Russia is not ready for the formation of proper, efficient, complex, and cause-effect risk management mechanism apart from the exceptional economic appraisal, and static approach in exchange of dynamic one on the macrolevel. But under what conditions can we at least try to speak about risk management in our country?
The majority of Russian companies have no practical risk management, which means that there is no integrated risk management, far from the systemic risk-management. The reason of this phenomenon lies in the fact that our country still has an uncivilized form of business. The proprietary interests are not protected. In addition, there is practically no way for a civilized form of business to appear.
In the first place, business is a chain of links; but an uncivilized form of business makes all these chain links unprotected. Every link, every owner takes care not about a common business, works not for the public good, and thinks only about his profit, and in addition takes actions, which are dangerous for the whole business. However, the owner makes nothing of the threat, but simply waits, when he gets away with all this.
In the second place, Russian economics is the economics of manufacturer, when the small business is weak, as the external environment pushes against it. Basic losses, incurred by the subjects of small and medium business are the losses from banks and other financial establishments. They, in their turn, do not want to make an effort for the benefit of small business. And even if this happens in certain time periods, it is only to their benefit. Banks use financial ignorance of the majority of small business managers, and in many cases propose predeterminedly disadvantageous conditions for them. Besides, they do not disclose certain nuances, which may simply harm this or that company in future.
In the third place, it is a low legal culture of the Russians. The citizens of the country cannot stand upon their rights, and force in their demands. The public choice mechanism fails to work.
Manufacturers (large enterprises) shift a range of responsibilities on the subjects of a small and medium business; and small companies are just unable to protect their interests and defend their rights. In addition, the transaction expenses are very high; so the small business cannot function well in such conditions.
Some industries have support from the side of the government; but the entrepreneurs in certain industries are simply left to their fate. Besides, the country faces a low level of competition in many branches. In this respect, the main killers of competition are the very authorities and oligarchs, as well as their interaction. The economics is inefficient. The conditions for business development are unequal. The risk management is ineffective in such a medium by definition.
Risk management is necessary for innovation, investments, and manufacture. In order to carry on a civilized business and innovations, the economics of the country should be effective. Here we can recall the hypothesis of high, medium and low market efficiency, which is described in the book “Financial Management” by Kovalev. According to that conception, the market is efficient in the information plan, when no market participants can receive high profit on the regular basis.
It is well known that prices reflect the information not only about the present but also about the future. From this point of view it is possible to receive hyper high profit in certain industries (for example, gas industry or oil industry) in our country. Meanwhile, the barriers for entering these industries are sky-high; and, generally speaking, the power in them belongs to highly positioned officials.
We should emphasize that the risk management is interesting and necessary in conditions of innovation, investments, and manufacture. Because of the fact that it is easy to receive super profit from simple operations like import of raw material resources in modern conditions, there is no sense to be engaged in the recent development in the area of manufacturing. Basic money is spent where it is easy to earn. Therefore, there is no time and interest for the system risk-management.
One more reason for immaturity of practical risk management in Russia is the following. Risk management is basically useful in large manufacturing complexes with industries, and well-developed infrastructure. Only they are able to control the whole process of manufacture of the released products. When business is isolated and broken into parts, it becomes difficult to control the whole process. The owners are not sure about how this or that innovation in a certain link can affect the common business. In addition, the process of invention and development has irregular pattern under such conditions. Systemic profit cannot be obtained because the rights protection system of links and the system of their coordination are absent. Besides, the subjects of small and medium business cannot be systemically engaged in the development, risk control and management physically, or materially.
Only a vertically-integrated system can afford an opportunity for the development of risk management. This system should be flexible so that the requirements from the last segment could be promptly transferred to the first one. The example of risk management inefficiency in Russia is an automobile industry in particular. The underdevelopment of innovations in this industry does not allow the car manufacturers of our country to produce any able to meet competition automobiles at all. Moreover, no restrictions on the part of the state like barrier duties against the import of foreign-made cars will be able to help in this case. It is simply impossible to have risk management in such a system and at such organization.
We should emphasize, that risk management can and should exist mainly in large manufacturing complexes, and in vertically-integrated systems. In this regard it is possible to build a general effective system of risk management, which will proceed from large enterprises to the subjects of small and medium business. Therefore, large companies-integrators in particular should invest into developments, as well as to undertake all risks, negative and positive, from these developments. The stimulus for this is the reception of profit from innovations.
Consequently, Russia has no conditions for the organization of the efficient integrated system of risk management so far; although in certain cases we may observe incidental risk-management, which theoretically is bent on the systematic one. In some time such a system of risk management may grow into a complex and systemic one; and then the theoreticians will start speaking about complex instruments of the risk management.
Nevertheless, nobody will deny, that risk management is of paramount importance. No matter, how well the owner can manage risks, the fact is that risk management has become a part of life and business at present. This means that risk management is used in ordinary life and in some business activities on some intuitive level, even if nobody is engaged systemically and systematically in the risk management. No matter whether the company starts the realization of a new business project, the development of new goods, the conduction of foreign trade operations, or is in search of the sources of finance, its authority should take into account the uncertainty of factors in the internal and external environment and be able to manage risks, which may become a source of failure and losses.
All this concerns all industries and all companies both in the whole world, and in Russia in particular, where the complex risk management is only originating. There are no guarantees that the realization of a new business project will be successful. The companies, which develop new goods, will have to undertake risks. It is because the market may not be able to accept this product. Companies, who strive to get some additional funding, will have to display good skills in the company management in order to get the highest credit rating, which will mean lower interest rates for the company. Finally, companies, who do their business on the international market, will have to meet with foreign-exchange fluctuations, political and economical instability of the country they work with, as well as the activity of non-state organizations.
There is no general philosophical understanding of why it is necessary to manage risks, what their boundaries are, what conditions and possibilities are necessary to change the situation in any case.
Traditionally the risks are divided into systematic (which cannon be managed by the company) and non-systematic (which can be managed by the company). But this approach is very rough and inaccurate, as we already stated. But how it then turns out that all companies are exposed to systematic risks; but some of them survive, and the others simply do not. The present crisis situation is a good confirmation of that. The result is that it is possible to manage systemic risks. It appears, that in the process of learning the company can go up the higher level, and the risks can transform from uncontrolled to controlled, and from systematic to nonsystematic ones.
But all this is possible only on conditions of deep adaptation. This means that those, who adapted themselves for economic circumstances, also adapted themselves for systemic risks. In this regard, the adaptation is impossible to be called passive only, because systemic risks can be planned or predicted. It is possible to distribute resources in a flexible way, so that the resources are absent in those business processes, which are mostly exposed to risks. At present the approaches to adaptation have not been studied.
There are certain conditions at which you can manage risks. The potential of influencing these conditions is flexible. For example, if business is civilized, the fraud risks will decrease. Another example is if the state will build proper policy, there will be less financial speculations. The mechanism of risk management on the level of a separately-run business unit will become complex if the company is able to correlate the causes, conditions, circumstances and risks. The company will not blindly use the generally accepted risk management tools, but it will deal with risks using the entire complex of multidirectional actions, in some cases, preventing the consequences and reducing the potential damage in others. This is how the dynamic risk management mechanism will function.
In addition, such measures will not always be able to work on the level of one company. It is necessary to conduct risk management by joint efforts: within the industry or within the country in particular. The conditions are differentiated; some of them are accessible for regulation. And it is quite possible that sometimes you need to combine efforts in order to manage risks effectively. Such approach has not been studied as well. Meanwhile, the effectiveness of risk management mechanism depends upon this.
There is a collection of theoretic definitions and methodology; however, there is no practice, which complicates further development of the science. Let’s take, for example, a mechanical approach, realized both in the books and in Russian corporations. It is expressed in the non-system approach to risks (there is a set of approaches, which are necessary to be taken from time to time). But the approach to the risk management should be organic. Risk management at the mechanical approach lies in the mechanical elimination of risks. As for available methods, it is proposed to apply them from time to time, by turns and in some permissible limits. Mechanicalness lies in the fact that the system of risk management and the system of financial management are understood as two independent systems. The risks are managed discreditably, which means certain measures are taken only with respect to separate occurring risks. And this involves consequences in its turn. One may fail to notice the risks in time, and the approaches of discreditable risk management are late. Therefore, their effectiveness decreases. Risk management science at the mechanical approach presupposes a certain set of approaches and a certain set (logic) of actions on holding of these risk factors within certain limits of the scripts. The behavioral character of the risks is ignored in this regard.
It is necessary to approach the risk management nondiscreditably. It should be based on the fact that risks cannot be fully eliminated; they arise in all spheres and penetrate any managerial decision. One may manage them only at the time they occur. In this respect it is necessary to create self-regulating approaches including identification of risks, evaluation of their seriousness, choice of methods and instruments, development of strategy and tactics of risk management. The system of macroeconomic regulation has automatic stabilizers including taxes, for example. Business Management System should also contain such mechanisms, which could enable to detect risks automatically, evaluate them and make respective decisions. The question of creation of such systems is not even raised, as nobody thinks about it.
Let’s try to specify the conditions and main factors of the efficient organization and functioning of risk management mechanism in holding companies at such informative deficiency of the existing theory and practice of management risk.
Statistical risk management, at which specific possible unfavorable events are not differentiated; mutual links of causes, factors, conditions, characters and variants of unfavorable events are not set; the methods are chosen traditionally according to a general rule, generalized recommendations, and the analogies; but systemic interaction of the risk management elements is absent. Dynamic control is to the contrary characterized by the fact that the selection of risk control element is becoming specific and systemic. The level of static risk management refers to the entrepreneur, the subject of small and/or medium business, when the directors has no necessary knowledge of the application of more flexible mechanisms and instruments, they therefore apply static risk management. The example of dynamic risk management is a company (or a group of companies), in which the system of risk management is built on all levels, and the links are interconnected with each other. Furthermore, a continuous process of knowledge accumulation takes place on the basis of not only existing situation, but also on the basis of expert evaluations, calculations, and analogies. All this enables the company to control all potential and occurring risks on all levels, evaluate them, set priorities, prevent any threats, and deal with those risks, which are impossible or impractical to prevent.
Consequently, we may formulate the definition of the efficient risk management mechanism. Efficient risk management mechanism is a continuous process of risk holding within certain frames using a certain set of approaches. The efficient mechanism (the efficient system of risk management) is a systemic, nondiscreditable, and organic process, which is built in the system of company management so that no managerial decision could be taken without considering its risk factors. The mechanism should be built on the alternative basis, based on the certain logic behavior concerning risk factors. It is necessary to elaborate a risk-strategy, which will enable to influence the whole complex of multidirectional risks. The efficient mechanism should work in the on-line mode, but not discreditably like in the mechanical (static) approach. And only then it will be possible to build an efficient model of risk management.
 V.V. Kovalyov “Introduction to Financial Management” / В.В. Ковалев «Введение в финансовый менежмент», М.: «Финансы и статистика», 2000.