Russia's drive to root out corruption takes off

By bne IntelliNews March 8, 2007

Ben Aris in Berlin -

Investment banks predicted at the end of last year that a corruption drive would become one of the Kremlin's tools in this year's election campaign and it duly took off last week when the government set up a new anti-graft watchdog to carry the banner.

Momentum in the anti-corruption campaign has been gathering pace in the last six months or so. President Vladimir Putin ordered the creation of the watchdog on February 5, four days after Russia became a member of the Group of States Against Corruption, which is part of the Council of Europe.

In November, Interior Minister Rashid Nurgaliev raised the curtain on the campaign by saying the scope of corruption in Russia jeopardizes the country's national security. He said corruption had "a growing impact on all aspects of social and political life," and that the number of corruption-related crimes has soared 50% over the last five years.

He went on to prepare the ground by suggesting that there would be harsh penalties for civil servants (including doctors and university professors) who got caught taking bribes.

More importantly, he suggested changes would be made to the Administrative Code and the Act on Civil Service to codify and make permanent the anti-corruption measures.

From top to bottom

Putin has been a catalyst for the endemic corruption in Russia. The Yukos affair may have led to a spike in the tax collection rates after companies abandoned their "tax optimization schemes." However, the campaign that ended with the bankruptcy of Russia's most valuable company also sent a signal to the bureaucracy that administrative power was superior to the rule of law. Putin let the dogs out and they will be extremely difficult to get back in the kennel.

"Things are getting worse," says the owner of one listed Russian company that provides services to a range of company and who didn't want to be named. "We are seeing increased interference by state officials across the board. It has always been bad, but now it is getting more aggressive."

Other company owners and fund managers report the same thing and corruption is the average Russian's chief moan; they resent being forced to pay bribes at almost every interaction with the state, such as a visit to the doctor or getting their children into a decent university.

Another businessman reports he was forced to pay $10,000 last year for "private tuition classes" organized by a university professor. The deal is that these lessons will "prepare" the candidate for the entrance exam. Taking the lessons ensures a student's success in the entrance exams, whereas refusing to take the lessons makes success in the exams unlikely, unless the student is extremely talented.

At the end of last year, the Finance Ministry estimated that 26.1% of budget spending was being stolen by bureaucrats. In all, the cost of corruption to business is estimated to be in the order of 10% of GDP and rising, or about $100bn a year, although the numbers are vague.

Sacrificial lambs

However, since the start of this year a growing number of high profile anti-corruption investigations have been launched, as much to set an example to other bureaucracts as to catch wrong doers; analysts expect the state to bring a series of high-profile cases rather than start a general pogrom against officials.

Amongst the most noticeable so far were the charges brought against Oleg Alekseev, deputy chief of Credit Institution Management Department at the Federal Tax Service (FTS), and Alexey Mishin, the leading legal adviser at Moscow Main Territorial Department of the Central Bank of Russia (CBR), who allegedly abused his position to extract tens of millions of dollars from banks in return for "losing" tax claims against them.

Then in February, the Duma started drafting laws to tackle the perfidious system of bribes for would-be students trying to get into university.

And the worst offender with the most hated civil servants is also now under attack: the GAI-shniki, or traffic police. Last week, the prosecutor general opened a criminal probe into bribe-taking by traffic policemen and is threatening to set up a network of informers to catch officers who demand cash for traffic offences (ie. most of them).

What is encouraging about the anti-corruption drive is that the high profile cases that play well to the public gallery in an election year are being accompanied by administrative reforms that are designed to institutionalize the anti-corruption measures.

For example, at the end of January, Russia's Federal Antimonopoly Service set up a division that will monitor purchases by government agencies and state-controlled corporations, which will run parallel to the Audit Chamber's function.

Putin raised the temperature of the campaign in February in his annual address to senior officers of the FSB security service. "(Economic crimes), if unpunished, cause considerable damage to Russia's reputation as a country with a civilized economic environment," Putin said.

The agency will be the flagship of this growing anti-corruption drive. The brainchild of a commission created last year by Putin to find a solution to the problem, the agency met for the first time late last week to thrash out a game plan.

Commission member Vladimir Katrenko, a member of the pro-Kremlin party United Russia, told the Moscow Times that in, "two or three years, we will have halved the level of corruption in Russia."

The commission is headed by Viktor Ivanov, a former KGB officer and loyal Putin aide, and is made up of some 30 officials from various state agencies.

The form of the commission is due to be decided by August 1 and then must be ratified by both houses of parliament before Putin can sign it into law.

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