Special Report on Russia: Grease my palm

RUSSIA

Grease my palm

Nov 27th 2008
From The Economist print edition

Bribery and corruption have become endemic

RUSSIA may not have democratic elections or the rule of law, but it does have one long-standing institution that works: corruption. This has penetrated the political, economic, judicial and social systems so thoroughly that is has ceased to be a deviation from the norm and become the norm itself. A corruption index compiled by Transparency International gives Russia 2.1 points out of ten, its worst performance for eight years and on a par with Kenya and Bangladesh. Ordinary Russians are well aware of this, with three-quarters of them describing the level of corruption in their country as “high” or “very high”.

The size of the corruption market is estimated to be close to $300 billion, equivalent to 20% of Russia’s GDP. INDEM, a think-tank that monitors and analyses corruption, says 80% of all Russian businesses pay bribes. In the past eight years the size of the average business bribe has gone up from $10,000 to $130,000, which is enough to buy a small flat in Moscow.

A businessman who was stopped by the traffic police in Moscow recently was shown a piece of paper with “30,000 roubles” written on it. He refused to pay and asked the policeman why he was being asked so much for a minor offence. “The answer was that the policeman had bought a flat for his mother in Bulgaria and he now needed money to do it up,” the businessmen said. Far from being a taboo subject, corruption is discussed openly by politicians, people and even the media—but it makes no difference.

Corruption has become so endemic that it is perceived as normal. Opinion polls show that the majority of Russians, particularly the young, do not consider bribery a crime. The Russian language distinguishes between “offering a reward” to a bureaucrat for making life easier for you, and the brazen (and sometimes violent) extraction of a bribe by a bureaucrat.

Small and medium-sized businesses suffer the most. Dmitry Golovin, who owns a tool-leasing company in Yekaterinburg, explains: “You go to the local administration to get permission for something and they send you to a private firm that will sort out the paperwork for you, which happens to be owned by their relatives.”

Novosti

What are we going to do about this? The reason for the persistent corruption is not that the Russian people are genetically programmed to pay bribes, but that the state still sees them as its vassals rather than its masters. The job of Russian law enforcers is to protect the interests of the state, personified by their particular boss, against the people. This psychology is particularly developed among former (and not so former) KGB members who have gained huge political and economic power in the country since Mr Putin came to office. Indeed, the top ranks in the Federal Security Service (FSB) describe themselves as the country’s new nobility—a class of people personally loyal to the monarch and entitled to an estate with people to serve them. As Russia’s former prosecutor-general, who is now the Kremlin’s representative in the north Caucasus, said in front of Mr Putin: “We are the people of the sovereign.” Thus they do not see a redistribution of property from private hands into their own as theft but as their right.

The precedent was set by the destruction of the Yukos oil company in 2003-04. Mr Khodorkovsky, its then owner, was arrested at gunpoint in Siberia and after a sham trial sent to jail where he has spent the past five years. Yukos was broken into bits and, after an opaque auction, passed to Rosneft, a state oil company chaired by Igor Sechin, the ideologue of the siloviki.

Tricks of the trade
The Yukos case changed the logic of corruption. As INDEM’s Mr Satarov explains, before 2003 officials simply took a cut of businesses’ profits. After Yukos they started to take the businesses themselves. These days businessmen pay bribes as much to be left alone as to get something done. They call it a “bribe of survival”.

This new form of corruption is changing the structure of the Russian economy. “Yeltsin-era corruption ended in a privatisation auction, even if it was a fake one. The new corruption ends in the nationalisation of business,” says Yulia Latynina, a writer. Nationalisation is not quite the right word, however, because sometimes state property is quietly transferred into private bank accounts. And even where a business is formally controlled by the state, the profits or proceeds from share sales may never reach its coffers.

When Mr Medvedev was chairman of Gazprom, a state-controlled gas giant, one of his first jobs was to oversee the return of assets which had been siphoned off under the previous management. But as Boris Nemtsov and Vladimir Milov, two opposition politicians, explain in a recent book, “Putin and Gazprom”, in the past few years Gazprom’s control over its multi-billion-dollar insurance company and part of its pension funds has passed to a private bank called Rossiya, controlled by Yury Kovalchuk, who is thought to be a friend of Mr Putin’s. The bank advertises itself as “Rossiya: the country of opportunities”.

A necessary evil?
Both Mr Medvedev and Mr Putin condemn corruption in public. In a recent speech Mr Putin grumbled: “Anywhere you go, you have to go with a bribe: fire inspection, ecologists, gynaecologists—everywhere. What a horror!” Mr Medvedev’s first presidential promise was to fight corruption for the Russian public, and recently he thundered: “We have to do something. Enough of waiting! Corruption has become a systemic problem and we have to give it a systemic answer.” Soon afterwards he appointed himself head of a new anti-corruption committee.

Mr Satarov says this may be more than just populism. “They feel that the system has become unmanageable. They also need to protect and legalise the wealth they have accumulated in the previous five years—hence all this talk about building a legal system.”

As a former lawyer, Mr Medvedev has started with legislation. A new draft law requires bureaucrats to declare their own and their family’s income and assets. But there are a couple of loopholes. First, the information about their income is confidential and available only to other bureaucrats. Second, the family is defined as spouse and under-age children—but not siblings, parents or grown-up children. “It is as if the government is telling everyone which accounts they should transfer the money into,” says Elena Panfilova, head of Transparency International Russia.

The trouble is that corruption in Russia has become a system of management rather than an ailment that can be treated, explains Ms Latynina. Central to this system is the notion of kompromat, or compromising material. “It is easier to control someone if you have kompromat on them, so that is how a boss often chooses his subordinates,” she says.

The only way to fight corruption, explains Ms Panfilova, is through political competition, independent courts, free media and a strong civil society. Those things may not get rid of it, but at least they would establish uncorrupt norms. Yet fighting corruption from within the Kremlin would require the skills of a Baron Münchhausen, who famously escaped from a swamp by pulling himself up by his own hair. As Mr Khodorkovsky said in a recent interview: “The fight against corruption is a fight for democracy.” The interview cost Mr Khodorkovsky 12 days in solitary confinement. But the cost to Russia of allowing corruption to flourish is a lot higher.

Gennady Timchenko and Gunvor International BV

In a section of our special report on Russia entitled “Grease my palm” (November 29th 2008) we referred to Gunvor and its cofounder, Gennady Timchenko. We are happy to make it clear that when we referred to the “new corruption” in today’s Russia, we did not intend to suggest that either Gunvor or Mr Timchenko obtained their Russian oil business as a result of payment by them of bribes or like corrupt inducements. Rosneft sells only 30-40% of its oil through Gunvor rather than the “bulk” of Rosneft’s oil (as we described it). We accept Gunvor’s assurances that neither Vladimir Putin nor other senior Russian political figures have any ownership interest in Gunvor. We regret if any contrary impression was given.