Battle against corruption is an uphill struggle

Economist Intelligence Unit
SUMMARY

Corruption has become arguably Russia’s biggest problem, hampering its ability to recover from the 2008-09 economic crisis and preventing meaningful diversification of the economy away from natural resources. The crisis hit Russia hard, and its economy would also be likely to fare badly in any future global downturn. There are signs that the president, Dmitry Medvedev, is gradually moving against bribery, graft and outright pilfering of national resources by corrupt bureaucrats. However, this is a major challenge, and there is a high risk that progress will be insufficient to tackle this major obstacle to Russia’s economic development.

Kleptocracy

Five years ago, Charlie Munger, an associate of investor Warren Buffett, explained why their investment vehicle, Berkshire Hathaway, decided not to invest in Russia even as it was taking a close look at the global natural resources and energy sectors. “We don’t invest in kleptocracies,” he declared.

Russia’s standing on corruption remains little changed since then, and among the worst in the world. On Transparency International’s latest Corruption Perception Index, Russia’s score is 2.1 on a zero-to-ten scale (the higher the score, the lower the corruption), and it ranks 154th out of the total of 178 countries surveyed. Countries ranking below Russia include former Soviet republics in Central Asia as well as the likes of Venezuela, Iraq and Afghanistan. Corruption is a major factor pushing Russia’s ranking in other international indices lower. Russia ranks 123rd in the World Bank’s latest Doing Business survey, in the lowest third of the 183 countries covered.

Direct repercussions

The view that it is corrupt and non-transparent continues to harm Russia, especially since many other countries have improved their business climate. In particular, the World Bank observed this year that Russia’s relative decline in its survey was due entirely to the fact that other countries have improved conditions for starting and running businesses—vested interests in Russia oppose such deregulation because it would remove opportunities for extracting bribes. Russia is losing out in the competition for investment and, consequently, receives relatively little of the technology transfers that benefit many other emerging economies.

In terms of FDI inflows, Russia compares well with the rest of the BRICs, and has attracted some sizeable investments, notably PepsiCo recently buying a Russian firm in a US$3.8bn deal that marks Russia’s biggest-ever investment outside of energy. However, Russia still underperforms east-central Europe (Poland for example has received three times as much FDI per head).

Moreover, overall, Russia is one of the few major emerging economies still experiencing capital outflows, despite the return of economic growth. In the first ten months of 2010, capital outflows from the country reached US$21bn, far surpassing even the most pessimistic official forecasts issued early in the year. Russian companies are looking to buy assets abroad, whereas foreign investors are apprehensive about putting their money into Russia. Even in terms of portfolio inflows, investment funds specialising in Russia attracted less than half the amount that went to India and Brazil in the second and third quarters of 2010, and only about one-fifth of the amount that was invested into China. Concerns about the business environment both cloud growth prospects and encourage Russian firms to transfer earnings abroad.

Mr Medvedev has long complained about corruption and he has declared war on it several times since becoming president in 2008. On his orders, for example, laws have been amended banning pre-trial detention of business executives in cases involving alleged tax evasion and other white-collar crimes. Over the past ten years, putting business executives and entrepreneurs in jail has been routinely used by extortionists in the law enforcement agencies who shake down private businesses for protection money.

So far, the results of Mr Medvedev’s anti-corruption campaign have been limited. The most notorious case of extortion and outright fraud, which involved William Browder’s Hermitage Capital Management Fund—and resulted in the death during pre-trial detention of the company’s Russian lawyer, Sergei Magnitsky—has not been properly investigated. In November, when the Foreign Affairs Committee of the European Parliament proposed to deny visas to Western Europe to Russian officials involved in Mr Magnitsky’s case, both the Russian State Duma (parliament) and the Foreign Ministry expressed sharply worded protests.

Small steps

Yet, some positive steps in the fight against corruption have emerged. Probably the most important has been the dismissal of the mayor of Moscow, Yuri Luzhkov, in September, after 18 years of uninterrupted service. Under his stewardship, the city became a byword for bribe-taking, insider deals and corrupt practices. The dismissal of Mr Luzhkov is more likely to have been motivated by the Kremlin’s desire to remove a politician with an independent power base than to set an example to other corrupt officials. Still there are now signs that corruption in Mr Luzkhov’s Moscow will be publicly uncovered, which could lay bare the subterranean connections between corrupt government officials and business which permeate Russian business culture, and emphasise the need for reform. Meanwhile, leaked US diplomatic cables published by WikiLeaks show that US diplomats view Russia as a criminal state dominated by venal officials.

What Mr Medvedev does about these accusations will be an important test of his intentions as far as fighting corruption is concerned. It will also have a bearing on his favourite project, the innovation centre at Skolkovo outside Moscow, which is supposed to become Russia’s equivalent of Silicon Valley. This is a major state-financed programme, costing some Rb115bn (US$3.5bn). Critics have maintained that it will prove to be yet another orgy of pilfering of state funds, and many Western high-tech companies have been reluctant to commit, waiting to see how the project develops. If Mr Medvedev fails to pursue blatant cases of fraud and corruption in other major national projects, there is a high risk that his Skolkovo dream will fail to develop as hope, and indeed that Russia’s economic modernisation and diversification will remain curtailed. срочный займ займ срочно без отказов и проверок https://www.zp-pdl.com zp-pdl.com займы на карту без отказа