Corruption and the Russian Economy

How Administrative Corruption Undermines Entrepreneurship and Economic Opportunities

Yulia Krylova

• Publisher: Routledge
• Year: 2018
• Topic: Social Sciences
• eBook ISBN:
  9781351185295
• Subtopic: Regional Studies
• Index: Social Sciences

Corruption and the Russian Economy examines why the number of entrepreneurs is declining so rapidly in contemporary Russia, how many economic opportunities are being irrevocably lost each year because of administrative corruption, and why entrepreneurship has become one of the most dangerous occupations in the country over the last decade. Based on extensive research, including in-depth interviews with entrepreneurs and case studies, it reveals a corrupt system of government agencies at both the regional and local levels, and the increasing involvement of public officials in unlawful seizures of businesses. One major conclusion is that the vast majority of informal payments by entrepreneurs to regulatory agencies are made not to achieve illegal advantages, but rather to secure the property rights that they are entitled to under the law.

1Introduction

Endangered Entrepreneurs and Their Struggle for Survival in Contemporary Russia

Many economic opportunities are being irrevocably lost each year in Russia because of administrative corruption, excessive regulation, and discretionary abuses by regulatory agencies and law enforcement authorities. The combination of these problems together with recent economic crises has created a considerable drag on entrepreneurial activity, amounting to a tremendous reduction in the number of entrepreneurs in Russia in the last decade. The decline of an entrepreneurial spirit is also compounded by threats of unlawful property seizures and the danger of unjust imprisonment by public authorities. These negative trends keep Russia’s economy on an unproductive trajectory of a resource-dependent country that lacks modern technology and diversified production.

In contemporary Russia, entrepreneurs might be considered an endangered species. The number of registered entrepreneurs decreased from 8.3 million in 2008 to 2.8 million in 2015.¹ This constitutes a 66 percent decline in their population over the course of eight years. The largest decline was observed at the end of 2015 when Russia’s economy lost more than 50 percent of the 5.6 million entrepreneurs registered at the beginning of that year. A confluence of different factors is responsible for this trend. Among them, one can list volatile politics, geopolitical tensions, the weakened currency, and a sharp decline in oil prices. The 2014 financial crisis and economic sanctions imposed by Western countries against Russia also played a critical role in this process. Yet, as the 2015 Moscow Economic Forum showed, many Russian entrepreneurs blame public authorities for putting their survival at risk. An alarming trend is the increasing rent-seeking activities by public agencies in the form of bribe extortion and illegal seizures of businesses. In turn, a long-term recession creates additional incentives for public officials to quickly regain their economic losses through informal venues.

In December 2015, the annual Moscow Economic Forum organized a special roundtable entitled “Changing Economic Policy as a Response to External Threats.” Contrary to the roundtable’s title, representatives of the entrepreneurial community in attendance indicated that Russian businesses suffer much more from internal threats than from economic sanctions. According to Dmitry Potapenko, the founder of several retail chains, the main enemies of the Russian business community are public officials:

For the past 20 years, the dialogue between business and authorities has been that of a butcher looking tenderly into the eyes of a cow, holding a knife at its throat and asking, “What do we have today, beef or milk?”²

Another participant of the roundtable, Pavel Grudinin, the Director of the Lenin Farm, indicated that corruption, pocket lining, and red tape are strangling Russian businesses.³ Both businessmen accused the government and public officials of predations on businesses.

Potapenko’s and Grudinin’s experiences with corruption are no exception. In recent decades, Russia’s corruption ranking has remained one of the worst in the world. In 2016, Transparency International ranked Russia 131st out of 176 countries on the Corruption Perception Index, with a score of 29 on a scale of 0 (highly corrupt) to 100 (very clean).⁴ Surveys of Russian small businesses and entrepreneurs demonstrate that most of them suffer under administrative corruption. For example, in the 2011 survey conducted by the Association of Entrepreneurs OPORA Russia, the majority of respondents indicated that corruption represents a significant obstacle to their development and survival. According to the survey, 39 percent of entrepreneurs characterized the level of corruption as extremely high and burdensome for their businesses, 26 percent indicated that they suffer from corruption, and only 5 percent answered that they did not face corruption in their relations with regulatory agencies.⁵

The aim of this book is to assess the impact of administrative corruption on entrepreneurs and identify methods they can use to decrease the scope of this problem in the Russian economy. Specifically, the book addresses the questions of how much incentive there is within Russia’s business community to organize collective action against corruption and how entrepreneurial organizations can increase their role in anti-corruption efforts. The question about entrepreneurial incentives to fight against corruption is particularly important. One of the serious fallacies of Russia’s anti-corruption initiatives is that they do not directly involve the private sector and civil society despite the economic opportunities of the former and moral authority of the latter. As Louise Shelley argues, “Those efforts will likely be short-lived and perhaps even counterproductive as scarce opportunities and citizen support are wasted.”⁶ Financial and administrative difficulties of businesses in Russia are exacerbated by weak enforcement of anti-corruption laws. Entrepreneurs in Russia comprise a potentially large community to be actively involved in anti-corruption efforts. At the same time, they demonstrate a low level of cohesion and are not actively involved in collective entrepreneurial organizations.

The importance of this research is related to the fact that corruption is a key factor explaining the failures of small businesses and entrepreneurs, especially in developing and emerging markets.⁷ Numerous empirical studies show that corruption has adverse consequences for economic development, including reduced investment, low economic growth, increased income inequality, and inefficient public spending. Yet, the negative effects of corruption go far beyond economic damages. Corruption of the public administration system has various distorting effects on society-state relations: undermining the integrity of the political system, destroying the rule of law, diminishing citizens’ trust in the state, demoralizing society as a whole, and facilitating organized crime, insurgent and terrorist organizations.⁸ In contemporary Russia, corruption prevents the development and growth of the entrepreneurial sector, keeping the economy on an unproductive path, and unless the business community recognizes its critical role in the fight against corruption, this situation is unlikely to change.

Research Focus and Terminology

This book focuses on administrative corruption in Russia and its impact on individual entrepreneurs. Russia’s Civil Code defines individual entrepreneurs as persons who are registered in accordance with the procedure established by law and who are carrying out entrepreneurial activities without forming a legal entity. An important feature of individual entrepreneurs is that they are responsible for their obligations with personal property. This distinguishes individual entrepreneurs from limited liability companies whose owners are responsible for the obligations only within their shares in the company’s capital. The state registration and activities of entrepreneurs are regulated by the Federal Law of the Russian Federation entitled “On State Registration of Legal Entities and Individual Entrepreneurs,” the Civil Code, and other federal laws and resolutions of the Government. Individual entrepreneurs can be self-employed or they can have employees. On average, individual entrepreneurs had three employees under their supervision in 2015.⁹

The research focuses on entrepreneurs because they are disproportionately affected by corruption in the public administration system. In comparison with large and medium-sized enterprises, they have fewer opportunities and less financial possibilities to counteract corrupt public officials. According to Government Decree #702 of 2015, individual entrepreneurs are classified into three groups based on their revenues: (1) microenterprises, with annual revenues of less than 120 million rubles (about $1.7 million); (2) small businesses, with annual revenues ranging from 120 million to 800 million rubles (from $1.7 million to $11.4 million); and (3) medium-sized businesses, with annual revenues ranging from 800 million to 2 billion rubles (from $11.4 million to $28.6 million). In 2016, 98.9 percent of Russian entrepreneurs represented microenterprises, with annual revenues of less than $1.7 million.¹⁰

The majority of individual entrepreneurs in Russia are engaged in retail and wholesale trade. They comprise 48.4 percent of the total number of individual entrepreneurs, followed by real estate (14.8 percent) and transport and communications (12.3 percent).¹¹ The remaining entrepreneurs operate in different industries: communal services (6.6 percent), agriculture (4.9 percent), construction (3.2 percent), education (0.7 percent), health (0.7 percent), fishing (0.1 percent), and manufacturing (0.1 percent).¹² Individual entrepreneurs in all industries encounter the rent-seeking practices of regulatory agencies and public officials who extort facilitating payments to issue the permits and licenses required for business activities, process governmental documents, provide inspections, and protect property rights. Although administrative corruption is not limited to these practices, they constitute a significant part of the informal sector in Russia.

There are many definitions of corruption which focus on the violation of trust and misuse of power by individuals or organizations. For example, Samuel Huntington defines corruption as the “behavior of public officials which deviates from accepted norms in order to serve private ends.”¹³ In countries that lack an effective system of checks and balances, bureaucrats performing public duties tend to abuse their position and office for illicit enrichment. In such countries, it is not rare for bureaucrats and regulatory agencies to impose additional administrative procedures for doing business to extort informal payments from entrepreneurs. Another definition offered by Nathaniel Leff describes corruption as “an extra-legal institution used by individuals or groups to gain influence over the actions of the bureaucracy.”¹⁴ This definition highlights the fact that private actors can initiate corrupt transactions in order to receive illegal advantages for themselves or their businesses. While the first definition concentrates on the demand side of corruption, the second focuses on the supply side. These definitions illustrate the selfish motives of different private and public actors who initiate corrupt deals.

Following these definitions, I define administrative corruption in this book as the abuse of office for personal gain by regulatory agencies that perform oversight and maintain control over business entities and entrepreneurs. This narrow definition of administrative corruption helps distinguish it from other types of corrupt activities that do not directly influence entrepreneurship. For example, the research does not include petty “household” corruption that involves citizens who deal with public officials representing social security authorities, traffic police, administrative staff in hospitals and educational bodies. Another type of informal activities excluded from the analysis is private-sector corruption that involves bribery, undue influence, fraud, money laundering, and collusion committed without involvement of public officials. Taking the book’s objective into account, my analysis of corrupt practices centers exclusively on the abuse of power by public officials that has a direct impact on entrepreneurs.

Administrative corruption can take many forms. In most developing countries, entrepreneurs are forced to provide informal payments to public officials in order to speed up bureaucratic procedures and gain access to property rights that they are eligible to receive under the law. However, there are also country-specific forms of administrative corruption. For example, Russian entrepreneurs increasingly fall victim to the illegal business raiding committed by regulatory agencies and public officials who want to seize valuable assets. In the Russian language, the practice of illegal raiding is often referred to as reiderstvo. It has become an increasingly profitable new type of organized crime in Russia.¹⁵ Thousands of illegal raids on businesses are committed by public officials every year through the use of illegal methods, such as forgery of registration documents, abuse of inspections and regulations, police violence, and criminal prosecution of legal owners on nonexistent grounds. Alarming statistics come from Boris Titov, Russia’s ombudsman for business rights, who estimates that nearly three million entrepreneurs were unjustly imprisoned and lost their businesses over the last decade.¹⁶

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Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of Figures
• List of Tables
• About the Author
• Acknowledgments
• 1 Introduction: Endangered Entrepreneurs and Their Struggle for Survival in Contemporary Russia
• 2 From State Capture to “Market Capture”: The Russian Entrepreneurial Environment
• 3 From Kleptocracy to “Regulocracy”: Administrative Barriers to Doing Business in Russia
• 4 “No Grease, No Ride”: Facilitation Payments in the Relations between Entrepreneurs and Regulatory Agencies
• 5 “Stand and Deliver, Your Money or Your Life”: Illegal Raiding Against Businesses by Public Officials
• 6 “Entrepreneurial Spring”: Collective Resistance to Administrative Corruption
• 7 Conclusion: Protecting Endangered Entrepreneurs
• Appendix 1 Interview Questions
• Appendix 2 Survey Questions
• Index