Before we get started, I apologize for the lengthy delay in posting. As I probably mentioned elsewhere in the comments, my in-laws are visiting from the Far East; also, Christmas is a very busy time for family – for those so fortunate as to be with their families – in Canada. There’s the Christmas shopping to be done, traffic is crazy (the city I live in is only about a million if you include incorporated suburbs, but at this time of year, you’d swear it was New York or something nutty like that, I don’t know where all the people come from). Anyway, I’ve found that being on vacation allows me a great deal less free time that I was used to having at work; a fact that might be viewed with equal astonishment by my employers.
I’ve never had the opportunity to be in Russia for Christmas, but I’m told it’s not anything like the occasion it is here. To my even greater regret, I’ve never been there for New Year, which I’m told is the social event of the season. It sounds like a great time, and I hope to experience it in the years to come – perhaps in St Petersburg: I’ve always wanted to see St Petersburg.
I’ve finally received Kovane’s latest work, his long-awaited omnibus piece on corruption in Russia. As is becoming his hallmark, this work strikes me as brutally honest – so much so that I’m afraid I’m going to have to climb down a little in my defense of Russia on this issue. The problem is much more serious than I ever thought, and much deeper entrenched. It’s an enormous challenge for the government, and changing what is for some the habit of a lifetime is going to be a daunting task. As I usually do, I wish Russia success in its efforts, and encourage…..well, encouragement. Let’s not waste any more time, but get right to it. Kovane?
“Just recently, reading the news made my forehead sweat. Transparency International once again downgraded Russia in their Corruption Perceptions Index; the head of the Kremlin’s control department, Konstantin Chuichenko, announced that by his conservative estimate, the Russian budget is 1 trillion roubles short due to corruption in the state procurement system (around 20% of the total amount).
This revelation plunged me into despair, and made me feel like an utter failure – everyone seems to be getting in on the sweet juicy action, and I’m missing out on all the fun. Meanwhile, the subject of corruption became the first violin in the merry band of those who are keen on portraying Russia as a failed state. It’s a mandatory part of any diatribe, whether concerning another prediction of Russia’s inevitable and forthcoming end, or the latest multi-page enumeration of Vladimir Putin’s sins. Is corruption in Russia a state-threatening phenomena? Is the current political system intrinsically unable to overcome the problem? In order to answer these questions, we should look critically at current methods of gauging corruption, its characteristics pertinent to Russia, and the very nature of corruption itself.
Economic theory teaches that corruption is a very broad umbrella term, including such many-sided forms as bribery, embezzlement, kickbacks, cronyism, police and judicial corruption, electoral fraud and trading in influence. Some of them, like petty bribery and clan cronyism, are more inherent in traditional societies; others, like trading in influence and lobbyism, are the hallmarks of developed democracies. But at the end of the day, all of them combine in about the oldest game, which has existed as long as humanity itself – the intertwining of wealth and power. The common attribute that allows their grouping is that all these forms come from the abuse of entrusted power for private gain. Their economic effects vary significantly, from paralyzing and crippling to even mildly beneficial, enabling navigation through an over-regulated economy.
There are many ongoing debates about the nature of lobbying: at first glance it’s a completely legal process, intended to be a competitive way for different groups to influence the government’s decisions. But in practice, lobbying turns out to be very reminiscent of corruption and prone to abuses. For example, US health care spending is approximately 17% of GDP, while Canada spent 10% and UK around 8%. Comparing the quality, WHO’s overall health service performance ranked the US below both Canada and UK in the terms of “composite measure of achievement in the level of health”, but this survey is certainly not without its detractors. The point is that the necessity of changes was evident to everyone. And any chance of meaningful reform was worn down in backroom dealings. What’s the result? All prognoses show that the costs will only go up, which means that more than 7% of GDP ends up in the pockets of the health care industry due to inefficiency. And the whole process is completely legal, no corruption whatsoever.
The situation with US health care demonstrates another economic aspect. Much more often than not the market fails to achieve an efficient allocation of resources, due to either information inequality, externalities or the tendency to monopolization. All these negative factors can be corrected to some extent by the state’s interference. This becomes the source of corruption, of course, but if the interference is reasonable, the economic loss from corruption is less than the potential loss from the market failure, so state involvement is acknowledged as the lesser evil. Of course, the degree and forms of interference are subjects of heated debate, especially given the tendency of bureaucracy to encroach on the controlled sphere.
What makes corruption such an ingrained problem – and complicates battling against it – is that the victim is often the state or an unsuspecting third party. Only in certain cases, like a rigged court decision, can the side that is wronged draw attention to the shady dealing. That happens fairly regularly in Russia when, under the pressure of public opinion, some court decisions are reviewed. But a much more common picture is when virtually no one is interested in the investigation of corrupt practices: for example, in the case of kickbacks on state contracts, everyone involved is usually getting a share and the police have no incentive to cross the path of the influential people, especially when their own uniform is far from unblemished. Besides, those who line their pockets with state money are not eager to rush into Forbes offices to brag about their ill-gotten profits. That’s why making any estimates of a corruption level is so difficult; it can be gauged only by indirect manifestations.
Currently, there are several international organizations that try to quantify the data on corruption in world countries. The most often cited is certainly Transparency International, which annually publishes its Corruption Perception Index. The name speaks for itself: this indicator reflects how corruption in a country is perceived by a number of international NGOs, such as Freedom House and the Economist Intelligence Unit. Basically, TI crams into a single number such a complex phenomenon as corruption using opinions of experts whose objectivity and knowledge is certainly not without question. For example, head of Freedom House James Woolsey claimed that the Russian administration behaved like a fascist government, which isn’t a very promising sign of impartiality. But one of the stinkiest eggs on TI’s face is the recent financial meltdown in Iceland. The country which was number one on the CPI index ranking in 2005 collapsed in 2008, ruining the lives of ordinary people. Even preliminary investigations showed that an orgy between the government and banking industry greatly contributed to the financial catastrophe. Something tells me that most Icelanders would gladly exchange that first place for corrupt road policemen, if only TI took Iceland corrupt elites with it.
Anyway, in 2010, Russia scored abysmally low, 2.1 on a 10-point scale (the 154th place out of 178). Much objection was raised over this ranking, and certainly not without reason. For instance, these charts show the correlation between a CPI rank, GDP per capita and Human Development Index. Venezuela, Iran and Russia clearly stand out against the common trend, and I will offer no prize for correctly guessing what they have in common. The answer is too easy: the love of the Western world clearly eludes them. Responding to criticism of their methodology, TI introduced another indicator, Bribe Payers Index (BPI), which shows the willingness of businessmen from different countries to pay bribes when operating abroad. Russia came in 28th of 30, right above China and India.
A possibly more solid approach to measuring corruption is demonstrated by another NGO, Global Integrity. They try to evaluate not so much corruption itself, but anti-corruption measures implemented by a country, something that can be performed more objectively than TI’s divining how many bribetakers can dance on the head of a pin. However, Russia didn’t turn out to be a bastion of incorruptibility there either: it was given an overall rating of “Very Weak” and scored 69 of 100. Global Integrity also brought out the fact that the Russian legal framework is much better that its actual implementation. There are some other international organizations issuing estimates of corruption, but they are either working with TI or not especially influential. Admittedly recently developed, but already tremendously authoritative, will the Karlin Corruption Index become the staple of objective corruption assessment? Time will tell.
Ironically enough, despite the visibly raging storm of public indignation in Russia, the number of non-government organizations that draw attention to the problem of corruption is small. It’s a local branch of the ubiquitous TI, the garishly liberal INDEM fund and Association of Russian Lawyers for Human Rights. They all issued reports on the state of corruption in Russia, and I will join them in their effort. However, my account will be different: I’ll try to describe the interdependent layers of corruption in Russia, rank them according to the danger they present, estimate corruption leverage they have and suggest the methods of dealing with them. Of course it will be subjective, but everything is when speaking about corruption.
As unpleasant as it is to admit, corruption in Russia is deeply rooted even at the lowest level. The source of this problem lies in the virtual devastation of the state after the USSR’s collapse. The wages of teachers, doctors, policemen and civil servants were devalued in a matter of months by hyperinflation. With the most capable having left for the private sector, the framework of society was quickly changing. For those who stayed, the only means to survive was by collecting small bribes. During the 2000s the situation improved somewhat, but still, wages were often half the average wage. Doctors, after 8 years of study, earn 300-400$, and this wage grows very slowly with experience. Nearly the same money is paid to entry-level road policemen; teachers make slightly more. This accounts for a very high churn rate there; the numbers of doctors, policemen and teachers having to be kept significantly higher than the world average. For example, there are four times as many policemen in Moscow compared to Vancouver, and two times as many compared to London. A similar picture is evident in health care. The ones who choose to occupy their lives with Russian health care or the police are a motley mix of true enthusiasts, low-qualified mediocrities and shady characters that learned to supplement their low wage with a hefty illegal income. The latter quickly understood a simple formula: “the state saves money on the wages, but turns a blind eye to some profitable escapades”.
Undoubtedly, the most lucrative spot is that of a road policeman; their bribery is infamous among common people. While official fines range from 3$ to 200$, they are quite inconvenient to pay: it requires going to a bank, saving the receipt, besides its leaving an official record. With a road policeman, you can solve the matter for as little as a third or half of the official fine, payable on the spot, no records. Don’t believe anyone who suggests that a road policeman extorted a bribe: they don’t need to. Supply is too high, they can allow themselves to be picky. A completely different story is violations punishable by disqualification from driving. A clever cop has merely to correctly assess the material wellbeing of the violator and how important the driver’s license is to him, in order to not drive too cheap a bargain. The bribe is usually from 100$ to 1500$. Earning a little bonus is much harder for doctors. The most common schemes are selling fake diagnoses, forcing unnecessary paid services on patients and prescribing various snake oils in the form of bioactive additives, for which doctors get a share of sales. But since doctors (of state hospitals) work primarily within the poor strata of society, the opportunities for illegal income are rare, so very few get to live in style on this kind of income. For low-level clerks, opportunities lie in expediting the process of obtaining papers; teachers content themselves with small shakedowns from parents.
At first glance, this type of corruption is pretty innocuous: it can be presented as an additional charge levied on the people who use state services. But such an interpretation leaves out several important negative consequences. First of all these practices increase the tolerance for corruption in society and subvert civil service, making it very inefficient. Second, petty bribery creates a bad image in the eyes of foreigners and contributes to the deterioration of the investment climate. Finally, involvement of a majority of state employees in illegal activity supports corruption at higher levels and facilitates criminal solidarity.
Luckily, the ways of eradicating low-level palm-greasing are well-known and relatively easy. Hell, it’s so easy that even such a boob as Saakashvili did it. Increasing wages to an adequate level, making honest living possible, is the first and most important step. Reducing the number of civil servants will help to come up with the required money. Establishing at least minimal anti-corruption measures is absolutely necessary to curb corrupt practices, as nobody will turn down the opportunity to earn more when punishment is unlikely.
Corruption that extends the rights of the wealthy
Throughout world history, the rich and powerful have enjoyed a completely different code of rights than other people, and modern egalitarian societies have existed for two centuries at the very most. But even now, despite declared equality, means are far from being equal: money provides better defense in court, better education and a better head start for children. Or, as the “Pravda” newspaper had it in a column; “Two worlds – two fates”. But that’s unremarkable, and is only disputed by marginal utopianists. A distinct characteristic of a developed society is that it clearly defines the areas which are intended for economic competition, and which are not, or at least that’s the ideal to which to aspire. Russia, on the other hand, looks like a bizarre libertarian paradise – there is a market for almost anything. A glaring example of this is the Russian conscription army. There are so many ways to avoid it: a bribe directly to a local draft station, buying a medical certificate that shows that a person is unfit for service, through education or simply old-fashioned draft-dodging. As a result, conscription works as inverted selection – only those who are too stupid or too poor end up there, along with people who have other reasons to serve. That, to a large extent, accounts for the pretty dismal state in which the Russian army finds itself, and it forms a vicious cycle. The worse the army becomes, the more young citizens try to avoid it.
The education system suffers from similar problems. Before 2009, all universities held entrance exams, which were infamous for their corruption. Addressing this problem, the government introduced the system of unified school exams (EGE), intended to be less susceptible to string-pulling. But the effect turned out to be quite different. Corruption simply shifted from universities to schools and regional public education authorities, and now the whole country rejoices at the inflow of students from North Caucasus who scored 100 out of 100 points in a Russian exam – but can barely speak it. In a study conducted by the mathematical-mechanical faculty of the MGU, more than 60% of first-year students failed an exam based on EGE material. Any calls to repeal the EGE failed, so Russia has to live with it, and whether its flaws are temporary or systemic remains as yet unclear. If, with EGE implementation, universities lost the potential for illegal earnings through entry exams, corruption among academics remains the same. Some students even don’t visit the university, paying for the whole set of examinations. Although the system of bribery became more subtle in recent years, often disguised as private tutoring, the state of Russian higher education leaves much to be desired.
But definitely the direst problem lies with law-enforcement. It’s not a secret that, in Russia, criminal laws are not so strict for those who can afford it and extremely pliable to the influence of money. It is possible to derail a criminal case practically on any stage – from beat policemen to courts. Fairly regularly, news about crimes involving Russian big shots or their relatives hits the headlines, but then dies away; only pressure from public opinion – rarely – succeeds in bringing attention to these cases. And how many crime investigations are just smothered in obscurity? An especially dangerous situation is emerging in the localities where all scarce sources of income are controlled by a single entity. That leaves whole villages and cities to the unregulated will of the owners, where even police and bureaucracy serve their interests. Such incidents as Kondopoga or Kushevskaya are direct consequences of such processes. Indifference of authorities results in social tension and interethnic conflicts; they represent one of the most dangerous threats to Russia.
“The Economist” can be really proud: some kind of market for these services formed, and the size of bribe generally depends on the affluence of a region. For example, draft stations in regions set a fixed rate with a complex discount system. In Moscow the price is around 10 grand, in regions it is much lower – around 2 thousand. Considering the multitude of ways to avoid the draft, there is even competition on this market. Things are roughly the same with EGE and bribes in universities. One EGE in Moscow costs up to 2 thousand; in regions – around 500 dollars. Making a criminal case go away is really a custom-made product. The price starts with several hundred to patrol policemen, if the crime is petty, and may go up to several hundreds of thousands to sway the judge. Of course, there are many factors, such as specifics of the case, the resistance of the injured party and the number of middlemen. But for the right price, a compromise can always be found.
Unfortunately, there’s no easy recipe to solve all these problems. Only consistent improvement of the legal framework and introduction of strict control mechanisms will make some headway. Changing the attitude of the citizens is also vital – their participation in the battle against corruption will alleviate the efforts to expose unsavory dealings.
Graft and embezzling of state funds
Government officials in Russia quickly understood the safest and most potent way to profit from their positions – by controlling state expenditures. A more or less transparent system of government procurement was introduced as recently as 2006; since then, more than 20 amendments were adopted. Despite the seeming immaturity of the system, the International Budget Partnership (another NGO) evaluated it fairly well. But any positive estimates mean little, knowing the real picture. Only in 2009 Medvedev made publishing income declaration mandatory for government officials and their immediate relatives, and first results made everyone laugh. To begin with, a group of officials simply refused to do so, and complied only after the president’s direct demand. Some declarations turned out to be absolute comedy gold. For instance, Ramzan Kadyrov (Chechnya governor), who – according to a Wikileaks report – loves to run around giving gifts like 5-kg gold bullion and dances with his gold-plated pistol, owns only a small flat, slightly larger than a kennel, and an old Soviet car. Another tendency: Russia is a country of freewheeling feminism; very often high-ranking officials put onto the family budget only their relatively modest salary, while their wives rake in piles of dollars. Or, take Krasnodar governor Tkachev. He may not be very rich, but his 22-year-old niece is a rouble billionaire, and owns a couple of big factories and a large development company in the region. Hey, you didn’t have any factories when you were 22? Too bad, you should have worked harder, that’s the reason.
All jokes aside, while there’s no control over the earnings of civil servants, it would be a sin for them not to stuff their pockets. The number of tricks in their playbook to assure that the right company wins a tender is infinite: concealment of a lot; a rigged requirements specification so only the right supplier meets it, using insider information and many others. Creatively using any combination of them makes corruption extremely profitable, and virtually unproveable.
1 trillion, announced by Chuichenko as the size of theft in the government procurement system, is certainly more a political statement than the real assessment. Not because that’s too large or small a number, there’s simply no reliable methodology to do that. The most difficult part is drawing the illusive line between inefficiency and corruption. What price should be considered fair, and how to determine it? Experts say this estimate is derived from the statistics of the unified electronic trade platform, which is due to be implemented in 2011. During the course of bidding, the price lowers by 20% on average: the system is not yet operational in Russia, and hence the 20% is stolen. Such logic is certainly debatable, but nevertheless, it shows that there’s plenty of room for improvement in the current procurement system. The size of an illegal mark-up varies greatly, depending on the subjective component of a bid. For example, in a recently investigated corruption case, tomographs were bought with a 100% mark-up. State purchases of medical equipment, along with research and IT projects are the most corrupt areas, while other goods and services are less so.
The dangers of the current system’s ineffectiveness are evident: it slows down economic development, subverts the people’s trust in any state projects and provides inducement for capital flight – corrupt officials often prefer to keep their ill-gotten gains abroad in case of emergency. Perhaps the most revealing example is the public attitude to Russia’s winning the right to host the World Cup. A significant number of people voiced their misgivings that a large part of the funds will be stolen.
There’s only one solution to this problem – more openness and transparency, and the government, fortunately, realizes that. In 2011, the Unified state procurement system will be introduced; from 2012, more purchases will be made on an electronic auction basis. The general public is also acutely aware of the problem, and the struggle has already attracted a champion – lawyer Alexei Navalny. Despite having a somewhat blemished reputation – he flirts too much with the US, which doesn’t improve his standing in Russia, and is often accused of attention-seeking behavior – his attack on Transneft caused a lot of resonance not a while ago. Regardless of whether Navalny’s activities are honourable and honest, or just another conspiracy to bring Mother Russia down, they put pressure on state companies and compel such giants as Transneft and VTB to change old practices.
Corruption and business
A quite common leitmotif of describing business in Russia – in the Western press – is that it’s constantly teetering on the brink of bankruptcy, being bullied by the bureaucracy and fearing inevitable chekist takeover. Is there any truth in that? Well, it’s undisputed that the Russian legal system is not the most business-friendly, to put it lightly. Many regulating legislations were grafted from the strict standards of the USSR, some others were drawn up with a maximum number of controlling clauses. A tendency of the most recent years is a very slow improvement of these regulations, but a lot more is still needed . The World Bank’s project “Doing Business” ranked Russia at 123th place according to the ease of doing business, which isn’t very reassuring. A closer look at the ranking revealed a lot of material for thought: no members of BRIC are doing better – Brazil is 127th, India is 134th and China is 79th. But that doesn’t stop these countries from rapid growth. Yet another example: Russia took the 182nd place of 183 for ease of dealing with construction permits (eat it, Eritrea at 183rd place!), and it’s fair to say that that placement is to a large extent justified. What’s surprising is that the bureaucratic barrier doesn’t strongly affect construction costs. According to the study by Rider Levett Bucknall, average building costs are on par with the European level, which confounds widespread myth about exorbitant expenditure on construction in Russia. These two facts alone demonstrate that the relationship between the government and the private sector in Russia is much more complex than the one-way street pictured in the media. The most appropriate characterization is the saying “strictness of laws in Russia is compensated with the non-obligation of following them”; and business gladly cuts corners here and there. For example, Russian labour law obliges companies to pay wages on time, properly register all vacations and keep detailed records. No wonder many businesses violate these regulations. They can pay the fine and correct violations, or they can order a “consultation” from a front firm, associated with a head of the labour law inspectorate, so everyone is happy. The capacity for illegal extortion actually is quite limited, as the firm can complain to the police, and an excessively greedy official will be arrested; such matters are best resolved amicably. Approximately in the same way, things work in other spheres of regulation: fire safety, tax regulations, etc. Often such arrangements backfire, as it was with the “Lame Horse” club in Perm. Its owner flagrantly neglected any safety regulations and, after the tragedy, was arrested along with the fire inspector who approved the club’s fire safety. For most businesses in Russia, paying a bribe is just a way to save money on the legal department. Instead of keeping track and following the constant flux of the arcane legal system, it’s often easier to work out an extralegal solution on an ad-hoc basis. In any case, entrepreneurs are far from being a docile and intimidated flock, and they actively fight for their rights. And this struggle is often successful: according to statistics, more than 73% of all tax cases in arbitration courts are resolved in favour of businesses.
Such cumbersome regulations couldn’t get past the eyes of big companies, and they gladly use them against competitors. The ability to cast upon an intractable counteragent swarms of inspections, which can completely paralyze any activity, proves very handy in hard negotiations; that’s something called “administrative resource”. This creates an additional layer of competition; any comparable company has to have similar methods in its arsenal, or at least be able to repel them. Small businesses are rarely affected by attacks like that: nobody wants to bother with them, and they are much more flexible. Tight regulations are also the favourite trump card of the Kremlin. Alleged violations of ecological regulations were used as leverage in the buy-out negotiations with Shell in the Sakhalin project. Those bastards didn’t care enough about grey whales and orchids! UKOS was no better, according to inspection reports; they tortured pigs and rabbits which were subjected to, quote: ”non-systemic mating and improper accounting”. My heart goes out to them.
The aforementioned practices are certainly not alien to any economy, but in Russia they reached a much wider and more dangerous scope. This has a severe negative effect on the investment climate, and creates more uncertainty and risks for entrepreneurs in Russia. Furthermore, using administrative resource allows the creation of monopolistic conglomerates, which suffocate competition and slow down economic development. The economic leverage wielded by the authorities is quite substantial. Fines are large enough by themselves, but other penalties, which can paralyze an entire company, are much more dangerous. Even criminal prosecution is used as a tool in competitive struggle, so administrative resource can be the difference between success and failure. A good rule of thumb: don’t start a large project in Russia without a few good connections among local authorities. As to the ways to uproot these harmful practices, regulating legislation should be definitely reviewed and simplified. The only thing that would be worse than the current corrupt regulations would be if they were followed to the letter. But even the most perfect legal framework is useless without correct application. So, much closer attention to anti-corruption Investigations is an integral part of any solution.
So, what can be said about corruption in Russia? On the one hand, it cuts across all levels of society and is deeply ingrained in the habits of the people. On the other, it bridges the differences between an absurd state of affairs and what people consider fair. But whatever benefit it brings, there’s no denying that corruption causes social tension that can lead to violent outbreaks; it gnaws at healthy economic development, and provides plenty of reasons to expose Russia to well-deserved ridicule.
Does the current power in the Kremlin realize that? Certainly; beside the usual big and empty words, recent initiatives show they are clearly aimed at fighting low-level corruption. Police reform, increases in the wages of public servants and the reform of anti-corruption laws launched by the government are essential steps in that direction.
Should any meaningful measures against high-level corruption be expected? Not from the current leadership. What is there to say if today any man who has never paid a single rouble in taxes can bring a bag of cash and buy the most expensive car and house; and no institution is interested in impartial investigation of high-profile cases? In one of his interviews Vladislav Surkov, the chief Kremlin ideologue, said, quote: “It’s critically important to preserve political stability. Stability doesn’t equal stagnation, doesn’t mean stopping. It’s an instrument of development. There will be no modernization from chaos”. This statement underlines the importance the Kremlin attaches to stability. And given the political backdrop – where even younger, second-tier politician, like Vasiliy Yakemenko, get accused of ties with organized crime – it’s crystal clear that virtually each member of the Russian political and business elite has more skeletons in the closet than are at the Arlington cemetery. Mutual assured destruction is the only thing that keeps them together, and an attack on any member will have the effect of an avalanche. Luzhkov’s ousting showed that corruption charges are only applied after political defeat, and used to mop up the scene of unwanted allies of a “gone” politician. Everyone else is safe as ever. The Kremlin’s long-term strategy seems to be a very gradual tightening of the rules, simultaneously punishing softly those who refuse to give up the old ways. A more radical approach could be brought about sooner if the economy runs into inexplicable stagnation. Aside from that, it would be a miracle to see them before Medvedev moves into some nice retirement community.
Is corruption in Russia state-defining and ineradicable? No; as the experience of Singapore and Sweden shows, decisive and thought-out actions transform places that were previously considered to be strongholds of corruption. All that is required is political will. Moreover, most of Russians are tired of corruption, and support decisive measures against it. There are plenty of people and businesses that refuse to participate in shady activities, even though it puts them at a disadvantage. Sooner or later , Russia will cure its social illnesses.”