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The cost of Russia’s public corruption even more astonishing than you think

Oligarchy is a weekly newsletter tracking how the super rich are changing the world for the rest of us. Also in this edition: money launderers’ fintech frontier

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At this time of year, I binge read the lists that newspapers put together of potential gifts to give your friends and relatives. Partly, they’re useful for ideas, but also, they’re helpful for cross-checking against. Am I spending too much, or too little? Is this the kind of thing that normal people give as a present? Would a proper nephew think a novelty t-shirt was acceptable for an uncle who doesn’t appear to like anything very much?

Anyway, imagine how much more stressful this dilemma would be for a Russian businessperson who’s keen to give their government contact a gift that will be appreciated; eager not to over-pay (because that will cut into their end of the deal); but also determined not to give so little that the contact gets the hump and has them thrown into prison for being corrupt.

As such, I think this piece of research by the Institute for Public Administration and Governance (IPAG) of the Higher School of Economics National Research University in Moscow, plays the same role for nervous entrepreneurs as a funny Christmas T-Shirts list does for a lazy nephew. Academics canvassed 1,200 Russian businesspeople involved in working with state organs and asked how much of the total volume of the contract they would expect to pay as a bribe. The results may surprise you.

Taken together, more than 70% of respondents said they expected to encounter corruption when dealing with officials (I reckon that’s on the low side and at least some of the other 30% were lying), and they paid an average of 22.5% of the contract’s value to the official who signed off on it. That meant the total added to state contracts last year to settle the corrupt demands of officials was 6.6 trillion rubles (about $89 billion). That is more than a third of Russia’s state budget, or approximately 6% of the country’s GDP. The equivalent proportion of the American economy would be $1.4 trillion. It is an incredible amount of money and explains quite a lot about why Russia struggles to innovate or diversify.

  • “In current conditions, it is more profitable for a supplier to collude than to work on the uniqueness or innovation of their goods, products or services,” the academics concluded.

Of course, this money is not free, but ends up being repaid by ordinary citizens – either through their taxes, or through state services being shoddy or unavailable. And the fact that such huge bribes are available also changes how officials think about things. If you’re going to get paid tens of millions of dollars from a major project – a bridge, a railway line, a gas pipeline, etc. – then you are going to privilege spending money on such projects rather than on the running repairs to existing infrastructure that will improve people’s lives.

It might also – and this is an alarming thought, considering there are tens of thousands of Russian soldiers currently on the border of Ukraine – make military officers keener to wage war, since they can take a cut from every shipment of weaponry that they approve. After all, nothing uses up ammunition quite like firing it at the enemy.

This is not to say of course that Russian officials don’t take corruption seriously. On the contrary. A court in Naryan-Mar has just convicted a former official named Yuri Zhdanov of corruption in relation to housing supply, and given him a three-year suspended sentence. It is no doubt entirely coincidental that his son Ivan just happens to be a close ally of the jailed anti-corruption activist Alexei Navalny, because otherwise, we’d have to believe that officials were abusing the court system to put pressure on critics. Navalny has also been convicted of a financial crime. So was his brother.

There is, however, some corruption that officials do not appear to appreciate being investigated. Two media outlets this week received official letters from the government’s communications watchdog demanding that they remove all material on their websites related to certain topics: the romantic and financial affairs of Chechen leader Ramzan Kadyrov; the business successes of certain relatives of Vladimir Putin, as well as of some of his female friends; and various other things.

Fortunately, the articles are still available elsewhere on the internet, and are well worth a read. Here is one looking into how Kadyrov has quite so much money, and here is another about a woman whose daughter bears an uncanny resemblance to the Russian head of state and who has gained a valuable stake in a major bank.

This is all worth remembering next time a Russian politician accuses a group like Memorial (which is being closed after decades spent researching Stalin-era atrocities, as well as those committed by today’s officials) of being unpatriotic. In my opinion, Memorial has done more for the Russian nation than anyone in office will ever do. Fortunately, these supposed “foreign agents” are determined to continue their unprofitable but honest labor to improve their homeland.

  • “Liquidating us won’t mean that everything will stop,” said Oleg Orlov, a board member at Memorial. “We’ll work from our apartments until they jail us all. But of course, our work will really become much, much harder.”

There was a time when people hoped kleptocracy would be a passing problem for Russia, something it would grow out of on its way to becoming a democracy. That has sadly not turned out to be the case. When I wonder what went wrong, I often go back to some extremely prescient testimony given to Congress in 1999 by Richard Palmer, a former CIA agent who laid out all the ways that corruption worked in Russia (and who warned about the threat posed by Vladimir Putin long before it was fashionable to do so). Even back then, he dismissed optimism that the mafia clan running the country would somehow democratize.

  • “This is a current problem that is going to go on into the future,” he said. “The idea that this is like Chicago in the 1920s, and this will also evolve into good legitimate money like our robber barons is nonsense. As I mentioned in detail in my testimony before the House Banking and Financial Services Committee, this would be as if they controlled the entire government, the Federal Reserve, all the police, the Congress. Why should they change?”

DAVOS

I had a dream last night about a huge wave sweeping away most of my friends and quite a lot of my relatives. It should be said that I have dreams like this frequently (though a wave was a novel way for everyone to die), but still it felt a bit like my subconscious was warning me about the omicron variant, which has crashed over London but has not yet – as far as I know – surged as far as the little bit of hillside on the Welsh borders which I call home.

How bad is it? Well, the World Economic Forum has been postponed until summer, and if the billionaires are worried, the rest of us probably should be too. In the good old days, I used to run events at the Frontline Club in London, in which loads of people came and listened to interesting people talk about kleptocracy. We are planning to revive them in January, but it’s not looking very positive right now.

FINTECH

Regular readers of this newsletter will know that I regularly prattle on about shell companies, and about the guilt of certain large Western countries in providing them to anyone willing to pay for them. I have two friends (Richard Smith and Graham Barrow. If you’ve not following them, you really should) who are amazingly knowledgeable about British structures in particular, and they’ve been telling the world for years that Fintech companies are the new frontier for money launderers who used to use Danske Bank, Deutsche Bank, and the like.

Transparency International has now dug into the topic of fintech – or, more accurately, Electronic Money Institutions (EMIs) — and come back with a report that should rather alarm you if you thought the world had made progress in tackling money laundering over the last decade. Of course, anyone who read anything about Wirecard over the last few years will be aware that there is a problem, but it goes far beyond one rogue operator.

  • “As this is a new threat, we do not yet know the likely scale of money laundering through these firms. However, due to the questionable character of those owning certain EMIs and the high-risk markets they are targeting, these firms could soon become a major gateway for illicit funds from around the world, if they are not already,” the report says.

Among other alarming elements are the facts that some EMIs have connections both to company formation agents – the firms that create shell companies – and to Russian or Ukrainian websites that offer anonymous structures. That means a client can buy a shell company, with an EMI account attached, and use it as a one-stop shop for laundering money. This is exactly how Danske Bank operated at the height of its reign as the lead dirty money mover in Eastern Europe.

  • “Our analysis identified 37 UK EMIs (14 per cent) with owners or directors from the CIS region, predominantly Russia and Ukraine. Many of these individuals held or currently hold links to financial services firms in these countries that have been forced to close, been subject to regulatory or criminal action, or investigated over money laundering concerns,” the report says. Considering what it takes to be investigated for money laundering in Russia, that is a very alarming statistic indeed.

Even worse is the fact that there is now a global market for licenses to run an EMI in the UK, precisely because they are subject to fewer regulations than banks. Not only is Britain not doing enough to regulate this new sector but, back in the spring, the UK government promised to do even more to promote fintech in the City of London.

  • “If we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s pre-eminent financial center,” said Rishi Sunak, who runs the Treasury.

I’m not sure the world can take an even less regulated City of London, but it’s all good news for Russian officials with $89 billion worth of bribes to move.

WHAT I’M READING

I’ve finally finished Dan Jones’ Power and Thrones book about the Middle Ages, which remained fascinating throughout. I was particularly interested by the insight that the crusades were funded by Italian merchants who liked being able to control the ports that were the terminus of the silk road in the eastern Mediterranean, and therefore piggy-backed onto the campaign to wrest control of the Holy Land from Muslims, which isn’t something I learned about when we learned the crusades at school. It’s funny how often great ideological causes turn out to be profitable, isn’t it?

You’ll be pleased to know that I’ll have other books to regale you with when this newsletter returns after the holiday period, in the second week of January. I hope you have a nice relaxing time off, that you manage to avoid the omicron variant, and that 2022 proves to be less delightful for the oligarchs than 2021 has been.

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Oliver Bullough

Oliver Bullough is an author and journalist from Wales, who specializes in writing about financial crime, often when it has links to the former Soviet Union. His most recent book is Moneyland, why thieves and crooks now rule the world and how to take it back, and he is currently trying to write another one despite lockdown.

@OliverBullough