FEDERAL STATE-FUNDED EDUCATIONAL INSTITUTION OF HIGHER EDUCATION

FINANCIAL UNIVERSITY UNDER THE GOVERNMENT OF THE RUSSIAN

FEDERATION

An Essay
on the topic:
"Corruption and anti-corruption measures in Russia"

Prepared by:
Student of the baccalaureate
of the International Finance
Faculty, Group IFF 3-3
Klypin Nikita

Moscow 2018
 This research uses regional data to formally examine the economic causes of
corruption across regions of the Russian Federation. Besides providing unique
insights into factors determining corruption, this paper contributes to the broader
literature on country-specific corruption studies and provides useful policy inputs.
While there are numerous studies examining various aspects of cross-national
corruption, related investigations analysing details of corruption in individual
countries are few, due primarily to a lack of adequate data on the extent of corrupt
activity across regions. In addition, we evaluate causes of both corruption perception
and actual corruption incidence, which is still relatively rare in the literature.
In international comparisons of corruption perceptions, Russia usually fares
relatively badly. For example, in 2017, Transparency International, the corruption
watchdog organization, ranked Russia 141 out of 180 countries in terms of
corruption perceptions (Transparency International, 2017). While one can debate
whether Russia is really more corrupt than, say, Haiti, it is clear that corruption is a
serious problem in Russia, ranging from petty corruption to high-level corruption
involving e.g. legislators and senior civil servants. This makes studying causes and
covariates of corruption all the more important for Russia. It is likely that corruption
significantly influences economic decisions by both households and companies. For
example, a majority of Russians seem to treat law enforcement officials with
apprehension, which has an obvious effect on willingness to obey laws and on
contract enforcement.
Russia is a large, geographically and ethnically diverse country. Hence, it is
natural to assume that corruption also varies between regions. Since 2014, the
Russian Federation has consisted of 85 federal subjects, while before 2014 there
were 83 regions.
Country-specific corruption studies are generally hampered by the availability
of adequate data, and Russia is no exception. While a handful of papers examine
corruption in Russia from various points of view (for more details see Guriev, 2007),
there is a paucity of papers examining the regional variation in corruption in Russia.
Regarding the small amount of literature formally studying the determinants of
Russian corruption, Dininio and Orttung (2005) and Sharafutdinova (2010) use
different aspects of similar corruption data to us to test primarily political causes of
corruption. They consistently find that a higher per capita income level decreases
corruption. In addition, Dininio and Orttung (2005) argue that the effect of the size
of the bureaucracy is sensitive to whether population effects are accounted for or
not. Since the largest number of Russian bureaucrats can be found in Moscow,
followed by St Petersburg, this indicates that the two metropolises are likely to lie
behind this sensitivity. No other (mainly political) variable is statistically significant
in explaining the amount of corruption.
Since corruption is a latent phenomenon of socio-political life, accordingly,
only a small part of corruption manifestations is fixed and proven in criminal
procedure. The criteria for a formalized calculation of the level of corruption are
imperfect, and estimates of its scale and distribution are always approximate.
Nevertheless, some authors believe that as a result of corruption, up to 30% of budget
funds are illegally appropriated.
In modern corruption, there are two main components - administrative and
political (sometimes the latter is also called "big corruption").
Under the first understand the abuse of administrative civil servants, officials
in the process of providing services to the public (registration, issuing licenses, etc.).
Political corruption is carried out at the level of ruling elites, high-ranking
employees, who determine the fate of billions of contracts, benefits and similar
issues related to national security. Their patronage is a prerequisite for the existence
and development of corrupt networks, giving them a systemic character, forming a
negative attitude toward the authorities, exerting a negative influence on many
aspects of social and political life, including - bringing crime to a qualitatively new
level.
Most experts recognize the inevitability of corruption. Some point to the
regulative function of corruption, noting that it refers to the oldest and most effective
techniques of social, economic and state self-organization. There are examples when
corruption is tolerated in a certain period not only by representatives of elites who
benefit from it, but also by quite broad sections of the population. This allows us to
assume that "in the absence of adequate and legitimate channels of representation of
the interests of citizens and disbelief of members of the society in the ability of the
state to be a real exponent of common interest, corruption behavior can become a
rational choice of society".
There is a non-linear link between political stability and corruption. It would
seem that the higher the level of political instability, the stronger the corruption. But
also the strengthening of stability can lead to an increase in corruption in states with
a weak law, an unconstructive administrative apparatus, and unprotected property
rights. In the conditions of insufficient effectiveness of formal institutions of power,
they are replaced by informal ones, primarily corruption. It also forms the
"institutional trap" of inefficient equilibrium, in which most individuals have no
incentive to oppose it. Thus, under certain conditions, corruption may for some time
be a factor in maintaining political stability.
Institutional analysis allows us to distinguish two main types of corruption
entities: informal teams in official structures and ethnic clans. Unofficial corruption
teams are understood to mean the unification of employees, officials and other
professionals who have organized to jointly convert the power and other powers
available in their institution to material means, preferences, resources, benefits. They
have, as a rule, a pyramidal structure. At the top is a manager who personally or
through a limited group of people approximates corrupt projects, or who allows them
to sell for a certain share of income. The level below is the transfer groups of
mediators who organize and facilitate the implementation of illegal schemes. At the
base are the executors who directly carry out massive corrupt activities. Such a
construction makes it difficult to prevent corruption in the right direction, allowing
only occasional identification of ordinary performers.
In the conditions of systemic corruption, almost all official structures,
willingly or unwillingly, acquire such informal components. They form network
structures that determine the socio-political situation in the region, interact
horizontally and are built into corruption verticals of the federal level. There is a
self-organization of the system on a country scale.
Criteria and conditions for an individual to belong to such a team are: loyalty
to the head of the team; participation in the processes of exercising power and its
illegal conversion; the ability to adequately perceive one's place in the hierarchy of
management, to understand correctly the will of the head of the team, to build their
actions according to the role setting and position in the system. These elements are
universal for most subjects of the Russian Federation.
Corruption is directly related to the inefficient distribution and spending of
public funds and resources, the narrowing of the tax base and the massive loss of
taxes, the stagnation of entrepreneurship, and the slowing of economic growth. It
reduces the effectiveness of the work of the state apparatus, exacerbates social
inequality and protest potential, strengthens organized crime, which increasingly
fuses with the apparatus of state power. Corrupt mechanisms for the formation and
functioning of elites were strengthened. There is a de-legitimation of power, a
deepening of the population's distrust towards its bodies and the loss of public
support by the state institutions. Developing in Russia, systemic corruption has
become one of the main threats to national security.
Thus, systemic corruption can be defined as a mass violation of the interests
of society, the regular abuse of public power for the sake of private gain, on the
initiative or with the consent of high-ranking officials, heads of state structures,
employees and other persons organized into hierarchical network structures.
Systemic corruption is stable, capable of reproduction, distributed at all levels of
state and municipal bodies, affects all social groups, entails the degradation of the
legal and value-moral foundations of public life and is fraught with the degeneration
of the institution of power into a corporate structure of a criminal nature.
• As before, greater GRPpc and INCpc lower corruption incidence. The
find-ings with regard to the negative effect of GPRpc on corruption incidence sup-
port earlier literature on Russian corruption) as well as the broader literature on
corruption determinants. The significance of different economic prosperity measures
in reducing corruption perceptions as well as corruption incidence is noteworthy,
especially given the modest correlation between the two corruption measures.
• The effects of the two government variables, and of those of
urbanization and unemployment, are statistically insignificant on corruption
incidence as well as corruption perceptions.
• Regional population again shows nonlinearities in terms of its effects
on corruption, although the quadratic term is now significant in one of the two cases.
• A more striking contrast across corruption causes emerges with regard
to Compete. Greater market competition does not significantly affect corruption
incidence. Thus, while competing firms are perceived to seek favours via bribery,
these efforts are not registering in terms of increases in actual corruption.
• Privatization, like its effect on corruption perceptions, fails to show up
as significant in corruption incidence. From a political perspective, additional
privatization in the decade following the breakup of the Soviet Union seems
relatively insignificant, at least from a corruption viewpoint.
• Corruption incidence is found to be greater in the Moscow and St
Petersburg regions, ceteris paribus, especially in the models where population
effects are directly accounted for (Models 1B and 2B). This result is consistent with
the notion that there is greater disbursement of favours in large government seats,
trade centres and major ports.
This paper contributes to the literature on country-specific studies of
corruption by examining economic causes of corruption across Russian regions.
Specific contributions include:
- formal study of corruption causes across Russian regions;
- comparisons of determinants of perceived corruption and those of actual
corruption;
- and examining the influence of the size of the enterprise sector on corruption.
Our results show that economic prosperity, population, urbanization, market
com-petition as well as large metropolitan regions are significant determinants of
Russian corruption, with often significant variations in explaining perceived versus
actual corruption. The negative effect of economic prosperity supports the larger
corruption determinants literature, and the effect on corruption incidence supports
earlier findings for Russia. In terms of magnitude, increases in economic prosperity
(negatively) impact corruption incidence more than they do corruption perceptions.
On the other hand, the effects of government employment and transfers as well as
unemployment are statistically insignificant. Related findings for these factors from
other countries are mixed. Greater market competition increases corruption
perceptions, but not incidence. This finding can be seen as tying into the cross-
national literature that has found greater economic freedom lowers corruption.
However, unlike the cross-national literature, our measure of economic freedom is
based on hard data (i.e. number of enterprises) and we find that competition in fact
adds to Russian corruption perceptions.
The use of alternative measures of corruption provides some interesting
insights. While economic prosperity and population have a similar impact on both
corruption perceptions and corruption incidence, there is a stark difference with
regard to the main metropolitan areas of Moscow and St Petersburg, and with respect
to number of enterprises. Unlike corruption perceptions (which are consistently
lower across all models), the incidence of corruption is shown to be greater in the
two main metropolitan areas and the resulting effect is significant in two instances.
Further, it seems that a vibrant economy and economic freedoms, as measured by
the number of per capita enterprises, lead to higher corruption perceptions, i.e.
people feel something illegal must be taking place as the number of enterprises
grows. However, the actual incidence of corruption does not increase.
From a policy perspective, we can make a few recommendations for
corruption control across Russian regions. Firstly, as regions attain greater economic
prosperity, the level of corrupt activity (both perceived and actual) will tend to
decline. Hence policies supporting economic development are recommended for
corruption control as well. Secondly, policies to combat corruption in large areas,
denoted by large population, might need to be different. Thirdly, while policymakers
strive to get a better handle on how corruption is measured, Sampford et al. for
related discussion), they should be careful to distinguish between perceived and
actual corruption, as evidenced by our results for the number of enterprises.
Perceptions about corruption might be quite different from reality also with regard
to the two main metropolitan areas. However, the size of the public sector does not
seem to appreciably contribute to corruption.