“Hypercorruption”.

7th June 2010

After discussions with colleagues, We thought it might be useful to follow-up our article on the limitations of Russia’s apparent renewed desire for foreign-policy rapprochement with the West Springtime for Dima?  with a couple of additional points on the roots of Russia’s current problems, and why I feel western firms will be rather wary of investing there.

To say that Russia has become an enormously corrupt or kleptocratic country is still not really to do justice to the current situation. In the same way that, in 1999, former French foreign minister Hubert Vedrine coined the term Hyperpuissance (“Hyperpower”) to describe how the US was able to dominate simultaneously in all key areas of international competition at the end of the 20th Century, the almost unique degree (for an industrialized country) and all-pervading nature of corruption in the contemporary Russian economy surely merits its own categorization; Hypercorruption.

The greek hyper means “over, beyond or above measure” and in relation to corruption as it has developed in Russia over the last decade it is most apt. Russia really is a world leader in the field; in 2009 it ranked at 146th (out of 180) in Transparency International’s Corruption Perceptions Index – which puts it on a par with Zimbabwe or Sierra Leone, and far behind the other three “BRIC” countries (Brazil, India and China) with whom Russia’s leaders had so enjoyed comparing themselves (in other respects) prior to 2008. It also scored well below a considerable number of more progressive sub-Saharan African countries – including Burkina Faso, Liberia and Rwanda. Transparency International estimates that corruption costs the Russian economy an astounding $300 billion per year.

Indeed, Russia’s hypercorruption has reached such proportions that it has emerged as a central obstacle to attracting foreign inward investment. In an interview with Reuters earlier this year a representative of the US-based non-profit anti-bribery association TRACE International, noted that things were getting so bad that many Western firms in Russia were starting to reconsider whether they should stay at all. According to TRACE, whereas more limited corruption patterns in China follow an “inverted pyramid” shape (mostly at the top) and in India mostly at lower levels, Russia is a “solid block” – with corruption effecting every aspect of the economy: “There appears to be a  sense of near-complete impunity, a sense of entitlement … there is no sympathetic low-level management, no sympathetic mid-level management, or sympathy at the top (for anti-bribery efforts).”

But this attitude should hardly come as a surprise. For just as, since 2000 the Russian authorities have been complicit in the creation of a culture of impunity for those who murder individuals willing to speak out against the regime (see Paul LeVine’s 2008 book Putin’s Labyrinth for more details), they have been equally complicit in the development of a culture of near-total impunity in relation to corruption – at least for those operating within the system. The reason for this is simple; corruption is a fundamental part of how the nomenklatura rules Russia – and the distribution of rents on the basis of loyalty is intrinsically linked to the operation of the “power-vertical.”

The all-encompassing extent of hypercorruption therefore goes quite a way to explaining why, in the absence of high prices for hydrocarbons and other raw-materials over the past 18 months, Russia is currently expecting its budget deficit to rise to 5% of GDP by the end of the year, and has already started to borrow on sovereign-debt markets. It also explains why Russia is falling so far behind in terms of its industrial, technological and scientific capabilities, and why it is seeking to renew these capabilities through a less-than-convincing “reset” with the West; hypercorruption has made the Russian economy so sclerotic that, in the absence of raw-materials revenues, it is starting to seize up; the corporatist system is starting to show signs that it might collapse onto itself.