Putin's moves a sign Kremlin struggling to contain graft

By bne IntelliNews November 20, 2013

Ben Aris in Moscow -

Russian President Vladimir Putin is frustrated with the slow progress in his anti-corruption drive and struggling to take charge of the situation. His answer has been to tighten the screws, though in ways that are upsetting the business community.

After ignoring the problem for over a decade, Putin has been forced to deal with the problem of graft because Russia can no longer afford to waste so much money. Despite the $100-plus oil price, the federal budget is only just in profit and actually fell into deficit in October, according to the finance ministry. Twin current account and federal budget deficits are set to become a permanent fixture in a near future, say economists, due to the rise of the middle class and a "new normal" of slower growth. However, the anti-corruption programme launched by then-president Dmitry Medvedev in 2008, and taken over by Putin since, is not producing the desired results.

In the latest move by the president, the Russian Economic Development Ministry proposed on November 18 to re-introduce permits for foreigners who want to own Russian property, which would be a significant step backwards for improving Russia's business climate if adopted. "The absence of norms in Russian Federation legislation... allows foreigners, stateless people and Russian companies where foreigners or stateless people hold 50% or larger stakes to acquire ownership and administration rights for real estate whose turnover is not restricted and located on the territory of the Russian federation without control, including land plots, flats, other premises, buildings, factories and complex properties, which may also create danger for Russian security," the ministry said, reports Prime.

In other words, people are buying property and the state has no idea who they are, where their money is coming from and where it is going.

The Economics Ministry proposal is in the same vein as another controversial proposal by Putin submitted to the Duma on October 11 that will also increase the control of the state over the economy. Putin wants to reverse a liberalisation of the criminal code pushed through by Medvedev in 2011 and make punishments for economic crimes significantly harsher.

The idea behind Medvedev's reforms was to prevent rival firms using bent officials and the criminal laws in attacks on each other. But Putin claims that Medvedev's relaxation of the criminal code has failed and public officials convicted of bribery under current law now just get off with fines - most of which are never paid. Medvedev's reform also cut the amount of time police can hold a suspect in jail, some classes of economic crime were eliminated and the penalties on other crimes were also reduced.

The clearly frustrated Putin has reverted to type and prefers the cudgel over the carrot: one of his suggestions to is to allow any investigator to instigate tax investigations on their own authority again. (Following the reform, only officials from the tax service can do this.) The idea has caused wails of protest and even Putin's new ombudsman for business, Boris Titov, signed a letter asking the president not to do it, as giving this power to any investigator is regarded by many as a major source of corruption. "We think that the Federal Tax Service of Russia, which administers the matter at the moment, has more than enough powers, and the government should simply define the problem more clearly," Titov and other business groups said in their letter to Putin.

Action man

While the Kremlin's commitment to seeing through real anti-corruptions measures is widely questioned, Putin's proposals that came out of the blue are a clear sign he wants to see results: the economy and finance ministries were both unaware of the plans and both, unusually, publicly criticized it.

Putin's main complaint is that since the 2011 reform came into effect, the volume of charges filed for tax-related crimes has fallen substantially. However, the pro-reform camp counter that the number of successful convictions has risen and argue that the fall in cases means there are a lot fewer spurious cases than there used to be.

Whichever way the fight over Putin's proposals goes - and increasingly the president and his government are engaged in an open policy debate about what is best for the country, rather than Putin simply dictating what he wants to happen - the stream of initiatives will continue as the state attempts to effectively institutionalize the fight against corruption, rather than just sling dodgy officials into jail.

Foreign investors will hate the Economic Ministry's idea of re-introducing permissions to own property, but Putin's proposal on November 3 to levy a 30% tax on dividends is far more welcome and won't affect foreigners who are open to declaring the ultimate beneficial ownership of equities.

Most of the Kremlin's ideas are eminently sensible. The list of those who have to declare their income (and that of their immediate family) has been steadily extended from Duma deputies (who also are not now allowed to own foreign property or hold foreign bank accounts) to state officials in general, and more recently employees of state-owned companies, who have also been made personally responsible for malfeasence occurring at their companies.

Another idea floated in November is a bit more loopy and so far not gaining much support in the Duma. Russian lawmaker Mikhail Degtyarev, from Vladimir Zhirinovsky's nationalist LDPR Party, suggested the ownership restrictions on owning dollars should be resuscitated from Soviet times.

He cited the importance of protecting Russian citizens from, "the American debt pyramid" by simply taking away their dollars, which Russians can legally hold in currency accounts at most Russian banks. "The proposed restrictions can be treated as a declaration of a start of a new, dollar-less international currency system, giving the status of the world's reserve currency to the Russian ruble, and eliminating the resident banks' dependency on the American dollars," the explanation attached to the bill said.

Degtyarev is a colourful character and was recently defeated in the elections for Moscow mayor where he ran on a platform of fighting for the forces of Good in the coming Armadgeddon. "I believe that we'll defeat the Antichrist - I'm sure of it - and that Russia will lead the fight against the Antichrist," he said.

Expect more of the same in the future, but hopefully some of the better ideas will stick.

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