University of Brighton

Brighton Business School

The Cost and

Causes of
Corruption An InDepth Case Analysis
on Russia

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.

International Business Ethics.................................................................4

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.

Aims and Objectives..................................................................................9

1.5.1.

Aims.................................................................................................... 9

1.5.2.

Objectives........................................................................................... 9

1.6.
2.

Research Methodology..............................................................................9

Extent and Costs........................................................................................... 11

2.1.

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

What Causes Corruption?.............................................................................. 25

4.1.

The State................................................................................................. 25

4.2.

Economic Rent........................................................................................ 26

4.3.

Discretionary Powers............................................................................... 26
2

4.4.

Accountability......................................................................................... 27

4.5.

Regulations and Authorizations...............................................................27

4.6.

The bureaucratic tradition.......................................................................27

4.7.

Decentralization...................................................................................... 28

4.8.

Social Norms........................................................................................... 28

4.9.

The Corruption Equation.........................................................................30

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

Velasquez (2001) defines ethics as the principles of conduct governing an

individual or a group. It is the study of morality. Morality are the standards that
and individual or group has about what is right and wrong, or good and evil
(Velasquez, 2001). Ethics is different from the law as De George (1994)
highlights, we can speak of American, German or Japanese law but its odd to
speak of American, German or Japanese ethics. Ethics is an interesting topic
when applied to international business as the standards of ethical conduct is
elusive (Donaldson, 2001). Cultural diversity may undermine the morals of an
organisation (Mahdavi, 2003)

1.1.1.

International Business Ethics

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:

Corruption Corrupt conduct is deliberate or intentional wrongdoing,

not negligence or a mistake (ICAC, 2011). Transparency International (TI)
defines corruption as The abuse of entrusted power for private gain
(Transparency International (TI), 2011), as does Nye (1967).

Employment practices ethical issues can arise when work conditions

are lower in the host country than the home country.

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

Moral obligation of multinational corporations MNCs should be

socially responsible and give something back to society

(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:

Bribery - Morris (2011) highlights that most equate corruption with

bribery, which is where an illegal payment is made to a government
official in return for some type of official, state-sanctioned, authoritative
act that has a selective and tangible impact and that in the absence of the
secret payment would not otherwise have been made (Johnston 2005).

Conflict of Interest, Favouritism & Nepotism where jobs or benefits

are given to benefit the decision maker usually as a result of a favourable
relationship

Embezzlement & Graft - are forms of corruption where (public) officials

act alone to withdraw or divert (public) funds.

Extortion - where a (public) official threatens to use or abuse their

powers to force a bribe from an individual or community generally with
force

Fraud - can involve complex systems to defraud an

community, company, government or country.

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):

Table 1.1- Corruptions Perceptions Index (2011):

Source: Transparency International, 2011

Corruption is widespread being prominent across the globe. Large proportions of
Africa, Asia and South America are red indicating high levels of corruption, where
most developing countries are situated. The following graphs show the highest
ranking countries and lowest ranking countries respectively:
Table 1.2 - Highest Ranking Countries:

Source: TI, 2011

Table 1.3 - Lowest Ranking Countries:

Source: Transparency International, 2011

The EU & Western Europe feature heavily in the highest ranking positions but not
in the lowest implying its the least corrupt region. The lowest are diverse in
terms of geographical regions. Venezuela and Haiti are situated near each other.
Iraq, Turkmenistan, Uzbekistan and Afghanistan are in close proximity, as are
Sudan and Ethiopia.
The same can be applied to the highest ranking countries. All the European
countries, bar Switzerland, are situated within North West Europe. Australia and
New Zealand are in the same geographical location. Besley and Case (1995)
compare the behaviour of state governors in the US and highlighted if one
governor adopted a successful policy the majority would follow. Dincer et al
(2010) shows corruption is positively related to the levels in adjacent states.

1.4.

Russia

Table 1.4 Russia Overview

Russia
$1.5tn
141,750,000
Atlas $9,900

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):

Source: Transparency International, 2011

Table 1.6 - FDI inflows (USD bn, 2002 2011):

Source: Reuters: 2012

This table shows Russia has the second highest FDI inflows. Such a large amount
of FDI implies Russia is reliant on foreign investment and with high levels of
corruption it might deter investment in the future restricting growth. It also
1 BRICS Brazil, Russia, India & China are the largest emerging markets.
9

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.

Aims and Objectives

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 cost of corruption to the global economy is overwhelming. Through paying

bribes alone, 3.3% of global GDP (World Bank, 2004) is diverted or withdrawn
from economies to go into the pockets of undeserving officials, and others, who
abuse their powers for personal gain. Alarmingly the number of new corrupt
cases appears to be rising. A search on Google for corruption in the news
section with results filtered to the past 24hrs, list over 56,000 results. Even the
World Bank President, Paul Wolfowitz (2006), suggests that one of the biggest
threats to [economic] development is corruption. It is for these reasons, the
undertaken research will:

Examine the extent and costs of corruption

Highlight the different types of corruption
Outline the sources and causes of corruption
Provide an in-depth case analysis on Russia
Look at the implications for business

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. Extent and Costs

This section will examine the extent of corruption and identify the costs to the
economy, businesses and society across the developing world focusing on Russia
but not exclusively. The main industries prone to corruption will also be
highlighted.

2.1.

Russia

This section will briefly examine the extent of corruption in Russia.

Firstly, the average value of bribes is $20 - $100 and is shown below:

11

Table 2.1 - Amount of Reported Bribe Demands in Russia (N = 286):

Source: Bribe Line2 (2011)

This may be distorted as a highly paid executive is unlikely to complain about
having to pay a $20 bribe if its so widespread. Similarly, a company
representative is unlikely to report they have been solicited for a bribe if its
necessary for business. Due to the small value of the bribes it is likely to be
disgruntled citizens.
Table 2.2 - Frequency of Recurring Bribe Demands in Russia (N = 161):

Source: Bribe line, 2011

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):

Source: Bribe line, 2011

All the factors in the above chart all affects businesses and shows the majority of
bribe requests are for the timely delivery of a service to which entitled too. This
may be connecting to the electric board or delivery of a permit from the fire
department. It is interesting to note that 22% of the time bribes are requested
to avoid harm to self or business interests and 40% of the bribes requested come
from the police, which is as it implies the police may use their power for self-gain
and may hurt individuals who do not comply.
Solomon (2002) (cited in slund, 2010) believes Russia has done well in recent
years to tackle corruption. However, aspects of the rule of law have largely been
left untouched which are promoting corruption as slund (2010) points out:

Promoting a free press

Empowering autonomous social organisations
Encouraging the spread of non-governmental organisations to monitor
breaches of law, general misconduct and consumer fraud

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

Source: Aslund et al (2008)

It appears levels of corruption have risen since 1993 after a fall in the level of
corruption from 1986, shown below:
Table 2.5 Number of Recorded Offences Committed by Officials in
Russia (Thousand)

Source: Luneev cited in Suhara (2003)

Perceptions of corruption in Russia have been getting worse. Between 1980 85
an average score of 5.1 was achieved, by 2002 it had fallen to 2.7 as the
following table shows:

14

Table 2.6 CPI for selected Countries

Source: Luneev cited in Suhara (2003)

Corruption is seen to hinder economic growth (Tanzi (1998) and Mauro (1995))
yet despite increasing levels of corruption and the severity of it, Russia has
enjoyed a period of stable growth and has emerged as one of the leading
developing nations. It is for these reasons the focus of this paper is on Russia.

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

4 (domestic corruption opposed to business corruption)

5 ($300bn (cost of corruption) / 141,750,000 (Population)
16

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).

Creating a business requires permission from about 50 officials.

These losses are offloaded to the ordinary customers and clients of
small business, since expenditures on bribes are included in the
price of goods and services.
Source: Levin & Satarov, 1999
In Russia, Karhunen and Kosonen (2011) point out foreign companies, more often
than not, find themselves subjected to inspections from various departments to
gain licences to operate. These official inspectors generally have enough
discretionary powers to be able to shut down a business or expropriate their
assets due to apparent fraudulent behaviour. Businesses may find they have to
pay bribes to operate making Russia a less attractive place to invest.

2.3.3.

Social

Organisations have the need to adhere to corporate social responsibility (CSR)

polices in the contemporary business world. CSR is a poorly defined term but
simply put it is a wide range of issues [on which] corporations are encouraged
to behave socially responsible (Dahlsrud, 2006). Jackson and Hawker (2001) add
we have looked for a definition and there isnt one, as there is an abundance of
definitions that are biased towards specific interest (Van Marrewijk, 2003, Cited
in Dahlsrud, 2006). As a result of CSR research will focus on social costs as well
as economic and business to highlight the impact corporations may have on
society as a result of engaging in corrupt practices.
Corruption is often thought of as an economic crime (De Swardt, 2011). Its not
just the global economy that is being affected; the social cost of corruption is just
as staggering. In Uganda, surveys have indicated that between the years 1991
1995 only 13% of allocated funds for schools reached their destinations. A
shocking 70% of schools received nothing (Transparency International, 2004).
This is socially damaging as a fundamental feature of modern society is being
damaged; the education of a nations population.

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).

Further estimates made by Russian law enforcement bodies

indicate that criminal groups in some branches of industry oil and
gas industry, mining of rare metals spend up to 50% of their
revenues actual, not declared on bribing officials at various levels,
according to the Audit Chamber of Russia, in 1997.
19

Source: Levin & Satarov, 2000

Opportunities exist for corruption in Russias tax and customs system due to the
levels of complexity, capital controls and financial market regulation, regulations
on businesses and management of state owned enterprises including their
privatisation (Roaf, 2000). In addition, Russia is ranked the riskiest country for
mining companies to operate in, partly due to corruption (Amaral, 2012).

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

Table 3.4 Grand Corruption Cases:

Source: The Economist (2012)

Corruption may be universal but the main sources of corruption are different. In
China, Government officials are the most common to request a bribe. In the
British Virgin Islands, the main form of corruption comes from shell and in
Russia the police. This may indicate that different cultures have different believes
on the definition and severity of corruption. For example, in Russia, it may be
deemed socially acceptable to request a bribe from someone as a government
official. In Afghanistan, at least 33% of the population see corruption as a normal
part of life (BBC, 2010). This may be one of the reasons why a global effort to
eradicate corruption has not be effective.

3.2.

Russia

The below chart highlights the main group to request bribes in Russia:

22

Source: (Bribe Line, 2011)

The most common group to request a bribe is the police (41%), around 3000
cases of corruption against the police are reported each year (The Moscow
Times, 2012). Even the Russian government has admitted that police corruption
is rife throughout Russia (BBC, 2009). In 2011 the ranks of the police force were
purged in an attempt to eliminate corruption. Of the 875,000 police officers
investigate about 183,000 were removed from their posts or fired or roughly 20%
(Golts, 2011). Police officers are punished to a greater extent than normal
people, yet still around 60% of cases against the police centre around corruption.
Police officers are generally reluctant to investigate crimes committed by their
colleagues and plans have recently been announced to establish an independent
department to investigate crimes from within (Moscow Times, 2012).

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

corruption one would expect there to be some form of international governance.

Searching the web for anti-corruption agencies using Google returns over 22m
results. These range from international organisations such as transparency
international and BRIBE line to national organisations. There are countless
numbers of non-governmental organisations (NGOs) both international and
national to fight corruption. In addition, governments have passed legislation and
introduced laws to combat corruption, such as the Bribery Act 2010 (UK) and the
Dodd-Frank Wall Street reform (US).
With all these agencies, legislation and money spent, one would expect
corruption to be diminishing. However, the OECD publishes progress reports
based on criteria set out in the 1997 convention. Out of the 38 parties of the
convention only seven have been actively enforcing the rules (OECD, 2010). The
European Commission (EC) suggests the level of corruption has risen over the
past three years (Europa.eu, 2012).
The Telegraph (2010) reports that 56% of those surveyed believed corruption
was getting worse. In addition, Corruption Watch (2012) states 62% of people felt
that corruption had increased in their country in the past three years. The BBC
(2010) reports the global crisis led to an increase in corruption. Jaffe and
Tsimerman (2010) conclude business ethics worsen in due to economic crisis and
that it is acceptable to compromise ethics when business and economic
conditions are unfavourable. Despite increasing costs and less demand
businesses need to stay ethical, even in times of economic uncertainty.
Many governments and independent agencies are fighting corruption; many
multinational companies (MNCs) have a code of conduct in place to forbid
corruption. For example in 2002, BP became one of the first companies to
prohibit the use of facilitation payments in the course of its business (BP, 2011).
However, The Economist claims so few companies are entirely clean even if they
insist they are (Pacek & Thorniley, 2004).

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.

Does Corruption Pay?

It would appear that corruption is damaging to the economy. However, China,

Vietnam, Indonesia and Thailand were among these most corrupt countries
between the years 1980 1995, yet enjoyed growth rates in excess of 6%
(Campos et al, 1999). Russia is one of the most corrupt countries now and enjoys
growth rates or 5% (2003 2011) (Trading economics, 2012). The severity of
corruption would suggest that corruption does pay to certain individuals, groups,
companies or governments. Corruption may be a necessity, especially in Russia.
For example, if two oil companies are competing for a contract to drill oil and, the
official in charge of allocating the contract requests a bribe, the contract may be
awarded to the company that acts unethically. Therefore, the losing oil company
will suffer in lost profits and, a small bribe may have been beneficial to stay
competitive, profitable and in business. This can also put pressure on businesses
to comply with bribery in the future to complete for business.
3.4.1.1. In Russia
Corruption can do magic in Russia (RT, 2012). Despite all these measures being
corrupt in Russia appears to pay. Aslund et al (2010) claim a small firm in Russia
can increase its chances of winning a property dispute with a similar company by
9% if it has good relations with the regional government. One report tells of an
individual who had his business bank account closed and it wasnt until he paid a
bribe he could reinstate his account to operate (rferl.org, 2010). Corruption
doesnt just pay for businesses.
Bribery is an institution in Russia: students pay teachers for better
grades, patients pay doctors for health care supposedly provided free by
the state, families pay off draft boards to keep their sons out of military
service.
Source: rferl.org (2009)
This can be interpreted to show how the police can see bribes as normal
behaviour. Those who commit motoring offences can bribe a traffic office and be
let go with no punishment (Nemtsova, 2011). It even pays for government
officials to be corrupt; one regional leader admits to having only a small
apartment but lives in a marble mansion (rferl.org, 2012)

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. What Causes Corruption?

Causes of corruption can be attributed to a range of factors and vary by country.
The general causes of corruption will be identified and applied to Russia. Causes
of corruption in Russia vary and the main concern is that its seen as morally
acceptable and has been increasing since the fall of the Soviet Union
(Gradirovski, 2006). The causes are widespread due to the geographical size of
Russia and Belousova et al (2011) concludes the causes are different in each
region.

4.1.

The State

If we abolish the state, we abolish corruption. (Becker (1974). According to

Tanzi (1998) corruption is generally concerned with the activities of the state
and especially with the monopoly and discretionary power of the state. Russia is
seen as a democratic state, yet many argue its democratic credentials are
extremely flawed (Darlington, 2012). This would imply that the state, or
government, is responsible for causing corruption. In Russia 91% of bribe
requestors are public officials (Trace, 2011), so it could be said the state is
responsible.

26

Ackerman (2006) states corruption is a symptom that something has gone

wrong in the management of the state. Institutions designed to govern the
interrelationships between the citizen and the state is used instead for personal
enrichments and the provision of benefits to corruption.
According to the OECD8 (2010) only seven out of 38 countries are actively
fighting corruption. So in some respects the government is not fighting
corruption thus letting it happen. This may not necessarily be a cause of
corruption but it may facilitate the amount of corruption. It could be argued in
Russia, more is being done to fight corruption by the state so, and the state is
not responsible. However, it could be the state is not doing enough to tackle
corruption. In Russia, more is being done to fight corruption, yet it is still very
persistent, so it may not be the state that is responsible or the state hasnt done
enough.
State departments supply corruption but only because there is demand. Tanzi
(1998) suggets the factors that promote corruption are those that affect the
supply and demand of acts of corruption. The public demands corrupt practises
and public officials supply acts of corruption. It is not just the state (government)
that is causing corruption. It may be external pressure on public officials that
cause them to be corrupt.
Roaf (2002) outlines the causes of corruption can be attributed to a combination
of opportunities and incentives. Opportunities can be seen as the demand,
company representatives seeing an opportunity to get a contract quicker so
demand corruption happens. Incentives exist for the public sector worker to gain
extra income from supplying the corruption.
Waters, 2004 claims that to eradicate corruption the demand for corruption must
be constricted as whilst there is demand there will be a supply. If potential
benefits from corruption are big enough, government organizations and
officials have incentives to create laws and regulations that enable them to
become the providers of additional required permits and license, charging for
them accordingly (Ninghua, 2010).

4.2.

Economic Rent

Myint (2000) describes economic rent in reference to corruption as:

Suppose a bureaucrat has the responsibility of delivering the
authorization letter that grants permission to business enterprises to
engage in a certain line of economic activity. Business executives are
anxious to have the letter typed expeditiously and correctly they are
willing to pay a price for this special service. Hence the bureaucrat who
has a monopoly of processing the letter can use his official position to
acquire economic rent from his clients. A useful approach to find out the
amount of his economic rent is to think of what he can earn if he is fired
8 OECD - (see glossary)
27

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

Proper observation of rules and regulation is required to minimize corruption

(Myint, 2000). If a government worker issuing permits is not audited on matters
such as number allocated, total value of each transaction or who purchased the

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.

Regulations and Authorizations

The existence of regulations and authorizations gives the officials in control an

implied monopoly power. Bureaucratic procedures are common and often long
winded. Surveys from developing countries suggest that a large proportion of the
time managers are spent dealing with bureaucracies (Tanzin, 1998. Bureaucratic
procedures in developing markets can make it difficult for business to participate
in the formal economy (article 13, 2012). The average new business in Russia
must deal with around 20 30 different licensing departments in Russia
(Broadman, 1999). He adds the discretionary powers of the judiciary are very
general in nature and interpretation on laws is very open in Russia.

4.6.

The bureaucratic tradition

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

There is evidence to support decentralisation reduces the level of corruption and

evidence against. Fisman and Gatti (2000) argue that decentralization can
reduce the level of corruption from bureaucrats as those seeking rents prefer a
centralised system. Decentralisation requires individuals and departments to be
more accountable and often audited. Huther and Shah (1998) note there is a
negative correlation between corruption and decentralization. Fisman and Gatti
(2000) argue if decentralization creates tiers in government, it could weaken
accountability as it is difficult to attribute blame to any one individual. They
conclude there is a negative correlation. However, they argue different types of
decentralisation may impact the level of corruption differently. For example,
inter-jurisdictional competition systems are predicted to have lower levels of
corruption (Fisman and Gatti (2000). Wei (2000) supports this argument and has
suggested that countries set up corruption free zones to force other regions to
improve their bureaucracies.
If we applied inter-jurisdictional competition to the UK, it would essentially be
different local councils competing against each other for business and residents.
Dincer et al (2010) add the poor performance of one jurisdiction is likely to be
cross checked against all other jurisdictions by the government, media and
voters. In addition, when focusing on jurisdictions rather than the whole nation
observations become more precise.
Despite decentralisation Russia is still rampant with corruption. It appears
regional governments are abusing their power by being corrupt. Russia
underwent decentralisation during the 1990s after the fall of the Soviet Union
but lacked a clear strategy (Andreeva & Golovanova, 2003). Without a clear plan
decentralisation hasnt completely taken place. Russia has achieved a degree of
decentralisation but regional budgets have no independence (Andreeva &
Golovanova, 2003. Blanchard and Shleifer (2000) claim regional governments in
Russia restricted growth during the 1990s. Sonin (2003) believes this is because
regional governors are more prone to treat local firms favourably as a result of
campaign donations, whereas central governors would not. It is possible that
during decentralisation more tiers were created in regional governments with no
or little accountability making opportunities for corruption more common.
Tax collection systems are rather opaque in regional governments and in 1998
regional governors were handed more discretion over bankruptcy of businesses
(Andreeva & Golovanova, 2003).

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

corruption even after democratisation. There appears to be a lack of

enforcement with the police being the biggest group to request a bribe. Opaque
accountability systems and lack of audits seem to be another cause. For
example, only 1 in 4 Russians has a bank account and most are paid in cash
(Telegraph, 2012) tax officers negotiate with individuals their tax liabilities and
have a great deal of discretionary powers with little accountability. With officials
in government being corrupt it filters through to the rest of society and becomes
normal behaviour. When Russians are asked about corruption they say its normal
(BBC, 2010). Levin and Satarov (2000) claim the norms of behaviour need to be
changed so corruption is no longer viable in Russia. Reuters (2012) reports
corruption in Russia is now normal behaviour.

We must ask ourselves: Do we live in a society where corruption is a moral

perversity to the normal flow of things, or is it the main part or even the spinal cord
of the system of administrative management in the country?
Source: Russian ombudsman Vladimir Lukin cited on TI, 2012
Vladimir Putin has described Russians corruption as civilised and normal (FT.com, 2012). It
appears bribery has become morally acceptable in Russia as the following graph highlights:
Table 4.1 Corruption, morally right or wrong?

31

Source: Gradirovski (2006)

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.

The Corruption Equation

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

Overall, Russia is prone to corruption for a number of reasons. Level of public

sector pay can be eliminated as in recent years this has risen to above the
private sector. The number of public sectors worker in a district can also be
eliminated as it has been disproven in a paper published by the IMF, whereas the
paper confirming the link has not been published by such a respected agency.
The main causes of corruption have been identified as

Complexity of laws and regulations

Social norms arising from Soviet rule and the behaviour displayed by the
elite Lack of transparency and accountability in state departments
Restriction of media and NGOs to report news on corruption

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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