corruption in the russian federation

7/28/2019 Corruption in the Russian Federation

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Christian-Albrechts-UniversittzuKiel

FacultyofEconomics

CorruptionintheRussianFederation:

ItsIn3luenceonPoliticalandEconomicalDevelopment

TheeconomictheoryofcorruptionexertedonthecaseoftheRussian

Federation

byRubenWerchan


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TableofContent

Introduction 2

1.EconomicTheoryofCorruption 3

1.1.TheProblemofDeiningCorruption 3

1.2.AnEconomicModelofCorruption 4

1.3.TheRoleoftheGovernment 6

1.4.CausesandDeterrencesofCorruption 7

2.TheCaseoftheRussianFederation 8

2.1.EmpiricalDataonCorruptionintheRussianFederation 8

2.2.ConsequencesofCorruptionfortheRussianSocietyandEconomy 13

2.3.ReasonsfortheCorruptionintheRussianFederation 14

2.4.HowtoBattleCorruptionintheRussianFederation 16

Conclusion 18


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together, identify main reasons, problemsand possible solutions, andto analyze it on the

backgroundoftheeconomictheoryofcorruption.Forthispurpose,theirstchapterwillgive

anoverview of theeconomic corruption theory, including aworkingdeinition, amodel of

corruptionand some insightson therole of the stateandmain causes anddeterrences of

corruption.Thepapersfocuswillbeoncorruptionofpublicservants.Thesecondchapterwill

present data on corruption in the Russian Federation and analyze its causes and

consequencesaswellasgivesomeideasonwhatisdoneandwhatshouldbedonetobattle

corruption.

1.EconomicTheoryofCorruption

1.1.TheProblemofDe3iningCorruption

Basically allcontemporaryliteratureon theissueof corruptionopenswitha descriptionofthedificulty, orevenimpossibilityofdeiningcorruption(cf. Jain1998: 13).Theliterature

also complains aboutthefact, that thelack ofa convenient andconsistentdeinitionofthe

problem makes the empirical analysis dificult and less fruitful (McChesney 2010: 219).

Neverthelesseverybodytriestogiveadeinitionbutstillnoconsensushasbeenfound.

Themaindrawbackofmostdeinitionsofcorruptionis thenormativeelement theyposses.

Thosedeinitionstrytoincludetheunlawfulaspectofcorruption.Illegitimacyisanimportant

aspectinthenormativeanalysisofcorruption,butfromaneconomicpointofview,itmakes

littledifference,wether corruptioninvolves legalor illegal transactions (cf. Rose-Ackerman

2001: 48f.). It is important to stress this aspect, because what is illegal and what is not,

dependslargelyonthelegislationinagivencountry,andthingsthatareillegalinonecountry

maybelegalinanother.Neverthelesstheconsequencesofcorruptionarelargelythesame.

Generallytherearetwo typesofcorruption:privatesectorandpublicsectorcorruption.Vito

Tanzi proposedaneutral deinition that covers both private and public sectorcorruption:

Corruptionistheintentionalnoncompliancewitharmslengthrelationshipaimedatderiving

someadvantagefromthisbehaviorforoneselforforrelatedindividuals(Tanzi1998:564).

Even though, corruption can occur and does occur in the private sector, namely in large

enterprises when it comes tohiring, or subcontracts (cf. Tanzi 1998: 564), most scientiic

interestisdirectedtopublic sectorcorruption, sinceit is by faremorewidespreadandhas

thereforeworseconsequencesforwelfare.

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Concerningpublic sectorcorruption,FredS.McChesneyoffersagooddeinitionbasedinthe

property-rightsapproach.2Accordingtohim,

corruptionshouldbe de1inedasagovernmental actorsuseofresources, that nominally

hedoesnotown,butthateffectivelyhedoesown,toenrichhimselfpersonally.Howhecan

enrich himself depends on the market(s) within which corruption is bought and

sold(McChesney2010:223).

Althoughthisdeinitioncapturestheactofcorruptionthebest, itlackssomeprecision. It is

notcorruptionthatisboughtandsold,rathercorruptionistheactofbuyingandsellingofa

stateownedresourcestothemutualbeneitofthebuyerandthegovernmentaloficial.

ArvindK.Jainstressesthepoint,thatcorruptionreferstoasituationwhereanasymmetryof

power exists and is abused. public oficials, bureaucrats, legislators, and politicians usepowersdelegatedtothembythepublictofurthertheirowneconomicinterests(Jain2001:

73).When looking at corruption as an economic transaction, it describes a private agent

buying something from the government, ormore precise from a governmental oficial or

employee. That something that is bought from the public servant should logically be

something, theprivateagent couldnotpurchaseelsewhere. Theonegood, governmentisa

monopolyownerof, ispower.Bydeinitionthegovernmentistheonlyagentinasocietythat

hastherighttocoercethecitizenry,andthustherighttoassemblearmiesandpoliceforces,

maintain prisons and levy taxes - none of which are recognized rights of private

individuals (McCheney 2010: 224). It is accordingly the monopoly of power, that gives

governmental oficialsandemployees somethingtosell toprivateindividuals. Thefollowing

section will present an economicmodel of corrupt behavior of public servants and their

privateclients.

1.2.AnEconomicModelofCorruption

A basic economic model of corruption was presented by Andrei Shleifer and Robert W.

Vishny. Inthismodel, thegovernmentproducesagood,whichisthensoldtoprivateagents

by an governmental oficial. This oficial can artiicially limit the access to this good, in

practice thismeans a long delay oran impositionofmanyrequirements (Shleifer/Vishny

1998:93), thuscreatingasituationwhereheorshe is themonopoly supplierofthisscarce

good. The price of the distribution of the good, hence the amount of the bribe, is then

determined by settingmarginal revenue equal tomarginal cost. It has to bedistinguished

betweenthetwocasesofcorruptionwithandwithouttheft.Inthecaseofcorruptionwithout

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2Seenextsubsection.


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theft, thegovernmentaloficialturnsoverthepriceofproducingthegoodtothegovernment

andthereforethesecostsdeterminethemarginalcostoftheoficialforprovidingthegood.In

this case, the amount the private agent has to pay for the good always lies above the

governmentprice,becausethebribeisaddedtothisprice(cf.Shleifer/Vishny1998:93f.). In

caseofcorruptionwiththeft,theoficialdoesnotturnoverthepriceofproducingthegoodto

thegovernment. Instead he actuallyhides thesale from the government andhis marginal

costs are therefore zero. In this case the bribe may actually be lower than the oficial

governmental price (cf. Shleifer/Vishny 1998: 94f.). Examples forcorruptionwithouttheft

wouldbetheprovisionofapassportorapermit,whichonlytakesplace,afterabribeispaid.

Examples for corruptionwith theftwould be the imposingof a ine or the declaration of

customs.Theoficialthencollectsaineorcustomsthatarelowerthentheywouldbewithout

corruption, butdoesnotreporttheactofiningorthedeclaredproductstothegovernment,andkeepsthewholepaidsumtohim-orherself.Theeffectofcorruptionwithouttaxonthe

economyisthesameasacommoditytax.Theonlydifferenceis,thatthetaxrevenuewouldgo

to the government, while thebribes arekeptbythebureaucrats (cf. Shleifer/Vishny1998:

94f.).

Themodel byShleiferandVishnydescribesthepracticeofrent-seekingbypublicservants.

Rent-seekingisaproblemofinsuficientpropertyrights:

Ifproperty rightswere clearlydelineatedand perfectlysecure, there couldbe norent-

seeking. Rent-seeking arises because of the discretionary powerof the state toalter or

transfer propertyrightsthroughtaxationand spending, regulation and eminent domain

makesprivatepropertyrightsinsecure(McChesney2010:226).

Assigningandmodifyingpropertyrightsisoneoftheelementaryfunctionsofgovernments.It

guaranteesthefunctioningof theeconomy. Onlyif propertyrights areclearlyassignedand

enforced, can economic interactions take place. Property rights are then traded between

privateactorsonmarkets(cf.Benson1984:390).Ideallythegovernmentinterventionwould

beheld to aminimumand the assignment ofproperty rightswouldbe ledby the goal to

maximize socialwelfare andeconomic eficiency. If this would actually be the case, there

wouldbenoroomforrent-seeking.Ifhoweverpropertyrightsarenotclearlydeinedand/or

not secure, government oficials andemployes have the discretionary power to alter and

reassign them for personal gain. In this case the private agent has to decide wether to

rightfullybuyadesiredpropertyrightonthemarket, orbribeapublicservant to havehim

reassignthepropertyrighttotheprivateagent.Hewilldothelatter,ifthebribeislessthan

themarketprice(cf.Benson1984:390f.).

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Weakinstitutionsareakeyconditionforthegovernmenttopossesdiscretionarypower,and

thepublicservants to beable tousethispowerfortheirpersonalbeneits. Especially legal

institutionsmustbesuchthatoficialsareleftwithanincentivetoexploittheirdiscretionary

powertoextractorcreaterents(Aidt2003:F633).Therefore, thelegalsystemcaneasilybe

caughtinaviciouscycle.Ifforwhateverreasonsasystemofcorruptionthatisbeneicialfor

thepoliticaleliteisestablished,thiselitewilltrytokeepit.Toachievethis,thepoliticalelite

weakensthelegalandjudicialsystembycuttingitsresourcesandappointingcorruptjudges.

But reduced resources and corrupt judgeswill make it hard for the legal system to ight

corruption, therebygivingcorruptiontheopportunityto spreadevenfurther(cf. Jain2001:

72).What forms public sector corruption can take andwhat consequences it has, will be

examinedinthefollowingsubsection.

1..TheRoleoftheGovernment

Whenfocussingonhowthestatecanuseitsdiscretionarypowerforpersonalbeneitsofits

oficialsandbureaucrats,adistinctioncanbemadebetweenthree levels ofcorruption.The

highestlevelconcernspublic,especiallyeconomic,policyandtheimplementationofpolicies.

Corruption on this level leads to the creationofpolicies that create opportunities forrent

seekingforthegovernmentaloficialsandpublicspending[s][are]divertedtothosesectors

where gains from corruption [for the governmental oficial] are greatest and where the

discretional nature of theproceduresreduces therisks involved(Portella/Vannucci 1993:

518).Thiskindofcorruption,thatleadstopolicydecisionsthatserveprimarilytheinterestof

somegovernmentaloficial,hasthemostseriousconsequencesforsocietybecauseitleadsto

an ineficient allocation of resources on a large scale, and thereby creates an incalculable

welfareloss(cf.Jain2001:74).

The second level is concerned with the legislative, and describes the extend, to which

legislatorscanbeinluencedthroughcorruption.Corruptiontakesplaceinformoflegislators

receivingpayments, orfavors fromprivateagentsinordertopassalegislationbeneicial to

theseagents.Wetherthesepaymentsarelegalorillegaldependonthelegalframeworkofthe

givencountry. Anoften seen legal formofpayments to a legislator to inluence legislative

outcomesarecampaigncontributions (cf.Rose-Ackerman2001:47). Indemocraticsystems,

legislators have to balance the gain from bribery and legislation that serves only the

particularinterestsofthose thatpaidthebribe, andthepossible punishmentofthevoters,

thatcanleadto alossofoficeinthenextelection.If legislatorsarebelievedtobalancethe

gainfromcorruptionandtheriskofbeingreelected,whendecidingonwethertobecorrupt

ornot,itisobvious,thatasystemofelectionforgeryencouragesbribetakingoflegislators.If

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thelegislatorexpectselectionstobeforgedandthereforknowsthathisorherelectiondoes

notactuallydependon voters decision, heor shedoesnot facethe risk oflosingthenext

election due to eventual corruption. Therefore a malfunctioning democracy reduces the

disincentivesofcorruption(cf.Jain2001:86).

Thelowestlevelofpoliticalcorruptioninvolvesbureaucratsandotherpublicemployees.This

typeofcorruptiondescribesbriberyofpublicoficialsforeitherprovidingagood,thatwould

otherwisenotbeavailable,ortospeeduptheprocessoftheprovisionofagoodprovidedby

thegovernment. Italsoinvolves corruptioninthe judiciary, wherebribes canlowereither

thecostsorthechancesoflegalpenalties(Jain2001:75).Butwhatarethefactorsthatfoster

corruptionandwhichfactorshinderit?

1.4.CausesandDeterrencesofCorruption

Onefactor, suggestedtosupportacorruptenvironment, is acomparablylargepublicsector.

Thelogicbehindthatassumptionisstraightforward.Ifitisgovernmentstructures,thatcause

corruption, then the reduction of these structures leads to declining corruption. The

instrumentsuggestedtoightcorruptionisthereforeprivatization(cf.Becker1994).However

this theory is not backed by empirical indings. The scandinavian countries are just one

example of countries with a strong public sector andvery few corruption (cf. Lambsdorff

2006:4).Andalso thesuggestedcure,privatization,hasbeenshowntobelesseffectivethen

thetheory suggests, because ithasbeenseenthat many transitioneconomiesexperienced

massivecorruptionintheprivatizationprogramsthemselves(Lambsdorff2006:5).

A clearer correlation exists between political competition and corruption. The more

competitionexistswithinthepoliticalsystem,thefewertheopportunitiesforcorruption.This

holdsfortworeasons.First,ifthereexists competitionbetweengovernmentaloficials, as is

usuallythecaseindemocracies,thediscretionarypoweroftheindividualoficialislimited.

Theoficialhaslimiteddecisionpowerbecauseanagreementwithotheroficialsisnecessarytoformadecision, andalsodeinitepromisescannot bemade, becausechancesarethatat

theendofatermtheoficial isnotreelected(cf. Montinola/Jackman2002: 150). Second, if

competitionexistsbetweengovernmentagencies that provide goods toprivate agents, the

bargainingpoweroftheclientisstrengthened.Iftwoagenciesoffercomplementaryservices,

the private individual can choose to turn to the less corrupt agency (Montinola/Jackman

2002:151).Thereforecentralizedandundemocraticsystemsarebeneicialforcorruption.

Theeconomiccost-beneit-analysiscontributestothesolutionofthecorruptionproblemby

providing insights onhow corruptionrelates to public servantspay and the possible loss

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fromdetection.Thebasicargument is, thatthehigherthesalary, thechanceofdetectionand

thepenalties,thelowertheincentivesforcorruption.However,wagesdonothavetoincrease

tolevels,unrealizableformostdevelopingcountries. CarolineVanRijckeghemandBeatrice

Wedernamefactorsthatreducecorruptionunderanonlymodestincreaseinpublicservants

wages.Firstofall,sincethemostbribesinthepublicsectorarelow,wageswouldonlyhaveto

increase moderately. Second of all, it is not the absolute level of wages, that inluences

corruption, but the questionwetherwages are perceivedas being fair. And last of all, if

public serviceremuneration includespersonalbeneits, suchas reasonablepensions, health

insurance,oropportunityforpromotion,theincentivestoriskbeingiredbecauseof corrupt

behaviorarereduced(cf.VanRijkeghem/Weder2002:60f.).

But also thestructureoftheeconomyinluencesthelevel ofcorruptionin ancountry.One

economic factor that has been made out to signiicantly contribute to corruption is the

availabilityofnatural resources. Ifresource rentsareeasilyappropriablebyanestablished

elite, theymaytriggerbribesanddistortpolicies(Bulte/Damania2008: 3). The reasonis,

thatresourcesincreasethepayoffofrent-seekingbehaviorbecausetheextractionandsaleof

naturalresourcesproducelargerents(cf.Bulte/Damania2008:3).Whoeverownstherightto

extractandsell theresourceshas theopportunitytoearnthis rent. Sinceinitiallythisright

usuallylieswiththegovernment,itofferspublicservantshugediscretionaryopportunitiesto

allow or deny access to the resource economy. Thismodel was empirically conirmed by

SambitBhattacharyyaandRolandHodlerina studyof124countries. They foundoutthat

natural resourcesfeedcorruption, however theydonot, if the countryhadwelldeveloped

democratic institutionsat the point of thediscoveringoftheresources (cf. Bhattacharyya/

Hodler2010:619),aswasthecaseinNorway.

2.TheCaseoftheRussianFederation2.1.EmpiricalDataonCorruptionintheRussianFederation

Therehasbeenalotof scientiicattentiononcorruptionintheRussianFederation.Themain

reason for this attention is, that the Russian Federation is amember of the G20 (the 20

economicallymost powerful countries)andranks the countrywiththe ninthhighestgross

domesticproduct(GDP)intheWorld(cf.OECD2011:23f.).Butatthesametimeitistheby

farmostcorruptcountryamongtheG20,withrank133outof176countriesinTransparency

Internationals Corruption Perception Index (cf. Transparency International 2012: 4). But

eventhoughstudies thatasses theinluenceofcorruptioninRussia oneconomic, political,

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andsocial developmentarenumerous, studies that actually triedtoquantify corruption in

russiaarefew. ThemostelaborateofthesestudieshasbeencarriedoutbytheRussiannon-

governmentalINDEMFoundation.3

ThestudybytheINDEMFoundationwascarriedoutin2005andincludedsomedatafroma

2001study.Itsmainindingwasthatcorruptionwasverycommonbothin2001andin2005,

but the structure of the corruption market had changedbetween 2001 and 2005. It was

characterized by a mutual readiness to bribe and take bribes in 2001, but this mutual

agreementoncorruptionwasnotfoundin2005.Bythen,ahigherpercentageofrespondents

waswillingtorefusepayingbribes,butatthesametimethepressurefromauthoritiestopay

bribeshadincreased,andsohadtheaveragebribeamount.Thereportputsitasfollows:

Ingeneralwehavetodealwithtwooppositebehaviorstrategies:theauthoritiesbuildup

its pressure towards citizens and the citizens avoid corruption. If previously one could

argue that corruption process may be caused by both parties, nowadays this given

suggestionjustcon1lictswithanyfactsavailable(INDEM2005).

Table1summarizesthemainindingsofthestudy.Thestudyestimatestheoverallvolumeof

theeverydaycorruptionmarketataboutthreebillionUS-Dollarandthebusinesscorruption

marketatabout300billionUS-Dollar(cf.INDEM2005).Thisresultmeans,thatin2005the

total amount ofbribespaidbybusinesses, exceededtheoficial federalbudgetrevenuesby

morethantwo andahalftimes. Thisisanalarmingresultrecallingthemodelfromchapter

one:Bribeshavethesameinluenceontheeconomyascorruption, butdonotcontributeto

thestatebudget,andthereforebribescanbe regardedasmissedgovernmentrevenues and

therebyleadtoasmallerstatebudget.Thatontheotherhanddecreasesthecapacitytoactof

thegovernmentandalsoleadstodistributionalproblems.

Thefactthatcorruptionisseenasamajorproblembytherussiancitizensisrelectedinthe

133rdrankintheCorruptionPerceptionIndex(CPI)ofTransparencyInternational.Asurveyofthemostimportantrussianopinionresearchinstitute,Levada,comestoasimilarbutmore

detailedresultonperceptionofcorruption.Intheiryearbookofopinionpollsfrom2012,they

presentnumbersonhowcorruptionisperceivedinRussiatoday.Themainresultsarethat90

percentofrespondentsseecorruptionasbeingworsetodaythenadecadeago(seeTable2).

Thesamepercentageofrespondentsstatedthattheybelievethatgovernmentaloficialsand

leadingbureaucratsmakeonlyasmallpartoftheiractualincomepublic(seeTable3)and

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3INDEMstandsforInformationScienceforDemocracy.Itisanongovernmentalorganizationthatwas

establishedin1997withtheaimtocontributetothedevelopmentofdemocraticinstitutionsintheRussian

Federation.Itsmainieldofworkhoweverhasbecomeresearchoncorruption.


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Table1:EverydaycorruptionmarketintheRussianFederation(2001/2005)

Problem Corruptio

(inpercent

risk

)

Readiness

(inpercent

tobribe

)

corruption

volume(m

market

illionUS$)

Totalmar

ofcorrupti

etshare

onmarket

Averagebr

Amount(i

ibe

Rubles)

AverageN

peryearp

. of bribe s

rperson

2001 2005 2001 2005 2001 2005 2001 2005 2001 2005 2001 2005

Freemedicalservice 23,5 37,7 80,4 62,0 602,41 401,1 28,7% 14,8% 1093 1423 1,098 0,847

School:toenterrequiredschoolandAinish

successfully13,2 41,0 76,2 60,8 70,10 92,4 3,3% 3,4% 1238 2312 2,213 0,950

Highereducation:enter,transferanother

one,examsetc.36,0 52,1 66,7 63,2 449,37 583,4 21,4% 21,5% 4305 3869 0,820 0,875

Pensions:paperworkcalculationsetc. 11,3 11,4 50,0 17,1 0,29 7,9 0,01% 0,3% 50 2250 0,669 0,339

Socialpayments:paperworkcalculations

etc.16,2 19,8 47,4 30,6 6,62 80,3 0,3% 3,0% 250 3467 1,065 0,657

Solvingproblemsrelatedtothe

conscriptionprocedure32,6 57,7 50,0 63,4 12,66 353,6 0,6% 13,0% 3250 15409 1,010 0,650

Employment:togetadesiredjoborcareer

development24,6 29,2 80,0 35,0 56,16 143,4 2,7% 5,3% 963 2448 0,950 1,053

Landarea:toobtainterritoryetc. 14,9 39,8 75,0 51,1 20,09 84,4 1,0% 3,1% 2000 3713 0,655 0,698

Dwelling:toobtainand/orlegalizea

relevantproprietaryinterest28,9 34,3 75,6 41,9 123,02 298,6 5,9% 11,0% 2529 5548 0,848 0,809

Togetdwellingmaintenance&repair

workservices32,2 29,5 60,5 31,6 22,67 15,6 1,1% 0,6% 292 400 0,771 0,954

Toobtainjusticeinlaw-court 26,2 39,5 59,4 43,6 274,48 209,5 13,1% 7,7% 13964 9570 0,681 0,672

togetassistancefromthemilitary 27,4 40,2 77,3 54,7 29,95 29,6 1,4% 1,1% 1715 930 1,787 0,809

Togetregistration,domesticorforeign

passport19,7 32,7 76,0 48,9 65,84 87,7 3,1% 3,2% 664 1426 1,107 1,030

Tosolveproblemswithroadpolice

authorities59,3 59,6 86,0 68,9 368,38 183,3 17,5% 6,8% 896 920 1,089 1,120

(owntable.source:INDEM2005)

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Table2:Howdoyouthink,

theadministrationdevelo

yea

didcorruptionandtheftin

pwithinthepast10to12

rs?

Table3:Inyouropinion,h

governmentaloficialsand

publicwiththeira

wmuchoftheirincomedo

leadingbureaucratsmake

nnualdeclaration?

Itincreased 41 llofit 2

Itstaidthesame 43 Thelargerpartofit 13

Itdecreased 9 Thesmallerpartofit 38

Noanswer 7 Onlyveryfewofit 32

(source:Levada2012:144) Noanswer 15

(source:Levada2012:144)

Table4:HowdoRussiansviewthegovernmentsattitudetowardscorruption?

Questions\Answers yes ratheryes ratherno no noanswer

Inyouropinion,dogovernmentofAicialsandleadingbureaucratshaveaforeignbank

account?70 24 2 1 3

Inyouropinion,iscorruptionanunavoidableoccurrenceinacoutrywherethepublicdoes

notcontrolthoseinpower,wherearenohonestelections,freepress,andrealpolitical

competition?

33 44 12 2 9

Inyouropinion,doesthepresent-dayadministrationinitsstrivingforpoweronlyrelyon

people,faithfultoitandinreturnclosesitseyesontheircrimesandallowsthemunlawful

practicestoenrichthemselves?

27 42 19 2 10

Inyouropinion,isthepresent-daycampaignagainstcorruptiononlycarriedouttodraw

attentionawayfromrealeconomicproblems,andtheincapabilityofthePutin-administrationtofulAillthepromises,madebeforetheelections?

25 35 23 4 13

Inyouropinion,isthepresent-daycampaignagainstcorruptiononlydesignedtoincrease

thetrustinVladimirPutinandkeephimfreeofchargesofestablishingacorruptregimein

Russia?

22 38 21 5 14

Inyouropinion,willVladimirPutinkeephispromise,madebeforetheelections,ofreducing

corruptionbytwotothreetimesatminimumwithinthenextsixyears?6 30 36 14 15

(owntable.source:Levada2012:144,145)

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almost100percentofrespondentsbelieve,thattheseoficialsandbureaucratshaveaccounts

inforeignbanks(cf.Levada2012:144).Thesurveyalsoshowsaveryparadoxicalviewofthe

populationongovernmentsattitudetowardscorruption.Whileavastmajoritystatesthatin

theirviewcorruptionandnepotismiscommonpracticeamonggovernmentoficialsandthat

thecampaignagainst corruption ismerely aneffort todrawattentionaway frompressing

problemsand increasethepopularityofVladimirPutin, theyalsobelievethat Putinat least

tries to ightcorruptionand25percentevenbelievesinhis success(cf. Levada2012:145).

Tables4summarizetheindingsoftheLevadasurvey.

Another interesting insight on corruption in Russia was discovered by the OECD. They

regressedtheTransparencyInternationalCPIagainstpercapitaGDPandshareofpetroleum

intotalexportsforvariouscountries.Bothregressionsshowedasigniicantrelationship.Both

regressions also showed, thatcorruption inRussia isconsiderablyhigh,comparedto other

countries with similar per capitaGDP or similar sharesofpetroleum inexports (cf. OECD

2011: 66f.). The following igures from the OECD illustrate the results. They support the

statementofJamesLeach,thatRussiaismorecorrupt,thancomparablecountries.

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Eventhough theseempirical analysisaremostly concernedwithcorruption at thelevel of

government employees, is does not mean, that high level corruption does not exist. The

problemwithhighlevel corruptionis, thatitishardertomeasure. Butthe largeamountof

bribes,paidbybusinesses,suggestthatcorruptionatthehighestlevelstakesplace.AlsoElena

Denisova-Schmidtnotes, thatapproximately80%ofalladministrativepositions areheldby

people, that have some kind of personal relationship with Vladimir Putin. That includes

coworkers from the timewhenheworkedwiththeKGB, political alliesfromhis timeinSt.

Petersburg, such as Dmitry Medvedev, members of the cooperative Ozero (the society

establishedbyPutinandhisfriendswhoownedcottagesnearSt.Petersburg),andoffcourse

family members and close friends of Putins people (cf. Denisova-Schmidt 2012: 5). This

alarmingpercentageisagraphicalexampleofthepredominanceofnepotism,andorientedon

personalbeneitsbehaviorintheRussianpoliticalelite.ThefollowingsubsectionisconcernedwiththeconsequencesofthecorruptionfortheRussianeconomyandsociety.

2.2.ConsequencesofCorruptionfortheRussianSocietyandEconomy

TheOECDsummarizesthenegativeconsequencesRussiasuffersfromcorruptionasfollows:

Currently,investmentishinderedbywidespreadcorruptionandaweakandinconsistent

applicationoftheruleoflaw.Thatslowsdownthemodernisationprocess,andalsoleaves

Russiawithamoreenergy-intensive economythanotherwise. Corruptionalsoin1latesthe

costofpublicprocurement,reducingthe effectivenessofgovernmentspendingand, other

thingsbeingequal,worseningthe1iscalbalance(OECD2011:20).

Michael P. Barry used a computable general equilibrium (CGE) model 4 to calculate the

economic costs of corruption in the Russian Federation. According to the basic model of

corruptionwithouttheft,hemodelstheburdenimposedontheeconomybycorruptionasa

ive percent tax. This is a rather modest burden compared to the amount of corruption

presentedin theprevious subsection. Barry comes to theresult, that corruption inRussiadecreasesGDPbyapproximatelytwo billionUS-Dollarandreduces consumerwelfareby2.4

billionUS-Dollar(cf.Barry2009:.397).Hesplitsupthewelfareeffectintothreepartstomake

theeffectmoreclear.Thewelfarelossconsistsof a$2.98billionallocationeficiencylossand

a $3.6 billion loss inRussianterms of trade. These losses are partially offset bya gain in

savingsandinvestmenteficiency,becausetherecipientsofbribeshaveextrafundsavailable

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4CGEmodelingtechniquesattempttosummarizealleconomicmarkets(supplycurvesanddemandcurves)inalarge,integratedsystemofsimultaneousequations.Allmicromarketsareaggregatedintoamacrosystem,which

allowsfordiscussionofeconomy-widevariables,suchasnationalpricelevel,nationaloutput,totalfactor

productivity,sectoraloutput,andsectoraltrade(Barry2009:394).


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forinvestment,savings,andconsumption.Butthispositiveeffectcannotfullycompensatethe

negativeeffectsofcorruption(cf. Barry2009:397).Byexamining thestructureofgainsand

losses due to corruption, the strongest impact is seen on investments. The decrease by

approximately40%incomparisontoasituationwithoutcorruption(cf.Barry2009:398f.).

In a study on bank lending and corruption, Laurent Weill found a signiicant negative

inluence of corruption on both investment and bank lending. Corruption was found to

diminishinvestmentssigniicantly. Itaddsto theuncertaintyofinvestorsandbanksandthis

uncertainty is passedon to thereceiver of loans in formof increased interest rates. Thus

makinginvestmentmorecostlyandthereforelessattractive(cf.Weill2011:241)Thereason,

investmentishamperedbycorruptionisthatlegalinstitutionusuallyprotectinvestmentsand

ensure theenforcement of contracts (cf.Weill 2011: 233). Corruption, anunderdeveloped

ruleof law andunclearpropertyrightsalladdtouncertainty forthe investorandtherefore

reduce incentives to invest. Reduced investment on the other hand slows down the

developmentoftheRussianeconomy.

Another serious consequence of corruption on public welfare is its impact on social

expenditures. Yuriy Timofeyev found out, that corruption signiicantly diminishes the

eficiency ofpublic expenditures andthereby theabilityof thestate toreducepoverty (cf.

Timofeyev2011:48).Thereasonis,thatinmosttransitioncountries,socialexpenditureare

the main contributors to poverty reduction. Because of corruption the tax incidence is

decreasedinRussiaandtherebythefundsforsocialexpenditures,orinotherwordsthesum

thatcanberedistributedthroughgovernmentprogramsisdeminished(cf.Timofeyev2011:

45ff.).

2..ReasonsfortheCorruptionintheRussianFederation

Inan article from 2009, thenpresidentDmitry Medvedevnamed someof the reasons he

believedtoberesponsibleforcorruptioninRussia:

Until todaythis corrosion hasbeen due tothe excessive government presence inmany

signi1icant aspects of economic and other social activities. But it is not limited to

governmental excess -- business is also not without fault. Many entrepreneurs are not

worried about 1indingtalented inventors, introducing unique technologies, creatingand

marketingnewproducts,butratherwithbribingof1icialsforthe sakeof controlling the

1lowsofpropertyredistribution(Medvedev2009).

By naming government involvement in the economy, and businesses investing in bribery

rather thanin researchanddevelopment,heshows aprofoundunderstandingof thelogics

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anddynamicsofcorruption, sinceboth factorshavebeenmadeoutbothby theoretical and

empiricaleconomicliteratureoncorruption.5

The key reason for corruption, presented in the irst chapter, is the opportunity for rent-

seeking. Situations that allow for the generation of a rent facilitate the spreading and

prevailingofcorruption.Afactorthatallowsforrent-seekingonalargescaleinRussiaisthe

heavyrelianceonnaturalresourcesoftheRussianeconomy.Notonlyisthissituationgiven,

butitisalsogettingworse,becausetheresourcesectorsisgrowingrelativeto therestofthe

Russianeconomy:onekeyaspectoftheopportunityforcorruption,theavailabilityofnatural

resourcerents,hasexpandedsharplyinthelastdozenyears(OECD2011:13).Thismightbe

onereason,whycorruptionhasratherbeenincreasingthandecreasingoverthepastdecade.

AnotherreasonforcorruptionhasbeenidentiiedbyVeronikaBelousovaandherco-authors.

Inastudy,usingdatafromdifferentRussianregions, theyfoundout,thattheeconomicmore

prosperous regions of theRussian Federationwitnessed signiicantly less corruption, than

less prosperous regions. The reason is most likely, that these regions have better anti-

corruption measures and also that economically successful individuals are less likely to

engage inillegalcorruption(cf. Belousovaetal. 2011:11).BecausetheRussianeconomyis

considerablyweak ingeneralandespeciallyweak inalmostevery sectorotherthantheoil-

andgassector, itis reasonabletoassume, thattheeconomicunderdevelopmentcontributes

totheprevailingofcorruptioninRussia.

Reasons for corruption in different parts of the Russian society and economy are easily

explained.Themainreasonforthewidespreadcorruptionintheeducationsectorforexample

isthelowwagesofteachers andprofessors. Russia spendsthesecondlowestpercentageof

GDP of all OECD countries on education, only Turkey being worse (cf. OECD 2011: 38).

Reasonsforthelargesumsofbribespaidbybusinesses,byfarthebiggestshareoftheoverall

corruptionmarket, as has been shown in subsection 2.1., are twofold. The OECD names

complex and hard-to-comply-with regulations and the need to stay competitivewith other

irmsthatpaybribes,themostimportantfactors(cf.OECD2011:65).

OnelastimportantreasonforthewidespreadcorruptioninRussialieswithintheinstitutional

structureandhistoryofthecountry.Twofactorshavebeenmadeoutintheirstchaptertobe

obstructivetothedevelopmentofacorruptenvironment:welldeinedpropertyrightsanda

strictruleoflaw.NeithercanbefoundincontemporaryRussia.ConstanzeDoblerandHarald

HagemannevenclaimthatRussialacksah istoryofpropertyrightsandtheruleoflaw.The

15

5Seepreviouschaptersandsubsections.


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reason is that secure property rights and the rule of law necessitate a third party

enforcement mechanism able to implement the rights against private persons or the

state (Dobler/Hagemann 2011: 23). InRussia however law hasalways been used by the

governmentasaninstrumentthatcouldbeusedagainstthecitizens.Sincepeoplecouldnot

rely on the government or the law, to achieve certain goals, but had to trust personal

relationshipsandnetworks.Asaconsequenceasystemofcorruption,bribery,andnepotism

evolved (cf. Dobler/Hagemann 2011: 23). It is therefore unlikely that corruption can be

reduced, unless the Russiangovernment breakswith the tradition ofusing the law as an

instrument of the ruling power. This leads over to the question, ofwhat can be done to

effectivelybattlecorruptioninRussia.

2.4.HowtoBattleCorruptionintheRussianFederation

FirststepsinightingcorruptioninRussiahavealreadybeentaken.Thegovernmentstarted

byapprovinginternationalrules,suchastheUNConventionagainstCorruptionin2006,and

the OECD Convention on Combating Bribery of Foreign Public Oficials in international

BusinessTransactionsin2011(cf.Denisova-Schmidt2012:13).Alsoin2008aNationalAnti-

CorruptionPlanhasbeenadopted.Itisaimedatreducingcorruptioninthelegalsystem.The

mostimportantsteps,thataretobetakenaccordingtotheplanaretheincreasingthejudicial

pay, the introduction of new, more transparent, procedures for appointing judges, the

establishingofnewmechanismsforpunishingjudicialmalfeasance, andalsotobringcourts

underfederaljurisdictiontoreducetheirdependenceonregionalauthorities(cf.OECD2011:

44). If carried out, most of those steps are likely to improve the situation in the judicial

system, although success of the lastmeasure is highly doubtful. Reduced independenceof

regionalauthorities,butincreaseddependenceonfederalauthorities,thatarealsoknownto

pressurethecourts,mayjustbesubstitutingoneevilbyanother.

Strictlyspeaking,itiseconomicallynotoptimaltofullyeliminatecorruption.Thecostswould

be prohibitively high because it would for example require very high wages for public

servants, major changes in the legal system and very harsh penalties. Theoretically, the

optimallevel ofcorruptionwouldbereached, when themarginal costs offurtherreduction

equal the marginal social beneits from that reduction (cf. Tanzi 1998: 586). That also

explains, why there exists no country on earth without any corruption. But the Russian

Federationis farfromthepoint,wheremarginal socialbeneitsequal themarginal costs of

reducingcorruption.Thereforerealeffortshavetobemadetoreducecorruption.

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Belousovaet al. recommend, in accordance with their indings, policies that are aimed at

economic development. The following economic prosperity would then lead to declining

corruption(cf.Belousovaetal. 2011:16).Economicgrowthhowevercanonlybeachieved,if

the investment climate in the Russian Federation is improved. The reasons for the grim

investmentclimate,presentedintheprevioussubsection,areweaklydeinedpropertyrights

and a unreliable judiciary system and unclear legal circumstances. The main problem

obstructingthesolutionofthisproblemisthelackofpoliticalwill.Supposedthiswillexisted,

theproblemcouldrelativelyeasybestemmedwith somepolicy reforms.The need forthe

solutionofthisproblemisbeautifullyillustratedinthefollowinginterview:

Theinterviewer:Letusassumethatcorruptionisnotatpresentinoursociety.

Theexpert:Withthecurrentlaws?

Theinterviewer:Yes.

Theexpert:Iftheexistinglawswerefullyobeyed,itwouldbeacatastrophe.Itwouldmean

that societywould stop in itsdevelopment, the economywould collapse (Cheloukhine/

King2007:112)

DoblerandHagemannhoweverpresentaratherfatalisticviewconcerningthepossibilityof

improving theruleoflawandthe securityofproperty rightsinRussia. Intheiropinion,the

necessityofcorruptionandbribery lieswithinthecharacteroftheRussianpoliticalsystem

with the patriarch as the head of state (Dobler/Hagemann 2011: 27), and real political

reformsareunlikelytohappenin thenearfuture, becausetheywouldunavoidablyleadtoa

weakeningofthecentralpower.

One policy measure to battle corruption, suggested by the literature, is privatization. If

governmentaloficialsandbureaucratsareknowntobecorrupt,theideais to limit therent

seekingopportunitiesforthembyreducingthesizeofthestatesector.Theeficiencyofthis

measureisdoubtedbyBelousovaetal.whichhavefoundnocorrelationbetweenthedegree

of privatization and actual and perceived corruption in different Russian regions (cf.

Belousova et al. 2011: 14). Johann Graf Lambsdorff comes to the same conclusion, that

downsizing the public sector does not help to reduce corruption, at least not during the

transition period (Lambsdorff 2006: 5). One example may serve as illustration, why this

policy measure is so susceptible to corruption itself, that it does not help. The Russian

programloansforshares, carriedout inthemid-1990s, hadtheaimtoimprovethepublic

budgetbylendingsharesoflargestateownedcompaniestoprivatebidders.Ifthestatewould

notrepaythosebidders,theshareswouldtheywiththemandcouldbeensoldforproit,what

17


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was in theend exactlywhathappened(cf. Treisman 2010:2.). Thepracticeof the auction

howeverlookedasfollows:

OnNovember3,995,intheremoteSiberiantownofSurgut,anauctiontookplaceforthe

righttolend the cash-strappedRussian governmenttensofmillionsofdollars.Collateral

for the loan was to be a 40 percent stake in the countrys 1ifth largest oil company,

Surgutneftegaz. Two bidders made it into the auction room; a third had been barred

because ofproblemswiththe 1irmspaperwork. Had anyothersplanned to1lyout from

Moscowtotakepart,theywouldhavehadtrouble:the localairportmysteriouslychose to

closethatday.When,lateintheevening,theparticipantsemerged,thewinnerturnedout

tobeSurgutneftegazsownpensionfund.(Treisman2010:1)

This example is symptomatically for how privatization often looked like throughout the

historyofeconomictransitioninpost-sovietRussia. It illustrates,whyprivatizationneither

reduces corruptionnor leadsto an increase inwelfare, and shouldthereforeimplemented

verycautious,ifatall.

Conclusion

Ithasbeenshown,thatcorruptionhasanumberofnegativeeffectsonpublicwelfare.These

areconvenientlysummarizedbyYuriyTimofeyev:

Corruptionslowsdown economicgrowthand increasesthegabbetweenthe richand the

poor. It also skews the incentive structure, with adverse consequences on the poor by

depriving themof incomegeneration opportunities[...]Finally, corruption canaffectthe

targeting of social programs to the truly needy because funds are siphoned off from

povertyprogramsbywell-connectedpeople inthepublic andprivatesector (Timofeyev

2011:39).

Alloftheseproblemsaswellastheexplanationsofwhytheyexisthavebeenpresentedinthis

paper.Thetheoreticandempiricalbackgroundofferssuggestionswhichcircumstancesfoster

andwhichdeterthedevelopment ofa corruptsystem. Theanalysis oftheRussiancasehas

shown,thatalmostallfactors,beneicialtocorruptionarefoundinRussia.Itcomestherefore

atnosurprise,thatRussiaisoneofthemostcorruptcountriesonearth,andmostlikely the

mostcorruptcountryofitseconomicandgeo-politicalimportance.

Nevertheless there exists hope for improvement. The problem of corruption has been

acknowledged the political elite and even been oficially one of the main goals of the

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presidency of Dmitry Medvedev. But so far few more than declarations on the battle of

corruption has been made by the government. Combining this fact with the observed

development ofcorruptioninRussia inthepastdecade, onehas to agreewiththe fatalistic

conclusionofDoblerandHagemann, thatareductionof corruptionwill takeplaceunderthe

givenpoliticalsystem.Thisalsomeans,thattheapproachofeconomicmodernizationwithout

politicalmodernization,chosenbytheRussianpoliticalelite,isnotfeasible.

Inthefaceofthepressingnegativeconsequencesofcorruptionfor theRussiansociety and

economy,itisdoubtfulhowlongthemomentousstabilityisRussiawillhold.Firstsignsofa

destabilizationof society canalready bewitnessedinRussia as moreandmorepeopleare

openlycallingforpoliticalreform.AlsothesurveybytheLevadacentrehasshownachanging

attitudeofthepublic towardscorruption.WithrespecttothewelfareoftheRussianpublica

soon change in the development of corruption in Russia is desirable, if not absolutely

necessary.

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