COMMENT: Putin threatens Russia's culture of corruption

By bne IntelliNews February 15, 2013

Stratfor -

Russian President Vladimir Putin submitted a bill to the State Duma on February 12 banning Russian officials from having foreign bank accounts. This action gives power to the belief that Putin is serious about his first real anti-corruption campaign within his own government. But how far can he push it?

Transparency International ranked Russia the most corrupt major economic and industrial power on its Corruption Perceptions Index, landing it among the likes of Honduras, Iran and Guyana. In Russia, corrupt practices are not new, but rather have become part of the country's tradition and culture. This integration stems from many sources. First, Moscow has historically struggled to provide basic goods across the country, generating a strong black market. Second, politicians use corrupt practices to control the people and reward the elite, including police or state firm chiefs and ministers.

Russian governments dating back to the czarist era have tinkered with legislation and crackdowns on corruption, though little has ever shown progress or success.

Putin's proposal would prevent government officials and their spouses or children from having foreign bank accounts, which are commonly used to hide embezzled funds. A recent flurry of government and independent reports estimate 5-30% of funds are lost to corrupt practices in the Russian government, a staggering cost for an administration with annual revenue of approximately $750bn.

The Russian government under Putin has allowed such unchecked practices to continue over the past 13 years for many reasons. It has accumulated massive amounts of capital from high energy prices for the past decade, leaving the administration with a glut of funds for its currency reserves (which stand at $538bn) and for its rainy day fund (which stands at $61bn). Put simply, the loss of revenue has not affected the government much.

In addition, the Putin regime was initially more concerned with consolidating its power over the major strategic sectors in the country, using anti-corruption campaigns against private groups to aid its efforts. Russia launched one such sweeping campaign in 2003, going after what the government deemed a corrupt oligarch class that was handling Russia's largest assets. The most famous case was against oil giant Yukos' CEO, Mikhail Khodorkovsky, who was charged with fraud, tax evasion, money laundering and embezzlement. The case was less about corruption than it was about enabling the government to start consolidating Yukos' assets back under the state. Through this campaign, the state consolidated control over sectors in energy, banking, military, industry and more.

The next notable anti-corruption campaign took place in 2009, when the global financial crisis slammed Russia. This time, the Russian government was interested in using the offshore funds the remaining oligarchs kept in places like Cyprus, Ireland and Luxembourg, to help prop up the Russian economy. Russia launched probes into major business owners' offshore assets, then called on those oligarchs to inject tens of billions of dollars to support Russia's currency, the Russian stock market and other projects.

Now, with Putin's proposal, it seems the Russian government is going after its own people for the first time.

Tough at the top

Never before has a senior ranking official been under investigation for corruption practices. The former defense minister, Anatoli Serdyukov, was forced to resign in November over a multi-million-dollar scandal, and he and his family are now under a series of investigations. In addition to being a former cabinet minister, Serdyukov is also the son-in-law of one of Russia's most powerful men, Viktor Zubkov, a former premier and former chairman of the Federal Financial Monitoring Service.

Serdyukov's example has shown that no one is protected from this new government crackdown. The administration has hinted that this is the first move in a larger trend being pushed by Putin. There is anecdotal evidence that many senior Russian government members are already starting to better hide their extravagant assets. For example, multi-million-dollar residences in Russia's most elite suburb of Moscow, Rublevka, are going on the market at a rapid pace. Truly cracking down on its own government institutions would be an immense cultural shift for Russia.

There are many factors driving Putin to action. The level of corruption (should those estimates be accurate) would be unsustainable if the government faced another dire financial situation. The Russian government is increasingly worried about maintaining financial stability should there be shifts in its large energy revenues. By ending the practices that lead to the siphoning of funds, the Russian government could help cushion that stability. Additionally, the Kremlin understands that the perception of corruption is making Russia unattractive to foreign investment. There is also growing discontent among the population over the issue, something the Kremlin has shown it is concerned about.

Another issue is that Putin could be preparing for another government reshuffle, something he does every few years. Ahead of such reshuffles, the Russian leader tends to ensure that no one feels too comfortable in his position. Knowing that Putin is cracking down is on its own good incentive for high-ranking government members to keep in line with his demands.

Putin must feel that he is in a strong enough position to actually go after his own loyalists. But ignoring government corruption has long been a way for Putin to maintain such loyalty. He has created a government system that is dependent on many powerful people remaining loyal to him and his agenda. If Putin starts to go after these people, his entire system of power could destabilise. There is a limit to how far this anti-corruption probe can go, something that Putin knows well.

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