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Yury Zaytsev

PhD in Economics, Senior Research Fellow at the Institute of Applied Economic Studies, Presidential Russian Academy of National Economy and Public Administration

Overcoming poverty in Africa through the achievement of the Millennium Development Goals by 2015 is a key task for the international community. Establishing a new agenda for development after 2015 requires the expansion and diversification of sources for financing development programs. Corporate social responsibility programs in African countries may constitute some of these sources. Expanding the resources to finance development programs helps meet the interests of Russia's policy in the field of international development assistance as well.

Overcoming poverty in Africa through the achievement of the Millennium Development Goals by 2015 is a key task for the international community. Establishing a new agenda for development after 2015 requires the expansion and diversification of sources for financing development programs. Corporate social responsibility programs in African countries may constitute some of these sources. Expanding the resources to finance development programs helps meet the interests of Russia's policy in the field of international development assistance as well.

The rise in global food prices, the diversification of official development assistance (ODA), debt remissions, and the restructuring of economic systems of African countries have substantially improved the investment climate in these countries. According to the Doing Business report by the International Finance Corporation, from 2008-2014, African countries such as Mauritius, Ghana, Nepal, Zambia, and Tunisia improved their investment attractiveness, rising in the ranking of the ease of doing business by 21 points on average [1, 2]. This, in turn, promoted the integration of foreign investors in the economies of the countries in Africa. On the other hand, the international community is sparing no effort to raise the standards for corporate social responsibility in order to solve socio-economic development problems in Africa.

Soviet heritage

Africa for decades has remained a priority of both Soviet and Russian foreign policy. The USSR made substantial investments in developing the primary sector of the economy of African countries. Thus, in the period of 1954 to 1987, the amount of financing from Soviet social and economic programs in sub-Saharan Africa amounted to $10.14 billion USD and in Northern Africa – about $11.7 billion [3]. These investments were allocated to meet the socio-economic development goals of the poorest countries and help solve their economic problems.

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Guinea, Compagnie des Bauxites de Kindia


The economic assistance of the USSR performed the function of social responsibility programs of those Soviet enterprises operating in Africa.

The presence of the Soviet Union in the commodities markets in Northern Africa dates back to the 1930s, when the young Soviet state began to help the poorest nations to prospect and develop natural resources such as oil, gas and minerals. The intensity of economic cooperation with African countries increased substantially at the turn of the 1950s-1960s, when the Soviet Union extended its sphere of geopolitical and economic interests to Tropical and Southern Africa.

As for the countries of Tropical Africa, the Soviet Union maintained the most extensive cooperation with Guinea, which had rich bauxite deposits. With the technical assistance of the Soviet Union, the country established the first national bauxite company Chindia with a volume of production reaching 2.5 million tons of minerals a year [4, p. 112]. To redeem the concessional loans granted by the USSR government, the company sold Soviet enterprises bauxite at a discounted price. This allowed the government of Guinea to pay off the debt at an opportune rate, while the Soviet Union received access to bauxite deposits necessary for aluminum production. Researchers call this form of economic cooperation the “Angola model”, and it is widely used currently by Chinese businesses operating in Africa [5].

Apart from mining operations, the USSR carried out international aid programs in Africa to promote the socio-economic development of the continent. Soviet authorities provided assistance for developing infrastructure, construction, and transportation, as well as trained national personnel, including those employed in geological prospecting. In addition, the USSR helped to implement institutional reforms through concessional lending. By the end of the Soviet period, the USSR had agreements for economic cooperation with 37 African countries and trade agreements with 42 countries of the continent [6].

In fact, the economic assistance of the USSR performed the function of social responsibility programs of those Soviet enterprises operating in Africa. This form of cooperation was aimed at offsetting the negative externalities associated with the work of Soviet industrial enterprises, as well as at strengthening their position in Africa. For ideological reasons, the presence of Community Programs that accompanied the work of Soviet organizations could neither conceptually, nor in essence, overlap with the presence of those programs run by companies from the capitalist countries. Nevertheless, they did actually intersect often at projects carried out by Western partners on the grounds of corporate social responsibility (CSR).

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Geological exploration, Algeria

From the Soviet to the Russian practice of social responsibility

The operation of Soviet enterprises in African countries has undoubtedly helped Russian companies to occupy advanced positions in the commodity markets of Africa. However, due to acute competition from Chinese, American and European businesses, Russian companies, having integrated into the markets of African countries, face the tough challenge of not just achieving their business goals, but meeting the interests of local communities too. Alrosa, Lukoil, Rusal, Gazprom, and Rosneft are the key Russian business actors that are actively operating in the mining sector of African countries. Currently, Africa accounts for about 11 per cent of the foreign assets of Russian corporations [7, p. 24], [8].

Lukoil satisfies about 2.1 per cent of world demand for crude oil and has become Russia's largest company in terms of assets and sales operating in the developing countries of Africa [9]. The fact that the company is one of the ten largest non-financial transnational corporations operating in developing and transition economies testifies to this growth (See Table 1) [10].

Table 1. Mining companies from BRICS countries in the Top 100 Non-Financial TNCs from Developing and Transition Economies Ranked by Foreign Assets (based on 2013 data)

Corporation Home country Industry Rating number in foreign ranking Total Assets (in millions of US$) Foreign Assets (in millions of US$)
Hutchison Whampoa Ltd Hong Kong, China Diversified 1 103715 85721
CITIC Group China Diversified 2 565884 78602
Vale SA Brazil Metal and metal products 5 131478 45721
Lukoil Russia Petroleum and natural gas 9 98961 31174
Gazprom JSC Russia Petroleum and natural gas 17 396454 23425
Tata Motors Ltd India Automobile 20 31281 21575
Petroleo Brasileiro SA Brazil Petroleum and natural gas 29 331078 16927
MTN Group Ltd South Africa Telecommunications 31 21409 15263
Bharti Airtel Limited India Telecommunications 32 30783 15153
Gold Fields Ltd South Africa Metal and metal products 49 11200 10931
Severstal Group Holdings Russia Metal and metal products 76 15707 5954
Mechel Russia Metal and metal products 84 17695 5186

Source: The Top 100 Non-Financial TNCs from Developing and Transition Economies Ranked by Foreign Assets.

Lukoil has projects in Egypt, Ghana and Sierra-Leone. The largest Lukoil project in Africa is the Meleiha production concession (Western Desert) with a contract validity period extending to 2024 [11]. The company owns a 50 per cent stake in the project. Other participants in the project are the government of Egypt and the Egyptian oil company EGPC. One of the conditions for granting the concession was the implementation of socially-oriented projects aimed at serving the interests of local communities and the development of infrastructure.

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Russian-African relations in ten years: a new
start

Historically, the Gazprom group of companies has prospected and produced gas in the countries of Northern Africa. Its cooperation with the Algerian oil and gas company Sonatrach in the prospecting and production of hydrocarbons in the Berkin Basin and the El Assel field is a vivid example this presence [12]. The activities are Gazprom group in Africa are accompanied by programs for forming and developing the technological, professional, human and institutional potential of the national companies involved in the project.

Rusal is a classic representative of a Russian business implementing projects aimed at the socio-economic development of African countries. One of the key areas of such projects is the training of Guineans and Nigerians in Russian universities where they pursue engineering and economic degrees. The company is also actively developing infrastructure in bauxite mining areas. For example, Rusal uses the capacities of its Fria bauxite and alumina complex to ensure a continuous supply of drinking water and electricity to the local residents [13]. The promotion of the school system in Nigeria and provision of scholarships to Guinean students (Rusal Scholarship 2011) illustrate some of the most successful projects of the company's corporate social responsibility program.

In 2010, Rusal provided over 700 laptops to schools in Nigeria as part of a children’s computer literacy program implemented together with the non-profit organization One Laptop per Child and Schlumberger [14]. In 2011, the Rusal Scholarship 2011 Program made it possible for 100 young Guineans to study in the best Russian universities and acquire economic, technical or medical education. The corporation covered all expenses for their education [15].

Social projects of Russian businesses at home are carried out primarily as charity, while CSR programs abroad are part of competitive business strategies.

As of today, the Russian private sector is quite experienced in CSR issues. Nevertheless, one notes a significant difference between the practice of implementing social responsibility programs of the Russian business at home and abroad. Social projects of Russian businesses at home are carried out primarily as charity, while CSR programs abroad (similar to those of the Western partners) are part of competitive business strategies, as well as help promote the introduction of international environmental and social standards, in particular in African countries.

Although the introduction of CSR projects has been prompted by the external demands of the international community and the local population, socially-oriented programs provide direct benefits for business activities in the region in terms of both prestige and infrastructure. These benefits, in turn, increase business profits.

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As far as funding such CSR projects is concerned, different Russian companies practice different approaches. In most cases, projects in the field of social responsibility reflect the interests of the company. So, for example, companies with a high logistical component focus in their activities engage in infrastructure development in the regions of their business. This helps solve business problems, as well as contributes to economic growth in the region.

Business risks and social responsibility programs

The work of the Russian business in Africa is fraught with increased risks of a different nature and origin. These risks may be divided into internal and external ones. The main domestic risk that Russian corporations face, operating in Africa are commercial in nature, which reflects the internal rate of return of capital investment (IRR). In turn, this figure in the poorest countries is determined by factors such as transportation, the ability of national governments/corporations to meet the terms of the contract on time, as well as the use of technology and business practices that represent a competitive advantage over foreign partners from China, USA, and Europe. The positions of companies from these countries in African markets are strengthened by agreements between the public and private sector that provide for social investment as well.

The weak geopolitical position of the Russian Federation on the continent, trade union movements for workers' rights, and political instability in the region as a whole also pose risks. The weak geopolitical position of Russian business in Africa mainly results from a lack of adequate political and economic support on the part of the Russian government, which could have been provided in the form of economic assistance to African countries and a strengthening of cultural ties.

Another risk is caused by pressure from the local community, international NGOs and national trade unions. Trade unions defending workers' rights have become a common problem that Russian companies are facing in Africa, particularly in Nigeria and Guinea. Collaborating with local communities as part of CSR projects should become a priority in order to reduce this kind of risk for Russian corporations.

To improve the competitiveness of Russian companies and expand Russia's participation in African economies, it is necessary both to create industrial and market infrastructure and to implement programs that address the socio-economic needs of the local population.

Political instability is one of the most significant macro-level risks. Instability can provoke a shift in economic and business cycles and the establishment of a new ruling regime, which could result in a revision of contract terms. The Darfur conflict, the war in Somalia, and the intervention in Libya offer vivid examples of modern political instability on the continent. Thus, when South Sudan separatists shut off the pipelines [16], the local economy declined and production decreased for oil and gas companies, such as PetroDar, GNPOC, and KRC, 40 per cent of which are owned by the China National Petroleum Corporation (CNPC).

Despite the above-mentioned risks, the majority can be reduced through improvements in operational efficiency and taking into consideration possible consequences when entering into a contract. Apart from that, risks can be alleviated by active interaction between Russian and local authorities as well as the public, lobbying economic cooperation with African countries in government bodies, an improvement in the international image of the company through CSR projects and participation in government projects on the continent.

Conclusions and recommendations

Bauxite and aluminum complex in Fria

Although more than 30 Russian companies are currently operating in Africa [17], their business operations remain somewhat limited. The main reason is increased competition from American, European, and Chinese corporations. To improve the competitiveness of Russian companies and expand Russia's participation in African economies, it is necessary both to create industrial and market infrastructure and to implement programs that address the socio-economic needs of the local population. Therefore, we need to identify key areas of work to attain these goals.

Firstly, business CSR programs should strengthen the positions of Russian companies by expanding cultural ties. In particular, some of the educational programs and technical assistance projects could be carried out in Russian. This use of a soft power instrument would consolidate the positions of the Russian private capital in African countries.

Secondly, the corporate social responsibility activities of Russian businesses should promote the efficient use of those resources allocated by the Russian government for development programs in Africa, and thus contribute to helping solve development problems on the continent.

Thirdly, trade and improvements to the investment climate could offer additional instruments for Russian companies in their efforts to promote development on the African continent. The three key aspects of this are as follows: the technological modernization of Russian industry in Africa; an expansion of the project segment in the format of public-private partnerships in the African markets; and the provision of assistance to Russian small and medium-sized businesses to gain greater access to markets in Africa.

References

1. Doing Business 2014. Understanding Regulations for Small and Medium-Size Enterprises. P. 3. URL: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB14-Full-Report.pdf

2. Doing Business 2008. P. 6. URL: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB08-FullReport.pdf

3. Machowski H., Shultz S. Soviet Economic Policy in the Third World.” International Studies. 1987. P. 234.

4. L. Fituni, I. Abramova. Resource Potential of Africa and Russia’s National Interests in the XXI Century. – Moscow, 2010, 212 p.

5. Foster V., Butterfield W., Chen C., Pushak N. Building Bridges. China’s growing role in infrastructure financier for Sub Saharan Africa. World Bank, 2008.

6. Tat'jana Dejch. Afrika v prioritetah vneshnej politiki Rossii. Moscow: Institut Afriki, 2003. p. 52.

7. Investment from Russia stabilizes after the global crisis. M.: IMEMO. 23 July 2011.

8. Russian Federation: Outward Foreign Direct Investments by Russian Residents, the official web site of the Central Bank of the Russian Federation. URL: http://www.cbr.ru/eng/statistics/print.aspx?file=credit_statistics/inv_out-country_e.htm

9. Lukoil official site URL: http://www.lukoil.com/static_6_5id_29_.html

10. The Top 100 Non-Financial TNCs from Developing and Transition Economies Ranked by Foreign Assets are listed in the below based on 2013 data - http://topforeignstocks.com/2014/09/09/the-top-100-non-financial-tncs-from-developing-and-transition-economies-ranked-by-foreign-assets/

11. Lukoil official site URL: http://lukoil-overseas.ru/projects/egipet/

12. Gazprom official site. URL: http://www.gazprom-neft.ru/press-center/news/?id=1690

13. Rusal official site. Social investment abroad URL: http://www.rusal.ru/development/social_investment/gvinea.aspx

14. Rusal official site. Social investment abroad URL: http://www.rusal.ru/development/social_investment/gvinea.aspx

15. Rusal official site. Social investment abroad URL: http://www.rusal.ru/development/social_investment/gvinea.aspx

16. Ocherednaja grazhdanskaja vojna v Afrike kak urok dlja vseh. Jeho Moskvy. URL: http://www.echo.msk.ru/blog/maria_butina/1227912-echo/

17. Arkhangelskaya A., Shubin V. Is Russia Back? Realities of Russian Engagement in Africa. London School of Economics, P. 24. URL: http://www.lse.ac.uk/ideas/publications/reports/pdf/sr016/sr-016-arkanghelshubin.pdf

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