How Really Corrupt is Russian Corruption?

'But if thought corrupts language, language can also corrupt thought' - 1984, George Orwell

Mon, Nov 28, 2016
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The author is Chairman Disciplinary Committee, National Association of Corporate Directors Russia


The other day I received an email from a potential client in the USA who is considering setting up a smaller version of their manufacturing business in Russia. They have never dealt in Russia but saw the advantages, from lower labor costs, shipping, energy, taxes and proximity to a growing Eurasian demand for their product. The obstacle according to the email was “Corruption” and their understanding that Russia is a swampy miasma of everything that is opaque and corrupt… so, how does anyone do business there successfully and not bribe, or tangle with federal corrupt practices laws in the US or their other global equivalents, Russia’s included?

Living in Russia and doing business here I was taken aback that their due diligence efforts did not clarify this issue. Then again, I should not have been surprised as they sent one senior executive who did not understand Russian to look at potential sites for a two-week period. Further, they had not even set up a token temporary representative office to learn, gain perspective and get a reality check. It is therefore understandable that corruption as a theme becomes a far greater problem in the mind than reality warrants. There is truth in the saying “fear is the product of not knowing”.

This is not to say that corrupt practices do not exist in Russia, they do and have done for centuries. Corruption cases and their prosecution are widely publicized in and outside of Russia. In both press and fiction, the image of Russia without corruption is the same as a pastrami sandwich without rye bread. The picture that emerges skews along the lines of the eternal question of the glass; is it half full or half empty? In fact today in most instances of corrupt practices impinging on business, the tide has already turned, and continuing strong inroads are evident in hands-on actualities. The stories that persist from the 1990’s “cowboy capitalism” era are now largely part of a turbulent eventful past. Already in the first three years of this new century, one could detect the freewheeling days in Russia were numbered by steadily implemented procedures and regulations that are largely supported by the vast majority of Russians themselves.

I clearly recall when first opening a private aesthetic medical clinic in Moscow in 1994, my Russian manager said “how I wish we were in America where it is easy and clear to open something like this, and not have to pay everyone for permission”. Having had some experience in Manhattan while working my way through college I shared the following with her.

For a while, I worked as bar manager at a well-known restaurant-discotheque on the Upper East Side. Inspected regularly by NYPD, FDNY, ATF, health and other departments and nothing (surprisingly) was ever cited that prevented or delayed conducting business. No cash in envelopes exchanged, everything was normal, the inspectors were friendly. The owner took me aside my first day and made sure I was clear on who was to be ‘treated well’ when these inspectors came socially with their girlfriends, wives, or friends. In dollar terms, these specific comps were worth between $10,000 – $15,000 per month in liquor and meals, do the math.

Getting back to the Moscow clinic, before we could open we had to meet the code standards of the sanitary and health department, the fire department, licensing by the ministry of health and the tax authorities. We prepared for the worst, codes were forming and reforming and no one knew from day to day what was being enforced and what was not, yet here we were. As it turned out, perhaps due to the fact that we were clearly organized and well prepared to follow whatever procedures were applicable at that time, we received permissions and permits from every department necessary without bribes or ‘comps’ if you don’t include coffee or tea.

The one incident was with the fire department who insisted on smoke detectors and extinguishers placed at certain specific distance intervals throughout our facility. The inspector even wrote down the name of the preferred supplier/installer. I contacted the supplier, and was shocked at their high price. Therefore, I found an alternative source who was far less expensive (80% less) and simply installed as required. When the inspector came to check if we did everything he asked, he was understandably disappointed that we did not use his preferred supplier but approved us nonetheless as we met the code requirements as he set them out.

Was it luck? Perhaps, although I have not faced any business circumstances in the years since then that required more that scrupulous attention to detail to resolve. The devil is truly in the details, and this is the grey area, which allows most casual business corruption. If you do not take the time, effort and energy to learn and fulfill exactly the requirements expected, the chances are you might be faced with an ‘after the fact’ transgression, which might seem simpler to resolve by passing an envelope. This is a mistakenly costly path to walk, whether it is in Manhattan or in Moscow as once a precedent is set it tends to persist.

Corruption is a catch all term, which as time goes forward gains aspects of meaning that are in current fashion. I recall the first loud insider trading cases in New York in the 1970’s, working in the trade then my colleagues and I were shocked to hear that taking advantage of tips and other information before it became public knowledge and making money on it was now illegal. Before that it was a given that most work of a successful trader was to winkle out precisely that information which might move markets before the public became aware of it, that effort was to be rewarded by profit. Now the added dimension of ethical standards had to be applied in an attempt to try and level the playing field, agree or disagree is no longer at issue as it was now the law. Yet, even today after 40 years, indictments continue in courts throughout the US on insider trading, and will continue to tempt for as long as business exists.

In Russia, like in the US, it is the newsworthy cases involving highly placed persons that set perceptions. For instance, a top man in the ministry of defense who is caught en flagrante with several tens of millions of dollars in his apartment. Alternatively, salaried parliamentarians who transfer to their relatives several homes on the Mediterranean or Switzerland along with their Bentley.

Just the other day several highly placed government officials arranged to be named “academicians” with the Russian Academy of Sciences, but had no true scientific involvements backing them up. They were given a choice; either earn their living as scientists, or bureaucrats, but not both.

Recently a major news item was the arrest of Russian Minister of Economic Development Aleksey Ulyukayev for allegedly accepting a $2 million bribe, but more investigations are ongoing throughout the country. Two deputies to the governor of central Russia’s Kemerovo Region arrested on charges of extorting a 51-percent stake in a coal mining company from a local businessperson. Russian operatives also detained a group of agents working in the regional directorate of the Investigative Committee – a Russian federal agency responsible for pursuing especially important crimes – including the head of its investigative department. All were charged for enabling extortion. Add to this the arrest of the former deputy governor of St. Petersburg for large-scale embezzlement of state funds earmarked for building a football stadium.

The juiciest stories of course tend to track with assets having the highest values, like rights to Oil, and other natural resources. There are plenty of scandals to go around, and no doubt, there will be more to come. Russians, same as Americans are outraged at schemes to milk the public trust, yet also appreciate the human temptation to do so given the power and opportunity.

In 2015, Donald Trump said, “I gave to many people, before this, before two months ago, I was a businessman. I give to everybody. When they call, I give. And do you know what? When I need something from them two years later, three years later, I call them, they are there for me. And that’s a broken system”.

Battling corruption at the enabling levels of power will always pose challenges, as there is no finite endgame to human nature. One example is U.S. Attorney Preet Bharara who publicly stated this year that he detected an “air of corruption” in the executive branch of New York’s state government. He then made his case to a grand jury and been given the green light to take eight top aides and associates of Governor Andrew Cuomo to trial on charges of soliciting bribes for state assistance and to rig economic development contracts for companies that gave to Cuomo’s campaigns.

Then there is a Sheriff Buncich who had the sole authority to designate towing companies his officers can use to remove cars from the public streets. County records indicate that between 10 and 12 firms removed more than 7,000 vehicles in the past two years. It seems he accepted bribes from the towing firms for cash and campaign contributions, although he didn’t record those contributions in his campaign finance reports, as state law requires. That sounds more as what is ascribed to Russia, and probably also happens there.

In Russia, several cases have come up and gone to court for cash or similar payments made by wealthy individuals or companies to influence policy one way or another, Khodorkovsky and other oligarchic groups come to mind. In the US, we have PACS and Super PACS that perform similar functions to the old-fashioned bribe, they are just wrapped differently. Traditional political action committees (PACS) are subject to contribution limits, however super PACs can tap unlimited corporate and individual contributions and then spend those funds without limitation on behalf of candidates. The only restriction is that super PACs can’t be seen to coordinate their political spending with the campaigns they support. In other words, the two events should appear unrelated, they should simply happen. Today super PACs dwarf the actual campaigns in fundraising and spending. For some politicians, super PAC money far outweighs actual campaign contributions, and nearly all-super PAC money comes from ultra-wealthy donors making multi-million dollar contributions to super PACs that would be illegal if made to candidates directly.

In the same vein and in every election turnover, U.S. Congressman Thomas Massie said he is “extorted” by the Republican Party to pay $300,000 for his committee assignments. “I call it extortion, they call it assessments,” he said. These “assessments,” are fundraised through political action committees and lobbyists as a price to pay for committee positions. He went on to say, “I don’t want to give you the impression committee seats are for sale, they’re for rent”. In the wise words of 16 term Congressman Barney Frank, “We are the only people in the world required by law to take large amounts of money from strangers and then act as if it has no effect on our behavior”.

So, getting back to Russia and corruption. The words written by Franklin Delano Roosevelt in a 1933 letter to Edward House could have been written today, and should give a timeline perspective: “I had a nice talk with Jack Morgan [i.e., banker J.P. Morgan, Jr.] the other day and he seemed more worried about [Assistant Secretary of Agriculture Rexford] Tugwell’s speech than about anything else, especially when Tugwell said, ‘From now on property rights and financial rights will be subordinated to human rights.’ … The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson … The country is going through a repetition of Jackson’s fight with the Bank of the United States — only on a far bigger and broader basis”.

The Russian Federation was born essentially in 1992, and only with the ascent of Putin in 2000 were steady coordinated efforts begun to make Russia into a functional social and economic nation of laws and opportunity. Objectively, the progress made on all fronts in controlling corrupt abuses is impressive and deep, and for me personally it is especially evident on the business front.

In the past just about every step of the way to getting permits, certificates or other approvals required a great deal of time, effort and energy going from one office to another, often very widely separated, to gather seemingly endless collections of stamped signatures. That in itself was a nightmare, but to truly work the process one had to read through reams of mind numbing Russian legalese which in many cases were old Soviet regulations with newer Russian ones stuck inside… often conflicting, and frequently self-cancelling. This was for many people the most daunting aspect of doing business as you had to learn to work within such a system in order to benefit from it. Otherwise, you had the very strong temptation to use the shortcuts, or simply pay to make a problem go away.

The sad fact was that such shortcuts never made anything just go away, it just masked the problem until it came up later when you have that much more to lose, and you paid more simply to kick that can further down the road of recurring payoffs. OPKO Russian Market Partners stated, “When you know what you need, and have the experience combined with patience to work within the system, no bribes are necessary, it may not be easy or immediate, but the easy and quick is usually a trap for novices, and the bread and butter for an army of fixers”.

Today most everything related to approvals and permits to conduct most businesses can be found on Russian government websites specifically created to eliminate the desire and temptation to go outside the system and feed the fixers. For the most part, they are simple and clear although in Russian. Today much can be done online, and in those cases where physical contact is needed, the websites allow for reserving and scheduling the necessary appointments. The processes are tracked, and time lapses or lengthy deliberations flagged for investigation. In addition, every ministry have dedicated contact numbers or emails where any attempts at fishing for bribes should be reported, and in the vast majority of cases are acted on quite seriously and with good effect.

Corruption is a part of human nature, especially if it is seen as something that can be gotten away with at varying levels of risk, which defines price. It is as old as time, and will never entirely disappear as is self-evident throughout the world. Change and progress also allow for opportunities of positional advantage, so the only real measure of a society’s corruption is to what degree. Perhaps Russia has been given a bad rap due to the complexities of bureaucratic processes that are and have been undergoing major simplifications. Perhaps the regulations are in overbearing legalistically official Russian, or perhaps because it is Russia and not Des Moines. At the end of the day, I can only say that for every one businessperson who chooses to be hooked on the treadmill by paying bribes, there are twenty who do not. It is not a mandatory cultural imperative by any means; it is just a marker that tells you to take time and effort to learn your market well and completely. The Rolling Stones summed it up well: “You can't always get what you want, but if you try sometimes well you might find you get what you need”.

 
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