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UNIVERSITY OF BRIGHTON

BRIGHTON BUSINESS SCHOOL

BY PEDRO SIMMONS

The Cost and Causes of Corruption – An In-Depth Case Analysis on Russia

Key Terms BRIBE Line – Set up by TRACE International to report bribe requests

GDP – Gross Domestic Produce

GNI – Gross National Income

Home Country – The home country of a MNC

Host Country – The Foreign country the MNC is in

IMF – International Monetary Fund

OECD – The Organisation for Economic Co-operation and Development

The World Bank - undertakes technical research on economic, political and social matters. It is a useful source for data and research publications focusing mainly on the developing world.

Trace International – Anti-corruption body

Transparency International - is a world recognized non-governmental anti-corruption organisation working in 90 different countries and

 

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ContentsTables....................................................................................................................................................3

1. Introduction...................................................................................................................................4

1.1. Ethics.....................................................................................................................................4

1.1.1. International Business Ethics.............................................................................................4

1.1.1.1. Ethical Issues..............................................................................................................5

1.2. Corruption.............................................................................................................................5

1.2.1. Types of Corruption.......................................................................................................5

1.3. Measurements of Corruption................................................................................................6

1.4. Russia.....................................................................................................................................8

1.5. Aims and Objectives..............................................................................................................9

1.5.1. Aims...............................................................................................................................9

1.5.2. Objectives......................................................................................................................9

1.6. Research Methodology..........................................................................................................9

2. Extent and Costs..........................................................................................................................11

2.1. Russia...................................................................................................................................11

2.2. Corruption Increasing..........................................................................................................13

2.3. Costs....................................................................................................................................14

2.3.1. Economic.....................................................................................................................14

2.3.2. Businesses........................................................................................................................16

2.3.3. Social................................................................................................................................17

2.4. Industries.............................................................................................................................18

3. Types of corruption.....................................................................................................................19

3.1. Sources....................................................................................................................................20

3.2. Russia...................................................................................................................................21

3.3. Global Governance..................................................................................................................22

3.3.1. Russian Governance.........................................................................................................23

3.4. Does Corruption Pay?..........................................................................................................23

3.4.1.1. In Russia...................................................................................................................24

3.5. History of Corruption.......................................................................................................24

4. What Causes Corruption?............................................................................................................25

4.1. The State..............................................................................................................................25

4.2. Economic Rent.....................................................................................................................26

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4.3. Discretionary Powers...........................................................................................................26

4.4. Accountability......................................................................................................................27

4.5. Regulations and Authorizations...........................................................................................27

4.6. The bureaucratic tradition...................................................................................................27

4.7. Decentralization...................................................................................................................28

4.8. Social Norms........................................................................................................................28

4.9. The Corruption Equation.....................................................................................................30

4.10. Summary of Causes..........................................................................................................30

5. Conclusion...................................................................................................................................31

6. References...................................................................................................................................32

List of TablesTable 1.1- Corruptions Perceptions Index (2011):

Table 1.2 - Highest Ranking Countries:

Table 1.3 - Lowest Ranking Countries:

Table 1.4 – Russia Overview

Table 1.5 - Russian CPI (2011):

Table 1.6 - FDI inflows (USD bn, 2002 – 2011):

Table 2.1 - Amount of Reported Bribe Demands in Russia (N = 286):

Table 2.2 - Frequency of Recurring Bribe Demands in Russia (N = 161):

Table 2.3 - Nature of Bribes Demanded in Russia (N = 286):

Table 2.4 – Extent of Bribery in government, 2000 and 2008

Table 2.5 – Number of Recorded Offences Committed by Officials in Russia (Thousand)

Table 2.6 – CPI for selected Countries

Table 3.1 – Forms of Bribes Requested (N = 286)

Table 3.4 – Grand Corruption Cases:

Table 4.1 – Corruption, morally right or wrong?

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1. IntroductionCorruption can be seen as one of the most costly aspect of business ethics, not just to corporations but the economy and society also. This paper will look at the extent, costs and causes of corruption in the developing world focusing on Russia and analysing the implications for businesses. Corruption is so widespread it would be impossible to analyse the developing world entirely therefore, this paper focuses on an in-depth case analysis of Russia.

The first and second sections introduces business ethics, outlines the motivations for choosing corruption, identifies the different types of corruption and familiarises the reader with the measurements of corruption used.

The third section starts by introducing the reasons for choosing Russia, uncovering the extent and costs of corruption in the developing whilst taking a closer look at Russia. Industries that are prone to corruption will be identified and governance relating to corruption outlined.

The fourth section outlines the types of corruption and the sources of corruption.

The fifth section looks to see if corruption pays, the history of corruption in Russia, outlines what causes corruption generally, before focusing on Russia and including primary research.

Lastly, a conclusion will be made on the effects of corruption in Russia.

1.1.EthicsVelasquez (2001) defines ethics as “the principles of conduct governing an individual or a group. It is the study of morality.” “Morality are the standards that and individual or group has about what is right and wrong, or good and evil (Velasquez, 2001).” Ethics is different from the law as De George (1994) highlights, “we can speak of American, German or Japanese law but it’s odd to speak of American, German or Japanese ethics.” Ethics is an interesting topic when applied to international business as the standards of ethical conduct is elusive (Donaldson, 2001). Cultural diversity may undermine the morals of an organisation (Mahdavi, 2003)

1.1.1. International Business Ethics Until the 1990’s it was assumed universal values controlled the behaviour of organisations (Managementstudyguide.com, 2012). The Australian government (2012) points out “international business ethics is particularly complex… as ethical standards are different depending on where you are.” Hill (2007) adds “Many of the ethical issues and dilemmas in international business are rooted in the fact that… culture varies significantly from nation to nation.

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1.1.1.1. Ethical IssuesThe most common ethical issues in international business are:

Corruption – “Corrupt conduct is deliberate or intentional wrongdoing, not negligence or a mistake” (ICAC, 2011). Transparency International (TI) defines corruption as “The abuse of entrusted power for private gain” (Transparency International (TI), 2011), as does Nye (1967).

Employment practices – ethical issues can arise when work conditions are lower in the host country than the home country.

Environmental regulations- Developing nations may lack environmental regulations which may result in MNC’s polluting more than they would at home

Human rights – Rights that are taken for granted in developed nations are not universally accepted. Questions may be raised when assessing the responsibility of foreign multinational corporations (MNC) when human rights expectations are not met

Moral obligation of multinational corporations –MNC’s should be socially responsible and give something back to society

(Hill, 2007)

1.2.CorruptionThis paper will focus on corruption. It is seen as one of the biggest threats to development (World Bank, 2004) and has major implications on economies, businesses and society which will be examined throughout.

1.2.1. Types of CorruptionThe term ‘corruption’ can refer to a wide range of behaviours (Morris, 2011) and generally includes one of the following:

Bribery - Morris (2011) highlights that most equate corruption with bribery, which is “where an illegal payment is made to a government official in return for some type of official, state-sanctioned, authoritative act that has a selective and tangible impact and that in the absence of the secret payment would not otherwise have been made (Johnston 2005).”

Conflict of Interest, Favouritism & Nepotism – where jobs or benefits are given to benefit the decision maker usually as a result of a favourable relationship

Embezzlement & Graft - are forms of corruption where (public) officials act alone to withdraw or divert (public) funds.

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Extortion - where a (public) official threatens to use or abuse their powers to force a bribe from an individual or community generally with force

Fraud - can involve complex systems to defraud an individual, community, company, government or country.

Kickbacks - similar to bribery but the payment is made after the service has been used

‘Blat’ – A Russian word that means different services or prices for friends , relatives and acquaintances (Ledeneva, 1998)

1.3.Measurements of Corruption

"The overall number of such crimes is 10 times or even 100 times as large as the number that is uncovered. It's just the tip of the iceberg,"

(Russian PM: Medvedev, 2010 cited in Telegraph, 2010)

“Corruption can be difficult to measure (Forbes.com, 2009),” due to its illegality in most countries. Many people may be unwilling to speak up in fear of legal repercussions. The World Bank publishes ‘The Worldwide Governance Indicators for 213 economies between the years 1996 – 2010 measuring the views of corruption. Similarly, Transparency International publishes the Corruptions Perceptions Index (CPI) each year based on perceptions of corruption. The CPI has been used as the measure of corruption in this report due to its recognition.

Perceptions are used because generally corruption entails illegal practices that if known would likely result in criminal prosecutions against those involved in corruption. The below graph highlights the most corrupt countries in red and least corrupt in yellow based on the Corruptions Perception Index (2011):

Table 1.1- Corruptions Perceptions Index (2011):

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Source: Transparency International, 2011

Corruption is widespread being prominent across the globe. Large proportions of Africa, Asia and South America are red indicating high levels of corruption, where most developing countries are situated. The following graphs show the highest ranking countries and lowest ranking countries respectively:

Table 1.2 - Highest Ranking Countries:

Source: TI, 2011

Table 1.3 - Lowest Ranking Countries:

Source: Transparency International, 2011

The EU & Western Europe feature heavily in the highest ranking positions but not in the lowest implying it’s the least corrupt region. The lowest are diverse in terms of geographical regions. Venezuela and Haiti are situated near each other. Iraq, Turkmenistan, Uzbekistan and Afghanistan are in close proximity, as are Sudan and Ethiopia.

The same can be applied to the highest ranking countries. All the European countries, bar Switzerland, are situated within North West Europe. Australia and New Zealand are in the same geographical location. Besley and Case (1995) compare the behaviour of state governors in the US and highlighted if one governor adopted a successful policy the majority would follow. Dincer et al (2010) shows corruption is positively related to the levels in adjacent states.

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1.4.Russia

Table 1.4 – Russia Overview

RussiaGDP $1.5tnPopulation 141,750,000GNI Per Capita, Atlas Method $9,900Poverty Ratio 11.1%Corruptions Perception Index Rank 143rd

Growth Rates 3.31% (1995 – 2011)5.00% (2003 – 2011)

Source: World Bank, 2012, the Telegraph 2011 and Trading Economics 2012.

Russia has been included in the ‘BRICS1’ group of economies, who are seen as the main drivers of global growth and a challenge to the world’s leading economies contributing to 45% of global growth (The Telegraph, 2011). With Russia poised to become one of the leading economies in the future it is interesting to see them ranked 143 rd in the CPI (see below) alongside Nigeria – a country where 92% of the population lives on less than $2 a day (Earth Trends, 2004) and Timor-Leste a country with a GDP per capita of $624 (World Bank, 2012).

Table 1.5 - Russian CPI (2011):

Source: Transparency International, 2011

1 BRICS – Brazil, Russia, India & China are the largest emerging markets.

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Table 1.6 - FDI inflows (USD bn, 2002 – 2011):

Source: Reuters: 2012

This table shows Russia has the second highest FDI inflows. Such a large amount of FDI implies Russia is reliant on foreign investment and with high levels of corruption it might deter investment in the future restricting growth. It also signals a growing market that may have high growth rates and a good opportunity for businesses to invest but they need to wary of the effects of corruption.

1.5.Aims and Objectives

1.5.1. Aims Highlight the implications of corruption to economies, societies and businesses in general

whilst focusing on Russia Analyse the different types of corruption, sources and causes whilst focusing on Russia To summarize the impact of corruption in Russia

1.5.2. Objectives Carry out extensive secondary research using websites, journals, books, respected websites,

international bodies, newspaper and reports Use secondary research to look at the costs, causes, sources and types of corruption on

economies, businesses and societies Conclude the impact of corruption in Russia

1.6.Research MethodologyThe cost of corruption to the global economy is overwhelming. Through paying bribes alone, 3.3% of global GDP (World Bank, 2004) is diverted or withdrawn from economies to go into the pockets of undeserving officials, and others, who abuse their powers for personal gain. Alarmingly the number of new corrupt cases appears to be rising. A search on Google for ‘corruption’ in the news section with results filtered to the past 24hrs, list over 56,000 results. Even the World Bank President, Paul Wolfowitz (2006), suggests that one of the biggest threats to [economic] development is corruption. It is for these reasons, the undertaken research will:

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Examine the extent and costs of corruption Highlight the different types of corruption Outline the sources and causes of corruption Provide an in-depth case analysis on Russia Look at the implications for business

The report will use secondary data sources as it is not possible for the researcher to travel to developing countries and explore the topic further. Firstly, an appropriate literature review was undertaken outlining the extent and costs of corruption, the types of corruption and the causes of corruption whilst providing an in-depth case analysis of Russia. Generally, qualitative research was used throughout. Quantitative research was not used but it may have been useful to apply to gather opinions about corruption in Russia from Russian citizens. Research has shown perceptions are used to measure corruption, thus primary research in the form of interviews would have been beneficial as information recorded may be distorted. There may be an issue with the bias of information. It could be overestimated by those who oppose corruption and are looking for the worst case scenario or, under estimated by those who are trying to cover up information.

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2. Extent and CostsThis section will examine the extent of corruption and identify the costs to the economy, businesses and society across the developing world focusing on Russia but not exclusively. The main industries prone to corruption will also be highlighted.

2.1.RussiaThis section will briefly examine the extent of corruption in Russia.

Firstly, the average value of bribes is $20 - $100 and is shown below:

Table 2.1 - Amount of Reported Bribe Demands in Russia (N = 286):

Source: Bribe Line2 (2011)

This may be distorted as a highly paid executive is unlikely to complain about having to pay a $20 bribe if it’s so widespread. Similarly, a company representative is unlikely to report they have been solicited for a bribe if it’s necessary for business. Due to the small value of the bribes it is likely to be disgruntled citizens.

2 BRIBE line only publishes information based on information from their hotline. It’s not a full representation of the bribe amounts but rather an indication to who is whistleblowing.

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Table 2.2 - Frequency of Recurring Bribe Demands in Russia (N = 161):

Source: Bribe line, 2011

The above chart shows the frequency of bribes requested by one person(s) is below five which may indicate other opportunities exist to extract bribes.

Table 2.3 - Nature of Bribes Demanded in Russia (N = 286):

Source: Bribe line, 2011

All the factors in the above chart all affects businesses and shows the majority of bribe requests are for the timely delivery of a service to which entitled too. This may be connecting to the electric board or delivery of a permit from the fire department. It is interesting to note that 22% of the time bribes are requested to avoid harm to self or business interests and 40% of the bribes requested come from the police, which is as it implies the police may use their power for self-gain and may hurt individuals who do not comply.

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Solomon (2002) (cited in Åslund, 2010) believes Russia has done well in recent years to tackle corruption. However, aspects of the rule of law have largely been left untouched which are promoting corruption as Åslund (2010) points out:

Promoting a free press Empowering autonomous social organisations Encouraging the spread of non-governmental organisations to monitor breaches of law,

general misconduct and consumer fraud

The Guardian (2012) reports 12 individuals from the Russian press have been killed since Putin took power. The only other countries where the media may suffer the same fate in such numbers are Pakistan and Afghanistan, countries that are war torn and in poverty. Freedom House (2011) state Russian media freedom as “extremely poor in 2010 with the Kremlin relying on alternatively crude and sophisticated media management to distract the public from widespread government corruption…” They claim the media has not been able to ‘freely’ cover the news on topics such as government corruption. In April 2010 police raided and searched offices of an independent news website seeking to identify sources about corruption within an elite police unit. Independent journalists are consistently attacked as a result of unfavourable news being published about the state (Freedom House, 2012). It is not just the media, nongovernmental organisations (NGOs) that monitor issues such as corruption, human rights abuses and protect consumer rights have had increased regulation and less funding imposed upon them(Aslund et al, 2010). Thus, information published in Russian media must be subjected to scrutiny as the majority of the media is controlled by the state and reluctant to run anti-state news (Freedom House, 2012).

It has been said the media can influence people’s opinions on public matters (Noelle-Neumann, 2008). Restrictions of free press mean the public will only hear indoctrinate information and important social issues, such as corruption, may be omitted.

2.2.Corruption IncreasingTwo large business surveys across Russia in 2000 and 2008 reveal the perceptions of corruption have risen rather than fallen as show below:

Table 2.4 – Extent of Bribery in government, 2000 and 2008

Source: Aslund et al (2008)

It appears levels of corruption have risen since 1993 after a fall in the level of corruption from 1986, shown below:

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Table 2.5 – Number of Recorded Offences Committed by Officials in Russia (Thousand)

Source: Luneev cited in Suhara (2003)

Perceptions of corruption in Russia have been getting worse. Between 1980 – 85 an average score of 5.1 was achieved, by 2002 it had fallen to 2.7 as the following table shows:

Table 2.6 – CPI for selected Countries

Source: Luneev cited in Suhara (2003)

Corruption is seen to hinder economic growth (Tanzi (1998) and Mauro (1995)) yet despite increasing levels of corruption and the severity of it, Russia has enjoyed a period of stable growth and has emerged as one of the leading developing nations. It is for these reasons the focus of this paper is on Russia.

2.3.CostsUntil recently corruption has never been measured and its true cost has been unknown. It is estimated over US $1 trillion is paid in bribes worldwide annually and that is seen as a conservative estimate (TI, 2004). Corruption has a heavy economic and social toll (Mauro, 1995). The economic cost of corruption is easier to quantify than the social cost (TI, 2010). The World Bank warns the social costs are higher than the economic costs (cited on BBC.co.uk, 2011). This section examines the economic, business and social costs of corruption.

2.3.1. Economic Bribery costs each country an average of $5 billion each year3. To put this into perspective the total GDP of all African countries in 2008 was US $1.5 trillion (McKinsey Quarterly, 2010). At the time it represented 3.33% of global GDP (World Bank, 2004). This measure only accounts for bribery alone,

3 $1tn bribery cost/ total countries

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the other types of corruption have not been officially been quantified and would rise substantially (World Bank, 2005)

“More than 150 high-ranking public officials and top citizens from over 60 developing nations ranked corruption as the biggest impediment to economic development and growth in their countries (UN, 2000).”

“The World Bank estimates that corruption can reduce a country's growth rate by 0.5 to 1.0 percentage points per year. IMF research has shown that investment in corrupt countries is almost 5 per cent less than in countries that are relatively corruption-free (UN, 2000).”

After the financial crisis growth rates across the world have been declining. A reduction of 0.5 – 1.0 percentage points can be damaging especially on emerging economies such as Russia who saw growth rates of 4.3% last year (World Bank, 2012). Although growth would have continued other countries such as Sudan and Andorran may find themselves out of recession if corruption wasn’t so widespread (World Bank, 2012).

On the other hand, Merton (1968) argues corruption may bring economic advantages (Cited in Andvig et al, 2000). Huntington (1968) adds “in terms of economic growth, the only thing worse than a society with a rigid, over-centralised dishonest bureaucracy, is one with a rigid, over centralized, honest bureaucracy.” It is claimed corruption can help against regulations and red tape whilst allocating resources to those who value them most (Alexeev, 2008). Lui (1985) suggests corruption within bureaucracy brings about an efficient allocation of time whilst Beck and Maher (1986) argue it’s a possibility corruption ensures projects are awarded to the most efficient firms. Myrdal (1968) confirms it may beneficial for bureaucracy to be corrupt as “it speeds up the queue.” “Without bribery, public administration would collapse altogether as no one would have any incentive to get anything done (Idebate.org, 2012).” It is claimed public sector workers are some of the lowest paid throughout the developing world receiving 24-32% less wages than their private sector colleagues (Gorodnichenko, 2006).

However, Boycko, Shleifer and Vishny (1995) argue there is uncertainty rising from corrupt contracts such as, reputation costs and larger enforcement costs which are economically damaging rather than beneficial.

Not succumbing to the forces of corruption may be costly. In Novgorod extortion is common and those who don’t pay bribes may be forced out of business (BBC, 2005)

“Russia is a country in which corruption has been recognized as a central economic issue in recent years by Karhunen & Ledyaeva (2011).” The size of corruption in Russia has been estimated to be $300bn (TI, 2010), or 20% of GDP. Karhunen & Ledyaeva (2011) highlight that ‘household’ corruption4 accounts for only 10% of the corruption market, so businesses and the government are responsible for the other 90%. Even GDP figures in Russia need scrutinising, being 40% higher than official figures in 1994 and It is estimated in 1993 Russia reported $27bn in imports, yet its partners recorded an extra $6bn which was unaccounted for by the Russian government (Kline, 2005).

4 (domestic corruption opposed to business corruption)

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The economic cost to Russia is staggering. Each year corruption, on average, costs each person $21165. Current GDP is $1.5trn, without corruption this could raise to at least $1.8tn6. The term ‘at least’ is used as measures of corruption are generally seen to be conservative estimates (TI, year). Kline, 2005 claims around 40% of Russia’s GDP is lost to corruption which would equate to a GDP of $2.1trn after the costs of corruption have been added back. The GDP per captia would equal $14814, $4,426 higher than the current $10,440 (World Bank, 2010). Deducting the cost of corruption from the current GDP equals a ‘real’ GDP per capita of $8324, $6,532 less than GDP per capita without corruption, making them around 60% better off. Currently Russia is ranked 60 th and without the negative effects of corruption Russia would jump to 46th on the World Banks rankings (World Bank, 2010.

2.3.2. Businesses

“Almost 45% of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks, 39% say their company has lost a bid because of corrupt officials, and 42% say their competitors pay bribes.”

(PWC, 2008)

Corruption costs companies as well as countries. Recently Wal-Mart has been accused of paying $24 million in illegal bribes to Mexican civil servants. On the same day their total market value plunged by $10 million (Fox Business, 2012). Thus, a total cost of $34m for Wal-Mart. The payment of bribes may actually lead to a higher cost of capital, increased spending and manager’s waste time dealing with bureaucrat’s negotiation regulations (Kaufmann and Wei (1999 (cited on world Bank, 2010). Daimler, the company behind Mercedes-Benz faces $185m fine for bribing public officials in 22 different countries, primarily Russia (The Independent, 2010). In 2008, Siemens paid $800m in fines for bribes paid to government officials in developing countries including Argentina, Bangladesh and Iraq (The Independent, 2010).

BP has recently investigated its Russian joint venture with TNK (TNK-BP) confirming 365 cases of alleged corruption including 37 criminal legal cases and 92 employees disciplined (Guardian, 2011). This is costly and time consuming for a business including court fees, lawyers’ fees, disciplinary and recruitment costs to replace old staff.

“Corruption adds up to 10% to the total cost of doing business globally, and up to 25% to the cost of procurement contracts in developing countries and moving from a country with low levels of corruption to a country with high levels of corruption is equivalent to a 20% tax on foreign business.”

(World Economic Forum (WEF), 2008)

Corruption can cost businesses from paying bribes to secure a permit, from fines and loss of market value. However, not being corrupt can also be costly. The NY Times (2009) reports weeks before Ikea

5 ($300bn (cost of corruption) / 141,750,000 (Population)6 1.5tn * 20% (estimate negative effect on GDP)

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opened its flagship store in Russia, it was asked to pay a bribe to the local electricity board if it wanted electricity for its grand opening. Instead, Ikea turned to renting generators to provide electricity. The executive involved was receiving kickbacks from the company to highly inflate the price, costing Ikea around $198m over two years. Even when Ikea tried taking the generator company to court, Ikea was force to pay a further $5m in damages for breach of contract. Ikea has not opened anymore stores as a result, despite seeing growth rates of around 20% in Russia (NY Times, 2009).

‘‘Creating a business’’ requires permission from about 50 officials. These losses are

offloaded to the ordinary customers and clients of small business, since expenditures

on bribes are included in the price of goods and services.”

Source: Levin & Satarov, 1999

In Russia, Karhunen and Kosonen (2011) point out foreign companies, more often than not, find themselves subjected to inspections from various departments to gain licences to operate. These official inspectors generally have enough discretionary powers to be able to shut down a business or expropriate their assets due to apparent fraudulent behaviour. Businesses may find they have to pay bribes to operate making Russia a less attractive place to invest.

2.3.3. Social Organisations have the need to adhere to corporate social responsibility (CSR) polices in the contemporary business world. CSR is a poorly defined term but simply put it is “a wide range of issues [on which] corporations are encouraged to behave socially responsible (Dahlsrud, 2006).” Jackson and Hawker (2001) add “we have looked for a definition and there isn’t one,” as there is an abundance of definitions that are biased towards specific interest (Van Marrewijk, 2003, Cited in Dahlsrud, 2006). As a result of CSR research will focus on social costs as well as economic and business to highlight the impact corporations may have on society as a result of engaging in corrupt practices.

“Corruption is often thought of as an economic crime (De Swardt, 2011)”. It’s not just the global economy that is being affected; the social cost of corruption is just as staggering. In Uganda, surveys have indicated that between the years 1991 – 1995 only 13% of allocated funds for schools reached their destinations. A shocking 70% of schools received nothing (Transparency International, 2004). This is socially damaging as a fundamental feature of modern society is being damaged; the education of a nation’s population.

“Corruption is inevitably a tax on those that are most vulnerable (BBC, 2011).” Which “perpetuates social injustice and the exploitation of the vulnerable: denial of healthcare, education, economic opportunity and justice, as well as preventing the holding to account of leaders for the theft of resources (De Swardt, 2011).”

Infrastructure projects can be subjected to corruption due to the large sums transferred and the opaqueness of accounting (TI, 2008). The social cost of this is poor infrastructure systems such as

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deteriorating roads, inadequate electricity supply and poor maintenance of public transport (Tanzi & Davoodi, 1998).

The health sector is an area prone to corruption that can have serious implications on the health care of a country. In China studies have shown around 30% of drug supplies are expired or counterfeit (Lewis, 2006). In Uganda an average of 73% of drug supplies are lost from hospitals (Lewis, 2006). The Independent (2010) reports widespread corruption in Uganda is diverting malaria treatment away from the population. A disease that is treatable is killing around 300 people a day in Uganda because government officials are selling the pills to criminal gangs in Kenya (The Independent, 2010).

The health care sector in Russia is rife with corruption indicating it’s not a localised problem. Health care in Russia is mostly public and medical services are supposed to be free. During the soviet period it was common to give informal payments to receive health care, a phenomenon that has astonishingly become more widespread (Lewis, 2007 cited in Zelenska, 2010). Unlike Uganda there is little data to show the true costs of health care corruption in Russia, it is estimated to be around $600m (INDEM, 2012). The social cost of corruption in Russia is unquantifiable but leads to issues like the poor being unable to afford free medical care and losing trust in the health system.

2.4.IndustriesAccording to Transparency International, construction, real estate, oil and gas are the most corrupt industries (Transparency International, 2011). Also, Holloway (2010) concludes “corruption is commonly found in the following areas of the public sector: public procurement, customs, taxation, police (especially traffic police), immigration, licenses and permits (including driver’s licenses), provision of services where there is a state owned monopoly (e.g. telephone connections), construction permits and land zoning, and government appointments.”

The oil industry in Russia is seen as very corrupt and “Gazprom is often pinpointed as the pinnacle of this corruption through both kickbacks and asset stripping (Aslund, 2008).” It is seen as so corrupt Russia needs $200 barrels of oil to compete with China and India in economic growth (Bloomberg, 2011).

“Further estimates made by Russian law enforcement bodies indicate that criminal groups in some branches of industry oil and gas industry, mining of rare metals spend up to 50% of their revenues actual, not declared on bribing officials at various levels, according to the Audit Chamber of Russia, in 1997.”

Source: Levin & Satarov, 2000

Opportunities exist for corruption in Russia’s tax and customs system due to the levels of complexity, capital controls and financial market regulation, regulations on businesses and management of state owned enterprises including their privatisation (Roaf, 2000). In addition, Russia is ranked the riskiest country for mining companies to operate in, partly due to corruption (Amaral, 2012).

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3. Types of corruptionCorruption comes in many forms and the types of corruption also vary. Influencing factors can be the location, sum of transaction and the person(s) involved. This section will introduce the different types of corruption before looking more specifically at Russia.

Morris (2011) concludes the most common criteria to define corruption are:

Political corruption v bureaucratic corruption – Generally, political corruption refers to corruption occurring at the policymaking stage and is usually undertaken by presidents or high ranking officials. Bureaucratic corruption relates to the implementation of policy carried out by lower level officials (Bardhan, 2006). It is argued the PM Vladimir Putin has an alleged illicit wealth from kickbacks and secret deals but it is impossible to confirm (The Independent, 2010).

Bribery v extortion – Bribery usually occurs when a public official is given ‘something extra’ to do their work. Extortion usually involves an official abusing their power often with actual or threatened force or violence. This relates to the direction of influence. Morris (2011) states the direction of influence in extortion moves from state to society whereas, bribery reverses the direction. Extortion is prominent in cities outside of Moscow and St. Petersburg. In Novgorod it is particularly bad with businesses living in fear of extortion from mafias with connections to high ranking public officials (BBC, 2005). Russia is ranked last on the Bribe Payers Index reinforcing bribery is a problem (TI, 2011)

Grand corruption v petty corruption – Grand corruption usually involves large sums of money, involves higher ranking officials and is less frequent. Petty corruption refers to smaller, more frequent payments and usually involves low level officials. Raof (2000) adds both petty and grand corruption is common throughout Russia ranging from bribes requested from ‘small-scale interactions with the state, to rumours of large kickbacks associated with privatisation and big business.

Further research by Beare (1997) adds “Systematic top-down corruption” is where a nation’s wealth is systematically removed from the people to favour the ruling elites. He adds election/campaign corruption, which is designed to ensure continuing influence from the political elite. There have been reports of extensive fraud in parliamentary elections which continued into the presidential elections in March 2012 (USA Today, 2012). There are thousands of posts online from March showing evidence of election corruption (The Guardian, 2012). Russian citizens know the election was corrupt (The Guardian, 2012). Since the era of Soviet rule Russians have been allowed to cast their votes at ballot boxes however, the results have always been known. It is seen as ‘the way of doing things’ in Russia and millions have always turned out to vote despite the presidency going to a pre-chosen candidate (The Guardian, 2012).

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Table 3.1 – Forms of Bribes Requested (N = 286)

The above chart shows the majority of bribes are paid in cash or cash equivalents which make it extremely difficult to trace. Products or services may be easier to trace than cash once they changed hands.

3.1. SourcesBribe line (2011) reports 85% of all bribes reported in Mexico and China where requested from public officials , in India and Russia this figures rises to 91%. This section will look at who initiated the corrupt act and identify them as the source. The sources of corruption are not universal and differ by country. In the USA, the main bribe requestors are private companies, In Brazil, Mexico and Russia it is the police, in Ukraine it is an employee of a state owned enterprise, in India it is from national level government and in China it is any government official (Bribe Line, 2011).

In Cuba, “officials worry that foreign investment brings corruption” (The Economist, 2012). The Economist (2012) writes that ‘shell7’ companies are partly to blame. The World Bank (2011) investigated 817 cases of grand corruption and concluded almost all of them used shells. The below table highlights the number of grand corruption cases:

7 . A ‘shell’ company is one that is set up offshore and most are legitimate but many are ‘paper’ companies, often free of any obligation to publish their accounts making it difficult for outsiders to know who is in control, why they are in operation and where they operate

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Table 3.4 – Grand Corruption Cases:

Source: The Economist (2012)

Corruption may be universal but the main sources of corruption are different. In China, Government officials are the most common to request a bribe. In the British Virgin Islands, the main form of corruption comes from ‘shell’ and in Russia the police. This may indicate that different cultures have different believes on the definition and severity of corruption. For example, in Russia, it may be deemed socially acceptable to request a bribe from someone as a government official. In Afghanistan, at least 33% of the population see corruption as a normal part of life (BBC, 2010). This may be one of the reasons why a global effort to eradicate corruption has not be effective.

3.2.Russia The below chart highlights the main group to request bribes in Russia:

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Source: (Bribe Line, 2011)

The most common group to request a bribe is the police (41%), around 3000 cases of corruption against the police are reported each year (The Moscow Times, 2012). Even the Russian government has admitted that police corruption is rife throughout Russia (BBC, 2009). In 2011 the ranks of the police force were purged in an attempt to eliminate corruption. Of the 875,000 police officers investigate about 183,000 were removed from their posts or fired or roughly 20% (Golts, 2011). Police officers are punished to a greater extent than normal people, yet still around 60% of cases against the police centre around corruption. Police officers are generally reluctant to investigate crimes committed by their colleagues and plans have recently been announced to establish an independent department to investigate crimes from within (Moscow Times, 2012).

3.3. Global GovernanceKline (2005) highlights During the US Watergate political scandals in the 1970’s over 500 US companies were found to have secret overseas accounts to facilitate the payments of bribes or for other improper purposes. This led to congressional hearings to the introduction of the Foreign Corrupt Practices Act (FCPA) (1976) which aimed to improve accounting standards for recording transactions and imposed US anti-bribery laws on US companies operating in overseas markets. Kline (2005) points out that despite other countries introducing law themselves not much was done for almost two decades to combat corruption. In 1996 the UN adopted the Declaration against Corruption and Bribery in International Commercial Transactions (1996). Kline (2005) reports a year later the OECD held a convention on tackling bribery in which a number of non-OECD countries attended and led to the introduction of ant-corruption laws in a number of countries covering MNE’s activities. During the 1990’s the World Bank and the IMF started to formally address the issue of corruption. It has been almost forty years since the political scandals in the USA and knowing the severity of corruption one would expect there to be some form of international governance. Searching the web for ‘anti-corruption agencies’ using Google returns over 22m results. These range from international organisations such as transparency international and BRIBE line to national organisations. There are countless numbers of non-governmental organisations (NGO’s) both international and national to fight corruption. In addition, governments have passed legislation and introduced laws to combat corruption, such as the Bribery Act 2010 (UK) and the Dodd-Frank Wall Street reform (US).

With all these agencies, legislation and money spent, one would expect corruption to be diminishing. However, the OECD publishes progress reports based on criteria set out in the 1997 convention. Out of the 38 parties of the convention only seven have been actively enforcing the rules (OECD, 2010). The European Commission (EC) suggests the level of corruption has risen over the past three years (Europa.eu, 2012).

The Telegraph (2010) reports that 56% of those surveyed believed corruption was getting worse. In addition, Corruption Watch (2012) states 62% of people felt that corruption had increased in their country in the past three years. The BBC (2010) reports the global crisis led to an increase in corruption. Jaffe and Tsimerman (2010) conclude business ethics worsen in due to economic crisis and that it is acceptable to compromise ethics when business and economic conditions are

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unfavourable. Despite increasing costs and less demand businesses need to stay ethical, even in times of economic uncertainty.

Many governments and independent agencies are fighting corruption; many multinational companies (MNC’s) have a code of conduct in place to forbid corruption. For example in 2002, BP became one of the first companies to prohibit the use of facilitation payments in the course of its business (BP, 2011). However, The Economist claims so few companies are entirely clean even if they insist they are (Pacek & Thorniley, 2004).

3.3.1. Russian GovernanceRussia knows it has a problem and even the President of office, Medvedev claims “no European country can boast such universal disregard for the law.” Over the past year a range of measures have been implemented to combat corruption, such as a law requiring government officials and their families to fully disclose their holdings and to scrutinise their purchase’s (Telegraph, 2012).

“Medvedev has proposed to get rid of ‘idiots in Russia.’ The new campaign will allow used to create a web portal for citizens to shame public sector officials and record their negative experiences of the civil service. The informational is to be used to decide on law changes and to prosecute the civil servants in question (RT.com, 2012). If people in Russia are unhappy with the levels of corruption they will now be able to publicly shame officials. The problem with this is the state may attempt to restrict the information available if it relates to high ranking officials.

Russia has recently joined the convention against bribery of foreign public officials as a prerequisite for joining the OECD (RT, 2011). Current laws include The Anticorruption Legislation, Council of Europe Criminal and law Convention on Corruption, Anti-Corruption Strategy 2010 – 2011 and numerous other bills. All with the intention on increasing the punishments for corruption, anti-corruption training and generally restricted discretionary powers and increasing the levels of accountability, all of which are hard to examine exact details.

Sources: OECD (2003), Business Anti-Corruption Portal (2012)

3.4.Does Corruption Pay?It would appear that corruption is damaging to the economy. However, China, Vietnam, Indonesia and Thailand were among these most corrupt countries between the years 1980 – 1995, yet enjoyed growth rates in excess of 6% (Campos et al, 1999). Russia is one of the most corrupt countries now and enjoys growth rates or 5% (2003 – 2011) (Trading economics, 2012). The severity of corruption would suggest that corruption does pay to certain individuals, groups, companies or governments. Corruption may be a necessity, especially in Russia. For example, if two oil companies are competing for a contract to drill oil and, the official in charge of allocating the contract requests a bribe, the contract may be awarded to the company that acts unethically. Therefore, the losing oil company will suffer in lost profits and, a small bribe may have been beneficial to stay competitive, profitable and in business. This can also put pressure on businesses to comply with bribery in the future to complete for business.

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3.4.1.1. In Russia“Corruption can do magic in Russia (RT, 2012).” Despite all these measures being corrupt in Russia appears to pay. Aslund et al (2010) claim a small firm in Russia can increase its chances of winning a property dispute with a similar company by 9% if it has good relations with the regional government. One report tells of an individual who had his business bank account closed and it wasn’t until he paid a bribe he could reinstate his account to operate (rferl.org, 2010). Corruption doesn’t just pay for businesses.

“Bribery is an institution in Russia: students pay teachers for better grades, patients pay doctors for health care supposedly provided free by the state, families pay off draft boards to keep their sons out of military service.”

Source: rferl.org (2009)

This can be interpreted to show how the police can see bribes as normal behaviour. Those who commit motoring offences can bribe a traffic office and be let go with no punishment (Nemtsova, 2011). It even pays for government officials to be corrupt; one regional leader admits to having only a small apartment but lives in a marble mansion (rferl.org, 2012)

3.5. History of CorruptionUnder tsarist rule close ties existed between state official and companies limited judicial discretion. State officials consistently undermined legislation (Heinzen, 2007). Law diminished even further during the Soviet era and leaders claimed the party was above the law and could do as it pleased. Post WWII there was a shortage of supplies and most people offered some form of bribe to gain access to houses, jobs or goods and services in short supply (Heinzen, 2007). Federal funds were limited; pay declined and civil servants lacked resources. Regional officers would often unofficial help their colleagues but for a small fee, which was usually in the form of preferential treatment (Aslund et al, 2010). It was the way of getting resources to those who needed them most (Heinzen, 2007). Under communism, corruption became institutionalized and controlled by the party with the state having the monopoly. Bribes were set a low profit maximizing level to ensure sustainability. Since the end of communism everyone is involved in corruption making it endemic (Shleifer and Vishny, 1993).

In the 1990’s that President Boris Yeltsin introduced legal reforms throughout Russia (Aslund et al (2010) and Putin pushed ahead with legal reforms in the early 2000’s (Sakwa, 2008). Despite these reforms a great deal more still needs to be done (Aslund et al, 2010).

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4. What Causes Corruption?Causes of corruption can be attributed to a range of factors and vary by country. The general causes of corruption will be identified and applied to Russia. Causes of corruption in Russia vary and the main concern is that it’s seen as morally acceptable and has been increasing since the fall of the Soviet Union (Gradirovski, 2006). The causes are widespread due to the geographical size of Russia and Belousova et al (2011) concludes the causes are different in each region.

4.1.The State “If we abolish the state, we abolish corruption.” (Becker (1974). According to Tanzi (1998) “corruption is generally concerned with the activities of the state and especially with the monopoly and discretionary power of the state.” Russia is seen as a democratic state, yet many argue its democratic credentials are extremely flawed (Darlington, 2012). This would imply that the ‘state,’ or government, is responsible for causing corruption. In Russia 91% of bribe requestors are public officials (Trace, 2011), so it could be said the state is responsible.

Ackerman (2006) states “corruption is a symptom that something has gone wrong in the management of the state. Institutions designed to govern the interrelationships between the citizen and the state is used instead for personal enrichments and the provision of benefits to corruption.”

According to the OECD8 (2010) only seven out of 38 countries are actively fighting corruption. So in some respects the government is not fighting corruption thus letting it happen. This may not necessarily be a cause of corruption but it may facilitate the amount of corruption. It could be argued in Russia, more is being done to fight corruption by the state so, and the state is not responsible. However, it could be the state is not doing enough to tackle corruption. In Russia, more is being done to fight corruption, yet it is still very persistent, so it may not be the state that is responsible or the state hasn’t done enough.

State departments supply corruption but only because there is demand. Tanzi (1998) suggets the factors that promote corruption are those that affect the supply and demand of acts of corruption. The public demands corrupt practises and public officials supply acts of corruption. It is not just the state (government) that is causing corruption. It may be external pressure on public officials that cause them to be corrupt.

Roaf (2002) outlines the causes of corruption can be attributed to a ‘combination of opportunities and incentives.’ Opportunities can be seen as the demand, company representatives seeing an opportunity to get a contract quicker so demand corruption happens. Incentives exist for the public sector worker to gain extra income from supplying the corruption.

Waters, 2004 claims that to eradicate corruption the demand for corruption must be constricted as whilst there is demand there will be a supply. “If potential benefits from corruption are big enough, government organizations and officials have incentives to create laws and regulations that enable them to become the providers of additional required permits and license, charging for them accordingly (Ninghua, 2010).

8 OECD - (see glossary)

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4.2.Economic RentMyint (2000) describes economic rent in reference to corruption as:

“Suppose a bureaucrat has the responsibility of … delivering the authorization letter that grants permission to business enterprises to engage in a certain line of economic activity. Business executives are anxious to have the letter typed expeditiously and correctly they are willing to pay a price for this special service. Hence the bureaucrat who has a monopoly of … processing the letter can use his official position to acquire economic rent from his clients. A useful approach to find out the amount of his economic rent is to think of what he can earn if he is fired from the licensing office. If the next best thing he can do when he loses his government job is to become a taxi driver then the difference between his earnings at his new job and his intake as a public official is his economic rent.”

Tanzi (1995) suggests low public sector wages gives public officials the opportunity to request bribes, especially within the taxation system if the payment of taxes requires frequent contact between taxpayers and administrators. The World Bank (2011) has uncovered that public sector wages are generally lower than private sector wages across the globe. “Van Rijckeghem and Weder find that quasi-eradication of corruption would require average public sector wages to be two to eight times higher than average manufacturing wages (Cited in Panizza, 2001). However, the World Bank (2011) highlights that empirical evidence as to whether low public sector wages increases corruption is extremely varied depending on the data set, research design and countries. Authors such as Rauch and Evans (2000) argue that there is no empirical evidence to suggest higher public sector wages leads to less corruption in 35 developing countries. Orttung (2006) states public sector wages in Russia are some of the best in the country averaging 11,430 Rubles per month compared to 9,876 Rubles per month for the average Russian worker, thus wages of the public sector are may not be causing corruption in Russia.

4.3.Discretionary PowersAs rules and regulations seldom take care of all contingencies that may arise many officials have flexibility and are given discretionary powers (Myint, 2000). Tanzi (1995) also claims certain aspects relating to the tax system and officials discretionary powers causes corruption. He claims laws relating to taxation can be difficult to understand and interpreted very differently. In addition, some administrators have discretion over important decisions such as the determination of taxes and selection of auditors (Tanzi, 19987). Roaf (2000) claims the discretionary powers of public officials has been reduced but departments such as tax can still negotiate tax deals with tax inspectors in Russia.

“The discretionary powers of the officials [in Russia] are so vast that they do not need to break laws to receive corrupt payments, said Sergei Plaksin from the Higher School of Economics. The informal payments are often on the initiative of businesses who wish to speed up the process.”

Source: Chaykovskaya, 2011

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4.4.AccountabilityProper observation of rules and regulation is required to minimize corruption (Myint, 2000). If a government worker issuing permits is not audited on matters such as number allocated, total value of each transaction or who purchased the permit then there is more incentive to act corrupt for personal gain as there is less chance of being caught.

Becker (1986) suggests that the likeliness of an individual committing a crime depends on the punishment. The penalty system present in a country is a factor that determines both the supply and the demand. In theory if the punishment for corruption was increased the number of cases should fall. However, Tanzi (1998) argues this may just lead to demands for higher bribes on the corruption that does take place. However, In Russia, punishment for the police is higher than for citizens yet the police are the biggest bribe requestors reported. (Trace, 2011).

Tanzi (1998) suggests, in relation to accountability in the taxation system, acts of corruption are often ignored, administrative procedures lack transparency and not accounted for properly and controls by the state are weak. The tax system is poor in Russia with poor auditing and lack of transparency (World Bank, 2005).

Roaf (2002) suggests Opaque noncash transactions, poor systems of accounting and auditing and lack of transparency in government as factors relating to poor accountability in Russia

4.5.Regulations and AuthorizationsThe existence of regulations and authorizations gives the officials in control an implied monopoly power. Bureaucratic procedures are common and often long winded. Surveys from developing countries suggest that a large proportion of the time managers are spent dealing with bureaucracies (Tanzin, 1998. Bureaucratic procedures in developing markets can make it difficult for business to participate in the formal economy (article 13, 2012). The average new business in Russia must deal with around 20 – 30 different licensing departments in Russia (Broadman, 1999). He adds the discretionary powers of the judiciary are very general in nature and interpretation on laws is very open in Russia.

4.6.The bureaucratic traditionIn Russia, many forms of corruption are deeply rooted in social practises and it is the ‘normal’ way of doing business (He, 2000). In Russia it relates back to the Soviet Era as mentioned earlier. According to Transparency Internal, the level of corruption in Russia is directly related to the number of bureaucrats in a region (cited in Orttung, (2006). Orttung (2006) points out major cities are more prone to corruption as there is a higher concentration of bureaucrats. This may be due to the bureaucratic tradition of being corrupt and thus the more bureaucrats the more corruption takes place.

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4.7.Decentralization9

There is evidence to support decentralisation reduces the level of corruption and evidence against. Fisman and Gatti (2000) argue that decentralization can reduce the level of corruption from bureaucrats as those seeking ‘rents’ prefer a centralised system. Decentralisation requires individuals and departments to be more accountable and often audited. Huther and Shah (1998) note there is a negative correlation between corruption and decentralization. Fisman and Gatti (2000) argue if decentralization creates tiers in government, it could weaken accountability as it is difficult to attribute blame to any one individual. They conclude there is a negative correlation. However, they argue different types of decentralisation may impact the level of corruption differently. For example, inter-jurisdictional competition systems are predicted to have lower levels of corruption (Fisman and Gatti (2000). Wei (2000) supports this argument and has suggested that countries set up ‘corruption free zones’ to force other regions to improve their bureaucracies.

If we applied inter-jurisdictional competition to the UK, it would essentially be different local councils competing against each other for business and residents. Dincer et al (2010) add the poor performance of one jurisdiction is likely to be cross checked against all other jurisdictions by the government, media and voters. In addition, when focusing on jurisdictions rather than the whole nation observations become more precise.

Despite decentralisation Russia is still rampant with corruption. It appears regional governments are abusing their power by being corrupt. Russia underwent decentralisation during the 1990’s after the fall of the Soviet Union but lacked a clear strategy (Andreeva & Golovanova, 2003). Without a clear plan decentralisation hasn’t completely taken place. Russia has achieved a degree of decentralisation but regional budgets have no independence (Andreeva & Golovanova, 2003. Blanchard and Shleifer (2000) claim regional governments in Russia restricted growth during the 1990’s. Sonin (2003) believes this is because regional governors are more prone to treat local firms favourably as a result of campaign donations, whereas central governors would not. It is possible that during decentralisation more tiers were created in regional governments with no or little accountability making opportunities for corruption more common.

Tax collection systems are rather opaque in regional governments and in 1998 regional governors were handed more discretion over bankruptcy of businesses (Andreeva & Golovanova, 2003).

4.8.Social NormsIt appears the causes of corruption in Russia can be related to the Soviet Era. Corruption was common and seen as a way of doing things. After the collapse of the Soviet Union this, ‘way of doing things’ had become a normal part of society. As mentioned earlier, public officials account for 91% of bribe requestors in Russia (bribe line, 2011) indicating the government is responsible for most of the corruption even after democratisation. There appears to be a lack of enforcement with the police being the biggest group to request a bribe. Opaque accountability systems and lack of audits seem to be another cause. For example, only 1 in 4 Russians has a bank account and most are paid in cash (Telegraph, 2012) tax officers negotiate with individuals their tax liabilities and have a great deal of discretionary powers with little accountability. With officials in government being corrupt it filters through to the rest of society and becomes normal behaviour. When Russians are asked about corruption they say its normal (BBC, 2010). Levin and Satarov (2000) claim the norms of behaviour

9 See glossary for definition

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need to be changed so corruption is no longer viable in Russia. Reuters (2012) reports corruption in Russia is now normal behaviour.

‘We must ask ourselves: Do we live in a society where corruption is a moral perversity to the normal flow of things, or is it the main part or even the spinal cord of the system of administrative management in the country?’

Source: Russian ombudsman Vladimir Lukin cited on TI, 2012

Vladimir Putin has described Russians corruption as civilised and normal (FT.com, 2012). It appears bribery has become morally acceptable in Russia as the following graph highlights:

Table 4.1 – Corruption, morally right or wrong?

Source: Gradirovski (2006)

This raises issues about the perceptions of corruption in Russia with business owners being more likely to give bribes. This could include entrepreneurs, future CEO’s and other high ranking officials in businesses. It could be these people who MNC’s are doing business with and they feel it is morally acceptable to give and receive bribes. In addition, business minded individuals feel they must be corrupt in order to ‘do business.’ It causes problems for the economy as 33% would bribe officials to

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avoid tax audit, implying businesses do not pay enough tax. Businesses could suffer, especially MNC’s as they may engage in corrupt practices and be fined or lose business as a result of not engaging. Society is damaged as it reinforces corruption as a positive behaviour.

4.9.The Corruption EquationKlitgaard (1998) outlines a formula that defines the causes of corruption called the ‘corruption equation:’

C = R + D – A

C stands for corruption, R is for economic rent, D for discretionary powers and A for accountability. The formula is stating that the more opportunities for economic rent there are, the larger the corruption. The more discretionary powers that are given to administrators the higher the chances of corruption will be. On the other hand, the more people held accountable, the less corrupt a country will be. Mathematically speaking, C varies directly with R and D, and inversely with A (Myint, 2000)

According to Myint (2000) if the above formula is stated differently it tells us corruption will increase if the following three conditions are met:

1. Large number of rules and regulations that restrict business and economic activities thus creating opportunities for generating economic rent. It is made worse if the restrictive measures are complex, inconsistent and opaque – which has been proven to be true in Russia;

2. Those who are given discretionary powers have a lot of freedom in interpreting, applying, amending or altering the rules – discretionary powers in the tax system is a good example of how this is true for Russia; and

3. There is a lack of institutional arrangements and mechanisms to ensure people are held accountable for the actions. The police are corrupt in Russia, the ones who are supposed to enforce the law.

4.10. Summary of CausesOverall, Russia is prone to corruption for a number of reasons. Level of public sector pay can be eliminated as in recent years this has risen to above the private sector. The number of public sectors worker in a district can also be eliminated as it has been disproven in a paper published by the IMF, whereas the paper confirming the link has not been published by such a respected agency. The main causes of corruption have been identified as

Complexity of laws and regulations Social ‘norms’ arising from Soviet rule and the behaviour displayed by the elite -

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Lack of transparency and accountability in state departments Restriction of media and NGO’s to report news on corruption

5. ConclusionTransparency International (2011) defines corruption as “The abuse of entrusted power for private gain.” It is estimated over $1 trillion is paid in bribes worldwide annually (TI, 2004). Corruption is having a major impact on economies costing Russia an estimated $300bn each year (TI, 2010) which has major implications for businesses and societies.

Corruption is primarily caused as a result of the actions of the state with 91% of bribes being requested by government officials in Russia. Couple this with the lack of free press in Russia and it can be seen how ‘social norms’ have been created. Inherited from communism the perception of corruption in Russia has been described as a victimless crime however, this research has uncovered corruption negatively effects the economy, businesses and society. The economy is losing between 20 – 40% of GDP, businesses are losing an average of $243, 750 a year (INDEM, 2012) and society is losing fundamental features such as health care.

With 63% of individuals being requested for bribes in 2008 (Bribe line, 2009). Corruption risk is seen to deter many firms; around 45% of businesses have not entered a market due to corruption risk (PWC, 2008). With a rapidly expanding economy and an influx of FDI, corruption is threating to derail the growth of Russia. With limited growth in the developed world, Russia looks like an attractive place to invest

With global measures to eradicate corruption, the problem is worsening in Russia, as this paper has highlighted throughout, rather than getting better. Corruption is perceived to be morally right by many Russians, particular those with business acumen. How can something that is so deeply rooted into society, something that is perceived as normal ever be eradicated?

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