| "Russian execs
mobilize against crooked deals" WEDNESDAY,
MARCH 22, 2000 Lev Kaplan, a St. Petersburg construction executive, became fed up with bribe demands and mafia activity. It galled him to see unfair competition and corruption flourish. The city in which he lived - Russia's second most well-known - had gained the unflattering sobriquet of the country's "crime capital" for its dirty deals and high-profile contract murders. But instead of just shrugging his shoulders, Mr. Kaplan decided to do something about it a year ago. He gathered 240 fellow members of the St. Petersburg Association of Construction Companies to draw up rules of ethical conduct. They agreed that anyone who violated the code would be kicked out and black-listed. It was a pioneering move. But the effort appears to be gathering momentum among local business owners. And the likely prospect that the tough acting president, Vladimir Putin, will be officially elected March 26 has the business community aflutter with hope. Expectations are that Mr. Putin will make good on his promise to establish a "dictatorship of law" - a term that doesn't seem to bother supporters - to overcome the crookedness that has marked the 10-year transition from Soviet rule to robber-baron capitalism. "Before, no one cared about the principles of ethics in business," says Galina Ratnikova, an official with the Russian Chamber of Commerce in Moscow. "But suddenly, the reputation of a company is a very important factor. The mentality is changing across Russia." The absence of a strong state under former President Boris Yeltsin meant that small businesses that challenged government authority often risked sanctions or harassment by tax police. Low salaries encouraged corruption by politicians; parliamentarians had immunity from prosecution. The judiciary was not independent. Putin supporters like Kaplan talk hopefully of such issues as transparency, respecting client confidentiality, honoring contracts, rejecting libel, and removing unfair advantages that hamper competition. Among the recent initiatives are plans for a competition organized by the chamber to honor the most-honest bosses and enterprises in Russia. The fervor is remarkable considering that there are no guarantees that Putin will succeed. Detractors note that he has revealed no concrete measures and question whether he will crack down only against political enemies. While Putin was deputy mayor in the early 1990s, St. Petersburg's economy declined. In fact, critics say, Putin nurtured the establishment of secretive, monopolistic structures that facilitated corrupt practices. Associations other than Kaplan's are drawing up their own codes of conduct. According to Ms. Ratnikova, entire branches of industry - such as realtors and bankers - are discussing the need for regulations. American businessman Matthew Murray, who has collected 100-plus signatures in St. Petersburg for a Declaration of Integrity in Business Conduct, says he has been swamped with queries on how to translate the document into action. To meet the "overwhelming" demand, he plans to hold a series of seminars starting next month to teach Russian entrepreneurs how to write and enforce ethics charters. "People are gravitating to the theme of Putin's 'dictatorship of law.' They genuinely believe he will place the Kremlin's authority behind the court system," Mr. Murray says. "Over the past eight weeks there has been a great deal more interest. Before, it was only a handful of reformers. Now a more diverse group of people are generally interested in the process." The pessimists say that corruption is so deeply embedded in Russia that it will be difficult to change mentalities that have lasted most of this century. "The establishment of ethics codes is certainly useful. But much more-serious changes are needed to create a civil society," says Alexander Metveyev, an analyst with the Russian Economic Barometer, an independent research foundation in Moscow. But businessmen such as Kaplan and Murray, who worked with Putin earlier in his career, are convinced the former KGB spy can mobilize the secret services to crack down on shady dealings - and that he's keenly aware of the need to revitalize Russia's moribund economy. "I am absolutely sure Putin can do it," says Kaplan. "He told me himself that Russia is doomed if it fails in fighting corruption." Even without Putin, Kaplan will continue his efforts as head of the local construction association. Over the past year, the organization expelled nine members for unfair practices, such as failing to fulfill building contracts. Another successful venture belongs to the St. Petersburg Insurance Companies Union, which wrote up a detailed list of rules, including prohibiting statements that damage other members' reputation and requiring honesty with clients. The union also set up an ethics commission that has heard five cases in recent months, most of them centering on suspicions of unfair competition. Each one was settled via mediation by the commission. "Guilty parties have demonstrated goodwill so far," says Olga Samovarova, the union's president. "The threat of expulsion is a good whip, which luckily we have never had to use." Successful as they are, such practices are far from the norm in Russia's chaotic business climate. "There was a sense of exhaustion and frustration before, because there was no firm government. But I think hope is returning that there will be a flicker of governance," says Scott Blacklin, president of the American Chamber of Commerce in Moscow. |
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A shocking number of both foreign and Russian private businesses regularly pay bribes to government officials. Most justify the practice on the basis that in a highly regulated market where officials of every level are poorly paid, bribery is a harmless means to facilitate government approvals and avoid penalties.
But bribery is a two-way street. Not only must a governmental official require a bribe, a company representative must offer it. Moreover, corruption imposes many hidden costs on Russia's economy. What may appear as a small transgression helps weave a web that is entangling the economy.
In a system fueled by bribery, the free market forces of competition, efficiency and quality are displaced. Economic decisions are taken by government officials on the basis of ulterior motives. For example, when a bribe helps secure a government contract, public funding is not being allocated for the best service at the lowest cost. As artificially high project costs use up limited Russian budgetary resources, bribery diminishes the funds available for government spending on basic infrastructure.
Bribery is also a brake on competition in Russia, which is desperately needed as a catalyst for economic growth. For example, bribes are sometimes paid in order to keep a competitor out of the market, by preventing it from receiving a license or winning a bid.
Competition forces companies to upgrade their performance to meet the requirements of shifting supply and demand. Due to widespread corruption in Russia, the consumer preferences that drive competition are over shadowed by those of government officials receiving bribes. When companies in Russia choose to rely on bribe payments to secure market position, they are less concerned about increasing operating efficiency, or developing new products, services and technologies. They can also remain in or enter industries for which they are ill-suited. As manufacturers, wholesalers and retailers transfer the cost of bribes to the Russian consumer, the prices of goods and services are inflated.
Ultimately, the practice of bribery undermines the ability of many firms to manage Russian operations efficiently. They must allocate a disproportionate amount of resources to the concealment of bribe payments and to the maintenance of the bribe-based relationship. When they alter accounting records, however, they lose control of finances. As they grow dependent on bribery, they find themselves without a plan and vulnerable to higher bribes by competitors.
The private sector companies that engage in bribery both contribute to Russia's economic stagnation and limit their potential. Together with many government officials, they have created a web of corruption that has ensnared Russia's free market reform.
In order to promote a free market and advance their long-term interests in a high-growth economy, private businesses operating in Russia should help fight official corruption. Indeed, as a practical matter, they are in the best position to stop bribery from the supply side.
In order to advance this goal, businesses could individually and collectively adopt no-bribe pledges on a voluntary basis. By reducing bribery on the supply side, a well-orchestrated private sector initiative would help prevent the further spread of corruption. It would assist those reformers in the government who seek to improve and enforce Russian laws which prohibit bribery on the demand side.
Ultimately, by adopting and implementing no-bribe pledges, business would help to create new rules for competition in Russia. Volunteering to refrain from bribery would give the private sector the collective leverage it needs to reduce the control that government has over private sector activities. Rather than seeking the favor of government, companies would thereby be freed to compete on a level playing field on the basis of quality, reliability and efficiency.
Matthew H. Murray is president of Sovereign Ventures Inc./Bronze Lion ZAO,a management consulting group specializing in direct equity investment and small business development in Russia. Martin S. Hupka, Sovereign Venture's managing director contributed to this article
There is, however, little time for hope. Russia's transition from communism to capitalism is dominated by a privileged political class which is amassing an alarming amount of wealth through illicit means. The criminal quality of Russia's nascent capitalism could dominate the country's economic and political development well into the next century. Russia's future leaders are being spawned in an environment of lawlessness and greed.
The movie "Once Upon a Time in America," a saga about a group of young friends who chose crime as the path towards wealth and power at the turn of the century, illustrates the dilemma of Russia in transition.
During one scene, the lead character, the criminal boss, tries to persuade a union leader to accept a bribe, philosophizing: "This country is still growing. There are certain types of diseases that are better to get when you are young."
The union man responds: "You guys are not the measles. You are the plague."
In the face of this kind of threat, most Russians have come to blame the "mafia." But the existence of a mafia is a myth, diverting attention from the government's role in criminalizing the economy. The use of illegal means to acquire the assets of the state did not start with perestroika or privatization. Under Soviet central planning, the state's resources were divided up by those with access to power, the members of the communist party. Party positions were bought and sold like commodities.
Russia's reformers, and their Western supporters, assure themselves that during the transition to capitalism some illegal privatization is inevitable. The rapid acquisition of assets by a handful of capitalists is required to spark economic growth and strengthen the position of the private sector vis a vis the state. The resulting concentration of wealth in the hands of a class of millionaires will lead to investment into profitable industries and the creation of laws designed to protect private property.
This model is also mythical. During Russia's privatization, the wealth of the state has become concentrated into the hands of a few billionaires cozily allied with the state. They have tended to hide their earnings abroad rather than invest them in Russia.
Progress towards a law-based state has been faltering. The political class who benefit from privatization have a vested interest in a legal system built upon rules that can be manipulated, not laws that can be enforced. The notion that a government official may have a conflict of interest when dividing up of the state's assets is a source of amusement.
The burial of Tsar Nicholas II should remind us of how Russia's political culture fosters myths to sustain weak, self-aggrandizing leaders, and that this phenomenon did not end with the monarchy.
The communist vanguard, the Bolsheviks, seized power illegally and did not let go of the reigns for 70 years. The Soviet Union was born of a revolution from above that never became accepted by the people or institutionalized as a government. Decisions about how to produce goods and allocate resources were made by a select group of party members, the nomenklatura. Market considerations, such as supply and demand, price and quality, rarely entered the picture. This centralization of control over resources took place under the banner of equality for workers and the redistribution of wealth.
Similarly, under Russia's new leadership, the free market and democracy are at risk of becoming mere slogans behind which a vanguard of capitalists privatize the state's wealth for their own benefit. Russia is in danger of becoming a plutocracy, ruled by a group of individuals whose stolen wealth is the source of new power over the people. The threat of the mafia could become the myth by which they sustain this power.
There is little time. If history is of value, it teaches that when Russia transforms itself from one system to another overnight, the leadership will advance its interests at the cost of social chaos, economic disintegration and, finally, an unmitigated and fatal dependence of the people on the state.
Matthew H. Murray is president of Sovereign Ventures Inc./Bronze Lion ZAO,a management consulting group specializing in direct equity investment and small business development in Russia.
There is, however, little time for hope. Russia's transition from communism to capitalism is dominated by a privileged political class which is amassing an alarming amount of wealth through illicit means. The criminal quality of Russia's nascent capitalism could dominate the country's economic and political development well into the next century. Russia's future leaders are being spawned in an environment of lawlessness and greed.
The movie "Once Upon a Time in America," a saga about a group of young friends who chose crime as the path towards wealth and power at the turn of the century, illustrates the dilemma of Russia in transition.
During one scene, the lead character, the criminal boss, tries to persuade a union leader to accept a bribe, philosophizing: "This country is still growing. There are certain types of diseases that are better to get when you are young."
The union man responds: "You guys are not the measles. You are the plague."
In the face of this kind of threat, most Russians have come to blame the "mafia." But the existence of a mafia is a myth, diverting attention from the government's role in criminalizing the economy. The use of illegal means to acquire the assets of the state did not start with perestroika or privatization. Under Soviet central planning, the state's resources were divided up by those with access to power, the members of the communist party. Party positions were bought and sold like commodities.
Russia's reformers, and their Western supporters, assure themselves that during the transition to capitalism some illegal privatization is inevitable. The rapid acquisition of assets by a handful of capitalists is required to spark economic growth and strengthen the position of the private sector vis a vis the state. The resulting concentration of wealth in the hands of a class of millionaires will lead to investment into profitable industries and the creation of laws designed to protect private property.
This model is also mythical. During Russia's privatization, the wealth of the state has become concentrated into the hands of a few billionaires cozily allied with the state. They have tended to hide their earnings abroad rather than invest them in Russia.
Progress towards a law-based state has been faltering. The political class who benefit from privatization have a vested interest in a legal system built upon rules that can be manipulated, not laws that can be enforced. The notion that a government official may have a conflict of interest when dividing up of the state's assets is a source of amusement.
The burial of Tsar Nicholas II should remind us of how Russia's political culture fosters myths to sustain weak, self-aggrandizing leaders, and that this phenomenon did not end with the monarchy.
The communist vanguard, the Bolsheviks, seized power illegally and did not let go of the reigns for 70 years. The Soviet Union was born of a revolution from above that never became accepted by the people or institutionalized as a government. Decisions about how to produce goods and allocate resources were made by a select group of party members, the nomenklatura. Market considerations, such as supply and demand, price and quality, rarely entered the picture. This centralization of control over resources took place under the banner of equality for workers and the redistribution of wealth.
Similarly, under Russia's new leadership, the free market and democracy are at risk of becoming mere slogans behind which a vanguard of capitalists privatize the state's wealth for their own benefit. Russia is in danger of becoming a plutocracy, ruled by a group of individuals whose stolen wealth is the source of new power over the people. The threat of the mafia could become the myth by which they sustain this power.
There is little time. If history is of value, it teaches that when Russia transforms itself from one system to another overnight, the leadership will advance its interests at the cost of social chaos, economic disintegration and, finally, an unmitigated and fatal dependence of the people on the state.
Matthew H. Murray is president of Sovereign Ventures Inc./Bronze Lion ZAO,a management consulting group specializing in direct equity investment and small business development in Russia.