Corruption: Russia's Economic Stumbling Block

Corruption as a transnational threat was high on the discussion agenda in early July when U.S. President Barack Obama traveled to Russia. It is clear that Russia needs to add anti-corruption to the long list of issues it must tackle to be considered a global economic powerhouse.

International investors fled in droves from Russia last summer: First, there was Russia's brief war with Georgia. Then Prime Minister Vladimir Putin conjured up memories of the demise of Russian oil giant Yukos with a cryptic suggestion that steel giant Mechel (MTL) should be investigated for tax evasion. Coupled with the chilling effect of the TNK-BP and Telenor (TEL.F) disputes over corporate governance, these events have curbed investors' appetite for Russia.

Those events played into ongoing fears and frustrations over Russia's reputation for seemingly pervasive corruption. The nation ranked No. 147 out of 180 countries in Transparency International's 2008 Corruption Perception Index. According to a 2008 U.S. State Dept. report, corruption amounts to an estimated $300 billion annual tax on investment and is one of the greatest barriers to foreign investment. Roughly 50% of Russians believe corruption is a permanent fact of life, stemming from official greed and immorality, according to a recent nationwide survey. According to TRACE, a U.S.-based anti-corruption nongovernmental organization, 41% of reported demands for bribes are from government officials and employees, and 50% are demands from the police or the military.

Despite these dismal statistics, Russia has launched some significant initiatives to mend its reputation. For example, soon after his election, Russian President Dmitry Medvedev made it clear that tackling corruption is foremost on his agenda. Last year he surprised critics by delivering on his promise and signed the new anti-corruption legislation package. The legislation was a good first step. According to the Investigative Committee of the Russian Prosecutor General, since the start of this year, 106 investigations have been initiated, and 12 corruption cases were tried involving bribes and damages totaling approximately $29 billion. The accused include Interior Ministry officials, customs agents, Audit Chamber members, prosecutors, and local officials. Recent convictions include the sentencing of a former Russian government investigator to nine years in prison for bribery.

What's Missing in Russia's Anti-Corruption Law But the legislation falls short because it does not criminalize the offering of a bribe—only completed acts of bribery. This is a significant problem because many enforcement actions begin when an honest official reports that he or she has been offered a bribe. Another defect of the new law is that it does not target judicial corruption. This is a serious shortcoming, since both the police and the judiciary are perceived by many Russians to be highly corrupt. A recent Transparency International progress report for the Organization for Economic Cooperation & Development (OECD) Anti-Bribery Convention quoted a popular Russian saying: "The severity of Russian laws is balanced by the fact that its enforcement is optional." Until Russia puts in place a system for systematically enforcing its anti-corruption laws, it will matter little how well or poorly those laws are drafted.

Russia's culture of corruption may simply be too deeply entrenched for the country's leadership to tackle on its own. But help might come from two unlikely rescuers: the U.S. Foreign Corrupt Practices Act (FCPA) and the OECD Anti-Bribery Convention.

The FCPA forbids anybody within its sweeping jurisdiction to make or promise a bribe to an official to obtain business. This wide net reaches U.S. persons, non-U.S. companies with U.S.-listed securities and anyone who, however briefly, plots or carries out a bribery transaction while in the U.S. or using U.S. communications or transportation facilities. Thus, U.S. companies and non-U.S. companies with U.S.-listed securities—and all subsidiaries of such companies—must comply with the FCPA or face criminal and civil sanctions. Out of self-protection, qualifying companies are increasingly implementing internal anti-bribery compliance programs and reporting to their national officials and international officials (such as the OECD) the corruption pressures to which they are exposed in Russia. Over time, these measures may induce Russian officials to take corruption issues more seriously. After all, it was exactly such measures that shifted the business and political climate in Europe from one that was highly tolerant of bribes to one that gave birth to the OECD Anti-Bribery Convention. Prosecution in OECD countries has already begun, with some cases including counts related to alleged bribery in Russia.

The OECD's Best Weapon: Peer Review During Obama's recent visit to Moscow, the Russia-U.S. Joint Working Group on Investment & Institutional Integrity made a number of recommendations. Among proposals regarding integrity, governance, and transparency, the group advised that Russia become a member of the OECD Anti-Bribery Convention. Membership would enlist Russia's commitment to numerous legally binding decisions, including the Anti-Bribery Convention. The Convention would require thorough evaluation of Russia's current legislation and enforcement efforts. Further, it would require Russia to implement extensive legal, regulatory, and policy measures to prevent, detect, prosecute, and sanction the bribery of foreign officials. Most important, the Convention has a peer-review mechanism that monitors each country's enforcement record. In practice, peer review has pressured governments to tighten their anti-corruption enforcement. The prospect of such peer review may also stimulate Russia to bring its anti-corruption efforts in line with OECD standards.

To many observers, the prospects for Russia's anti-corruption program seem bleak. Russia appears more on track, however, when its efforts are considered in the context of other countries' achievements. When U.S. companies first became subject to the FCPA more than 30 years ago, they lobbied for European and Asian companies to be held to the same standard. Many in Europe and Asia simply smirked at American naivete; after all, until 10 years ago, foreign bribes were legitimate tax deductions in many OECD countries.

It has taken several decades to change that culture. Similarly, it isn't reasonable to expect Russia's business and political culture to change in this decade, or for at least several years to come. Change may come as Russia gets more integrated into the global economy. But it will come only if non-Russian companies doing business in Russia began to insist, lobby, and educate in favor of an anti-corruption culture and a level playing field.

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