Oil is the cause of Russia’s outsized corruption problem

Oil is the cause of Russia’s outsized corruption problem
Corruption is closely related to per capita GDP levels - unless you are an oil producer or Italy
By Ben Aris in Berlin March 27, 2017

Russia was wracked by protests over the weekend when an estimated 60,000 people took to the street in more than 80 cities large and small to decry rampant corruption. Russia does have an outsized corruption problem and its oil wealth is to blame. 

To its credit, the Russian government has identified corruption as probably the biggest drag on growth and has launched a raft of anti-graft reforms. The problem is that it has not had much success.

The World Economic Forum (WEF) global competitiveness index ranked Russia 45th out of 140 countries surveyed in 2015. WEF found that Russia had made little progress in institution-building, financial market development and commodity market efficiency reforms. It concluded that corruption remains the biggest obstacle to doing business, even if Russia’s ranking actually improved slightly over the past decade: the WEF’s 2005 survey ranked Russia 53rd of 117 countries surveyed.  

Russia slipped slightly in Transparency International’s Corruption Perception Index (CPI), maintaining its score of 29 in 2016 from the year earlier, but that was enough to see its ranking fall from 119 out of 168 countries surveyed to 131 place as other countries made progress in the fight against graft and saw their scores rise.

TI noted that conditions that promote civil society development and press freedom have weakened in Russia, while government reforms seem to be having little effect.

A few days before the protests, Russia’s Justice Ministry said it is planning to expand the legal concept of bribery in order to include favours and non-material benefits. This follows on from the de-offshorisation laws that ban politicians and managers of state-owned enterprises (SOE) from having assets and accounts overseas. And e-procurement and e-declaration systems were set up years ago and are constantly being tweaked.

But Russia, along with Ukraine, remains among the most corrupt countries in Europe and Central Asia, according to the 2016 Global Corruption Barometer published by Transparency International on November 15. The survey found that 34% of households in Russia paid bribes for access to basic services, with a higher rate seen only in Ukraine (38%), Moldova (42%), and Azerbaijan, Kyrgyzstan (both 38%), and Tajikistan (50%).

In addition, households in Ukraine and Russia are more likely than those from any other country to have paid a bribe for public primary and secondary education, the Barometer claims. It estimates that 38% and 29% of households, respectively, paid a bribe for access to schooling in the past 12 months.

Russia, Ukraine and Belarus are also among the countries where the least people think that it is socially acceptable to report a case of corruption (10-17% of respondents), along with Armenia, Lithuania, Hungary, and a number of Balkan countries. The survey covers 42 countries in Europe and Central Asia, including EU member states.

Oil and per capita GDP

Is Russia more corrupt than its peers? The short answer is yes, but that is largely due to its oil curse rather than Russians being especially prone to the cardinal sin of avarice.

“What has changed is during the last decade the economy was booming and there was plenty of money for everyone thanks to the high oil prices,” Boris Titov, Russia’s ombudsman for business, told bne IntelliNews in an interview. “But since the 2008 crisis started there is only the oil income. This is a huge amount of money that goes through a narrow pipe that is controlled by very few men. The government missed a golden opportunity to reform and fight corruption in 2005.”

Corruption has been in the news in March with fresh details of Russian money being washed through the “Global Laundromat” via London, while Ukraine has indicted its first big fish, Roman Nasirov, the head of the head of the State Fiscal Service.

However, Global Chief Economist at Renaissance Capital Charlie Robertson said at the New Sparta Russian Investment Summit on March 23 that Russia’s corruption problem is in line with other countries when considered from the point of view of its per capita GDP.

“There is a direct correlation between corruption and per capita GDP,” Robertson said. “Put very simply, if you are rich, you get a high transparency score (100 no corruption, 0 total corruption) and if you are poor, you suffer from a lot of corruption. The average score for the 10 richest countries with per capita GDP in 2011 of $50,000 or more (in 2011 dollars) is 82/100. The average score for the 32 poorest countries with per capita GDP of less than $1,000 is 28/100,” says Robertson.

The relation is not entirely linear and the exception to the rule are oil exporters (and Italy), which are all significantly more corrupt than their less well endowed peers. In Rencap’s survey, 18 of the 25 countries that are measurably more corrupt in the TI survey and more corrupt than their per capita GDP levels suggest they should be, are all oil exporters. And in the Commonwealth of Independent States (CIS) the three countries that jut out from the rest are Russia, Kazakhstan and Turkmenistan – the three largest oil and gas producers.