A few months ago Market-Racket posted a piece about Russia trying to sell itself as a great place for FDI, and how corruption is sucking credibility out of President Putin’s pitch. In light of Transparency International’s latest corruption survey, which moved Russia from 90th place all the way down to 126th place (out of 159), this phenomenon merits a closer look.

One of the most obvious questions brought by the survey’s astonishing results is: how did Russia get such a terrible grade? A quick read of Russian think-tank INDEM’s recent report provides more than a few jaw-dropping responses.

The INDEM organization took a survey of 3,000 Russians this year and asked them a series of questions on their experiences with corrupt behavior. Here are some of the observations:

• 62% of respondents have offered bribes for health service.
• 44% have paid bribes to obtain justice in court.
• 63% have offered bribes for higher education.
• 86% have been requested to pay bribes for police matters (obtaining driver’s license, traffic incidents, etc.).
• The average bribe paid in Russia is US$136 thousand.
• A successful Russian businessman has to allot $243,7 thousand of his budget to bribes.
• The Russian market of bribes is evaluated at some $316 billion a year.

In addition, the Levada Centre, a Russian polling service, says that Russians think that “policeman” is the most criminal of professions, beating “drug dealer” and “terrorist” by a landslide.

The problem with bribes is that they inject an enormous amount of uncertainty into ordinary transactions. The IMF compares corruption to a tax, which it says lowers investment and retards economic growth. The institution also claims that corruption misallocates talent to less productive opportunities made more profitable by bribes.

To add to these monetary consequences, the Economist extends the chain of events of bribery to other areas of Russian life. As an example, the fact that guards and policemen can ignore their duties in return for cash is a frightening thought in today’s world of decentralized crime. Kidnappings, bombs on board airplanes and arms sales by the Russian army to insurgents are all horrific fallouts from a corrupt system of life. How can the country hope to withstand terrorism under these circumstances?

Putin recognizes this problem and is trying to convince the public that great changes await. Prosecutors indicted a senior taxman and a central bank official for seeking $5.3 million in bribes from a bank last week – coincidentally just one day after the Transparency International survey was released. The deputy head of the Federal Tax Service's credit department, who was accepting $1 million in cash from a Moscow bank to end a tax probe, was also arrested. These high-profile arrests clearly sent a message to others involved in such activities that punishment exists. But will that really do the trick?

Unfortunately, until Russia straightens out its legal system, these one-off cases won’t make waves, no matter how much press they attract. Russian stifling laws must adapt to accommodate business so that people don’t need to find alternatives to burdensome over-regulation (such as pace-quickening corruption) to carry out their daily business. In addition, punishments for bribes should be consistent, mandatory and severe.

Time and time again, the band-aid approach fails. A change at the core is needed – and soon. After all, there are still 30 more places for Russia to drop to come next year’s survey.

Posted by Michelle Smith on October 23, 2005 11:41 PM