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Russia: Corruption Continues To Thrive, Say Researchers

Russia's strong economic growth over the past three years -- after a decade of crisis -- has been fodder for scores of magazine cover stories and newspaper headlines. But two new studies -- both originating in Russia -- say corruption and the shadow economy are thriving as never before, casting doubt on the effectiveness of reform and the sustainability of the country's new boom.

Prague, 4 June 2002 (RFE/RL) -- According to the latest research by the INDEM Center For Applied Political Studies, one of Moscow's leading think tanks, Russians spend an estimated $37 billion on bribes and kickbacks annually.

That works out to $247 for every Russian man, woman, and child -- nearly twice the average monthly salary. Put another way, the amount of bribes paid each year in Russia nearly equals the $40 billion the Russian government takes in as legal revenue.

The INDEM figures are the culmination of a two-year study of the Russian economy. INDEM President Georgii Satarov -- a former adviser to Russia's first president, Boris Yeltsin -- tells RFE/RL the numbers mean that despite the government's periodic antivice campaigns, corruption continues to permeate life in Russia: "The fact is that corruption is built into the system of social relations. You could call it a habit. The paradox is that on the one hand people condemn this, but they nevertheless resort to corruption in their personal dealings."

Sixty percent of business owners and half of ordinary citizens surveyed by INDEM said paying bribes was a "necessary" part of their lives.

Corruption runs the gamut from small bribes paid by drivers to traffic policemen for real or imaginary infractions to larger amounts paid by parents so their children will win a place at university, to major kickbacks paid by companies to avoid taxes or obtain lucrative state contracts.

As Satarov points out, the issue of corruption in Russia is not just a moral one, it has a direct impact on every sector of the economy, imposing a de facto tax on citizens which both slows economic growth and deprives the authorities of legitimate revenue. The only winner is the bloated state bureaucracy, which thrives on the practice and becomes more resistant to reform.

"Corruption is not just an ethical problem or a criminal one. It is above all a problem of the ineffectiveness of government. The two things are linked. When I speak about reforming the bureaucracy, it means anticorruption measures and measures to increase the effectiveness of the system as a whole. The two things are intimately linked."

According to INDEM, Russia's nominally free medical system actually cost patients some $600 million in bribes last year. Admission to universities was a close second, costing an estimated $520 million. Satarov's institute says corruption in the education sector is so serious that one in five university places is obtained through a direct bribe.

But the biggest sums by far are exchanged in the business sector. Federal ministry officials often collude with local authorities and law enforcement agents to form protection rackets -- "kryshy," or roofs, in Russian slang -- to extort money from business owners in exchange for various services.

Irina Yeliseeva, head of the department of statistics at the St. Petersburg State University of Economics and Finance, is the author of a new study on Russia's shadow economy, which was commissioned by the EU-funded Russian-European Center for Economic Policy. Her survey looked specifically at the economic situation in Russia's Kaliningrad Oblast and Leningrad Oblast, which includes the city of St. Petersburg.

She confirms the widespread prevalence of protection rackets run by state officials. "The enterprises we surveyed showed us that the kryshy -- those organizations that allow them to evade taxes and falsify payments to employees' social security funds, etc. -- they showed us that you can always find somebody to cover up for these things. [The enablers] are employees of the financial sector, of state bodies, of law enforcement, etc."

Yeliseeva estimates that 49 percent of business revenue in Russia last year went undeclared, making a mockery of the government's boast that it is improving tax collection. Yeliseeva says President Vladimir Putin's moves to lower tax rates to encourage payment will have little effect as long as people know a strategic bribe will allow them to avoid paying taxes altogether. "They allowed people to have hard-currency accounts. They lowered the tax rate. But despite all this, if there is a possibility of not paying, people will not pay (taxes), no matter how much you lower rates. If they can get away with not paying, they just will not pay."

Yeliseeva, among other things, recommends shifting to new types of taxes that cannot be so easily avoided. She says the government should institute property taxes as well as a withholding tax which would make it harder for businesses to under-report their assets. "We have to create a tax collection system that includes a withholding tax -- that is, a specific tax based on a specific sum -- so that there is no basis for tax evasion. A property tax would be a very good thing -- a tax on things that are standing, that can't be hidden. These are some simple tax measures that could have a greater effect, in our view, than simply lowering the tax rate on profits."

Georgii Satarov, at IDEM in Moscow, notes that for now, the government's efforts at combating corruption have been ineffective. Ideally, he says, reducing graft should be the Kremlin's top priority. "We think one of the government's main tasks should be to continually act as a barrier against corruption. We talk about the government having a social policy, an economic policy. It should also have an anticorruption policy that is continually at work."

Above all, this is because all the information government and private business leaders need in order to formulate policy and make rational decisions becomes distorted and ineffective due to corruption. As recent accounting scandals in the United States involving Enron and other companies have shown, apparent prosperity can turn into bankruptcy at the drop of a hat when deception is involved.