Corruption remains key reason for Russian economy’s stagnation

Source: Moscow Times/nikitich.livejournal.com

Corruption is widespread throughout the executive, legislative and judicial branches at all levels of the Russian government. The Russian authorities recognise that corruption is a major problem and have implemented a number of measures to combat this issue.

The Sochi Olympics served as a reminder of the massive issue of corruption that haunts Russia. Corruption affects every level of society, with the country slumping from 46th place in 1996 to 127th out of 177 countries in 2013 (tied with Pakistan) in perceived levels of corruption.

The Duma adopted new legislation in April 2013 aimed at preventing high-ranking officials from transferring illicit wealth abroad and stopping annual capital outflows of around $80 billion. Previously in 2012, Russia became the 39th party to the OECD Anti-Bribery Convention and adopted the National Anti-Corruption Plan 2012-2013 to target official corruption. Federal Law No. 273,  which came into force on 1 January 2013, required companies to create compliance programs and implement extensive internal measures to prevent corruption.

Despite the increase in anti-corruption regulation, corruption is still rampant. Weak implementation and enforcement of these measures, weak institutions, abuse of office, theft, and extortion have all contributed to its continuation. In one such case, President Putin’s ally Vladimir Pekhtin resigned from Parliament in February 2013 facing charges from failing to declare ownership of property in the U.S. worth $2 million. As of November 2013 the case was still pending.

A key problem in the fight against corruption is that Russian law enforcement and security forces detect too few major corruption crimes. There has been a downward trend in exposing these crimes, with the number of organised corruption crimes revealed over the first six months of 2013 halving compared to the previous year.

This trend is not news to Elena Panfilova, director of Transparency International Russia, who stated that Russian authorities took “the greatest possible effort, under the circumstances, to combat low-level corruption, combined with an almost complete absence of resistance against large-scale corruption.”

Leading Russian economist Sergei Guriev described the situation as “perverse – yet stable – political equilibrium.” Russia’s political elite understand that the economy could grow 5 to 6 percent annually, but the reforms needed to achieve such growth would threaten their ability to hold on to power and extract rents. “For those in power, a big piece of a shrinking pie is preferable to no piece of a growing one, which is what most of the current elite would receive under a fair legal system with clear rules and predictable enforcement.”

These issues help explain the slowdown in the GDP growth rate from nearly 5 percent in early 2012 – with President Putin campaigning in 2012 on a promise that the economy would grow at 5 to 6 percent per year during his six-year term – to 1.2 percent at the end of 2013.

Dr. Guriev rejected a number of other explanations for the economic stagnation from weak external markets (doing much better in 2013, with the U.S. economy in particular growing faster than expected), to ‘populist overspending’ (the budget is still balanced), to a cyclical downturn (there is low unemployment as well as growing consumer spending and credit).

In addition, world oil prices are above $100 per barrel. The Ministry of Economic Development recognised in November 2013 that the slowdown indeed reflects Russia’s own “internal problems.” The European Bank for Reconstruction and Development had the same prognosis, blaming the government’s lack of structural reform.

Growth rates are expected to recover partly in 2014 to 2.5 percent, assuming accommodating fiscal policy, including increased spending on large public infrastructure projects. In addition, the figures from the World Bank & IFC’s ‘Doing Business 2014’ show a slight improvement in the ease of doing business in Russia.

However, structural reforms and improvements in the business environment are needed, with the fight against corruption a key issue, to increase Russia’s potential growth above 3 percent per annum. President Putin’s denial of the large-scale corruption surrounding the Sochi Olympics, however, does not inspire confidence.

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Categories: Economics, Europe

Author:Tiia Lehto

Tiia Lehto is currently a master’s candidate in MSc International Political Economy at the London School of Economics (LSE). She received her BSc in Economics, Politics and International Studies (with a major in Economics) from the University of Warwick in 2013. She has lived in seven countries within Europe and Asia, and has completed internships within a number of industries and functions varying from Finance to Sales and Marketing. During her time at LSE, in addition to her core course she is taking ‘Politics of Money in the World Economy’ to deepen her knowledge of the intersection between financial markets and politics, and is gaining regional expertise from the course ‘Russia and Eurasia: Foreign and Security Policies’. In addition, she is the president of the LSE SU Political Risk & Investment Society, and enjoys travelling and sports.

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  1. Lack of energy sector reforms hold back Russia’s economy | Global Risk Insights - March 25, 2014

    […] with the deep structural problems in the Russian economy, it will be no easy task. With rampant corruption, money allocated to infrastructure would likely face poor […]

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