Brittle roads and gilded domes: the price of corruption in Russia
26 Apr 2017

Last Thursday, the Russian-language edition of Forbes magazine released its annual list of the 200 wealthiest businesspeople in Russia. Top of the list two years in a row is Leonid Mikhelson, co-owner of natural gas producer Novatek, with an estimated fortune of $18.4 billion. With the rouble slightly strengthened by favourable conditions on the commodities market, Russia’s oligarchs saw their collective wealth grow to an impressive $460 billion—up $104 billion on the previous year—and the number of billionaires in their ranks rise from 77 to 96. This occurred despite the fact that several of these individuals, amongst them another Novatek stakeholder Gennady Timchenko and Stroygazmontazh owner Arkady Rotenberg, have been subjected to United States and, in the case of the latter, also European sanctions since the Crimean referendum in March 2014.

For all intents and purposes, what the West saw as material assistance for Russia’s unlawful attempt to undermine Ukraine’s sovereignty was vindicated as acts of loyalty in Russia’s eyes, loyalty that has since been repaid in kind. After all, in Russia—one the world’s most rapacious kleptocracies—members of Russian President Vladimir Putin’s inner circle often flourish in what would otherwise be adverse conditions, and are often forgiven for what would otherwise be costly transgressions. Take, for example, Timchenko, who, for the sake of facilitating business proceedings, renounced his Russian citizenship to obtain Finnish citizenship in the 1990s (dual citizenship was forbidden in Finland before 2003). Timchenko supposedly later restored his Russian citizenship, all the while maintaining his Finnish citizenship, though, according to Russian law, no citizen of Finland is legally allowed to obtain Russian citizenship without first relinquishing Finnish citizenship (with a few exceptions, for which Timchenko may or may not qualify).

Moreover, a 2016 Forbes report showed that “Putin insiders reign” when it comes to garnering favour in tenders for government contracts, thereby expanding their wealth by way of the federal budget. Putin’s judo sparring partner Rotenberg, for instance, is involved, amongst other projects, in the construction of a bridge across the Kerch Strait, the narrow passage of water separating the Crimean Peninsula and mainland Russia. Not coincidentally, Rotenberg saw a $1.6 billion increase in his fortune in 2016, coming in 39th place in the Forbes list, up 36 places on the year.

Meanwhile, as of March 2016, 13.4 percent of Russians were living in poverty. Russia’s GPD per capita has drastically worsened since the start of the Ukraine conflict in 2014, decreasing from $15,552.05 in 2013 to $8,928.70 in 2016. The country’s average monthly wage fell to below $450—lower than China, Poland, and Romania—in 2015. These problems run deeper than recent economic struggles tied to Russia’s involvement in the Ukraine conflict: the truth of the matter is that Russia is plagued by institutionalised and systemic corruption, which is difficult to combat and is rapidly crippling the country’s economy.

Russia occupies 114th place out of the 180 countries evaluated in the Heritage Foundation’s 2017 Index of Economic Freedom, joining the ranks of Iran and Uzbekistan as a country with a “mostly unfree” economy. Russia and Ukraine also tied for 131st place out of the 176 countries ranked in Transparency International’s 2016 Corruption Perceptions Index. Corruption in Russia comes in many forms (from bribery to embezzlement to nepotism), affects every branch of government and type of institution (Russia suffers from political and judicial corruption, as well as corruption in its police, security forces, and educational structures), and can be clearly identified along all echelons of Russian society (from officials down to petty bureaucrats).

Corruption emerges when employees, regardless of station, engage in opportunistic behaviour, and becomes all the more likely when a country has been unable to decentralise its financial institutions and diversify its economy. This, in Russia’s case, has concentrated wealth in the sector of natural resources and in the hands of 100-200 corporations, most of them headed by the oligarchs on the Forbes’ list. These problems are compounded by a lack of corporate and governmental transparency, and the fact that no attempt has been made to combat a culture of bribery and petty corruption in business.

Stockholm University’s economics professor Jacob Svensson claimed in a 2005 paper that “corruption could conceivably have a positive effect on economic growth,” because bribery may act as a stimulus to bring down “bureaucratic hold-ups and bad, rigid laws”. But, in Russia, corruption has been a decidedly destructive force in the economy. In creating a shadow economy and essentially concealing money that could otherwise have been invested into the federal budget as tax revenue, corruption, specifically in the form of bribery, sabotages economic development by limiting the amount of money available to fund much-needed infrastructure. This pocketed money often ends up laundered in tax havens or Western banks, or concealed as investments such as shoreline property on the Mediterranean.

Towns across Russia lack roads, plumbing, and heating in winter. Pensions, which in 2016 averaged a mere 13,000 roubles ($195 or £136) per month, are miserly and under constant threat of confiscation when the government lacks funds to fulfil any of its projects, be they assimilating the new territorial acquisition of Crimea or financing new anti-terrorism laws. Fostering development at the expense of food for the elderly hardly seems sustainable.

Education is also insufficient. According to the World Bank, “private businesses in Russia consider a lack of skills, especially social and behavioral skills, as well as those related to problem-solving and creativity, to be one of the most severe constraints on their expansion and growth. Despite the very high level of formal education of Russian workers, the current quality and content of education does not develop the skills demanded by the labor market.” Counter-intuitively, a large percentage of the money that remains in the federal budget is spent on defence, which enables Russia—ranked the world’s third largest military spender in 2016—inadvertently or not, to maintain the image of a threatening giant beside its Eastern and Central European neighbours.

Russia’s decreasing standard of living has been accompanied by an increasing suppression of civil society. This has happened through legislation (such as Irina Yarovaya’s anti-terrorism law of 2016, which granted the government unprecedented powers of surveillance), the labelling of independent NGOs as “foreign agents” and “undesirable”, the arbitrary conviction of ordinary citizens for acts as benign as playing Pokémon Go in a church, and by other means. This in turn makes it harder to combat corruption: a number of notable Russian commentators agree that a strong civil society is one of the best weapons against the abuse of office.

On March 26, anti-corruption protests swept across nearly 100 Russian cities in what became the country’s largest demonstrations since Bolotnaya Square in May 2012. Conservative estimates maintain that police detained over 1,600 of the protests’ 8,000 to 20,000 participants, many of them teenagers. There were 1,043 detainees in Moscow alone. The rallies were spearheaded by oppositionist leader Alexei Navalny, the head of Russia’s Anti-Corruption Foundation, which three weeks earlier had published a report into the “secret empire” of Russian Prime Minister Dmitry Medvedev. Protest participants, such as fifth-grader Gleb Tokmakov, called for serious changes to Russia’s governance to eliminate corruption and ensure that the constitution starts working for citizens rather than against them.

While corruption sometimes has little effect on economic growth, i.e. a country’s GDP, its effects on GDP per capita—traditionally seen as an indicator of standard of living—are often significant. Bouncing back from such a setback would require long-term investment in infrastructure and human capital, economic diversification and financial decentralisation (to prevent the creation of monopolies, which are often hotbeds for corruption), and, most importantly, economic, political, and social liberalisation.

Raisa Ostapenko is a writer and political commentator. Currently based in Paris, she spent three years as a journalist in Moscow and has written for numerous outlets including the BBC.

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