Corruption in Russia as a Business
Alexandra Kalinina
29 January 2013

Transparency International has ranked Russia 133rd in its recently-published 2012 Corruption Perceptions Index.1 The previous year, Russia was ranked 143rd. Is this improvement a result of effective anticorruption measures by the Russian government, or just a different methodology of calculation? According to economist Alexandra Kalinina, despite the improved score, corruption in Russia remains “not a problem, but a business.”

 

 

Character, areas, and level of corruption in Russia2

Corruption has penetrated all levels of government and most other aspects of life in Russia. According to Transparency International’s Corruption Perceptions Index, corruption in Russia is worse than in many African countries. In 2012, Russia was tied for 133rd place (out of 176 countries) together with Comoros, Guyana, Honduras, Iran and Kazakhstan. On the other hand, compared to Russia, the 2012 rankings of the other three BRIC countries are much better: Brazil (73rd place), China (80th place) and India (94th place). A notable worsening of this ranking for Russia – from 90th place to 126th – occurred at the beginning of Vladimir Putin’s second term as president; a drop of 36 places in only one year.

An equally pessimistic picture emerges from the estimates of the average size of bribes which has substantially increased over the last five years. For example, according to the Interior Ministry’s Department for Combating Economic Crimes, the average bribe amounted to 9,000 Rubles in 2008; 23,000 Rubles in 2009; 61,000 Rubles in 2010; and 236,000 Rubles in 2011.3 In other words, the average bribe in 2011 was 26 times greater than the average bribe in 2008, many times the inflation rate for the same period.4

According to Sergei Ivanov, the Kremlin chief of staff, the most corrupt spheres in Russia (in terms of household corruption) are healthcare, education, housing and communal services.5 In comparison, independent experts from RBC magazine name law-enforcement agencies (including the State Traffic Safety Inspectorate) as the most corrupt sphere in Russia, which is followed by healthcare, education, housing and communal services, and social security services6.

At the government level, however, the five top areas for corruption are as follows:

  1. Government contracts and purchases.
  2. Issuance of permits and certificates.
  3. Law-enforcement agencies.
  4. Land distribution and land relations.
  5. Construction.

There are many different estimates of the actual cost of corruption. According to official government statistics from Rosstat, the “shadow economy” occupied only 15 percent of Russia’s GDP in 2011, and this included unreported salaries (to avoid taxes and social payments) and other types of tax evasion.7 According to Rosstat’s estimates, corruption in 2011 amounted to only 3.5 to 7 percent of GDP. In comparison, some independent experts maintain that corruption consumes as much of 25 percent of Russia’s GDP.8 A World Bank report puts this figure at 48 percent.9

There is also an interesting shift in the main focus of bribery: whereas previously officials took bribes to shut their eyes to legal infractions, they now take them simply to perform their duties.10

Independent experts maintain that corruption consumes as much of 25 percent of Russia’s GDP. A World Bank report puts this figure at 48 percent.

Many experts admit that in recent years corruption in Russia has become a business. In the 1990s, businessmen had to pay different criminal groups to provide a “krysha” (literally,  “roof”, i.e. protection). Nowadays, this “protective” function is performed by officials.

Currently, most public purchases, public contracts and any other services that are done for the government or for state-owned enterprises involve bribes and kickbacks.11 Not surprisingly, the cost of public works in Russia (e.g. repair and building of roads and pipelines, construction of buildings, etc.) is much higher, sometimes several times higher, than in any other European country. In the end, the Russian population pays for this corruption. For example, some experts believe that the rapid increases in tariffs for housing, water, gas and electricity, which significantly outpace the rate of inflation, are a direct result of high volumes of corruption at the highest levels.12

According to official data from Rosstat (which are believed to significantly understate the degree of corruption,) the number of registered bribery cases increased from 2,700 in 1990 to 13,100 in 2009, and declined slightly to 12,000 in 2010. Therefore, even a government agency has officially registered a 4.5-fold increase in corruption levels during the past 20 years.13 However, 65 percent of those convicted under anticorruption statutes have received only conditional sentences, meaning that in practical terms, they have paid no penalty for their misdeeds.14

The reaction to corruption has also changed. In the 1990s, corruption cases were greeted by loud public protests: for example, the purchase of plastic chairs for the Moscow Luzhniki stadium from a company owned by the mayor’s wife, or royalties for a book on privatization paid to government officials.  Starting from Putin’s second term, however, very few corruption cases have been the subject of such outrage. For instance, the founders of Ozero cooperative society and other good friends of Putin have greatly enriched themselves since the early 2000s, and not much is known about the legality of their wealth. Putin’s system is remarkable for its ubiquitous and open merging of the civil service and business, as well as its use of relatives, friends, and acquaintances to benefit from budgetary expenditures and take over state property.

 

Reasons for corruption in Russia

Both corruption in Russia and the attempts to fight it are not new. Even in ancient times there were some effective measures against corruption. For example, in 12th century Novgorod, the ruler had to sign a contract according to which he, his relatives and his entourage were not allowed to own any landed estates in the region. This contract helped to prevent Novgorod traders, who already owed such estates, from ruling the region and using that position to entrench themselves and their allies as an oligarchy. In the 15th century, Grand Prince Ivan III frequently rotated court officials and provincial governors. He also introduced a specific oversight institution to monitor the governors’ work.

In contrast to these attempts, corruption flourished at the highest levels during the Romanov dynasty. It is no secret that Peter I and Catherine II had favorites, who received generous presents from the monarch. According to historians’ estimates, Catherine spent more than 90 million Rubles on gifts to her favorites and lovers. In comparison, Russia’s entire annual budget at that time was 16 million.

Corruption in the USSR had a mostly non-monetary character, and consisted primarily of using personal contacts to gain access to goods, services and privileges that were in short supply and were controlled by the state.

Even though corruption in Russia is not a new phenomenon, there are three specific contemporary causes of it: the absence of independent mass media, the absence of independent judiciary; and the absence of political competition. Another reason is the lack of a civil society with the ability to exercise control over the executive.  It is not surprising that these conditions result in the formation of an oligarchical class.

According to a 2010 survey of the relative influence of different groups in the Russian political system, conducted by the “Clean Hands” anticorruption center, power is concentrated mainly in hands of the “security forces” (the Federal Security Service, the Security Council, the Interior Ministry, the Federal Protective Service), with their index of influence on the political system equaling 55 percent. The second and third most influential entities are President Putin (13 percent) and organized crime (12 percent). All other groups (civil society, opposition, mass media, business, etc.) have a combined 20 percent rating in terms of political influence. This situation is dangerous both for society and the government. In effect, there is no political competition in Russia – the opposition only has a 2.5 percent influence on the political system, – and this permits corruption to flourish.

In addition, gaps in the Russian legislation and the regulatory framework as a whole prevent an effective fight against corruption. Russian laws do not clearly define the term “corruption,” which leaves considerable latitude for the courts to interpret this concept.

When officials are convicted of accepting bribes, they usually receive conditional sentences. Severe sentences are reserved for those who openly criticize the authorities.

Yet another reason for corruption is that Russia’s judicial system is highly dependent on the government and subject to influence by its senior officials. Many court decisions are dictated by the executive.  In cases where officials are convicted of accepting bribes, they usually receive conditional sentences. Severe sentences are reserved only for those who openly criticize the authorities.

Like the courts, the mass media are highly dependent on the government. The editorial policies of the Russia’s main TV channels (Channel One, VGTRK, NTV, etc.) as well as radio stations and newspapers are controlled by the Kremlin. Even Russian Public Television, theoretically an autonomous institution, is dependent on the state, since the president appoints its general manager and board of directors.

 

The Effects of Corruption

Corruption results in the “hidden sector” taking an increasing share of the overall economy, which means reduced tax collections and budgetary problems (which, in turn, cause social problems.) Corruption also leads to less efficient competition: the enterprises that succeed are not necessarily those that are the most effective, but those that have agreements with officials (based on bribes or personal influence) and thereby gain certain favors and advantages. A very small group of people is able to reap enormous profits from its corrupt relations with officials, while the rest of the population must bear the costs. Corruption at the highest levels results in the waste of government resources and the consequent inability to meet the population’s needs.

 

The once-independent NTV television channel regularly informed Russian viewers about high-level corruption. In April 2001, control of the channel was seized by the state-owned energy giant Gazprom.


Bribes are also a cause of inflation, since these costs are included into the final prices paid by consumers or taxpayers. In addition, corrupt officials are bribed to ignore price-fixing and other forms of monopolistic collusion, whose costs are passed onto the rest of the population. Because of corruption, there is a lack of protection for private investment, which leads to a worsening investment climate and results in a decline in output and fewer opportunities for innovation and modernization. People fear for their own savings and seek to find safer havens for their capital abroad.

One can see the negative influence of corruption on the Russian economy in the fact that in the post-crisis period, Russia’s GDP growth is much slower than in the other three BRIC countries, where there is far less corruption.16

 

The fight against corruption and its impact

The anticorruption campaign in modern Russia began on April 4, 1992, when President Boris Yeltsin issued a decree entitled “The fight against corruption in the public service.” This document prohibited officials from engaging in business activities. Moreover, state employees were required to provide information about their income, personal property and real estate holdings, bank deposits and securities, as well as financial liabilities. Failure to provide this information could result in dismissal from office or “other measures prescribed by law.” The implementation of the decree, which formed the basis of the laws on combating corruption and on civil service, was vested in the presidential control directorate.

Other attempts to fight corruption in the last 20 years included the establishment of the National Anticorruption Committee, the ratification of the UN Convention Against Corruption, the introduction of an “Anticorruption Plan,” and the enactment of the law “On Combating Corruption”. The government has recently developed a National Anticorruption Plan for 2012-2013. According to the new anticorruption legislation, officials must provide information not only on their own income, assets and property obligations, but also on the income, assets and property obligations of their family members.

The anticorruption measures have brought unexpected results: there are far more convictions of people who paid bribes than of officials who took them.

Despite all these efforts, however, corruption in Russia continues to grow. The anticorruption measures have brought unexpected results: there are far more convictions of people who paid bribes than of officials who took them.17

Experts on “institutional economics” have identified three conditions that should be met in order to correct a state’s failure to control corruption. First, society must have the ability to influence the state and its decisions. Secondly, there must be people who are ready to fight corruption (some will refuse to participate in this struggle even though they will eventually reap its benefits – these are the so-called “free riders”.) Finally, those who take bribes should not be more powerful than those from who they solicit these bribes. None of these conditions exist in today’s Russia.

 

The fight against corruption in Georgia: an example of a successful policy18

Georgia was a typical example of a highly corrupt country both during the Soviet and the post-Soviet periods. Until 2003, corruption penetrated every sphere of Georgian life: police, the government, educational and judicial systems, housing and communal services. However, thanks to an effective anticorruption campaign backed by the necessary political will and public support, Transparency International ranked Georgia 51st in its most recent Corruption Perceptions Index. Georgia has also been ranked 16th in the World Bank’s “Doing Business Report,” which is on a level with developed OECD countries. Georgia’s success led The Economist to describe the situation in the country as an “evolution of mentality.”

Here are some of the main factors that helped Georgia in its anticorruption struggle:

  1. Strong political will.
  2. Establishing trust at the very start of the reforms. Corrupt officials were severely punished.
  3. Immediate implementation: there was no long strategic planning or postponement.
  4. Recruitment of government personnel on a competitive basis.
  5. Reduction of state involvement in the economy.
  6. Incentives for officials to act legally: higher salaries and higher probability of punishment for corruption.
  7. Good coordination between participants of the reform process.
  8. Adapting foreign experience to local realities.
  9. Use of new technologies (such as online services) and modernization.
  10. Strategic communication effort: explanation of reasons and processes of reforms to the population; publicizing of corrupt cases and the names of corrupt officials.

 

Russia: Proposing ways of solving the problem

The Russian opposition and politically active public figures (journalists, artists, human rights activists, bloggers, etc.) should draft a detailed unified plan of action with the following aims:

  1. Increasing the influence of independent mass media, so that a significantly higher percentage of Russians are able to receive truthful information, including about corruption;
  2. Establishing a political party that would have significant public support in the 2016 parliamentary election; field candidates in municipal elections, creating a pool of new political leaders;
  3. Involving a higher percentage of Russians (especially from the middle class) in social and civic projects. The Coordination Council of the Opposition should play an important role in consolidating these efforts and developing a strategy that includes fighting corruption;
  4. Establishing a serious public anticorruption organization that will be able to cover the costs of the fight against graft.

One should also consider the successful anticorruption measures abroad (Italy, Hong Kong, Singapore):19

  • The independence of judges and the unavoidability of punishment for corrupt behavior;
  • Amnesty for officials and oligarchs who will be ready to legalize their wealth and pay significant taxes on it;
  • Transparency in government decision-making;
  • Creation of a special independent anticorruption agency;
  • Meritocracy – recruitment of government personnel on a competitive basis;
  • Frequent rotation of officials, monitoring of corruption in all public offices;
  • Creation of monetary and non-monetary incentives for officials who perform their duties honestly.

Experts highlight the need to amend Russia’s legislation and eliminate the many gaps that exist in the area of fighting corruption. Changing the Russian education system would be another important step in fighting corruption and developing civil society. Starting at the school level, educational programs should change the perception of corruption and raise the level of general legal knowledge.

None of these measures, however, will work until there is a strong will to change the situation and a firm belief that Russia’s heritage of corruption can be overcome. Corruption can only be eliminated by an effective fight both from inside and outside the system.

 


1 http://cpi.transparency.org/cpi2012/results/#myAnchor2

2 Source: Доклад «Коррупция в России: Независимый годовой отчет Всероссийской антикоррупционной общественной приемной “Чистые руки”», Москва (2010). (rusadvocat.com/doklad2010.doc)

3 http://imrussia.org/index.php?option=com_content&view=article&id=235&Itemid=95&lang=ru&limitstart=2

4 http://www.icss.ac.ru/macro/index_year.php?id=6

5 May 2008 – December 2011, Deputy prime minister of Russia, since December 2011, the head of Russian Presidential Administration.

6 http://magazine.rbc.ru/2012/01/25/trends/562949982589258.shtml

7 http://interfax.ru/txt.asp?id=242603&sec=1476&sw=%F0%E0%E7%EC%E5%F0+%F2%E5%ED%E5%E2%EE%E9+%FD%EA%EE%ED%EE%EC%E8%EA%E8&bd=22&bm=4&by=2012&ed=22&em=5&ey=2012&secid=0&mp=2&p=1

8 Source: Milov, Nemtsov, Ryzhkov, Shorina (2011). “Putin. Corruption. Independent expert report”, p. 6.

9 http://www.newsland.ru/news/detail/id/580475/

10 http://ria.ru/economy/20110201/329132334.html

11 Milov et al., 2011, p. 6.

12 Milov et al., 2011, p. 6.

13 РОССИЙСКИЙ СТАТИСТИЧЕСКИЙ ЕЖЕГОДНИК. 2011. Пункт 10.1

14 Выступление председателя Верховного суда РФ В. Лебедева на совещании председателей судов субъектов Российской Федерации, 27 января 2009 г. — Среди осужденных за взяточничество преобладают милиционеры // Коммерсантъ. 28.01.2009.

15 Ю.В. Кузовков. «История коррупции в России». Интернет-версия. Москва, 2010.

16 Transparency International’s Corruption Perceptions Index

17 http://www.gosrf.ru/news/3848/

18 The World Bank. The fight against corruption in public service. Chronicle of reforms in Georgia (2012).

19 Harvard Business Review. Russia. Falaleev. “They have overcome corruption.” (2007)

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Comments  

 
# John Newcomb 2013-01-29 20:47
Thanks IM Russia - that corruption article is a great piece of research and work!

Just to clarify, TI suggests that cannot accurately compare year-over-year CPI because of their methodology, but this will change with the 2013 CPI.

So, better to compare Russia (133) with Kazakhstan (133) and Ukraine (144), but not with previous Russia CPI.

Reference:
cpi.transparency.org/.../...

.
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# GW 2013-02-16 15:40
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