Author's Note: This was the beginnings of an article I had started to write in 2012. All information, all interviews, contacts and quotes were made during that year. Because it still has relevance today, as well as wanting to share some of the insights it may provide to some, I've included it here in this blog.
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Russia’s leverage over assets in natural resources, oil and natural gas, accumulates tremendous revenues for the country, but as studies linked international corruption indices to indicate a country’s long term, real-world economic potential, Russia finds itself as the richest among the least efficient and most corrupt of countries.
Perception of corruption in Russia remains high according to Transparency International’s Corruption Perceptions Index, which is a compilation of reports and surveys from resident and non-resident experts in addition to business surveys and assessments of commercial risk analysts.
The index receives considerable interest from businesses, Fortune 1000 corporations and financial institutions as a valuable resource whose evaluation is independent of the government and will, on the other hand, receive criticism and dismissal from the sector, of which the index was intended to spur change – policy making bodies in an attempt, according the TI’s Web site, to “force governments around the world to take notice of corruption.”
However, countries ranked in the index rarely change their line up year-to-yeardespite the organizations efforts to be a part of international policy agenda by grabbing the attention of policy makers, and Russia is no different.
The Chief of Staff of Russia’s Presidential Executive Office Sergei Ivanov in September dismissed international corruption indices in September at a conference with anti-corruption organizations when he said, that “there’s no need to turn this into a tragedy. All ratings are subjective".
It is true that the results are based on the subjective perceptions of individuals, but it is the extent to which these surveys are collected and their methodologies that make the difference – canceling out much of the bias, according to the research of Boris Podobnik.professor at the Zagreb School of Economics and Management in Croatia and member of the Faculty of Civil Engineering at the University of Rijeka
“It is not strange that the richest countries in the world are among the least corrupt countries,” Podobnik said. “It is true that there are some rich countries which are very corrupt; but, not surprisingly, they are very rich in natural resources such as some Arab countries. It also isn’t unexpected that the least corrupt countries in the world are the Nordic countries, Singapore and New Zealand just as the CPI values would suggest.”
Russia has yet to exclude itself from some of the most corrupt countries.However, so long as the issue of curbing corruption in governing institutions and in the public sector persists, the country will struggle to increase its economic potential and improve public perceptions.
“Clearly one can say that Russia is now increasing its GDP (gross domestic product) in spite of its corruption and so one may conclude that corruption is not a big issue,” Podobnik said. “However, Russia’s growth in the last decade is mainly based on the fact that it has enormous natural resources particularly oil and natural gas.”
TI’s 2012 results were relatively unchanged, with Russia ranked 138 of 174 countries; 1 being the least corrupt. The chronically poor ratings have led Podobnik to find, as published in The Competitiveness Versus the Wealth of a Country, that without revenues from natural recourses, Russia’s GDP would follow suit, by sinking its GDP to match its corruption perception rating.
GDP isn’t the only consequence of CPI indices. Financial institutions, as well as Fortune 1000 corporations, do refer to the CPI for a snapshot of the perception of fraud and corruption related to different countries Arild Moen, the senior communications officer at Nordic Investment Bank (NIB) said.
“However, to better understand the score of different countries, one has to look at the entire TI Index report, which is useful when doing country analysis,” NIB’s Chief Compliance Officer Per Eldar Sovik said adding that the index could also function as an incentive for countries to move up the ladder.
Pablo Bachelet, chief of regional media relations of the Inter-American Development Bank, echoed NIB in that the results of the CPI are one of several elements taken into consideration when the investment bank constructs projects with the intention of helping a country develop more effective and transparent institutions.
“We feel increased transparency and reduced corruption are important ingredients in helping a country overcome its development challenges,” Bachelet said. “To this end, the TI’s Corruption Perception Index gives us a sense of how citizens, including business community and other stakeholders, perceive corruption in a country at a particular moment.”
Thus, at this point, the international community sees the following picture in relation to Russia’s CPI ranking:
“Russia is one of the biggest countries with significant economic growth; and at the same time that you have a lot of potential, it is a high risk, high reward environment,” the President of the not-for-profit business the Russian-American Chamber of Commerce in the U.S. Sergei Millian said.
Millian’s job requires him to facilitate the respective interests of businesses of Russia and the U.S. and, in light of the perceived and reported corruption in Russia, he considers his company fortunate to be able to work with different regions in Russia, which allows him to choose with whom he coordinates business deals.
“I personally like working with people in the younger elite, not the Soviet style leaders, because they still remain in some of the regions,” Millian said. “Many times their thinking is so much different from the modern-day thinking that it’s impossible to work with them. So, we do have an opportunity to choose who to work with.”
Russia’s size and its young business generation offer relief to counter the post-Soviet and transitory environment that would seem to foster perceptions and acts of corruption.
“Overall, they (Russia) offer a lot of potential for U.S. businesses; however, when interpreting a lot of the problems in the area of corruption, it’s quite a complicated and complex business environment in Russia,” Millian said.
Russia’s potential manages to outweigh the apparent risk, and in addition to anobservable, beneficial shift in the business ethics of some of Russia’s business leaders, Millian said that it seems inevitable that the expectations of the international business community has and can raise standards for trade operations and business deals as Russia becomes more involved internationally, mellowing a risky backdrop.
Russia’s ascension to the World Trade Organization (WTO) also imposes standards to challenge the country’s domestic environment as it and the 156 other members work to promote non-discriminatory, predictable, transparent and a more competitive trade environment, according to the WTO’s Web site.
Millian added that, “Russian companies have to behave in a civilized, international, respectable and honest way (when working with international businesses). Although, this will be more difficult for corrupt Russian officials, because they will have to play by the rules commonly accepted throughout the world.”
A change of character:
Although, just as mentioned earlier, that if a country is a huge exporter of oil, it does not need to be very competitive or un-corrupt.
“So, if Russia has such a large growth as a corrupt country, we can just imagine how rich it would be if it was not corrupt,” Podobnik said. “Let’s be honest, it is in the benefit of Russia’s competitors that Russia is a corrupt country.”
Russia’s chronically poor CPI rating does not just indicate perception, but a pillar of sustainable economic presence that does not exist yet.
“CPI is not the only indicator for the level of corruption in a given country, and some others are very much in agreement with CPI estimates,” Podobnik said. “In our most recent paper, published in Nature Scientific Reports… we find that the countries with the sharpest drops in CPI over the last decade, e.g. Greece and Italy, now face the most dangerous public debt crisis. This is not surprising. With an increasing corruption level, the public sector in a given country is becoming less efficient and this inefficiency decreases the capacity of the entire economy to pay back its debt.”
In order to prove the CPI’s quantitative value, a power law – the quantitative relation between CPI and GDP for all the countries represented in the indices - was calculated to indicate the expected level of corruption for countries and their relative wealth; so that if two countries were reported to have a similar GDP but a different CPI or Control of Corruption Index (CCI) rating, the power law indicates where a country’s expected level of corruption.
In the info graphic, Russia’s position is far below the expected level of corruption for a country that receives a particular GDP. To further explain, Podobnik points out Uruguay (UR) in relation to Russia (RUS): “Uruguay is especially interesting because (in 2011) it has a similar GDP per capita as Russia, but a much higher CPI. By the way, Uruguay has no oil, so they must work. Russia should have expected a CPI of 4.5, to be just on the line.”
The quantitative relationship was also used with the CCI, produced by the World Bank and produced similar results with the power-law dependence showing that, even when produced by different institutions and with different methods, the quantitative relation determined by the power law “is not an artifact of a subjective evaluation of corruption.”
“Recently, in order to increase the EU’s (European Union) competitiveness and also reduce its financial vulnerability, many EU politicians have been advocating the creation of a fiscal union. I believe that the EU also needs a common mechanism to control corruption at the EU level, an anti-nepotism law,” Podobnik said, adding that “the reason is obvious, if corruption is allowed to continue to grow, un-corrupt EU countries will increasingly be paying the bills of the corrupt. For that reason, fighting corruption is thus fighting for an increase in competitiveness, and this must be a top EU priority. The same holds for any country, and also for Russia.”
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