© Cheryl Ann Sigsbee & Victor Konovalenko, 2005

 

 

 

The Mirror of Russian Corruption: Are We Foreigners In It? –

A Review of INDEM’s Research on Corruption in Russia

In prior articles written in conjunction with Nordea Bank (see Nordea’s October 2000, April 2002, May 2003, and September 2004 Country Reports: “Russia – Unveiling the Enigma” at pp. 17-20, “Russia – Oiling the Wheels” at pp. 27-40, “Russia – Against the Tide” at pp. 20-22, and “Russia – The Bear Hug?” at pp. 26-31), our emphasis was upon practical principles for making investments in Russia (in light of shadow economy, corruption, and corporate governance difficulties) and upon protecting commercial secrets.

In this article, we return to the subject of corruption in Russia. While initially we had planned only to emphasize business corruption, we ultimately decided to emphasize consumer corruption as well since to a certain degree business corruption has its origins in consumer corruption and it may be that a grassroots “war” against consumer corruption ultimately can lead to significant inroads in “fighting” business corruption. Thus, for those of you who lack patience, you may skip the section on consumer corruption and go directly to the section on business corruption – otherwise, if you are “smart” you will read all of the article.

In July of 2005, Fund INDEM (see end of article for background info) published at its www.indem.ru web site the article “By How Many Times Corruption Increased During the Past Four Years: Results of New Research by Fund INDEM - A Short Summary of the Main Preliminary Results”. Soon, INDEM will publish in book form the full and final results of both the 2005 and 2001 corruption research. In addition, INDEM will publish a textbook for university students (and others, e.g., business people) on corruption entitled Anticorruption Policy which includes seven chapters (corruption as a social phenomena, sociological analysis of corruption, economics of corruption, international experience in fighting corruption, realization of anticorruption programs, anticorruption policy, corruptibility of legal norms, and measures against corruptible legal norms).

For purposes of this article, we use the following widely-accepted definitions regarding government (public) corruption:

“corruption” – misuse or abuse of public goods or power by government (public) officials for private (including personal, close family, or private clique) gain or benefit (including wealth, power, or status);

“bribery” – an inducement (in money or kind or by other means) given in an attempt to dishonestly persuade a government (public) official to act in one’s favor.

For a review of several articles on how corruption undermines democracy, the economy, and general national welfare and the many forms of corruption, see http://en.wikipedia.org/wiki/political_corruption

and the Norwegian Agency for Development Cooperation’s site www.norad.no under the selected area “Anti-corruption” and “Publications”.

I. An Introduction to INDEM’s Corruption Research and Research Methodology

INDEM’s research concentrates on two types of government (public sector) corruption: consumer corruption and business corruption. Business-to-business (private sector) corruption was NOT a part of the research.

INDEM conducted the government corruption research in the Spring of 2005. The actual field research was carried out by Research Holding ROMIR Monitoring. The research was meant to analyze the level and structure of corruption, the particularities of corruption practices, the approach of individuals to corruption, and the dynamics of corruption, as well as to compare the 2005 research results with the prior 2001 research results. The ultimate goal of the research is to develop practical recommendations for an anti-corruption policy.

Both in 2001 and 2005 the population at large regarding consumer corruption and business representatives regarding business corruption were polled. Specialized mathematical-statistical methods of analysis of polling data were used by the INDEM research team, which included 11 members (with expertise in market research, mathematics, computer programming, and sociology) led by INDEM’s president, Mr. Georgy Satarov.

As regards the population at large polling (by random sample), in 2001 there were 2000 respondents from 16 regions of Russia (Moscow; St. Petersburg; Kaluga, Kostroma, Leningrad, Novgorod, Perm, Stavropol, Volgograd, Sverdlovsk, Irkutsk, Omsk, Primorsk, and Habarovsk regions; Chuvashiya and Udmurtiya republics). In 2005, there were 3,000 respondents from 29 regions of Russia, including the 16 regions set forth above. As regards the business representative polling, in 2001 there were 700 respondents, and in 2005 there were 1,000 respondents.

II. Consumer Corruption in Russia

INDEM researched consumer corruption in the following 14 categories: medical services, school education, higher education, retirement pensions, social payments, military draft, government employment, land ownership, housing ownership, housing repair services, court justice, police services, passport and residence registrations, and traffic police services.

INDEM analyzed the consumer corruption market according to 8 characteristics and their definitions (see Table 1), including scope of corruption, risk of corruption, demand for corruption, intensity of corruption, average amount of bribe, average annual bribe contribution, and annual volume of consumer corruption market. INDEM further analyzed the risk of corruption and demand for corruption separately for each of the above 14 consumer corruption categories (see Table 2).

From 2001 to 2005, the consumer corruption market grew from USD 2.825 billion to USD 3.014 billion, with the average amount of one bribe growing from USD 62.29 to USD 96.50 and the average annual bribe contribution of one bribe-giver growing from USD 74.12 to USD 85.11.

Tables 1 and 2 reflect two important conclusions. On the one hand, the risk of consumer corruption (i.e., the intensity of government pressure on individuals to give bribes) increased from 2001 to 2005 in 13 of the above 14 categories from an overall of 25.7% to 35.0%. In the housing repair services category, however, a decrease in risk occurred, most likely because this area has opened up to private sector competition and thereby has ceased to be dominated by government entities. On the other hand, the demand for consumer corruption (i.e., an individual’s readiness to give a bribe) decreased from 2001 to 2005 in 13 of the above 14 categories from an overall of 74.7% to 53.2%. In the military draft category, however, an increase in demand occurred, most likely because more and more parents attempt to protect their sons from the war in Chechnya and the overall unfavorable situation in the Russian army. Based on this data, INDEM concludes that individuals are ready to refrain from corruption practices in all categories where there is an alternative method for resolving problems or where modest losses are involved. However, when refraining from bribes endangers the lives of their children, parents are NOT willing to take this risk.

As regards Tables 3 through 9 also included in INDEM’s consumer corruption summary, below we provide brief details of the most important aspects of these tables:

Table 3: Dynamics of Annual Volumes of 14 Categories of Russian Consumer Corruption Market

By annual volume, the 5 largest categories are:

higher education (USD 583.4 mln in 2005 versus USD 449.4 mln in 2001),

medical services (USD 401.1 mln in 2005 versus USD 602.4 mln in 2001),

housing ownership (USD 298.6 mln in 2005 versus USD 123.0 mln in 2001),

court justice (USD 209.5 mln in 2005 versus USD 274.5 mln in 2001),

traffic police services (USD 183.3 mln in 2005 versus USD 368.4 mln in 2001).

The leaders in increase in annual 2005 volume are: military draft (2,693%), land ownership (320%), government employment (155%), and housing ownership (143%).

The leaders in decrease in annual 2005 volume are: traffic police services (-50%), medical services (-33%), housing repair services (-31%), and court justice (-24%).

Table 4: Dynamics of Average Amount of Bribe (in Rubles) of 14 Categories of Russian Consumer Corruption Market

By average amount of bribe, the 5 largest categories are:

military draft (RUR 15,409 in 2005 versus RUR 3,250 in 2001),

court justice (RUR 9,570 in 2005 versus RUR 13,964 in 2001),

housing ownership (RUR 5,548 in 2005 versus RUR 2,529 in 2001),

higher education (RUR 3,869 in 2005 versus RUR 4,305 in 2001),

land ownership (RUR 3,713 in 2005 versus RUR 2,000 in 2001).

The leaders in increase in average amount of 2005 bribe are: military draft (374%), government employment (154%), housing ownership (119%), and passport and residence registrations (115%).

The leaders in decrease in average amount of 2005 bribe are: court justice (-31%) and police services (-46%).

Table 5: Dynamics of Intensity of Corruption (i.e., the average number of bribes a year per random bribe-giver) of 14 Categories of Russian Consumer Corruption Market

By intensity of corruption, the 5 most intensive categories are:

traffic police services (1.120 in 2005 versus 1.089 in 2001),

government employment (1.053 in 2005 versus 0.950 in 2001),

passport and residence registrations (1.030 in 2005 versus 1.107 in 2001),

housing repair services (0.954 in 2005 versus 0.771 in 2001),

school education (0.950 in 2005 versus 2.213 in 2001).

Intensity of corruption increased in the following 5 categories: housing repair services, government employment, higher education, land ownership, and traffic police services.

Table 6: Dynamics of Demand for Government Services (in %)

By demand for government services, the 5 highest demand categories are:

medical services (23.6% in 2005 versus 16.1% in 2001),

social payments (10.2% in 2005 versus 7.4% in 2001),

government employment (8.5% in 2005 versus 6.4% in 2001),

housing ownership (8.0% in 2005 versus 5.3% in 2001),

housing repair services (7.6% in 2005 versus 8.8% in 2001).

Demand for government services increased in the following 5 categories: medical services, social payments, government employment, housing ownership, and passport and residence registrations.

Table 7: Frequency of Response (in %) of Individuals (who did not give a bribe when confronted with a corruption situation) to the Following Question: “Were you able to resolve the problem without giving a bribe or “gift”, or did you give up on your attempts to resolve the problem?”

Response breakdown is as follows:

(1) Yes, I was able to resolve the problem without giving a bribe or gift

(68.3% of respondents in 2005 versus 49.8% of respondents in 2001);

(2) NO, I was not able to resolve the problem without giving a bribe or gift, and I gave up on attempts to resolve the problem

(31.7% of respondents in 2005 versus 45.1% of respondents in 2001);

(3) Refused to respond to the question

(0% of respondents in 2005 versus 5.1% of respondents in 2001).

In our estimation, 2005 responses to the above question are encouraging for four reasons:

(1) there was a significant 18.5% increase in the number of respondents who WERE able to resolve their problems without giving a bribe or gift, and a corresponding significant 13.4% decrease in the number of respondents who WERE NOT able to resolve their problem without giving a bribe or gift;

(2) approximately one-third (31.7%) of respondents is willing to live with the consequences of not being able to resolve their problems due to their unwillingness, for whatever reason, to give a bribe or gift;

(3) none of the respondents refused to respond to the question, which can be taken as an indication that consumer respondents are more willing to speak openly about the problem of corruption, and in our estimation this is the first step to dealing with the problem;

(4) with an active government campaign against corruption that involves taking serious and methodic (i.e., non-selective) action against corrupt government officials, during the next four years it is realistic for the 31.7% to decrease even further.

Table 8: Frequency of Response (in %) of Individuals (who gave a bribe when confronted with a corruption situation) to the Following Question: “On whose initiative and for what reason did you have to give a bribe to a government official?”

Response breakdown is as follows:

(1) The government official insisted on the bribe (hinted about bribe, created environment for bribe)

(25.1% of respondents in 2005 versus 17.4% in 2001);

(2) I knew beforehand that here it is not possible to resolve a problem without a bribe

(54.2% of respondents in 2005 versus 57.2% in 2001);

(3) The government official did not insist on a bribe, but I decided that giving a bribe is safer

(18.3% of respondents in 2005 versus 20.3% in 2001);

(4) Difficult to respond (or refused to respond)

(2.4% of respondents in 2005 versus 5.1% in 2001).

From Table 8, it is apparent that government officials now (25.1%) initiate corruption transactions (bribes) more often than in 2001 (17.4%). This fact corresponds with the risk of corruption (indicator of intensity of government pressure on individuals to give bribes) reflected in Table 135% in 2005 and 25.7% in 2001.

Table 9: Frequency of Response (in %) of Individuals (who gave a bribe when confronted with a corruption situation) to the Following Question: “To what extent did you understand beforehand the size of the bribe or value of the “gift” that you needed to give?”

Response breakdown is as follows:

Totally Clear (29.8% of respondents in 2005 versus 23.4% in 2001);

Almost Clear (40.7% of respondents in 2005 versus 37.1% in 2001);

Not Very Clear (21.4% of respondents in 2005 versus 25.0% in 2001);

Not Clear at All (8.1% of respondents in 2005 versus 13.9% in 2001;

Refused to Respond (0% of respondents in 2005 versus 0.5% in 2001).

From Table 9, it is apparent that individuals understand (i.e., “totally clear” and “almost clear” responses) to a greater degree what government officials expect from them as regards the size of the bribe, i.e., 70.5% of respondents in 2005 versus 60.5% in 2001.

III. Business Corruption in Russia

Business corruption includes 6 categories in the legislative, executive, and judicial branches of government: non-financial control and supervision; fiscal and tax regulation; licensing regulation; customs regulation; law enforcement regulation; and other areas.

INDEM analyzed the business corruption market according to 6 characteristics and their definitions (see Table 10), including intensity of corruption, average amount of bribe, average annual bribe contribution, annual volume of business corruption market, size of a newly-built apartment that a government official can buy based on the average amount of a bribe, and the ratio of annual volume of business corruption to federal budget income.

From 2001 to 2005, the business corruption market grew from USD 33.5 billion to USD 316 billion (a 9.4x increase), with the average amount of one bribe growing from USD 10,200 to USD 135,800 (a 13.3x increase) and the average annual bribe contribution of one bribe-giver growing from USD 22,900 to USD 243,750 (a 10.6x increase). Taking into account that during this four-year period economic, budgetary, and price parameters increased as well, a more accurate picture of the increase in the business corruption market is obtained by comparing how many m2 of a newly-built apartment the average bribe could buy, i.e., from 2001 to 2005 this figure grew from 30m2 to 209m2 (a 7.0x increase) and also by comparing the ratio of annual volume of business corruption market to federal budget income, i.e., from 2001 to 2005 this ratio grew from 0.66 to 2.66 (a 4.0x increase). INDEM concludes that the significant increase in business corruption is partly explained by the fact that it is much more difficult for businesspersons (as opposed to consumers) to limit their contact with government officials and search for alternative methods to resolve their problems.

As regards Table 11 and Diagrams 1 and 2 also included in INDEM’s summary of business corruption, below we provide brief details of the most important aspects of these tables and diagrams.

When those business respondents who gave details of their most recent corruption situation were asked “which branch of government was involved” (Diagram 1), they responded as follows:

legislative branch (6.2% in 2005 versus 4.2% in 2001);

executive branch (76.6% in 2005 versus 90.2% in 2001);

judicial branch (4.8% in 2005 versus 3.6% in 2001);

difficult to respond (12.4% in 2005 versus 2.0% in 2001).

When those same business respondents were asked “what type of control did the government organ involved exert” (Table 11), they responded as follows:

non-financial control and supervision (38.9% in 2005 versus 39.5% in 2001);

fiscal and tax regulation (12.2% in 2005 versus 19% in 2001);

licensing regulation (16.4% in 2005 versus 19% in 2001);

customs regulation (1.2% in 2005 versus 4.2% in 2001);

law enforcement regulation (11.8% in 2005 versus 10.5% in 2001;

other areas (3.0% in 2005 versus 3.3% in 2001);

difficult to respond or refused to respond (16.5% in 2005 versus 4.5% in 2001).

Taking into consideration Diagram 1 and Table 11, the business corruption market is currently divided among the three branches of government as follows (Diagram 2):

executive branch (87.4%);

legislative branch (7.1%);

judicial branch (5.5%).

INDEM concludes that the executive branch plays such a significant role in business corruption partly because business is highly (“fantastic proportions”) regulated in Russia.

As regards business respondents’ substantial increase in resorting to the responses “difficult to respond” and/or “refused to respond” (i.e., from Diagram 1 and Table 11, 12.4% and 16.5% of respondents in 2005 versus 2.0% and 4.5% of respondents in 2001), INDEM attributes this to the fact that business respondents fear government officials who place more and more pressure on them to give bribes. At the same time, it is important to note that of the four categories of business respondents (i.e., small with less than ten employees, medium with tens of employees, large with hundreds of employees, and very large with thousands of employees), in 2001 business respondents in all four categories in roughly the same percentages resorted to the response “difficult to respond” when asked the question “Can you remember when was the last time that you (your firm) had to resort to “stimulation” in one form or another of a government official to resolve your business problem?” (Diagram 3). However, in 2005 while there was a substantial decrease in the percentage of small, medium, and large business respondents who resorted to such response, there was a significant increase in the percentage of very large (i.e., thousands of employees) business respondents who resorted to such response, which we take as an indicator that corruption pressure is being placed first and foremost on very large businesses.

Primarily because of two factors (a larger % of very large businesses being unwilling or finding it difficult to respond plus a tendency for medium and large businesses to report lower than actual sales volumes and thereby bribe volumes), INDEM states that the business corruption data in Table 10 represents minimum levels and most likely is understated by not less than approx. 1.5 times.

IV. Our Comments on the Results of INDEM’s Business Corruption Research and INDEM’s Response

Regarding the research results on Russian business corruption presented above, we have the following comments to make. By providing these comments we do NOT in any way want either to minimize the importance or the size of business corruption in Russia (i.e., it is truly widespread) or to even appear to attempt to discredit the serious work of INDEM in this area. However, our objectivity and independence require that we make these comments, even IF ultimately we find out that our assessment is wrong.

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

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

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

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

When addressing our concerns with INDEM’s president, Mr. Georgy Satarov, he stated the following:

(1) Methodology of calculation of the business corruption market can be reviewed in Attachment 4 to the report “Diagnostics of Russian Corruption” at http://www.anti-corr.ru/awbreport/indextxt.asp?filename=rutxt/app4.xml# .

Transition from the poll sample to the overall market was achieved by using official statistics data on the number of Russian business enterprises. In 2001, the official number of enterprises was divided by 2, and in 2005 it was divided by 2.5. (note: here, we believe that this was done to take into account the fact that there are many “dead” (inactive) business entities in Russia).

(2) Your perplexity over comparison of bribes with GDP is understandable, as it arises not only with you but also with some other experts. INDEM itself searches for an explanation to this phenomena. Your assumption that kickbacks on average account for 10-20% of government orders is a “romantic evaluation” and “extremely outdated”. Currently, kickbacks often reach 50% of government orders, with the record high being 70%.

(3) The total business corruption market includes a double and triple count, which is difficult to evaluate. Bribes are dispersed in four directions:

(a) into shadow consumption within the country;

(b) transferred out of the country for consumption there (most often, this includes shadow savings and real estate);

(c) pumped into the legal economy with the purpose of money laundering; and

(d) into bribery (in essence, part of the bribes of a government official became bribes of his wife or son in private business that are paid to other government officials).

(4) Bribes are difficult to relate to final consumption, and therefore it is not very correct to compare bribes with GDP.
(5) Corruption is an example of the ideal externalization since in Russia government bureaucrats have practically absolute power over the market on which they are monopolists (here I mean the corruption market). And now they have absolute power over the legal market as well. This allows them outrageously to inflate prices for their services at the expense of a steep increase in the price of legal behavior. For the majority of businesspeople in Russia carrying on business is one of the means of survival. In actuality, business pays the “the lion’s share” of its profit for the right to continue to survive in this sphere of human activity.

(6) Standard macroeconomic correlations work in a stable market economy, not infected with “dangerous diseases”. The Russian economy today is quite an anomaly. First, the economy grows without growth in worker productivity. Second, the economy is corrupted to fantastic proportions. This skews not only normal functioning of the economy but also economic statistics, as well as comparisons between macroeconomic indicators. Science has this far studied poorly these economics.

(7) In closing, INDEM’s valuations are conservative. Actual corruption is much higher.

Summarizing both our comments and Mr. Satarov’s responses, we still question the estimated USD 316.bln. annual volume of business corruption market, but we agree with Mr. Satarov that for any expert the task of estimating is indeed a complex one.

V. Comparative Analysis of Consumer Respondents and Business Respondents

INDEM performed a comparative analysis of consumer respondents and business respondents according to 3 parameters: evaluation of corruption level (Diagrams 4 and 6, Table 12), understanding of corruption (Diagram 5), and approach to corruption (no diagram or table presented).

As regards evaluation of the corruption level (high, average, low), consumer respondents considered corruption to be at a much higher level currently (i.e., 49.7% high, 41.5% average, 8.8% low in 2005 versus 29.2% high, 47.2% average, and 23.5% low in 2001), and business respondents shared this view (40.6% high, 45.2% average, 14.2% low in 2005 versus 27.6% high, 47.1% average, and 25.2% low in 2001). When analyzing intensity of corruption, average amount of a bribe, and average annual bribe contribution among business respondents who evaluated the corruption level in Russia as either “average” or “high”, INDEM concluded that those business respondents who evaluated the corruption level as “high” give bribes more often and in much larger amounts.

When asked the question “In your estimation, when was corruption, bribery, embezzlement of government resources, influence, and favoritism/nepotism more widespread?” and given at least 5 variants of response (i.e., during the Gorbachev period, during Soviet times, before the revolution, during the Yeltsin period, during the Putin period),

consumer respondents responded as follows:

in 2005 (57.8% Yeltsin period, 43.1% Putin period);

in 2001 (58.0% Yeltsin period, 14.3% Putin period).

Business respondents responded as follows:

in 2005 (53.8% Yeltsin period, 37.6% Putin period);

in 2001 (57.3% Yeltsin period, 11.0% Putin period).

INDEM points out that while there is stability of response in evaluation of the Yeltsin period, there is a significant increase in evaluation of the Putin period (3x among consumer respondents and 3.4x among business respondents). However, in our estimation, possibly one reason for such a large increase in 2005 could be that Putin had been in office only for a short time in 2001 and therefore both consumer and business respondents were not yet able fully to assess his administration’s impact.

As regards understanding of corruption (systematic, layperson, lack of),

consumer respondents responded as follows:

in 2005 (52.6% systematic, 39.8% layperson, 7.5% lack);

in 2001 (38.3% systematic, 41.9% layperson, 19.8% lack).

Business respondents responded as follows:

in 2005 (61.3% systematic, 33.6% layperson, 5.1% lack);

in 2001 (50.6% systematic, 36.5% layperson, 12.8% lack).

In both instances, there was a significant increase in systematic understanding of corruption, and thus INDEM characterizes corruption as a “social phenomena”.

As regards approach to corruption (which reflects the level of positive or negative attitude towards corruption), between 2001 and 2005 there was NOT a significant shift in attitude for either consumer or business respondents. Unfortunately, in its preliminary research results, INDEM did not present any hard data to back up this conclusion and therefore analysis is not possible. While this conclusion is not surprising as regards business corruption (given that annual volume of the business corruption market increased 9.4x between 2001 and 2004), it is surprising as regards consumer corruption and Table 1 (given the fact that demand for corruption declined significantly from 74.7% in 2001 to 53.2% in 2005).

VI. Where Do We Foreigners Go From Here

Clearly, it is apparent that in at least a small way Russians themselves are attempting to come to grips with rampant corruption and its effect on their lives and livelihoods. Thus, the question becomes, “What can we foreigners do to help?” In an attempt to respond partially to this question, we would like first to provide two examples of what NOT to do:

(1) St. Petersburg In Your Pocket Essential City Guide

(www.inyourpocket.com; e-mail: stpetersburg@inyourpocket.com)

An excerpt from the July 2005 issue # 16 at page 7 reads as follows:

“Arriving in St. Petersburg: By car – Are you driving your car all the way to Russia? . . . Traffic police may also fine you for not having a fire extinguisher, a first-aid kit, or for exceeding the speed limit, which on highway varies between 80-110 km/h. The usual course is to pay an on the spot bribe of 100-200 Rbl instead of an official fine.

As regards the last sentence of the above quote, in our estimation it would have been better to write, for example:

“For the most part, official traffic fines in Russia are not substantial in amount (as compared with those in the USA and Europe) and are easy to pay at any one of more than 19,240 Savings Banks (“Sberbank”) throughout Russia.”

By the way, regarding the “100-200 Rbl spot bribe” (approx. USD 3.50 to USD 7.00), recently traffic police offered a friend of ours to pay a spot bribe of USD 200 (i.e., 28x to 57x more) for a railroad crossing violation but ultimately settled on 1,500 Rubles (approx. USD 52, still 7.5x to 15x more), so it appears that traffic police appetites are indeed growing!

Encouraging is the fact that some of our Russian friends are now reluctant to pay a bribe to traffic police since they now ask themselves the simple question “WHY should I give this bribe,” but do not come up with any significant reason to do so.

(2) Book Entitled Russian Customs for Finns (published in the spring of 2003)

The Finnish-Russian Chamber of Commerce (“FRCC”) used a Finnish government grant from the Ministry of Trade and Industry to finance the publication of Russian Customs for Finns written by Mira Haapaniemi, Maisa Moijanen, and Kirsi Muradjan. The book remained on sale in Finland until January of 2005 when the FRCC took the book out of circulation after the Finnish daily newspaper Helsingin Sanomat cited a chapter from the book describing Finnish businessmen’s experiences in bribing Russian officials.

While an FRCC representative stated that “the intention of the writers of the book was not to incite anyone to commit bribery, but rather to describe the situation that prevails in Russia,” an objective review of the pertinent sections leads to a contrary conclusion:

What to Give as a Bribe: “There are no universally applicable instructions about what should be given as a bribe.” (after this sentence, there are 9 sentences describing various bribe options).

How to Give the Bribe: “One should give a bribe delicately, absolutely without witnesses, preferably using a Russian go-between . . . . In some situations it may even be appropriate to give the bribe in an overdramatic manner, with speeches, as a gift to a ‘dear friend’.”

The only section of the book on bribery that we considered helpful was “How to Recognize the Desire for a Bribe” since this knowledge can be used to “combat” a potential bribe.

The Finnish Ministry of Trade and Industry stated that “such a book makes bribe-giving and taking popular, and such instructions should not appear in the book that is sponsored [by the government]”.

Now that we have considered briefly what NOT to do, below we consider what we foreigners can do to make a difference in combating corruption:

(1) Use every opportunity that you are given to promote fair salaries for government officials and employees.

(a) Salary Examples - One of our friends is a doctor at a military hospital with 16 years of work experience – her monthly take-home pay is approx. USD 150. Another friend is a secretary in the clerk’s office at a civil district court – her monthly take-home pay is approx. USD 105 (by the way, she stated to us that while she has been offered bribes many times, she has not ever taken a bribe and always explains to people that the work she does is within her official responsibilities). Since currently the average official salary in St. Petersburg is more than USD 360, it is apparent that government employees make far below the average official salary, that it is very difficult to live on such salaries, and that this financial pressure contributes to (but definitely does not control) the issue of corruption.

(b) No Justification for Corruption - At the same time, we recognize that low government salaries are not and cannot ever be “justification” for corruption. In support of this notion, when we asked a good friend of ours who worked for the Russian federal government for 21 years (and then retired to work in the private sector) about government corruption and its sources, here is what he stated:

(1) the primary factor contributing to corruption is NOT low government salaries, although this factor indeed affects a person’s ability to support his family and enjoy life.

(2) If a government official takes a bribe one time, even if given a better monthly salary thereafter the chances are high that he/she will continue to take bribes in the future unless the primary factors contributing to corruption are addressed.

(3) the primary factors contributing to corruption are (in the order of their importance):

(a) lack of societal morals (i.e., it is necessary that individuals come to the conclusion that either to give or take a bribe is morally wrong and not in his/her ultimate best interest);

(b) lack of government will to tackle corruption;

(c) lack of sufficiently detailed legislation (laws) to deal with corruption;

(d) lack of enforcement of existing legislation (laws) meant to combat corruption;

(e) lack of serious criminal and civil responsibility of those government officials who engage in corruption (i.e., too many government officials do not fear loss of their existing government positions, loss of their ability to hold other government positions in the future, and/or criminal investigations, charges, and convictions).

(2) When someone (whether a government official, an intermediary, an employee, business partner, etc.) tells you that in Russia without a bribe it is not possible to accomplish a needed result, tell them THE TRUTH, i.e., that even with a bribe there still are NOT EVER any guarantees (all the more so since the government official involved may or may not be in his/her position in the future to control implementation of the needed result), and therefore your policy is to trade a potential bribe for actual hard work and diligence. In addition, do not implement bad business practices in Russia if you would not dare to implement them “in your own backyard” (in the 1990s, we saw quite a few foreigners doing this).

(3) When you see corruption (whether “significant” or “insignificant” in your estimation), confront it and help those around you to confront it.

(a) Medical Services Example - Recently, our friend’s mother had a stroke. When the ambulance arrived the medical workers informed him that they could take his mother to one of three hospitals, BUT in order for his mother to be taken to the BEST of the three hospitals he would need to pay 300 Rubles (approx. 10 USD) to the medical workers, regardless of the fact that his mother had mandatory medical insurance that covered the ambulance’s services. Our friend paid the 300 Rubles since his mother’s life was in danger. When we learned about this incident, we researched the issue and e-mailed our friend with the telephone number of the specialized government department set up to handle complaints about emergency ambulance services and encouraged him (anonymously, if necessary) to report the incident.

(b) Higher Education Example - Recently, two of our friends talked with us about paying bribes to two local universities for admittance of their children to the government-financed section of the universities (i.e., if parents pay monies unofficially upfront, then their children can study officially “free of charge” for 5 years). We encouraged both of them to refrain from paying bribes but instead to send their children to year-long preparatory classes, emphasizing the importance of the children themselves doing everything within their ability to pass the university entrance exams and also emphasizing the potentially-damaging psychological effect of children knowing that they were able to enter the university ONLY because their parents paid a bribe. One friend took our advice and enrolled the child in preparatory classes – the child scored a 5 (the highest score possible) on the entrance exam and was accepted. The other friend paid 5,000 EURO to have the child admitted to university, and for various objective reasons to this day the friend is not sure whether the bribe in fact helped.

(4) Continue to employ the guidelines set forth in our 2000 and 2002 articles regarding corruption and how to combat it, i.e., as a general rule refrain from taking “shortcuts” that ultimately will cost you more in time, money, and frustration and limit your options. As applied to corruption, this means that you should:

(a) have a firm written and verbal policy never to give a bribe and never depart from this policy;

(b) know and persistently use the law (especially tax, currency control, customs, corporate, and securities law) and respectfully but firmly “push” bureaucrats to fulfil their duties under the law so that any issue of bribery will be much less actual;

(c) hire a competent local full-time bilingual representative (one who is not willing to give a bribe and who knows that nothing ultimately can be accomplished securely by doing so) and set forth in writing the representative’s rights and responsibilities, accountability (including written monthly reports), official salary, annual budget and expense reimbursement procedures, and requirements regarding strict confidentiality, non-competition, no conflicts of interest, and no other job.

(d) invest in “relationship capital”, i.e., take the time to find reliable and trustworthy trading partners, business partners, management teams, etc.

VII. Closing Remarks from Cheryl Ann

Corruption has changed my life forever, not because I give, promote, or take bribes but rather because I cannot seem to do enough to combat their proliferation nor can I find a sufficient number of like-minded Russians who view my stubborn-headedness on this subject as intelligence, rather than as naivety and foolishness. In 1991 when confronted for the first time in my life with corruption in business, I literally cried because of my disappointment in the person who had acted corruptly and my concern over compromising the integrity of the Russian business entity involved.

Now, I no longer cry over corruption. Instead, I ask questions that I never would have asked 15 years ago. For example, not long ago I asked my four brothers if they had ever attempted to give a bribe to U.S. traffic police - their replies unanimously were “Sis, are you crazy?”, and my heart felt a little relief.

More recently, I reviewed the 2004 Transparency International Corruption Perceptions Index. The TI Index defines corruption as the abuse of public office for private gain and measures the degree to which corruption is perceived to exist among a country’s public officials and politicians. TI considers a score of 5.0 as the borderline figure distinguishing countries that do and do not have a serious corruption problem. In 2004, Finland scored 9.2 out of a possible 10 and came in 1st out of 146 countries. The USA scored 7.5 and came in 19th. Russia scored 2.8 and came in 95th, and the 15 former republics of the Soviet Union (with the exception of Estonia, Lithuania, and Latvia who scored 6.0, 4.6 and 4.0 respectively) all scored between 3.3 and 1.9. Armed with this information, I asked my Swedish colleague who works and lives in Finland if based upon his business experiences Finland deserves to be considered the world’s least corrupt country. My Swedish colleague replied “yes”, giving a practical example of the typical Finnish mentality against corruption, and my heart once more felt a little relief.

 

This article is dedicated to our Soviet and American parents who are vital and vivid examples to us of honest character.

Cheryl Ann Sigsbee, Victor Konovalenko

Investment Consultants

RusTex International Ltd.

Ul. Belgradskaya 6-4-46

St. Petersburg, Russia 192242

Tel/Fax: (812) 707-03-54

Messages: (812) 709-69-14

E-mail: rustex99@hotmail.com

 

BOX:

Regional Public Fund “Information Science for Democracy” (“INDEM”) was founded as a Russian non-government organization (NGO) in October of 1997 on the initiative of its current president Mr. Georgy Satarov, the former assistant to Russian President Boris Yeltsin, and traces its roots back to 1990 when the Center for Applied Political Research “INDEM” was founded. INDEM’s main purpose is to support the development of democratic institutions in Russia. Priority areas of research include various democratic systems (government, party, election, election campaign, etc.) and primary threats to modern society (corruption, terrorism, narcotics, etc.).

INDEM can be contacted at:

Mr. Georgy Satarov

President

Fund INDEM

Bolshoi Zlatoustinsky Perelok 8/7, Office 1, 4

Moscow, Russia 101000

(7-495) 624-2409 (tel/fax)

Web site: www.indem.ru

E-mail: ,

 

 

Table 1. Characteristics of the Russian Consumer Corruption Market

Characteristic of Corruption

Year 2001

Year 2005

Scope of Corruption (%)

(i.e., percentage of individuals who at least one time in their lives personally encountered a situation involving corruption, regardless of whether they did or did not ultimately give a bribe)

50,4 %

54,9 %

Risk of Corruption (%)

(i.e., when an individual contacts with a government official the percentage of cases that he/she encounters a situation involving corruption – this is an indicator of the intensity of government pressure on individuals to give bribes)

25,7 %

35,0 %

Demand for Corruption (%)

(i.e., percentage of cases when an average individual gives a bribe – this is an indicator of his/her readiness either to use corruption as a means to resolve problems or to give in to government pressure to give a bribe)

74,7 %

53,2 %

Intensity of Corruption

(i.e., average number of bribes a year per random bribe-giver)

1.19

0.882

Average Amount of a Bribe in Rubles (USD equivalent)

(i.e., average size of a bribe per random corruption transaction)

* 2001 avg. annual exchg. rate: 29.17 RUR: 1 USD

** 2004 avg. annual exchg. rate: 28.81 RUR: 1 USD

1,817 RUR

(62.29 USD*)

2,780 RUR

(96.50 USD**)

Average Annual Bribe Contribution in Rubles (USD equivalent)

(i.e., average annual expenses of one random bribe-giver)

2,162

(74.12 USD*)

2,452

(85.11 USD**)

Annual Volume of Consumer Corruption Market (in billions of USD)

(estimation of total annual volume of consumer corruption market,

i.e., the amount of all bribes paid by all bribe-givers).

2.825 bil. USD

3.014 bil. USD

Table 2: Characteristics of 14 Categories of the Russian Consumer Corruption Market

¹

Problem (consumer corruption market)

Risk of Corruption

(intensity of government pressure on individuals to give bribes) (%)

Demand for Corruption

(readiness of individuals to give bribes) (%)

2001

2005

2001

2005

1

Medical Services

(receipt of free medical services in medical clinics and hospitals)

23.5 %

37.7 %

80.4 %

62.0 %

2

School Education

(acceptance into the desired school and successfully finishing school, education)

13.2 %

41.0 %

76.2 %

60.8 %

3

Higher Education

(acceptance, transfer from one institution to another one, exams, etc.)

36.0 %

52.1 %

66.7 %

63.2 %

4

Retirement Pensions

(initial application, recalculation, etc.)

11.3 %

11.4 %

50.0 %

17.1 %

5

Social Payments

(initial application, recalculation, etc.)

16.2 %

19.8 %

47.4 %

30.6 %

6

Military Draft

(resolution of problems connected with being drafted into the military)

32.6 %

57.7 %

50.0 %

63.4 %

7

Government Job/Career

(receive desired position or promotion)

24.6 %

29.2 %

80.0 %

35.0 %

8

Land Ownership

(acquisition of land plot for summerhouse or for growing crops for personal consumption)

14.9 %

39.8 %

75.0 %

51.1 %

9

Housing Ownership

(receive and/or register legal rights thereto)

28.9 %

34.3 %

75.6 %

41.9 %

10

Housing Repair Services

(receive repair and maintenance services)

32.2 %

29.5 %

60.5 %

31.6 %

11

Court Justice

(obtain justice in court)

26.2 %

39.5 %

59.4 %

43.6 %

12

Police Services

(obtain assistance and protection from police)

27.4 %

40.2 %

77.3 %

54.7 %

13

Passport and Residence Registrations

19.7 %

32.7 %

76.0 %

48.9 %

14

Traffic Police Services

(resolution of issues with auto inspection, i.e., receive drivers license, pass auto inspections, settle traffic violations, etc.)

59.3 %

59.6 %

86.0 %

68.9 %

Table 10. Characteristics of the Russian Business Corruption Market

Characteristic of Corruption

2001

2005

% Change

Intensity of Corruption

(i.e., average number of bribes a year per random bribe-giver)

2.248

1.795

-20.2 %

Average Amount of a Bribe in USD

(i.e., average size of a bribe per random corruption transaction)

10,200 USD

135,800 USD

1,231.4 %

Average Annual Bribe Contribution in USD

(i.e., average annual expenses of one random bribe-giver)

22,900 USD

243,750 USD

964.4 %

Annual Volume of Business Corruption Market

(in billions of USD)

33.5 bil USD

316 bil USD

843.3 %

Size of Newly-Built Apartment (in m2) That a Government Official Can Buy Based on the Average Amount of a Bribe

30 m2

209 m2

596.7 %

Ratio of Annual Volume of Business Corruption Market to Federal Budget Income

0.66

2.66

303.0 %