Streetwise Professor

March 15, 2010

How’s That Anti-Corruption Thing Going?

Filed under: Politics,Russia — The Professor @ 8:21 pm

Anti-corruption drive?  What anti-corruption drive? you might say, after reading this Reuters article:

Alexandra Wrage, whose non-profit organization TRACE International advises firms on how to avoid bribery, told Reuters the “rampant endemic” corruption in Russia was much worse than in other big emerging economies.

“My recommendation is: ‘Maybe you should reconsider doing business in Russia,'” she said. “I am considerably more optimistic about Nigeria than I am about Russia on this issue.”

So, then it’s not accurate to say that Russia is Nigeria with missiles?  Because it’s unfair to Nigeria?

Russia trawls the depths of the corruption rankings:

Berlin-based NGO Transparency International rates Russia joint 146th out of 180 nations in its Corruption Perception Index, saying bribe-taking is worth about $300 billion a year.

Apparently, the risks of not paying to play are much greater in Russia than elsewhere:

Wrage recalled a question at her first workshop in Moscow in 2002 which underlined the unique dangers of Russian corruption:

“Somebody came up to me in the break and said: ‘If I don’t pay the bribes here, I am really worried that my office will be burned to the ground.'”

Her reply? “Well, I have nothing to give you. I don’t have any best practice tips to help with that scenario.”

. . . .

Questions included how to avoid getting your company shut down on a trumped-up charge if you did not pay off an official, through to corporate raiding by Russian competitors with official connivance which could mean losing the whole company.Businesses were asking: “How do we survive here without paying bribes, because we’re not sure it’s possible,” she added.

Wrage serves on a U.S.-Russia government commission created to strengthen ties by sharing expertise. She was skeptical about Russian President Dmitry Medvedev’s repeated pledges to fight corruption, though she acknowledged they had contributed to a bigger public debate on the issue.

Frau Wrage calls bullsh*t on the metronomic Russian government pronouncements of anti-corruption campaigns:

“There is a new and exciting anti-corruption initiative here with startling regularity,” she said. “We don’t need any more initiatives, we need results.”

I like this woman.  She is wonderfully sarcastic.  And brutally honest in her appraisals:

TRACE has studied other leading emerging economies. In China, it describes corruption as an “inverted pyramid,” with most bribery at the top while India is the opposite, with corruption rampant at lower levels but tapering off higher up.

“Russia is a solid block. There is bribery at all levels,” Wrage said. “There appears to be sense of near-complete impunity, a sense of entitlement … there is no sympathetic low level management, no sympathetic mid-level management, or sympathy at the top (for anti-bribery efforts).”

In other words, solidly corrupt from top to bottom .

To sum up:  Russia is incredibly corrupt.  Its form of corruption is unique.  It is not getting any better, despite repeated criticism from the President and continued claims that something will be done.

Recall that foreign direct investment plunged during the crisis, and has not rebounded.  It is unlikely to do so as it becomes evident that corruption will sap returns, and puts entire investments at risk.

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7 Comments »

  1. The 300bn $ figure is actually just referenced from a 2005 corruption report by India, which I criticized here two years ago. In particular I would quote from here (http://www.indem.ru/en/publicat/CherylCorrup09.htm):

    (1) The figure for the annual volume of business corruption market (USD 316 bln.) appears to us to have been obtained by multiplying the number of active business entities in Russia (approx. 1.3 mln.) by the average annual bribe contribution (USD 243,750). Given the fact that the vast majority of these entities are small businesses which are not likely to generate even annual sales of such magnitude, correctness of the above USD 316 bln. annual volume is questionable. For instance, in 2004 there were approx. 151,000 business entities in the Russian manufacturing industry that sold goods totalling 11.209 trillion RUR (approx. USD 389.07 billion), which on a per manufacturing entity basis works out to average sales of approx. USD 2.6 mln. Thus, such average manufacturing entity should have paid approx. 9.4% of its total SALES (i.e., USD 243,750 / USD 2.6 mln.) in bribes. Of course, unfortunately, there is tax evasion, underreporting of income, shifting of sales to trade companies, etc. Even so, it is much more difficult to understate sales (than it is, for example, to manipulate the expense side), and at large enterprises this practice is less prevalent – therefore, if we were to agree with the average annual bribe contribution amount (USD 243,750), then it would be rather safe to assume that this amount would represent at least 5% of total sales of a relatively large industrial entity which simply would eat up at least 50% of its profit margin. Obviously, for smaller entities USD 243,750 in bribes would simply be unbearable.

    (2) There are a little over 1 mln. government officials in Russia. Thus, on average one public servant should have received in excess of USD 300,000 annually in bribes, which in our estimation is quite unlikely.

    (3) Russian official GDP in 2004 was USD 580 bln. Thus, the suggested business corruption market represents 55% (!) of official GDP. We are afraid that this 55% figure is a little high even for Zaire during the rule of infamous Mobutu. Of course, without a doubt there is a significant unreported portion of the Russian economy. However, even if we increase the official GDP figure by 50% (which is what various international and domestic organizations estimate the understated percentage to be) to USD 870 bln. to take into account the shadow economy, business bribes would still represent a staggering 36% of total GDP. One should also keep in mind that the gross profit portion of GDP (which theoretically should form the source for bribes) was officially only USD 210 bln., i.e. much less than the USD 316 bil. annual volume of business corruption market. Even after increasing this gross profit to take the shadow economy into account, it seems that entrepreneurs would be giving away all of their profit as bribes. Of course, one could argue that there can be a double (or even triple) count in the bribe market (see Mr. Satarov’s comment below) or that earlier accumulated wealth might be used as a source, but even so the aggregate USD 316 bln. figure still seems too high. From an economic standpoint a bribe can be considered a sort of informal “tax”, and at a certain point if the levy is too heavy entrepreneurs would prefer just to wind up business than to pay too much. This does not seem to be what is happening with businesses in Russia.

    (4) Finally, if annual volume of the consumer corruption market with its tens of millions of participants is estimated at USD 3.014 bln., in our estimation it is questionable that the business corruption market with much less participants can be USD 316 bln., i.e., a staggering 105x (!) difference.

    Comment by Sublime Oblivion — March 15, 2010 @ 11:20 pm

  2. FDI probably will rebound if Russia shows any significant growth (which the World Bank forecasts for 2010). There are always some companies who think they can manage the risks long enough to net a profit.

    Lotsa luck!

    Comment by Swaggler — March 18, 2010 @ 8:21 am

  3. Odd that Sublime LIAR chooses not to include the following statement which precedes the text he quotes: “By providing these comments we do NOT in any way want either to minimize the importance or the size of business corruption in Russia (i.e., it is truly widespread) or to even appear to attempt to discredit the serious work of INDEM in this area. However, our objectivity and independence require that we make these comments, even IF ultimately we find out that our assessment is wrong.”

    Well, maybe it’s not so odd. Being just as corrupt and mendacious as the “country” he ritualistically defends (thereby helping it to avoid reform and perish), we can expect nothing else.

    The notion that corruption in Russia, documented by respected scholarly sources around the globe in a systemmatic fashion and confirmed by every businessman who deals with Russia (including those who have been jailed and killed for trying to oppose corruption), is somehow overblown by a Russophobic conspiriacy is so laughably idiotic that it’s surprising even from filth of this ilk.

    Comment by La Russophobe — March 18, 2010 @ 10:04 am

  4. I’m not clear where Sublime Oblivion is going with the above comment. Do we agree that corruption in Russia is a major problem or not? As the joke has it, “We’ve established that, we’re just haggling about the money”.

    Comment by Martin — March 19, 2010 @ 6:13 am

  5. MARTIN: I can explain it to you. You see, for a neo-Soviet propagandist, if the true value of Russian corruption is $299,999,999.99 rather than $300,000,0000 then anyone who reported the former figure is a fraud and a liar and must be ignored. In fact, even if they report the accurate figure, if they make a typo or don’t love to guzzle kvas, they are a fraud and a liar and must be ignored. This is the Soviet smear-the-critic and deny, deny, deny tactic, you know, the same one that drove the USSR into the toilet of history. Russians found it so much fun to swirl the bowl, they want to do it all over again. And the likes of Sublime LIAR want to help them.

    Comment by La Russophobe — March 19, 2010 @ 6:27 am

  6. I never denied corruption is a major problem. I have in fact expressed the opinion that large-scale corruption in Russia ought to be punished with the death penalty, as is the policy in China. For better or worse, the powers that be are far too liberal or self-interested for that.

    And yes, haggling over the money is important. Determining whether Russia’s “corruption market” is closer to 30bn $ or 300bn $ is quite important, since obviously a tenfold difference in the bribe tax is highly significant.

    Comment by Sublime Oblivion — March 19, 2010 @ 8:18 pm

  7. More shameless LIES from Sublime LIAR. He has NO BASIS for claiming Russian corruption is less than reported, HIS OWN SOURCE clearly says so. He owes this blog an apology for his incomplete citation, which was inherently fraudulent and utterly without any sound basis in fact.

    The net effect of his “comment” is, in the manner of a Soviet propagandist, to undermine the drive for reform and the assignment of blame, helping Russia to continue on its failed course towards national collapse.

    Comment by La Russophobe — March 20, 2010 @ 3:37 pm

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