Introduction
Corruption and bribery in Russia are a widespread and growing problem that threatens to undermine business and political institutions. It is expected that the vast majority of businesses operating in Russia practice some form of corruption, and it would be almost unheard of to do business without resorting at least once to bribery. Although there has been attention paid towards addressing the issue, there are still serious obstacles to its widespread abatement.
Bribery in Russia is not limited to cases of one-time exchanges or single favors. Instead, it is widely viewed that corruption requires ongoing relationships between parties engaged in corrupt practices, at different times and with varying amounts of money changing hands.
It is not unusual for a Russian to encounter corruption at all levels of society, from being shaken down by traffic police to paying bribes when applying for university admissions or jobs in government agencies. Some have described the construction industry in Moscow as rife with extortion and bribery, with costs skyrocketing due to kickbacks on contracts and sweetheart deals.
In the business realm, bribery is a common fact of doing business in Russia. It can take on many forms, sometimes blatant and other times discreet.
Often, the practice takes place at the point of sale or service delivery between two businesses, where one offers to provide kickbacks in return for essentially selling their product for more than it's worth or providing a service without conducting due diligence, inspection, or guaranteeing quality.
At other times companies enter into agreements where they agree to provide kickbacks for future contracts, essentially entering into an ongoing extortion scheme in collaboration with corrupt officials. Finally, bribery can take place during the bidding process, where businesses offer to pay off local authorities to secure a contract.
While much attention has been paid towards combating corruption and bribery practices, much less public attention and resources have been devoted to identifying the root causes and providing solutions for this endemic issue.
This article takes a look at the unique business culture that allows such practices to exist as well as those factors that contribute to its wide use in Russia.
The Business Environment in Russia
To have a firm understanding of the prevalence of bribery and corruption, it is important to understand the business environment in which such practices take place. In Russia, several cultural factors contribute to an environment where bribery and corruption are both widely practiced and accepted.
Key among these is the state's dominance of the economy, with the Russian government controlling over 50% of its GDP through various state-owned enterprises. This has led businesses to become dependent on political actors for access to resources, customers, and capital. Due to the necessity of having powerful allies to be successful, many businesses have felt that they have no choice but to engage in corrupt practices to secure contracts, build relationships with local authorities and steer clear of state scrutiny.
Additionally, the lack of transparency has allowed many companies to exceed the letter of the law if not its spirit.
'We have to pay bribes,' Shishkhan, a manager at one of the world's top producers of dairy products, said bluntly over dinner with friends recently. He was recounting his recent encounter with officials at a local tax office who demanded he pays them off if he wanted to keep his business running. "I know it's wrong," Shishkhan said, shrugging his shoulders and spreading out his hands, palms up.
Bribe-taking and bribe-giving are so common in Russia that they even have their slang terms. At its root, the verb "to give bribe" is pronounced " bljudzhet," which derives from the word for an envelope (bljudzhek), while the act of receiving a bribe is called " blat." Those who engage in bribery are usually known as blatniki, or blat-givers.
The Effect of Corruption on Business in Russia
Corruption and bribery in Russia are a widespread and growing problem that threatens to undermine business and political institutions. It is expected that the vast majority of businesses operating in Russia practice some form of corruption, and it would be almost unheard of to do business without resorting at least once to bribery. Although there has been attention paid towards addressing the issue, many businesses still see corruption as simply a part of doing business, while the population at large tolerates bribery in all sectors of society.
Consequently, business executives are often placed in the difficult position between upholding their corporation's image and reputations by complying with legal requirements or making money through illegal means. Corruption has become especially common during privatization, as many government officials have used bribery to give private interests control over state assets. It has been estimated that the volume of bribes paid annually in Russia has reached $300 billion. The majority of this sum is believed to be given by foreign corporations seeking access to natural resources, especially oil companies.
What Corruption and Bribery means in Russia?
Corruption and bribery have been major problems that have undermined justice, security, order, and other public interests within contemporary society. Although corruption has been an issue for centuries around the globe, bribery is a relative novelty and has only become a big issue since the twentieth century. Corruption and bribery both involve illegality; however, they differ in important ways. The relationship between corruption and bribery is similar to that of arson and fire: although both arson and bribery involve some form of destruction, they are not synonymous. Corruption can take place without bribery being involved, and similarly, bribery takes place every day that doesn't involve corruption. Bribery is a form of corruption, but it doesn't necessarily have to be illegal. Although bribery does cause certain harm to society by promoting unfairness and disadvantaging those who don't participate in this activity, not all bribery is considered bad. Bribery can be seen as a form of 'rent-seeking', which is the idea that companies and individuals obtain economic benefits without providing any social value in return. Many would argue that businesses obtain concessions by bribery, which may give them an advantage over their competitors without actually harming society. Corruption on the other hand usually involves illegal activities.
Consequences of Bribery and Corruption on Russia
The economic effects of corruption and bribery in Russia are widespread, as they impede economic growth and diminish the business potential of different industries within the country. These negative implications stem directly from Russian government officials receiving bribes to influence their decisions regarding regulations, resource allocation/distribution, tax policy, tariffs, etc.
Consequently, private businesses face adverse effects when the officials they must bribe are involved in decision-making processes, which may lead to attempts by businesses to purchase influence over government decisions. This type of corruption breeds an ominous culture of mistrust and unethical practices within Russian society; this, in turn, stifles foreign investment and distorts the Russian economy.
Corruption is displayed in various industries within Russia, but those subject to the most corruption are those that require a large degree of interaction with the government, such as real estate, oil and gas exports/imports, transportation, telecommunication services, etc.
As Russia's oil industry is one of the most corrupt sectors, the effects are evident in the country's global standing. For example, According to Transparency International's Corruption Perceptions Index in 2009, Russia ranked 143 out of 180 countries in terms of corruption.
Further, Russia has been ranked as one of the most corrupt countries in terms of bribery within a business. In a 2010 survey conducted by the Russian branch of Transparency International, over 70% of businesses reported having paid a kickback to a government official at least once to evade tax inspections, and over 45% of businesses surveyed stated that they had attempted to influence a government official by offering them a bribe.
The effects of corruption and bribery in Russia on foreign investors are profound, as most companies cannot identify which officials require bribes and which do not; this makes it difficult, if not impossible, to avoid corruption altogether.
Because of Russia's growing reputation as one of the most corrupt countries in the world, foreign investors tend to be deterred from investing in the country for fear that their activities will be dampened by corruption. This, in turn, diminishes the potential for economic growth from foreign investment and businesses, decreases tax revenue from foreign investors, and ultimately hinders Russia's attempts to compete globally.
Conclusion
The effects of Russia's widespread corruption are wide-ranging, which has implications for both Russian businesses and foreign investors. Russia's poor standing on corruption indexes makes it more difficult to attract foreign investment, thereby inhibiting economic growth potential through this avenue.
As bribery is pervasive throughout different industries in Russia, civil servants must interact with the private sector often; this puts private businesses in a difficult position as they must either pay bribes or attempt to navigate the increasing levels of bureaucracy without them. Corruption is detrimental to faith in government institutions, which breeds an ominous culture of mistrust and unethical practices within Russian society; ultimately, this hinders foreign investment and distorts the Russian economy.
Corruption has serious effects on different industries within Russia including, but not limited to, the oil industry; this is evident in its global standing as one of the most corrupt countries. As foreign investment is vital for economic growth potential, corruption and bribery in Russia hamper these efforts. However, bribes are only required by some officials who may be involved in decision-making processes that can have a profound impact on businesses; this makes it difficult, if not impossible, for Russian businesses to avoid corruption altogether.
In conclusion, the effects of Russia's corruption and bribery are far-reaching and have implications for both Russian businesses and foreign investors. Although there has been attention paid towards addressing the issue, systemic changes must take place to achieve positive results.