Beruflich Dokumente
Kultur Dokumente
Key Terms
BRIBE Line Set up by TRACE International to report bribe requests
GDP Gross Domestic Produce
GNI Gross National Income
Home Country The home country of a MNC
Host Country The Foreign country the MNC is in
IMF International Monetary Fund
OECD The Organisation for Economic Co-operation and Development
The World Bank - undertakes technical research on economic, political and social
matters. It is a useful source for data and research publications focusing mainly
on the developing world.
Trace International Anti-corruption body
Transparency International - is a world recognized non-governmental anticorruption organisation working in 90 different countries and
Contents
Tables..................................................................................................................... 3
1.
Introduction..................................................................................................... 4
1.1.
Ethics........................................................................................................ 4
1.1.1.
1.1.1.1.
1.2.
Corruption................................................................................................. 5
1.2.1.
Types of Corruption............................................................................. 5
1.3.
Measurements of Corruption.....................................................................6
1.4.
Russia........................................................................................................ 8
1.5.
1.5.1.
Aims.................................................................................................... 9
1.5.2.
Objectives........................................................................................... 9
1.6.
2.
Research Methodology..............................................................................9
Russia...................................................................................................... 11
2.2.
Corruption Increasing.............................................................................. 13
2.3.
Costs....................................................................................................... 14
2.3.1.
Economic.......................................................................................... 14
2.3.2.
Businesses........................................................................................... 16
2.3.3.
Social................................................................................................... 17
2.4.
3.
Industries................................................................................................ 18
Types of corruption........................................................................................ 19
3.1.
Sources...................................................................................................... 20
3.2.
3.3.
Russia...................................................................................................... 21
Global Governance..................................................................................... 22
3.3.1.
3.4.
Russian Governance.............................................................................23
Does Corruption Pay?..............................................................................23
3.4.1.1.
3.5.
4.
Ethical Issues...................................................................................5
In Russia........................................................................................ 24
History of Corruption............................................................................24
The State................................................................................................. 25
4.2.
Economic Rent........................................................................................ 26
4.3.
Discretionary Powers............................................................................... 26
2
4.4.
Accountability......................................................................................... 27
4.5.
4.6.
4.7.
Decentralization...................................................................................... 28
4.8.
Social Norms........................................................................................... 28
4.9.
4.10.
Summary of Causes............................................................................. 30
5.
Conclusion..................................................................................................... 31
6.
References..................................................................................................... 32
List of Tables
Table 1.1- Corruptions Perceptions Index (2011):
Table 1.2 - Highest Ranking Countries:
Table 1.3 - Lowest Ranking Countries:
Table 1.4 Russia Overview
Table 1.5 - Russian CPI (2011):
Table 1.6 - FDI inflows (USD bn, 2002 2011):
Table 2.1 - Amount of Reported Bribe Demands in Russia (N = 286):
Table 2.2 - Frequency of Recurring Bribe Demands in Russia (N = 161):
Table 2.3 - Nature of Bribes Demanded in Russia (N = 286):
Table 2.4 Extent of Bribery in government, 2000 and 2008
Table 2.5 Number of Recorded Offences Committed by Officials in Russia
(Thousand)
Table 2.6 CPI for selected Countries
Table 3.1 Forms of Bribes Requested (N = 286)
Table 3.4 Grand Corruption Cases:
Table 4.1 Corruption, morally right or wrong?
1. Introduction
Corruption can be seen as one of the most costly aspect of business ethics, not
just to corporations but the economy and society also. This paper will look at the
extent, costs and causes of corruption in the developing world focusing on Russia
and analysing the implications for businesses. Corruption is so widespread it
would be impossible to analyse the developing world entirely therefore, this
paper focuses on an in-depth case analysis of Russia.
The first and second sections introduces business ethics, outlines the motivations
for choosing corruption, identifies the different types of corruption and
familiarises the reader with the measurements of corruption used.
The third section starts by introducing the reasons for choosing Russia,
uncovering the extent and costs of corruption in the developing whilst taking a
closer look at Russia. Industries that are prone to corruption will be identified and
governance relating to corruption outlined.
The fourth section outlines the types of corruption and the sources of corruption.
The fifth section looks to see if corruption pays, the history of corruption in
Russia, outlines what causes corruption generally, before focusing on Russia and
including primary research.
Lastly, a conclusion will be made on the effects of corruption in Russia.
1.1.
Ethics
1.1.1.
Until the 1990s it was assumed universal values controlled the behaviour of
organisations (Managementstudyguide.com, 2012). The Australian government
(2012) points out international business ethics is particularly complex as
4
ethical standards are different depending on where you are. Hill (2007) adds
Many of the ethical issues and dilemmas in international business are rooted in
the fact that culture varies significantly from nation to nation.
1.1.1.1. Ethical Issues
The most common ethical issues in international business are:
Environmental
regulationsDeveloping
nations
may
lack
environmental regulations which may result in MNCs polluting more than
they would at home
Human rights Rights that are taken for granted in developed nations
are not universally accepted. Questions may be raised when assessing the
responsibility of foreign multinational corporations (MNC) when human
rights expectations are not met
(Hill, 2007)
1.2.
Corruption
This paper will focus on corruption. It is seen as one of the biggest threats to
development (World Bank, 2004) and has major implications on economies,
businesses and society which will be examined throughout.
1.2.1.Types of Corruption
The term corruption can refer to a wide range of behaviours (Morris, 2011) and
generally includes one of the following:
Kickbacks - similar to bribery but the payment is made after the service
has been used
Blat A Russian word that means different services or prices for friends ,
relatives and acquaintances (Ledeneva, 1998)
1.3.
individual,
Measurements of Corruption
"The overall number of such crimes is 10 times or even 100 times as large
as the number that is uncovered. It's just the tip of the iceberg,"
(Russian PM: Medvedev, 2010 cited in Telegraph, 2010)
Corruption can be difficult to measure (Forbes.com, 2009), due to its illegality
in most countries. Many people may be unwilling to speak up in fear of legal
repercussions. The World Bank publishes The Worldwide Governance Indicators
for 213 economies between the years 1996 2010 measuring the views of
corruption. Similarly, Transparency International publishes the Corruptions
Perceptions Index (CPI) each year based on perceptions of corruption. The CPI
has been used as the measure of corruption in this report due to its recognition.
Perceptions are used because generally corruption entails illegal practices that if
known would likely result in criminal prosecutions against those involved in
corruption. The below graph highlights the most corrupt countries in red and
least corrupt in yellow based on the Corruptions Perception Index (2011):
1.4.
Russia
GDP
Population
GNI Per Capita,
Method
Poverty Ratio
11.1%
Corruptions
Perception 143rd
Index Rank
Growth Rates
3.31% (1995
2011)
5.00% (2003
2011)
Source: World Bank, 2012, the Telegraph 2011 and Trading Economics 2012.
Russia has been included in the BRICS 1 group of economies, who are seen as
the main drivers of global growth and a challenge to the worlds leading
economies contributing to 45% of global growth (The Telegraph, 2011). With
Russia poised to become one of the leading economies in the future it is
interesting to see them ranked 143rd in the CPI (see below) alongside Nigeria a
country where 92% of the population lives on less than $2 a day (Earth Trends,
2004) and Timor-Leste a country with a GDP per capita of $624 (World Bank,
2012).
Table 1.5 - Russian CPI (2011):
signals a growing market that may have high growth rates and a good
opportunity for businesses to invest but they need to wary of the effects of
corruption.
1.5.
1.5.1.Aims
Highlight the implications of corruption to economies, societies and
businesses in general whilst focusing on Russia
Analyse the different types of corruption, sources and causes whilst
focusing on Russia
To summarize the impact of corruption in Russia
1.5.2.Objectives
Carry out extensive secondary research using websites, journals, books,
respected websites, international bodies, newspaper and reports
Use secondary research to look at the costs, causes, sources and types of
corruption on economies, businesses and societies
Conclude the impact of corruption in Russia
1.6.
Research Methodology
The report will use secondary data sources as it is not possible for the researcher
to travel to developing countries and explore the topic further. Firstly, an
appropriate literature review was undertaken outlining the extent and costs of
corruption, the types of corruption and the causes of corruption whilst providing
an in-depth case analysis of Russia. Generally, qualitative research was used
throughout. Quantitative research was not used but it may have been useful to
apply to gather opinions about corruption in Russia from Russian citizens.
Research has shown perceptions are used to measure corruption, thus primary
research in the form of interviews would have been beneficial as information
recorded may be distorted. There may be an issue with the bias of information. It
could be overestimated by those who oppose corruption and are looking for the
10
worst case scenario or, under estimated by those who are trying to cover up
information.
2.1.
Russia
11
2 BRIBE line only publishes information based on information from their hotline.
Its not a full representation of the bribe amounts but rather an indication to who
is whistleblowing.
12
The above chart shows the frequency of bribes requested by one person(s) is
below five which may indicate other opportunities exist to extract bribes.
Table 2.3 - Nature of Bribes Demanded in Russia (N = 286):
The Guardian (2012) reports 12 individuals from the Russian press have been
killed since Putin took power. The only other countries where the media may
suffer the same fate in such numbers are Pakistan and Afghanistan, countries
that are war torn and in poverty. Freedom House (2011) state Russian media
freedom as extremely poor in 2010 with the Kremlin relying on alternatively
crude and sophisticated media management to distract the public from
widespread government corruption They claim the media has not been able to
freely cover the news on topics such as government corruption. In April 2010
police raided and searched offices of an independent news website seeking to
identify sources about corruption within an elite police unit. Independent
journalists are consistently attacked as a result of unfavourable news being
13
published about the state (Freedom House, 2012). It is not just the media,
nongovernmental organisations (NGOs) that monitor issues such as corruption,
human rights abuses and protect consumer rights have had increased regulation
and less funding imposed upon them(Aslund et al, 2010). Thus, information
published in Russian media must be subjected to scrutiny as the majority of the
media is controlled by the state and reluctant to run anti-state news (Freedom
House, 2012).
It has been said the media can influence peoples opinions on public matters
(Noelle-Neumann, 2008). Restrictions of free press mean the public will only hear
indoctrinate information and important social issues, such as corruption, may be
omitted.
2.2.
Corruption Increasing
Two large business surveys across Russia in 2000 and 2008 reveal the
perceptions of corruption have risen rather than fallen as show below:
Table 2.4 Extent of Bribery in government, 2000 and 2008
14
2.3.
Costs
Until recently corruption has never been measured and its true cost has been
unknown. It is estimated over US $1 trillion is paid in bribes worldwide annually
and that is seen as a conservative estimate (TI, 2004). Corruption has a heavy
economic and social toll (Mauro, 1995). The economic cost of corruption is easier
to quantify than the social cost (TI, 2010). The World Bank warns the social costs
are higher than the economic costs (cited on BBC.co.uk, 2011). This section
examines the economic, business and social costs of corruption.
2.3.1.Economic
Bribery costs each country an average of $5 billion each year 3. To put this into
perspective the total GDP of all African countries in 2008 was US $1.5 trillion
(McKinsey Quarterly, 2010). At the time it represented 3.33% of global GDP
(World Bank, 2004). This measure only accounts for bribery alone, the other
types of corruption have not been officially been quantified and would rise
substantially (World Bank, 2005)
More than 150 high-ranking public officials and top citizens from over 60
developing nations ranked corruption as the biggest impediment to
economic development and growth in their countries (UN, 2000).
The World Bank estimates that corruption can reduce a country's growth
rate by 0.5 to 1.0 percentage points per year. IMF research has shown that
investment in corrupt countries is almost 5 per cent less than in countries
that are relatively corruption-free (UN, 2000).
3 $1tn bribery cost/ total countries
15
After the financial crisis growth rates across the world have been declining. A
reduction of 0.5 1.0 percentage points can be damaging especially on
emerging economies such as Russia who saw growth rates of 4.3% last year
(World Bank, 2012). Although growth would have continued other countries such
as Sudan and Andorran may find themselves out of recession if corruption wasnt
so widespread (World Bank, 2012).
On the other hand, Merton (1968) argues corruption may bring economic
advantages (Cited in Andvig et al, 2000). Huntington (1968) adds in terms of
economic growth, the only thing worse than a society with a rigid, overcentralised dishonest bureaucracy, is one with a rigid, over centralized, honest
bureaucracy. It is claimed corruption can help against regulations and red tape
whilst allocating resources to those who value them most (Alexeev, 2008). Lui
(1985) suggests corruption within bureaucracy brings about an efficient
allocation of time whilst Beck and Maher (1986) argue its a possibility corruption
ensures projects are awarded to the most efficient firms. Myrdal (1968) confirms
it may beneficial for bureaucracy to be corrupt as it speeds up the queue.
Without bribery, public administration would collapse altogether as no one
would have any incentive to get anything done (Idebate.org, 2012). It is claimed
public sector workers are some of the lowest paid throughout the developing
world receiving 24-32% less wages than their private sector colleagues
(Gorodnichenko, 2006).
However, Boycko, Shleifer and Vishny (1995) argue there is uncertainty rising
from corrupt contracts such as, reputation costs and larger enforcement costs
which are economically damaging rather than beneficial.
Not succumbing to the forces of corruption may be costly. In Novgorod extortion
is common and those who dont pay bribes may be forced out of business (BBC,
2005)
Russia is a country in which corruption has been recognized as a central
economic issue in recent years by Karhunen & Ledyaeva (2011). The size of
corruption in Russia has been estimated to be $300bn (TI, 2010), or 20% of GDP.
Karhunen & Ledyaeva (2011) highlight that household corruption 4 accounts for
only 10% of the corruption market, so businesses and the government are
responsible for the other 90%. Even GDP figures in Russia need scrutinising,
being 40% higher than official figures in 1994 and It is estimated in 1993 Russia
reported $27bn in imports, yet its partners recorded an extra $6bn which was
unaccounted for by the Russian government (Kline, 2005).
The economic cost to Russia is staggering. Each year corruption, on average,
costs each person $21165. Current GDP is $1.5trn, without corruption this could
raise to at least $1.8tn6. The term at least is used as measures of corruption are
generally seen to be conservative estimates (TI, year). Kline, 2005 claims around
40% of Russias GDP is lost to corruption which would equate to a GDP of $2.1trn
after the costs of corruption have been added back. The GDP per captia would
equal $14814, $4,426 higher than the current $10,440 (World Bank, 2010).
Deducting the cost of corruption from the current GDP equals a real GDP per
capita of $8324, $6,532 less than GDP per capita without corruption, making
them around 60% better off. Currently Russia is ranked 60 th and without the
negative effects of corruption Russia would jump to 46 th on the World Banks
rankings (World Bank, 2010.
2.3.2.
Businesses
Almost 45% of respondents say they have not entered a specific market
or pursued a particular opportunity because of corruption risks, 39% say
their company has lost a bid because of corrupt officials, and 42% say
their competitors pay bribes.
(PWC, 2008)
Corruption costs companies as well as countries. Recently Wal-Mart has been
accused of paying $24 million in illegal bribes to Mexican civil servants. On the
same day their total market value plunged by $10 million (Fox Business, 2012).
Thus, a total cost of $34m for Wal-Mart. The payment of bribes may actually lead
to a higher cost of capital, increased spending and managers waste time dealing
with bureaucrats negotiation regulations (Kaufmann and Wei (1999 (cited on
world Bank, 2010). Daimler, the company behind Mercedes-Benz faces $185m
fine for bribing public officials in 22 different countries, primarily Russia (The
Independent, 2010). In 2008, Siemens paid $800m in fines for bribes paid to
government officials in developing countries including Argentina, Bangladesh
and Iraq (The Independent, 2010).
BP has recently investigated its Russian joint venture with TNK (TNK-BP)
confirming 365 cases of alleged corruption including 37 criminal legal cases and
92 employees disciplined (Guardian, 2011). This is costly and time consuming for
a business including court fees, lawyers fees, disciplinary and recruitment costs
to replace old staff.
Corruption adds up to 10% to the total cost of doing business globally,
and up to 25% to the cost of procurement contracts in developing
countries and moving from a country with low levels of corruption to a
country with high levels of corruption is equivalent to a 20% tax on foreign
business.
(World
Economic
Forum (WEF), 2008)
6 1.5tn * 20% (estimate negative effect on GDP)
17
Corruption can cost businesses from paying bribes to secure a permit, from fines
and loss of market value. However, not being corrupt can also be costly. The NY
Times (2009) reports weeks before Ikea opened its flagship store in Russia, it was
asked to pay a bribe to the local electricity board if it wanted electricity for its
grand opening. Instead, Ikea turned to renting generators to provide electricity.
The executive involved was receiving kickbacks from the company to highly
inflate the price, costing Ikea around $198m over two years. Even when Ikea
tried taking the generator company to court, Ikea was force to pay a further $5m
in damages for breach of contract. Ikea has not opened anymore stores as a
result, despite seeing growth rates of around 20% in Russia (NY Times, 2009).
2.3.3.
Social
18
Corruption is inevitably a tax on those that are most vulnerable (BBC, 2011).
Which perpetuates social injustice and the exploitation of the vulnerable: denial
of healthcare, education, economic opportunity and justice, as well as preventing
the holding to account of leaders for the theft of resources (De Swardt, 2011).
Infrastructure projects can be subjected to corruption due to the large sums
transferred and the opaqueness of accounting (TI, 2008). The social cost of this is
poor infrastructure systems such as deteriorating roads, inadequate electricity
supply and poor maintenance of public transport (Tanzi & Davoodi, 1998).
The health sector is an area prone to corruption that can have serious
implications on the health care of a country. In China studies have shown around
30% of drug supplies are expired or counterfeit (Lewis, 2006). In Uganda an
average of 73% of drug supplies are lost from hospitals (Lewis, 2006). The
Independent (2010) reports widespread corruption in Uganda is diverting malaria
treatment away from the population. A disease that is treatable is killing around
300 people a day in Uganda because government officials are selling the pills to
criminal gangs in Kenya (The Independent, 2010).
The health care sector in Russia is rife with corruption indicating its not a
localised problem. Health care in Russia is mostly public and medical services are
supposed to be free. During the soviet period it was common to give informal
payments to receive health care, a phenomenon that has astonishingly become
more widespread (Lewis, 2007 cited in Zelenska, 2010). Unlike Uganda there is
little data to show the true costs of health care corruption in Russia, it is
estimated to be around $600m (INDEM, 2012). The social cost of corruption in
Russia is unquantifiable but leads to issues like the poor being unable to afford
free medical care and losing trust in the health system.
2.4.
Industries
According to Transparency International, construction, real estate, oil and gas are
the most corrupt industries (Transparency International, 2011). Also, Holloway
(2010) concludes corruption is commonly found in the following areas of the
public sector: public procurement, customs, taxation, police (especially traffic
police), immigration, licenses and permits (including drivers licenses), provision
of services where there is a state owned monopoly (e.g. telephone connections),
construction permits and land zoning, and government appointments.
The oil industry in Russia is seen as very corrupt and Gazprom is often
pinpointed as the pinnacle of this corruption through both kickbacks and asset
stripping (Aslund, 2008). It is seen as so corrupt Russia needs $200 barrels of oil
to compete with China and India in economic growth (Bloomberg, 2011).
3. Types of corruption
Corruption comes in many forms and the types of corruption also vary.
Influencing factors can be the location, sum of transaction and the person(s)
involved. This section will introduce the different types of corruption before
looking more specifically at Russia.
Morris (2011) concludes the most common criteria to define corruption are:
Political corruption v bureaucratic corruption Generally, political
corruption refers to corruption occurring at the policymaking stage and is usually
undertaken by presidents or high ranking officials. Bureaucratic corruption
relates to the implementation of policy carried out by lower level officials
(Bardhan, 2006). It is argued the PM Vladimir Putin has an alleged illicit wealth
from kickbacks and secret deals but it is impossible to confirm (The Independent,
2010).
Bribery v extortion Bribery usually occurs when a public official is given
something extra to do their work. Extortion usually involves an official abusing
their power often with actual or threatened force or violence. This relates to the
direction of influence. Morris (2011) states the direction of influence in extortion
moves from state to society whereas, bribery reverses the direction. Extortion is
prominent in cities outside of Moscow and St. Petersburg. In Novgorod it is
particularly bad with businesses living in fear of extortion from mafias with
connections to high ranking public officials (BBC, 2005). Russia is ranked last on
the Bribe Payers Index reinforcing bribery is a problem (TI, 2011)
Grand corruption v petty corruption Grand corruption usually involves
large sums of money, involves higher ranking officials and is less frequent. Petty
corruption refers to smaller, more frequent payments and usually involves low
level officials. Raof (2000) adds both petty and grand corruption is common
throughout Russia ranging from bribes requested from small-scale interactions
with the state, to rumours of large kickbacks associated with privatisation and
big business.
Further research by Beare (1997) adds Systematic top-down corruption is
where a nations wealth is systematically removed from the people to favour the
ruling elites. He adds election/campaign corruption, which is designed to ensure
continuing influence from the political elite.
There have been reports of
extensive fraud in parliamentary elections which continued into the presidential
elections in March 2012 (USA Today, 2012). There are thousands of posts online
from March showing evidence of election corruption (The Guardian, 2012).
Russian citizens know the election was corrupt (The Guardian, 2012). Since the
era of Soviet rule Russians have been allowed to cast their votes at ballot boxes
20
however, the results have always been known. It is seen as the way of doing
things in Russia and millions have always turned out to vote despite the
presidency going to a pre-chosen candidate (The Guardian, 2012).
Table 3.1 Forms of Bribes Requested (N = 286)
The above chart shows the majority of bribes are paid in cash or cash
equivalents which make it extremely difficult to trace. Products or services may
be easier to trace than cash once they changed hands.
3.1.
Sources
Bribe line (2011) reports 85% of all bribes reported in Mexico and China where
requested from public officials , in India and Russia this figures rises to 91%. This
section will look at who initiated the corrupt act and identify them as the source.
The sources of corruption are not universal and differ by country. In the USA, the
main bribe requestors are private companies, In Brazil, Mexico and Russia it is
the police, in Ukraine it is an employee of a state owned enterprise, in India it is
from national level government and in China it is any government official (Bribe
Line, 2011).
In Cuba, officials worry that foreign investment brings corruption (The
Economist, 2012). The Economist (2012) writes that shell 7 companies are partly
to blame. The World Bank (2011) investigated 817 cases of grand corruption and
concluded almost all of them used shells. The below table highlights the number
of grand corruption cases:
7 . A shell company is one that is set up offshore and most are legitimate but
many are paper companies, often free of any obligation to publish their
accounts making it difficult for outsiders to know who is in control, why they are
in operation and where they operate
21
3.2.
Russia
The below chart highlights the main group to request bribes in Russia:
22
3.3.
Global Governance
Kline (2005) highlights During the US Watergate political scandals in the 1970s
over 500 US companies were found to have secret overseas accounts to facilitate
the payments of bribes or for other improper purposes. This led to congressional
hearings to the introduction of the Foreign Corrupt Practices Act (FCPA) (1976)
which aimed to improve accounting standards for recording transactions and
imposed US anti-bribery laws on US companies operating in overseas markets.
Kline (2005) points out that despite other countries introducing law themselves
not much was done for almost two decades to combat corruption. In 1996 the UN
adopted the Declaration against Corruption and Bribery in International
Commercial Transactions (1996). Kline (2005) reports a year later the OECD held
a convention on tackling bribery in which a number of non-OECD countries
attended and led to the introduction of ant-corruption laws in a number of
countries covering MNEs activities. During the 1990s the World Bank and the
IMF started to formally address the issue of corruption. It has been almost forty
years since the political scandals in the USA and knowing the severity of
23
3.3.1.
Russian Governance
Russia knows it has a problem and even the President of office, Medvedev claims
no European country can boast such universal disregard for the law. Over the
past year a range of measures have been implemented to combat corruption,
such as a law requiring government officials and their families to fully disclose
their holdings and to scrutinise their purchases (Telegraph, 2012).
Medvedev has proposed to get rid of idiots in Russia. The new campaign will
allow used to create a web portal for citizens to shame public sector officials and
record their negative experiences of the civil service. The informational is to be
used to decide on law changes and to prosecute the civil servants in question
(RT.com, 2012). If people in Russia are unhappy with the levels of corruption
they will now be able to publicly shame officials. The problem with this is the
state may attempt to restrict the information available if it relates to high
ranking officials.
24
Russia has recently joined the convention against bribery of foreign public
officials as a prerequisite for joining the OECD (RT, 2011). Current laws include
The Anticorruption Legislation, Council of Europe Criminal and law Convention on
Corruption, Anti-Corruption Strategy 2010 2011 and numerous other bills. All
with the intention on increasing the punishments for corruption, anti-corruption
training and generally restricted discretionary powers and increasing the levels
of accountability, all of which are hard to examine exact details.
Sources: OECD (2003), Business Anti-Corruption Portal (2012)
3.4.
25
3.5.
History of Corruption
Under tsarist rule close ties existed between state official and companies limited
judicial discretion. State officials consistently undermined legislation (Heinzen,
2007). Law diminished even further during the Soviet era and leaders claimed
the party was above the law and could do as it pleased. Post WWII there was a
shortage of supplies and most people offered some form of bribe to gain access
to houses, jobs or goods and services in short supply (Heinzen, 2007). Federal
funds were limited; pay declined and civil servants lacked resources. Regional
officers would often unofficial help their colleagues but for a small fee, which was
usually in the form of preferential treatment (Aslund et al, 2010). It was the way
of getting resources to those who needed them most (Heinzen, 2007). Under
communism, corruption became institutionalized and controlled by the party with
the state having the monopoly. Bribes were set a low profit maximizing level to
ensure sustainability. Since the end of communism everyone is involved in
corruption making it endemic (Shleifer and Vishny, 1993).
In the 1990s that President Boris Yeltsin introduced legal reforms throughout
Russia (Aslund et al (2010) and Putin pushed ahead with legal reforms in the
early 2000s (Sakwa, 2008). Despite these reforms a great deal more still needs
to be done (Aslund et al, 2010).
4.1.
The State
26
4.2.
Economic Rent
from the licensing office. If the next best thing he can do when he loses his
government job is to become a taxi driver then the difference between his
earnings at his new job and his intake as a public official is his economic
rent.
Tanzi (1995) suggests low public sector wages gives public officials the
opportunity to request bribes, especially within the taxation system if the
payment of taxes requires frequent contact between taxpayers and
administrators. The World Bank (2011) has uncovered that public sector wages
are generally lower than private sector wages across the globe. Van
Rijckeghem and Weder find that quasi-eradication of corruption would require
average public sector wages to be two to eight times higher than average
manufacturing wages (Cited in Panizza, 2001). However, the World Bank (2011)
highlights that empirical evidence as to whether low public sector wages
increases corruption is extremely varied depending on the data set, research
design and countries. Authors such as Rauch and Evans (2000) argue that there
is no empirical evidence to suggest higher public sector wages leads to less
corruption in 35 developing countries. Orttung (2006) states public sector wages
in Russia are some of the best in the country averaging 11,430 Rubles per month
compared to 9,876 Rubles per month for the average Russian worker, thus wages
of the public sector are may not be causing corruption in Russia.
4.3.
Discretionary Powers
As rules and regulations seldom take care of all contingencies that may arise
many officials have flexibility and are given discretionary powers (Myint, 2000).
Tanzi (1995) also claims certain aspects relating to the tax system and officials
discretionary powers causes corruption. He claims laws relating to taxation can
be difficult to understand and interpreted very differently. In addition, some
administrators have discretion over important decisions such as the
determination of taxes and selection of auditors (Tanzi, 19987). Roaf (2000)
claims the discretionary powers of public officials has been reduced but
departments such as tax can still negotiate tax deals with tax inspectors in
Russia.
The discretionary powers of the officials [in Russia] are so vast that they do not
need to break laws to receive corrupt payments, said Sergei Plaksin from the
Higher School of Economics. The informal payments are often on the initiative of
businesses who wish to speed up the process.
Source: Chaykovskaya, 2011
4.4.
Accountability
28
permit then there is more incentive to act corrupt for personal gain as there is
less chance of being caught.
Becker (1986) suggests that the likeliness of an individual committing a crime
depends on the punishment. The penalty system present in a country is a factor
that determines both the supply and the demand. In theory if the punishment for
corruption was increased the number of cases should fall. However, Tanzi (1998)
argues this may just lead to demands for higher bribes on the corruption that
does take place. However, In Russia, punishment for the police is higher than for
citizens yet the police are the biggest bribe requestors reported. (Trace, 2011).
Tanzi (1998) suggests, in relation to accountability in the taxation system, acts of
corruption are often ignored, administrative procedures lack transparency and
not accounted for properly and controls by the state are weak. The tax system is
poor in Russia with poor auditing and lack of transparency (World Bank, 2005).
Roaf (2002) suggests Opaque noncash transactions, poor systems of accounting
and auditing and lack of transparency in government as factors relating to poor
accountability in Russia
4.5.
4.6.
In Russia, many forms of corruption are deeply rooted in social practises and it is
the normal way of doing business (He, 2000). In Russia it relates back to the
Soviet Era as mentioned earlier. According to Transparency Internal, the level of
corruption in Russia is directly related to the number of bureaucrats in a region
(cited in Orttung, (2006). Orttung (2006) points out major cities are more prone
to corruption as there is a higher concentration of bureaucrats. This may be due
to the bureaucratic tradition of being corrupt and thus the more bureaucrats the
more corruption takes place.
29
4.7.
Decentralization9
4.8.
Social Norms
It appears the causes of corruption in Russia can be related to the Soviet Era.
Corruption was common and seen as a way of doing things. After the collapse of
the Soviet Union this, way of doing things had become a normal part of society.
As mentioned earlier, public officials account for 91% of bribe requestors in
Russia (bribe line, 2011) indicating the government is responsible for most of the
9 See glossary for definition
30
31
This raises issues about the perceptions of corruption in Russia with business
owners being more likely to give bribes. This could include entrepreneurs, future
CEOs and other high ranking officials in businesses. It could be these people
who MNCs are doing business with and they feel it is morally acceptable to give
and receive bribes. In addition, business minded individuals feel they must be
corrupt in order to do business. It causes problems for the economy as 33%
would bribe officials to avoid tax audit, implying businesses do not pay enough
tax. Businesses could suffer, especially MNCs as they may engage in corrupt
practices and be fined or lose business as a result of not engaging. Society is
damaged as it reinforces corruption as a positive behaviour.
4.9.
Klitgaard (1998) outlines a formula that defines the causes of corruption called
the corruption equation:
C=R+DA
C stands for corruption, R is for economic rent, D for discretionary powers and A
for accountability. The formula is stating that the more opportunities for
economic rent there are, the larger the corruption. The more discretionary
powers that are given to administrators the higher the chances of corruption will
be. On the other hand, the more people held accountable, the less corrupt a
country will be. Mathematically speaking, C varies directly with R and D, and
inversely with A (Myint, 2000)
According to Myint (2000) if the above formula is stated differently it tells us
corruption will increase if the following three conditions are met:
1. Large number of rules and regulations that restrict business and economic
activities thus creating opportunities for generating economic rent. It is
made worse if the restrictive measures are complex, inconsistent and
opaque which has been proven to be true in Russia;
2. Those who are given discretionary powers have a lot of freedom in
interpreting, applying, amending or altering the rules discretionary
powers in the tax system is a good example of how this is true for Russia;
and
3. There is a lack of institutional arrangements and mechanisms to ensure
people are held accountable for the actions. The police are corrupt in
Russia, the ones who are supposed to enforce the law.
32
4.10.
Summary of Causes
5. Conclusion
Transparency International (2011) defines corruption as The abuse of entrusted
power for private gain. It is estimated over $1 trillion is paid in bribes worldwide
annually (TI, 2004). Corruption is having a major impact on economies costing
Russia an estimated $300bn each year (TI, 2010) which has major implications
for businesses and societies.
Corruption is primarily caused as a result of the actions of the state with 91% of
bribes being requested by government officials in Russia. Couple this with the
lack of free press in Russia and it can be seen how social norms have been
created. Inherited from communism the perception of corruption in Russia has
been described as a victimless crime however, this research has uncovered
corruption negatively effects the economy, businesses and society. The economy
is losing between 20 40% of GDP, businesses are losing an average of $243,
750 a year (INDEM, 2012) and society is losing fundamental features such as
health care.
With 63% of individuals being requested for bribes in 2008 (Bribe line, 2009).
Corruption risk is seen to deter many firms; around 45% of businesses have not
entered a market due to corruption risk (PWC, 2008). With a rapidly expanding
economy and an influx of FDI, corruption is threating to derail the growth of
Russia. With limited growth in the developed world, Russia looks like an
attractive place to invest
With global measures to eradicate corruption, the problem is worsening in
Russia, as this paper has highlighted throughout, rather than getting better.
Corruption is perceived to be morally right by many Russians, particular those
with business acumen. How can something that is so deeply rooted into society,
something that is perceived as normal ever be eradicated?
33
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