the outward foreign direct investment (OFDI)

1 Foreign Direct Investment (FDI) includes investments in physical assets, such as plant and equipment, in a foreign country. Holdings of 10 percent or more equity in a foreign enterprise is the commonly accepted as it demonstrates an intent to influence management of the foreign entity. The main types of FDI are acquisition of a subsidiary or production facility, participation in a joint venture, licensing, and establishment of a Greenfield operation.

360 Seventh International HSE Summer School «Baltic Practice» ·2007 quintupled from 2000 to 2005.2 In 2006 Russian OFDI amounted 18 billion US dollars3. Projections on FDI outflow comparing Russia, Brazil, China and India indicate that the Russian FDI outflow will increase beyond 50 % from 2006 to 2011 and reach the remarkable amount of 27 billion US Dollars4. These figures demonstrate the increasing impact of Russia as an important investor within a changing world. Gazprom chairman Alexey Miller lately pointed out: “Two years ago Gazprom decided therefore to start creating a global energy company. It wouldn’t be an exaggeration to say nowadays that the process of Gazprom’s conversion from the “national champion” into a global energy business leader has been completed.”5 Today, Gazprom ranks on top as most valued corporation in Europe6. In this context the statement underlines the fast paced impact resulting from FDI not only in CIS, moreover in Europe and worldwide. On a global scale Russian outward investments are still marginal compared to that of U.S. or the leading EU countries including France, United Kingdom and Germany. Nevertheless, within the emerging CIS, which is driven by a remarkable GDP growth of 7.9% on average, Russia is leading7. The Chicago based management consultancy A. T. Kearney has recently published the FDI Confidence Index which ranks numerous CIS countries in the top 258. According to this survey traditional operational risks occurring from FDI´s such as government regulation, financial, political and social instability, appear to be less threatening in 2005 compared to previous years, which indicates a much more experienced approach to FDI in CIS and higher attractiveness towards investments into CIS compared to previous years. Russia has recognized as first mover the importance of CIS, even though only one-fifth of total Russian OFDI has entered the CIS. Anyhow, Russia as such, has a predominant role within the CIS, since Russia outward investments

2 Central Bank of Russia: http://www.cbr.ru/eng/statistics 3 The Economist Intelligence Unit: World investment prospects to 2011 (2006): Appendix A. 4 Ibid. 5 Alexey Miller as of June 29th,2007:http://www.gazprom.com/eng/articles/article24271.shtml 6 Due to market capitalization as of may 31st 2007 by Financial Times Europe 7 IMF (2007): http://www.internationalmonetaryfund.com/external/cee/2007/030807.pdf 8 A. T. Kearney FDICI®: http://www.atkearney.com/shared_res/pdf/FDICI_2005.pdf

361 Seventh International HSE Summer School «Baltic Practice» ·2007 are as of July 2005 Fahd Hajji Russian OFDI into CSI characterized by their nature; most of OFDI is targeted in selected in key sectors of CIS countries9. The year 2004 for example showed by analyzes of the mergers & acquisitions market that numerous Russian corporations pursued several landmark transaction within selected industries in CIS, e.g. through takeovers of diverse oil refineries in Ukraine, electric power distribution companies and generating plants in Georgia or even an Armenian Airline in order to ensure prospective profit generation within the emerging CIS region10. Driven by large scale investments Russia has become one of the leading capital exporting countries. Besides the fact that an increasing number of Russian corporations hold considerable stakes in numerous oil, natural gas and power companies in the region, Russia is also the prominent energy and raw-material supplier to all CIS countries. Considering this role in the strategic natural resource-based sectors often provides Russia with significant economic and political leverage in the target countries. With specific regard to the multilateral relevance of Russian OFDI within CSI the research paper at hand is going to address diverse questions, such as, but not limited to: • In which way did the historical and economical development in the CIS region facilitate and/or restrict foreign direct investments? • What are the underlying economical models behind Russian investments? • What are the core drivers of Russian investments within the CIS region? • Which countries have attracted most FDI from Russia? • What sectors have been most attractive? • What are the core drivers of Russian investments? • How do political ambitions effect the Russian investments? • How does the typical Russian investor profile look like? • What are their success factors? In which way does it differ from western Investors?

9 International Monetary Fund (2005) 10 UNCTAD (2005): Statistics on cross-border mergers and acquisitions by Russian companies

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• What is the outlook for Russian investments into the CIS region? Essentially, the paper is aiming in providing a comprehensive, but in-dept overview on Russian outward investments within the Commonwealth of Independent States.

2. Historical Development of the CIS Alliance The Commonwealth of Independent States (CIS) was created in December 1991 by leaders of Russia, Belarus and Ukraine in the near of Minsk, which is the place were CIS today is headquartered11. Despite warnings of former soviet president Mikhail Gorbachev marking the CIS as “illegal and dangerous” Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova, Georgia, Tajikistan, Uzbekistan followed the invitation to ratify the initial CIS treatment12. From a historical point of view the warnings of Gorbachev were comprehensible, since CIS could be viewed a successor entity to the Soviet Union, insofar as one of its original intents was to provide a framework for the disassembly of the Soviet Union. Hence, the creation of the Commonwealth of Independent States has finally signalized the dissolution of the Soviet Union even though according to leaders of Russia, its official purpose was to "allow a civilized divorce" between the Soviet Republics. The CIS is due to its supranational powers more than a symbolic organization: coordinating powers in the realm of trade, finance, lawmaking, and security. Historically, the most significant issue for the CIS was the establishment of a free trade zone or economic union between the member states, which was launched in 2005. This political move has promoted cooperation on democratisation and enabled a unified approach for cross-border crime prevention, which managed to increase trust. Trust as a pillar for further economical development has enlarged the attractiveness of FDI in this region. Since its formation, the member-states of CIS have signed a large number of documents concerning integration and cooperation on matters of economics, defence and foreign policy, which were

11 CIS means transliterated Sodruzhestvo Nyezavisimykh Gosudarstv. 12 At the moment CIS consists of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. Turkmenistan discontinued permanent membership as of August 26, 2005 and is now an associate member.

363 Seventh International HSE Summer School «Baltic Practice» ·2007 mainly initiated by the executive secretary13. Up to now, all of the CIS executive secretaries have been from Belarus or Russia14. Essentially, for all other CSI countries of the political concerns about FDI in their transition economies are strongly linked with the concerns about Russian motivations and behaviour. Many observers perceive the CIS as a geopolitical tool, allowing Russia to maintain its influence over the former Soviet republics. While many of the CIS countries would not essentially prefer to see themselves in a closer alliance with Russia even though the alternatives are hopeless. Within the context of political and geographical realities, none of the CIS countries are in the position to hope for widespread and large-scale investments from the EU or the USA or closer political and economic integration with the West in the foreseeable future. On the other hand by the reflections of the oil sector boom Russia has become an attractive business partner for many of the CIS countries. Naturally, this type of development has strengthened the cross-border economic ties between Russia and other CIS countries. But on other hand those countries, which are not in control of considerable energy resources have seen themselves falling more and more indebted to Russia along with the record-high oil and gas prices.

3. Russian Outward FDI within the CIS 3.1 Scientific pre-condition Though an international debate on foreign direct investments about its diverse aspects has started for years, the empirical database is still weak due to lack of information and data inconsistencies. Several particularities on Russian OFDI should be pointed out in order to understand the weak data situation on FDI within CIS. First, Russian outward investments are technically not only made out of Russia, but as well from so called tax heavens like Liechtenstein, British Virgin Island and Switzerland. These

13 The alliance is managed by a chairman who is known as the Executive Secretary. 14 The current executive secretary is Sergei Lebedev (Russian citizen). Fahd Hajji Russian OFDI into CSI

364 Seventh International HSE Summer School «Baltic Practice» ·2007 offshore units tend to work as investment vehicles resulting from substantial capital flight movements in post Soviet times15. In Ukraine for example, Cyprus is ranked as one of the leading FDI importer with remarkable 14% of FDI inflow ahead of the US. In this regard Cypriot capital inflows represent Russian or Ukrainian offshore capital, since Russia officially accounts for just 4.6% of all FDI despite being a major player in the Ukrainian economy16. Second, a substantial number of foreign investments in the CIS by Russian enterprises, private or state-owned, are not technically made from Russia but through corporate subsidiaries or limited partnerships located abroad. Furthermore, owner structures of immediate investment vehicles are also difficult to trace, since public disclosure requirement are often weak or not sufficiently enforced. Third, recipient countries have also problems tracking the origin of inflows of direct foreign investments, since all of the recipient-country statistics show substantial inflows of FDI from Cyprus, the British Virgin Islands, and other popular tax heavens of Russian investors. Nevertheless, statistical offices of recipient countries tend to find it easier to track incoming investment than does Goskomstat Rossii in tracking foreign direct investments by Russians17. Aiming in getting a comprehensive view on FDI within CIS, it is therefore important to obtain figures from diverse sources, e.g. Central Bank of Russia, Goskomstat Rossi, statistical offices of recipient countries, but to assess each figure by scrutinizing their origin and size. Since most of the empirical data is not comprehensive at all, the derived numbers are often illustrative rather than definite.

15 According to the European Commission, the non-recorded capital flight from Russia totalled bn$ 245 in 1992 – 2002. One can only estimate the total amount of capital that has left the country under registered and nonregistered investing and capital exporting schemes. 16 The Economist Intelligence Unit (2006) 17 Crane et. al. found out by comparison of Goskomstat Rossii data with the their mirror statistics from recipient countries, that for the outward investment value of in all cases except Moldova, the mirror statistics are much larger than the Russian figures.

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3.2 Economical reflection on FDI From an economical point of view the neo classical trade theory predicts that foreign direct investments are able to increase aggregated output and herby global welfare18. Opening broader investment opportunities for investors in countries with high liquidity leads consequently to realization of higher returns. Capital-poor states on the other hand benefit because they are supplied by capital at lower cost, and from substantial knowledge transfer. Both factors help those countries to increase their factor productivity. Especially in transition economies of Central and Eastern Europe, FDI has been positively associated with transferring new technologies, increasing labour productivity through better management practices, expanding export markets, and creating a number of effects due to employee development, efficient sourcing and increasing competitive market pressure. Realization of those advantages requires a positive investment climate, which is associated with a wide array of factors including removal of burdensome taxation, widespread corruption, structural governance deficits, and weak legal and regulatory frameworks19. Overall, the progress of transition is strongly correlated with the FDI per capita inflow20. This leads to the conclusion that a fast paced, but sustainable transition process from planned to market economy the ultimate economic tool for increasing FDI in CIS is.

3.3 Historical development of Russian outward Investments After collapse of Soviet Union, Russian Investors focussed on the national market. Consolidation, restructuring of inefficient businesses and cautious growth became most dominating topics among Russian investor circles. According to economic experts most of the Russian investment interest did not emerge until the end of 1990s though the economic environment or development in most CIS countries has earlier started to improve significantly21. Economic experts of most CIS countries stated in interviews that

18 Mundell (1967) 19 Shiells (2005) 20 EBRD (2000) 21 Crane et. al. (2005); Interviews with local entrepreneurs and government officials

366 Seventh International HSE Summer School «Baltic Practice» ·2007 the Russian investment interest did not emerge until the end of 1990s though the economic environment or development in these countries has started to improve22. After “primitive capital accumulation”, Russian investors have started to globalize step by step. Investment in the CIS has accelerated in 2000 driven by Russia’s economy rebound and the economic growth in CIS that reached double digit values.

3.4 Russian Investor Profile Russian investors fall into five groups: (1) state-owned enterprises; (2) private enterprises; (3) wealthy individuals; (4) small business men and (5) expatriates from CIS who live and work in Russia. State-owned enterprises are the most important investor, since the largest transactions in terms of value became proceeded by state owned enterprises. Especially the two state- owned energy giants, natural gas producer Gazprom and the Russian power industry monopoly RAO UES have acquired strong positions in the CIS region, with their expansion more often based on intergovernmental agreements23. Private enterprises, especially those of leading Russian investor groups play key roles in selected branches like the FMCG sector. Wealthy Russian individuals in particular Oligarchs like Michail Maratowitsch Fridman pursue large scale investments by offshore entities24. Expatriates from CIS working in Russia are not that much relevant for FDI research purposes, since there engagement focuses mainly on smaller investments25.

3.5 Overview on Russian outward investment in the CIS The official statistics on Russian investments in the CIS give an essentially misleading image of the reality. According to the differing Russian and CIS statistics, the CIS region accounts for

22 Ibid. 23 Vahtra (2005) 24 Michail Fridman is head of Alfa Group one of Russia’s largest privately owned financial-industrial conglomerates, with selected offshore units throughout Europe. 25 The 2002 Russian census recorded 1.130.491 Armenians in the country, but taken into account Armenian guest workers without Russian citizenship the estimated figures exceeds 2.000.000 making it home of the largest community in Armenian diaspora.

367 Seventh International HSE Summer School «Baltic Practice» ·2007 between 1 and 5 per cent of the Russia’s total OFDI. Based on this figure, one might regard Russia as a negligible investor in the region. According to the Goskomstat Rossi 2005 the country’s OFDI flows to the entire region totalled $ 713 Million in 2004. In contrast, the recent years have witnessed several acquisitions in the CIS by Russian energy and telecommunication giants with many of the individual transaction valued more than the total investments from Russia as reported by Goskomstat in 2005. Therefore, figures from the Economist Intelligence Unit report on FDI seem much more plausible by summarizing Russian OFDI with amount of 18 billion US dollars in 2006. This figure is backed by the Rand database, which draws the conclusion that the number of Russian investments in CIS are generally few, but large in their investment volume26. In terms of outward FDI stock, the year 2004 saw the exceeding of $ 100 billion-landmark in Russian OFDI stock27. While Russia’s share in inward FDI in CIS stands around 69% the country accounts for no less than 97% of the regions outward FDI28. Though a substantial Russian OFDI investment stock has been build up in CIS it surprises that for the most part of the Russian outward investments have gone to countries other than members of the CIS. Only one-fifth of total Russian FDI was invested into CIS29. Balance of payments and financial account data from other members of the CIS also suggest that most Russian FDI was directed outside the CIS30. However, among the 10 largest FDI projects by Russian companies during 2004-2005 5 were targeted to the CIS region31. For many Russian companies, the CIS region has been the first step on their way towards global markets. According to Goskomstat Rossi 2005 data a huge part of Russian FDI in CIS is concentrated in Belarus, Ukraine, Uzbekistan and Kazakhstan, in that order. Ukraine doesn’t surprise experts, since Ukraine has

26 Crane et. al. (2005) 27 Central Bank of Russia (2006) 28 UNCTAD (2005) 29 Goskomstat Rossii data. 30 International Monetary Fund´s International Financial Statistics, IMF (2002) 31 Vahtra (2006)

368 Seventh International HSE Summer School «Baltic Practice» ·2007 been the most popular destination for Russian investments among the CIS countries. In the time range between 2000-2004, 22 large scale cross-border m&a activities have been executed by Russian companies32. Even though Azerbaijan, Kyrgyzstan and Moldova are relatively small, they have managed to attract a substantial amount of these Investments, which are quite large in their transaction volume. In the same context recipient country statistics indicate otherwise, with Kazakhstan emerging as the leading destination, followed by Azerbaijan. Sectoral analyzes indicate that naturally the largest transactions have been pursued in the energy, metallurgy and chemicals industry. The Oil & Gas, finance and food processing industry have attracted the most investments by numbers.

3.6 Drivers of Russian outwards Investments in CIS 3.6.1 Availability of Capital and need for higher return rate After “primitive capital accumulation” high liquidity and an insufficient rate of return Russian investors started to strive for investments. Especially entrepreneurs who have been active within the natural resource based, telecommunications and financial industries generated high cash-flows the years before and were aiming in comparable investments that generate not only cash-flow but an high return on investment. Those strategic investors became the pioneers at the beginning of 2000, but were followed immediately by competing financial investors like Pharos Financial Group or The Blackstone Group.

3.6.2 Need for Internationalization The majority of Russian companies were first aiming in creating national giants like Gazprom. Dependencies on Russian market lead investors to the strategic solution to globalize and to participate in the extraordinary market growth in CIS. In these days Russian giants like LUKOIL hold most of there assets not any more in Russia and have become companies with an truly internationalized shape33.

32 UNCTAD (2005) 33 LUKOIL Financial Statement 2006

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3.6.3 Superior market knowledge Superior market knowledge in the CIS region is one of the key advantages in order to facilitate entrepreneurial success in the CIS region, since lower transaction cost enable faster time to market and enlarged output quality. The competitive advantage is driven by the common cultural, historical and economical background. Even though each CIS country has its individual characteristics, their roots to the soviet time are identically and lead to the possibility to transfer Russian patterns into other countries, e.g. experience of Russian consumer behaviour becomes an indicator for consumer behaviour in Belarus. Conversely, knowledge transfer from Ukraine or Belarus to Russian can be easily proceeded and are essential for continuous improvements. In addition to the transferability of knowledge, Russian investors have already managed to build up extensive experience in diverse industries, especially in those in which Russian investors were the first entering CIS countries, e.g. natural resources.

3.6.2 Management skills and experience Management education in the CIS region has still not much developed compared to western standards. Nevertheless there are differences. Russian Manager especially those working for huge conglomerates have usually enjoyed a multinational education or at least worked in western countries. Consequently, according to several reports Russian investors are preferred shareholders, because of their in-depth management skills and experience. More important in this regard is that Russian investors are able to think in global dimensions and to align their management skills for each specific CIS country. Furthermore, the management practice of a rather democratic than authoritarian management style is more and more necessary in order to react on non-market oriented processes, bureaucratic and corruptive structures.

3.6.3 Formal and informal network Most investment opportunities in CIS demand a strong network in experiencing them. Especially Russian investors with their strong family ties of soviet times are able utilize their network to their favour. Those networks enable Russian investors to participate in privatizations of state owned enterprises, to invest under particular conditions (e.g. lower price, tax subvention, etc.) 370 Seventh International HSE Summer School «Baltic Practice» ·2007 or to pass bid auctions successfully. Furthermore several CIS Investors argued in this regard that Russian Investors buy assets at what locally are perceived as less than fair value34.

3.6.4 Risk mitigation through portfolio diversification Risk mitigation through portfolio diversification by horizontal integration enables investors to create conglomerates that are able to shape diverse industries. Experiences from the Alfa Group show that not only risk mitigation is possible through diversification. In the case of Alfa Group the Alfa Bank is able to finance preferred conditions on loans for Alfa industries.

3.6.5 Increase of operational efficiency Ambitions of Russian investors for Investments in CIS are strongly linked with the possibility to realize high economies of scale and scope. Those economies of scale and scope become realizable by vertical integration, which considers the value chain as well as geographical matters. Especially in the manufacturing, consumer goods and process industries the economies of scale are able to generate cost advantages up to 30%35. Those cost benefits enable Russian companies to survive in the long run the fierce competition in Russia and CIS.

3.6.6 Business environment Generally, decision making processes are shorter compared to western European standards. The business environment, meaning the working mentality and the way investments got realized favours the Russian investor profile. Russian investors have managed to build up an extensive set of transaction know- how in CIS, which allows them to execute transactions rigorously, since time is a very crucial factor in the decision making process in fast paced business environments like in the CIS.

34 Sikora, 2003 35 The Boston Consulting Group “Investments of a new era” 2003

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3.6.6 Political Impact Empirically, political ambitions of Russian outward investments could be only traced within the energy sector36. Russian Investors hold considerable stakes in numerous oil, natural gas, and power companies in the region. Those investments in strategic natural resource-based sectors often provide Russia extensive economic and political impact. As reaction on the on the “Orange Revolution”, which brought forward a Russia critical administration in Ukraine, Russia increased in 2005 the Gas price without warnings from $ 50 per 1000 cubic metres up to $23037. By this action the position of Viktor Juschtschenko was threatened, since economic and herby political stability has started to downturn after closing the gas tap. This historical example demonstrates the political.

3.7 Russian and western investor behaviour Comparison of Russian and Western investor behaviour results into following insights38. Russian investors tend to have a more risk friendly investment profile, because investment transactions in CIS demand a much more intuitive business judgement rather than rational driven decision making process. In this case, Western investors are more into a risk adverse investment profile. Russian investors prefer to own substantial block holder positions in companies, that risks become more manageable in a long term perspective. Russian Investors prefer to control assets rather than take a minority position. Western investors more often take minority positions or create cross-border joint-venture in order to limit risks. Strong ties resulting from the Soviet time provide Russian investors a competitive advantage even before real pitch situation occurs, while Western investors naturally are able to initiate privatizations of state owned enterprises. Russian investors are able to ease their engagements by decisive Eurasian specific knowledge. On the other hand Western Investors offer competencies in diverse functional fields, e.g. finance, marketing or engineering.

36 Crane et. al. (2005) 37 Reuters as of January 2006. 38 Analyzes are based on own research and expert interviews during my studies at the Higher School of Economics Moscow. This view contains mainly subjective views of the author.

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4. Resume In consistence with the questions raised up above, subsequent conclusions can be drawn from the obtained research: The establishment of the CIS alliance has opened Russian investors the impact through being the number one supplier of gas in CIS. door to emerging post-soviet countries. However, increasing amount of Russian outward investments into CIS has been technically made from so called tax havens, e.g. British Virgin Island, Liechtenstein or Cayman Islands. Considering these figures Russian investment activities within the CIS Region began lately to accelerate from the year 2000. Only about one Fifth of all Russian OFDI has gone to CIS, accounting 18 billion US dollars in 2006. Most of Russian OFDI has gone to Belarus, Ukraine, Uzbekistan and Kazakhstan. Five main reasons can be obtained for the rapid Russian OFDI growth; need for new markets, superior market knowledge, strong connections to corporations through family ties, the realization of high economies of scale and scope by investments within CIS region and the existing business culture, which enables to use the existing transaction know-how and ability and willingness to execute transactions rigorously. These drivers have facilitated investments especially in the oil & gas, finance and food processing industry have attracted the most investments by numbers. Not surprising that the largest transactions particularly in the energy sector have been executed by state controlled conglomerates. This provides Russia with extensive impact on all economies and political institutions within CIS. Therefore, even with latest political developments and strengthening of pro-western attitude in Ukraine and Georgia, the CIS countries are more dependent on Russia in these days than ever. According to OFDI projections until 2011 Russian FDI outflow into CIS will reach 27 billion US Dollar this trend is going to boost. But what are the alternatives? It is not the question whether Russian OFDI should be avoided or supported to some extent. Moreover, the core task for future developments within CIS should be aimed to establish an institutionalized framework, which limits the Russian influence and broadens the opportunities for Western investors to create myriads of mutual benefiting cross- border relationships.

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5. Appendix A. “FDI Outflow Comparison 2002-2011”

Source: The Economist Intelligence Unit

B.“FDI Outflows 2002-2011 Russian Federation”

Source: The Economist Intelligence Unit

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Bibliography A. T. KEARNEY (2007, September), Foreign Direct Investment Global Business Policy Council 2005, Volume 8 BORENSZTEIN EDUARDO; DE GREGORO JOSÉ; LEE JONG-WHA, (1998),”How does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics, Vol. 45, No. 1 (June), pp.115-135 CENTRAL BANK OF RUSSIA (2006), Cross-border Transactions of Individuals (survey), Moscow IVAKHNYUK IRINA (2006, June), Migration in the CIS Region: Common Problems and Mutual Benefits, Moscow CRANE KEITH: PETERSON D.J., OLIKER OLGA, (2005) Russian Investments in the Commonwealth of Independent States, Rand Corporation, Arlington, United States: The Rand Corporation ECONOMIST INTELLIGENCE UNIT (2006): World investment prospects to 2011 – Foreign direct investment land the challenge of political risk, United Kingdom; London ELINA PELTO; PEETER VAHTRA; KARI LIUHTO; (February 2003), CYP-RUS Investment Flows to central and eastern Europe - Russia’s Direct and Indirect Investments via Cyprus to CEE, Turku School of Economics, Sweden GARIBALDI PIETRO; MORA NADA; SAHAY RATNA; ZETTELMEYER JEROMIN (2001), “What moves Capital to Transition Economies?” IMF Staff Papers, Vol. 48 (Special Issue), pp. 109 – 45 INTERNATIONAL MONETARY FUND, 2003, “Foreign Direct Investment in Emerging Market Countries: Report of the Working Group of the Capital Markets Consultative Group” KÁLMÁN KALOTAY (2005, May), “The Role of Foreign Direct Investment in Transition”, Switzerland, Geneva KÁLMÁN KALOTAY (2003), “THE LATE RISER TNC: OUTWARD FDI FROM CENTRAL AND EASTERN EUROPE”, Geneva MUNDELL ROBERT (1968), International Economics, Macmillan, New York LANKES HANS-PETER; VENABLES A. J., (1996), ”Foreign Direct Investment in Economic Transition: the Changing Pattern of Investments” Economics of Transition Vol., No.2 (October)

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LOUNGANI; PRAKASH; MAURO; (2000) “Capital Flight from Russia”, Policy Discussion Paper No. PDP/00/6 IMF, Washington SHIELLS CLINTON R. (2003, November), FDI and the Investment Climate in the CIS Countries, IMF Moscow SVEJNAR JAN: Transition Economies: Performance and Challenges, The Journal of Economic Perspectives, Vol. 16, No. 1. (2002, Winter), pp. 3-28. THE BOSTON CONSULTING GROUP (2003), “Investments of a new era“, Munich THE INSTITUTE OF INTERNATIONAL FINANCE (2007, May), Trends and recent developments in Foreign direct Investments UNITED NATIONS, (2005-2008), Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, New York and Geneva UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD) World Investment Report, Transnational Corporations, Extractive Industries and Development, 2007 VAHTRA PEETER: ZASHEV PETER, (2006, September). Russian Investments in the CIS, Turku School of Economics, Sweden: INDEUNIES Papers VAHTRA PEETER: Russian Investments in CIS – Scope, Motivations and Leverage, (2005, September), Turku School of Economics and Business Administration, Sweden WORLD TRADE ORGANIZATION (2005), International Trade Statistics, Geneva

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Lukas Klipstein International standards against insider information usage and market price manipulation in financial markets

Abstract I want to give an overview on the current international standards against insider information usage and market price manipulation. Coming from the history of insider trade and price manipulation I want to show how these issues are defined and addressed by the supranational organizations that set standards for financial markets regulation. In this case the European Union and the IOSCO. After showing how European legislation is put into national law, I will discuss arguments in favor and against the permission of insider trade.

1. List of abbreviations: BaFin – Bundesaufsicht fuer Finanzen (German securities commission) EC – European Commission EU – European Union IOSCO – International Organization of Securities Commissions SEC – Securities Exchange Commission

2. History of insider trade and market manipulation Flexible prices are a clear characteristic of stock and commodity markets ever since they exist. On the one hand flexibility and fast reactions lead to efficient market results. On the other hand the history of stock and commodity markets knows numerous extreme price adjustments caused by “bubbles”, “insider trades” and “market price manipulations” that disrupted the market performance and ruined countless market participants. One could assume that these problems are as old as the stock markets. And indeed the first market crash happened in 1637, when the Dutch market for tulip bulbs first experienced a “tulip mania” with

377 Seventh International HSE Summer School «Baltic Practice» ·2007 increasing speculative demand and rising prices. As the expected demand failed to appear, the bubble collapsed1. Back in 1474, a Dominican priest from Venice wrote a guide to confession (Summula Confessionis) that listed a number of sins. Curiously it listed among others, the contemporary variants of exchange- rate manipulation, insider dealing and profiteering2. It took more than 300 years until a case of market manipulation became publicly known and found his way into literature. At February 12 in 1814 three persons, dressed as soldiers spread the rumor at the Royal Stock Exchange in London that Napoleon I. had died and that allied troops (from England, Austria, Prussia and Russia) had captured Paris. Until then the British economy was depressed because of the war against France. So the stock traders expected a quick revival of trade and business as they heard the rumors that the war had come to an end. During just one day the stock price rushed up and - after the government confirmed that the news was made up - the prices crashed. Even in the early nineteen’s century such an incident was investigated and it came out that a group of conspirators had bought stocks a few days before and sold them again as the stock prices had risen due to the “good news” they had led spread3. The conspirators were sentenced to one year of prison, a fine and one hour at the pillory. Just like today the issue of market manipulation was perceived as bad and was prosecuted by the authorities. In Germany the first laws that prohibited the deliberate influence of stock prices were passed seventy years after the great stock exchange fraud in London. It was included in the new commercial law of the HGB of the German Reich (Art. 249d Abs. 1 Nr2 ADHGB) in the year 1884. The industrialization had led to the foundation of several hundred corporations whose stocks were publicly traded. In 1896 these elements of crime were transferred to the stock exchange act (als § 75 BörsG a.F.21) since the German Reich introduced the German Civil Code (BGB)4 on the 1st of January in 1900, invalidating all former laws4. The stock exchange act remained valid (with changes) for almost 100 years, until the usage of insider information by the insider himself

1 Aschinger, Börsenkrach, S. 55 ff. 2 Antoninus „Florentius“, Summula Confessionis, 1474. See (COM(2001) 281 – C5-0262/2001 – 2001/0118(COD)) proposal for a European Parliament and Council directive on insider dealing and market manipulation (market abuse) of the 27th of February in 2002, p 59. 3 Yapp, Nick. Great Hoaxes of the World (and the hoaxers behind them). Robson Books. 1995. 4 RGBl. 1896, S. 157, 174

378 Seventh International HSE Summer School «Baltic Practice» ·2007 was banned by the securities trading law (§20a WpHG) in 1994. Other countries like the U.S. or the UK have a longer tradition of insider trading regulations than the countries in continental Europe. After the stock exchange crash in 1929 (Black Monday) the government of the U.S. passed the Securities Exchange Act5 which instated the Securities Exchange Commission (SEC) as a regulation authority for financial markets. Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm’s shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading. As mentioned, in continental Europe, insider trading was for a long time (unlike security price manipulation) regarded as a peccadillo. It only changed due to an initiative of the European Union. Before I will show how European legislation impacts national law it is important to define the subject of insider trading and market manipulation first.

3. Definitions of insider trade and market manipulation When people commonly think of market manipulation, they most probably think of some dubious stockbroker like Gordon Gecko in the famous movie “Wall Street6”. Examples of insider trade are regularly published in the popular press. But how are those activities defined by those who ban them? Since this paper is focused on international standards, I will stick to the definitions of the European Commission, the SEC and the IOSCO. The SEC laws are actually national U.S. law. However it has some international relevance as almost all international investment banks, pension funds and other actors on international capital markets are obliged to follow the SEC standards due to their labor agreements. The SEC defines insider trading as “corporate insiders” who trade their own securities. Which is not always illegal. Company officials are allowed to trade their own securities if they report it to the SEC. Illegal insider trading consists of a breach of the “fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security”7. Examples of insiders are all corporate officers that have strategic information on corporate developments,

5 15 U.S.C. § 78a 6 Movie, 1987, 20th Century Fox 7 http://www.sec.gov/answers/insider.htm

379 Seventh International HSE Summer School «Baltic Practice» ·2007 lawyers, bankers, but also friends, and other people that get a tip by those insiders. The SEC regards as market manipulation: “intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security“8. In 2003 the European Commission introduced DIRECTIVE 2003/6/EC on insider dealing and market manipulation (market abuse)9. Insiders are defined as natural or legal persons that possess “insider information”. Insider information again is extensively defined as “information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”. “In relation to derivatives on commodities, ‘inside information’ shall mean information of a precise nature which has not been made public, relating, directly or indirectly, to one or more such derivatives and which users of markets on which such derivatives are traded would expect to receive in accordance with accepted market practices on those markets. For persons charged with the execution of orders concerning financial instruments, ‘inside information’ shall also mean information conveyed by a client and related to the client's pending orders, which is of a precise nature, which relates directly or indirectly to one or more issuers of financial instruments or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.”10 Article 2 of the directive deals with the issue of market manipulation, which are: “Transactions or orders to trade - which give, or are likely to give, false or misleading signals as to the supply of, demand for or price of financial instruments, or — which secure, by a person, or

8 http://www.sec.gov/answers/tmanipul.htm 9 DIRECTIVE 2003/6/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 28 January 2003on insider dealing and market manipulation (market abuse) 10 Article 1 of DIRECTIVE 2003/6/EC of the European Commission

380 Seventh International HSE Summer School «Baltic Practice» ·2007 persons acting in collaboration, the price of one or several financial instruments at an abnormal or artificial level”11. Otherwise market manipulation can mean “the dissemination of information through the media, including the Internet, or by any other means, which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news, where the person who made the dissemination knew, or ought to have known, that the information was false or misleading12.” The IOSCO (International Organization of Securities Commissions) is an international assembly of the national securities exchange commissions (like the BaFin) whose aim it is to set up international capital market standards13. Those standards can be regarded as “soft law”, since they do not directly force national governments to implement the standards into national law as a directive of the European Commission does. Insider trade is covered in a comparative survey that examines all national legislation on inside information usage and gives advice on implementation and clarification of measures against it. The most important attributes of insider information are confidentiality and materiality14. In the IOSCOs Report on the prosecution of market manipulation the latter is categorized by the methods, the objectives and the parties involved. The methods are: • “Engaging in a series of transactions that are reported on a public display facility to give the impression of activity or price movement in a security (painting the tape); • Improper transactions in which there is no genuine change in actual ownership of the security or derivative contract (wash sales); • Transactions where both buy and sell orders are entered at the same time, with the same price and quantity by different but colluding parties (improper matched orders); • Increasing the bid for a security or derivative to increase its price (advancing the bid)15” While the objectives are defined as:

11 Article 2a of DIRECTIVE 2003/6/EC of the European Commission 12 Article 2b and c of DIRECTIVE 2003/6/EC of the European Commission 13 http://www.iosco.org/about/ 14 IOSCO 2003 Insider trading and how to regulate it 15 IOSCO 2002 Investigating and Prosecuting Market Manipulation, p. 5

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• “Influencing the price or value of a security or a derivative contract, so that the manipulator can: buy at a lower price, sell at a higher price, • influence takeover bids, or other large transactions, or • Influencing the price of a derivative contract or the underlying asset;16” • Etc. The parties involved can be: • “Issuers of securities; • Participants in the securities market, derivatives market or underlying cash market; • Market intermediaries; and • Any combination of the above acting in cooperation with one another”. The IOSCO adds an interesting remark: “It is important to note that the methods used in many manipulation cases involve transactions or other activities carried out in two or more affected markets. These markets may be within the same or different jurisdiction. Manipulation involving cross border activities often involves parties (physical and/or legal persons) that are domiciled in different jurisdictions17”. This leads us to the reason why there are international standards and not only national standards against insider trade and market manipulation. As both financial markets and investors get more and more connected and globalized, international standards ease the orientation of foreign investors and allow international prosecution of violations of these standards.

4. International Standards 4.1. The Securities Exchange Act The U.S. laws are not international standard like the other ones discussed, but it is of international importance, since employees of investment banks and international finance companies have to act in accordance with the SEC standards due to their labor agreement. Those employees are subject to those laws (brokers, bankers etc.).

16 IOSCO 2002 Investigating and Prosecuting Market Manipulation, p. 6-7 17 IOSCO 2002 Investigating and Prosecuting Market Manipulation, p. 7

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The Securities Exchange Act of 1934 regulates insider trading. SEC rule lob-5, implementing section 10(b) of the 1934 Act, states, that an insider must disclose material inside information or refrain from trading18.

4.2. The IOSCO As mentioned above the standards of the IOSCO are not as obligatory as EU-directives. They can be considered as “soft law”. This means that not every member state of the IOSCO has to adopt the suggestions, reports and resolutions (All EU member states have to adopt the EU directives into national law). The IOSCO usually elaborates “best practices”, tools against market manipulation and forms agreements of member states about common treatment of certain issues. Those “best practices” are usually adopted by the European Union and most of the 170 IOSCO member states19. Considering insider trade, the IOSCO published a comparative study in 2003 that reviews all national laws against insider information usage and classifies the definitions, delinquency and penalty for insider information usage20.

4.3. The EUdirective 2003/6/EC In order to show how this standard works I will shortly explain the way the EU impacts the national legislation of its member states. Unlike in national legislation, the European Parliament does not just adopt laws that are valid in the EU. The process is a bit more complicated.

18 Securities Exchange Act SEC rule lob-5, Section 10 19 http://www.bafin.de/internationales/iosco.htm 20 IOSCO 2003 Insider trading and how to regulate it

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Legislation Process of the European Union21. In the beginning the European Commission makes a proposal for new legislations. These proposals are discussed by the European Parliament that decides on so called “directives”. These directives are – once passed by the parliament – transferred into the perspective code of law of the member states of the European Union. To show the relevance: In 2004 almost eighty percent of the German regulations concerning capital markets were set by the European Union22. In May 1999 the European Commission proposed an “action plan” in order to complete the single market for financial services. The European Counsel (in this case the panel of all European finance ministers) called for the implementation of this action plan in 2000. After 3 years of legislative process the European Parliament called for the directive in 2003. The aim of the Commission is mentioned in the first paragraphs: (1) A genuine Single Market for financial services is crucial for economic growth and job creation in the Community23. (2) An integrated and efficient financial market requires market integrity. The smooth functioning of securities markets and public confidence in markets are prerequisites for economic growth and wealth. Market abuse harms the integrity of financial markets and public confidence in securities and derivatives.

21 Own diagram 22 Handelsblatt 24. Sept. 2004 23 Directive 2003/6/EC (1)

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Further it is stressed why there needs to be this kind of market regulation: (10) New financial and technical developments enhance the incentives, means and opportunities for market abuse: through new products, new technologies, increasing cross-border activities and the Internet. (11) The existing Community legal framework to protect market integrity is incomplete. Legal requirements vary from one Member State to another, leaving economic actors often uncertain over concepts, definitions and enforcement. In some Member States there is no legislation addressing the issues of price manipulation and the dissemination of misleading information24. (15) Insider dealing and market manipulation prevent full and proper market transparency, which is a prerequisite for trading for all economic actors in integrated financial markets. To prevent insider dealing the directive requests the member states of the EU to prohibit any person to disclose inside information to any other person and to recommend the acquisition or disposure of any financial instrument that is related to this information25. Of course all member states are to permit (and punish) market manipulation as well (Article 4). To increase market transparency companies are required to draw up a list that contains persons working for them, persons under contract that have insider information and transmit this list to their respective national securities exchange commissions26. A corporation would for example list all executives, accountants, lawyers, tax advisors and the bankers that have access to inside information and send the list in Germany for Example to the BaFin. But not only have the persons to be known publicly. Whenever a manager or other insider makes transactions on his own account that are related to shares or derivates that again are related to his inside information, he has to inform the public (or at least the respective authorities that will publish the information)26. So how is a directive transferred into “hard” national law? In the case of Germany the WpHG (law for the trade of securities) was changed so that it the code of laws complies with the directive yet remains genuine in the context of the HGB (German Commercial Code). §13 WpHG

24 Art 3. Directive 2003/6/EC 25 Art. 6.4 Directive 2003/6/EC 26 Art. 6.5 Directive 2003/6/EC

385 Seventh International HSE Summer School «Baltic Practice» ·2007 defines insiders and insider trade which is permitted by §14. The obligation to disclose insider information and ad-hoc messages about deals is regulated in §15 WpHG. § 15b requires companies to write up lists of insiders. Disclosed information is published by the BaFin. Finally §20a WpHG permits the manipulation of prices of financial instruments at stock markets or other markets.

5. Should insider trading be permitted? Even if it seems to be clear to governments, supranational legislation authorities and the IOSCO that insider trading should be prosecuted, economists do not all agree with that. While it is obvious that market price manipulation is damaging other market participants just like fraud does, insider trade remains controversial. The views of the European Union and the IOSCO are that insider trade scares away investors that stay away from the stock markets or turn away to financial markets that are better regulated. Therefore insider trading diminishes the liquidity of a financial market that is not regulated. First of all, not every insider trade is illegal. Heydorn, Meyer and Pentrowiak (2004) separate illegal insider trade and “directors dealings”27. Insiders are not permitted to trade at all. But they have to report all transactions they undertake on their own account to the national authorities. But is insider dealing good for other market participants or not? Meulbroek (1992) argues that as far as her reaserch is concerned, insider trade increases the stock price accuracy by moving the stock prices significantly. Therefore she writes: “Since trading leads to the incorporation of private information in stock prices, regulation that impedes trading may also result in less informative prices”28. The opposite is found by Huddart, Hughes and Levine (2001). Their analysis show that information is reflected more rapidly in stock prices when insiders have to disclose their trade than when the trades remain unpublished29. Even more complicated is the finding of John and Narayanan (1997) about disclosure requirements for insider trades. They say that these requirements could be an incentive for insiders to trade against their inside information. Since the announcement of the trade has to be made after the insider transaction took place, the market will

27 T.Heidorn, B. Meyer, A. Pietrowiak: Performance-Effekte nach Directors’ Dealings in Deutschland, Italien und den Niederlanden, 2004 28 Lisa K. Meulbroek, The Journal of Finance, Vol. 47, No. 5. (Dec., 1992) p 1696 29 S. Huddart J. S. Hughes, C. B. Levine, 2001, p. 667

386 Seventh International HSE Summer School «Baltic Practice» ·2007 perceive it as strong signal (“actions speak louder than words”) to undertake transaction in the direction of the insider deal. Once the price moved towards the direction that was predicted by the insider he can capitalize it30. Last but not least one could ask the question: Was it successful to introduce the directive against insider information usage? In 2006, the BaFin investigated 74 times for insider trade. 24 of these suspicions were inquired by the police. Of them, 11 were sentenced. In the same period (2006), 60 cases of market manipulation were investigated. 15 cases turned out to be illegal market manipulations and were prosecuted by the police31. In terms of law enforcement it seems that the capital market regulations that deal with insider trade and market manipulation fulfill its purpose. Market manipulation is probably easier to investigate than illegal insider trade, since manipulations are displayed in the reaction of the prices and all transactions are monitored by banks and brokers that have to report suspicious behavior to the BaFin. Insider trade is not always so obvious. If the insider does not trade huge amounts of stocks, the prices do not necessarily react on the transactions. And “tippees” are hard to identify, especially if their relation with the insider is not too close.

Literature Books 1. Aschinger, Börsenkrach, S. 55 ff. 2. Antoninus „Florentius“, Summula Confessionis, 1474. See as well (COM(2001) 281 – C5-0262/2001 – 2001/0118(COD)) proposal for a European Parliament and Council directive on insider dealing and market manipulation (market abuse) of the 27th of February in 2002, p 59. 3. Yapp, Nick. Great Hoaxes of the World (and the hoaxers behind them). Robson Books. 1995.

Codes of law and Europan directives 1. RGBl. 1896, S. 157, 174 (German) 15 U.S.C. § 78a (U.S.) 2. Securities Exchange Act SEC rule lob-5, Section 10 (U.S.)

30 K. John, R. Narayanan, 1997, p. 239 31 BaFin Jahresbericht (Annual Report) pp. 166-171

387 Seventh International HSE Summer School «Baltic Practice» ·2007

3. DIRECTIVE 2003/6/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 28 January 2003on insider dealing and market manipulation (market abuse)

Newspapers and official reports 1. IOSCO, Insider trading and how to regulate it, 2003 2. IOSCO, Investigating and Prosecuting Market Manipulation, 2002 3. Handelsblatt 24. Sept. 2004 4. BaFin Jahresbericht (Annual Report) pp. 166-171

Economic papers 1. Thomas Heidorn, Bernd Meyer, Alexander Pietrowiak, Performance-Effekte nach Directors’ Dealings in Deutschland, Italien und den Niederlanden, 2004, Herausgeber: Hochschule für Bankwirtschaft (HfB) 2. Lisa K. Meulbroek, An Empirical Analysis of Illegal Insider Trading The Journal of Finance, Vol. 47, No. 5. 3. (Dec., 1992), pp. 1661-1699. 4. Steven Huddart John S. Hughes and Carolyn B. Levine, Public Disclosure and Dissimulation of Insider Trades, Econometrica, Vol. 69, No. 3 (May, 2001), 665-681 5. Kose John, Ranga Narayanan, Market Manipulation and the Role of Insider Trading Regulations, 1997, 6. The Journal of Business, Vol. 70, No. 2. (Apr., 1997), pp. 217- 247.

Websites and movies 1. Movie, Wall street, 1987, 20th Century Fox 2. http://www.sec.gov/answers/insider.htm 3. http://www.sec.gov/answers/tmanipul.htm 4. http://www.iosco.org/about/ 5. http://www.bafin.de/internationales/iosco.htm

388 Seventh International HSE Summer School «Baltic Practice» ·2007

About Summerschool “Baltic Practice” Baltic Practice is one of the most vivid and efficient student projects of the State University Higher School of Economics started in 2001. Every year more than 50 students decide to spend their time at the Summer School There are students from different Universities: from Moscow ones such as HSE, Lomonosov State University, Moscow University of International Relations, Culture Institute, and the regional ones (St. Petersburg, Perm, Nijni Novgorod, Ufa, Krasnodar and many others). More over as the School is called international there are students coming from Germany, Austria, Poland, Estonia, Latvia, Lithuania. Baltic Practice is aimed at realization of the Public Civic Expertise model. The School unites students’ initiative, politicians’ experience and experts’ knowledge: there are well-known professors, politicians taking part in the School’s work. The Summer school is an annual activity that gives students an opportunity to solve practical problems for concrete customers and to develop such an atmosphere that all the students can really show their creative potential. That can only be reached through productive combination of work and rest-time.

The work of Summer School “Baltic Practice” is organized as a full-year self-activity of students and professors. On two seminars held in winter and spring summer school team develop work plan and decide all organizational and substantial issues. We have initiative students from different faculties working together with politicians and experts (often they are outstanding public figures) to solve the most imperious problems and cases and form recommendations for a special client or government structures. Interfaculty integration and active international university cooperation allows us to use interdisciplinary approach to produce highly–professional analytical material.

Thus, participation in Summer Schools will help students to acquire special skills of: • individual and team work • formulating the recommendations • communication skills • making analytical reports • project presentation • public speech

389 Seventh International HSE Summer School «Baltic Practice» ·2007

THEMES of Summer Schools «Baltic Practice» • 2001: Cooperation between society and government - Svetlogorsk • 2002: Citizens expertise of Kaliningrad-Baltic region development –Kurshskaya Kosa • 2003: Russia and Europe cooperation through contact point – Kaliningrad • 2004: Russian routes to Europe: educational, cultural and economic cooperation- Peterghof • 2005: Russia and “new Europe”: Baltic States – ways for cooperation – Jurmala, Latvia • 2006: North-West Pipe-line: North corridor of resources exchange-Viborg+Helsinki, Finland • 2007: Russia and EU cooperation: case-study of Germany – Witten-Herdeke, Germany • 2008: Russia-Europe dialogue: democratic values vs oil and gas prices - Sweden

The School Program is based on research projects that are developed by the multidisciplinary group consisting of students, ph.d. candidates, administrators and chaired by the scientific leader, , public experts.

The Projects of Summer School 2008 in Sweden • “Democratic values vs oil and gas prices”: • The Bologna Process – students’ impact on university; • Democracy: values, culture, institutes; • IT & Youth; • Corporate Governance; • Ancient Cities of Europe;

Young scientists that aims to participate in the Summer School is to: • choose one of the projects; • find information about the topic using any sources; • contact the group leader or student’s curator; • participate in the group work; • write an essay (2-3 pages) on the following topic; • send an essay not later then it is needed (April) to the group leader and to bring the essay copy to the department of Public Policy or to send it via e-mail to the group leader or student curator and to [email protected].

390 Seventh International HSE Summer School «Baltic Practice» ·2007

www.hse.ru [email protected]; [email protected] 007 (495) 152 09 91 125319, Kochnovskiy proezd, 3. Moscow, Russia

391

УДК 001.83(100) Международное научное сотрудничество

Россия и Германия. Взаимодействие в европейском контексте: case-studies для пяти направлений сотрудничества. Научные доклады. Седьмая Международная летняя школа ГУ-ВШЭ «Практика на Балтике», Виттен-Хердеке, Германия, 29 июля – 06 августа 2007 г. / Научное издание / Текст : на англ. яз. / Отв. ред.-сост. Н.Ю.Беляева, - М.: Центр публичной политики и глобального взаимодействия Международного общественного фонда политико- правовых исследований «Интерлигал». – 2008. – 392 c.

УДК 001.83

Издание содержит научные доклады участников Седьмой Международной летней школы ГУ- ВШЭ «Практика на Балтике». Школа проводится с 2001г. в разных странах Балтики на базе партнерских университетов ГУ-ВШЭ в рамках развития академической мобильности и международного научного сотрудничества по общей теме «Россия – Европа: пути взаимодействия». В 2007 г. тема Школы - взаимодействие России и Германии. Научные доклады включают работы молодых ученых - российских и немецких студентов, магистров, аспирантов - и их старших коллег - преподавателей ГУ-ВШЭ, российских и международных экспертов. Структура книги включает три раздела: вступительные статьи руководителей и организаторов школы с российской и германской стороны, установочные доклады ведущих экспертов по общим проблемам взаимодействия России и Европы на пленарных заседаниях, а также пять глав, в которых представлены результаты работы исследовательских групп Школы, раскрывающих конкретные стороны этого взаимодействия. Издание ориентировано на специалистов по проблематике Российско-Европейской интеграции, а также на всех, кто интересуется вопросами академической мобильности, Болонским процессом и организацией международного научного сотрудничества.

УДК 001.83 (100)

Научное издание

Отв. ред.-сост. Н.Ю.Беляева

Технический редактор Б.Б. Опастный Подписано в печать: 00.00.00. Формат: 60 х 90 1/16 П.л. 00 Тираж 300 экз. Заказ № 000

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