Corruption and business environment in Russia in the 2010s: Real improvement or make-belief?
Sinikka Parviainen,
Dr. (Econ), Analyst,
East Office of Finnish Industries,
Helsinki, Finland
Russia has famously hiked its ranking in the influential Doing Business Survey by the World Bank by to 28th (of 190 countries) just ahead of Japan in 2020 while being ranked 120th (of 183) still in 2012. On the other hand, Russia still maintains a very low score in the equally influential Transparency International Corruption Perceptions Index (CPI) that is even below the Sub-Saharan African average and a ranking of 138 out of 180 countries (CPI 2018). Given these contradicting signals from prestigious surveys, what can we say about the development of Russian business environment in the last decade?
The World Bank and the International Finance Corporation (IFC) have in their Enterprise Surveys (ES) since the start of the 2000s surveyed the experiences of corruption and other problems of the business environment that firms face on the ground. Compared to the Transparency International’s CPI, the distinction between experiences and perception is key here; CPI measures expert opinions, who may not even be based in the country in question. As I together with a co-author show in an article published in 2018 in the Journal of development Economics, actual experiences of corruption and their expert perceptions are not strongly correlated (40-52 % on average) and there are regions and countries where the perception[1] is systematically higher than the experience (Russia, Sub-Saharan Africa) and vice versa (Latin America). This difference is not negligible as we also showed that these perception measures that are widely publicized and easily available have a strong correlation with inward Foreign Direct Investment (FDI) flows[2]. These results show that often the choice of indicator can lead to very different conclusions on how much a problem corruption or some other informal practice is in a given country. The association between perceptions and FDI, however, breaks down and actual firm experiences matter when we focus only on green-field investment flows (foreign investment built from zero), whereas expert perceptions have statistically significant (positive) association for mergers & acquisitions type of investment.
However, in the case of Russia since the publication of the afore-mentioned study there are some visible concurrent results between perceptions and experience-based measures. Transparency International’s CPI score for Russia has stayed relatively stable at slightly below 30 (max score is 100) with only marginal changes in the last decade. In the experience-based ES survey, where firms operating in Russia (large and SMEs) have been surveyed three times in the last decade (2009, 2012, 2019), there are some signs of corrupt activity increasing or not improving. From 2009 to 2012, there is clear indication of corruption incidence declining based on all the 13 indicators focusing on corruption in the survey. For example, the % of firms experiencing at least one bribe payment request in the last year (so called Bribery Incidence) declined from 27 % to 14 % between 2009-2012 and the % of public transactions where a gift or informal payment was requested (Bribery Depth) fell from 22 % to 10 %. Also, firms that identify corruption as a major constraint decreased from 50 % to 33% in 2009-2012. In the last seven years, however, this improvement seems to have been partly reversed but the specific source of the worsening corruption outlook is less clear.
Bribery Depth and Incidence measures in the 2019 survey fell nearly back to their shares measured decade ago (20 % and 27 % consecutively). However, at the same time the commonly corruption-prone encounters with state officials such as court cases, getting permits and licences and government procurement bids or water and electrical connections seems to be less prone to corruption and have improved below the European and Central Asian (ECA) averages with a notable exception of construction permits. In addition, the % of firms that identify corruption as a major constraint has fallen to 14 % (33 % on average for ECA). These changes suggest that the source of corruption in Russia may have shifted from the lower echelons of administration and everyday encounters to something else. In this sense, Russia’s phenomenal improvement in World Bank’s Doing Business ranking that measures administrative burden for business with simple technical criteria (number of days etc) is part of the same story. Russian state administration in a technical or technocratic sense, has become undoubtedly more efficient, which is what the Doing Business study also focuses on, to a large part through advances digitalization of public services that has been commended by the World Bank and IMF experts. Digitalization in money transfers leaves less room for graft. Also, anecdotal evidence from Finnish firms confirms that dealing with Russian officials on a everyday-level has become easier and their conduct has become more professional.
If the average petty official and administrator is more honest, what could explain the backlash in corruption depth and incidence? One explanation offered is that the security apparatus has more or less monopolized graft for itself and crowded out other officials. This has happened now as economic growth has been modest in the last five years and there is less of “loose” money available for grabs and only for those powerful enough.
As a conclusion, corruption in the lower ranks of public officials has been solved by the technical modernization as well increase in real wages. Now remains the much harder task of tackling the large-scale corruption institutionalized at the higher levels of society, ambiguous forms of reciprocity shaped also by Russia’s historical legacies and the role of the security apparatus that is in charge of eradicating the very phenomenon. Russian business environment has thus, become less volatile and increasingly predictable (less random check-ups by officials) in conducting everyday business unless you manage to step on some big toes. For example, a recent survey by the independent Levada Center, shows that Russians expect more corruption scandals from 2020 than seen in 2019 that have already been plenty. The results presented above imply that Russia has probably lost the momentum for real anti-corruption gains during the current regime that is likely to reign beyond 2024 in some form or another.
[1] Proxied by the Transparency International’s CPI and World Bank’s Governance Indicators Control for Corruption measure.
[2] We also control for income levels, skill level, population, openness to trade, surrounding market potential and some geographical factors.
Email: sinikka.parviainen@eastoffice.fi
Expert article 2669