Causes and Consequences of State Corruption

On the 19^th of May 2013, the bill prohibiting Russian officials from holding bank accounts abroad or owning foreign-issued shares and bonds came into force. It would seem at first glance like a very useful law. However, though the Kremlin stated that this law will “raise efficiency of anti-corruption efforts,” one can be forgiven for being skeptical about such a promise. This law will probably only have a limited impact on capital outflow because public servants will simply use more discreet and ingenious ways than before of hiding assets abroad.

But at least this new law seems to indicate that the authorities understand how damaging the shockingly high level of state corruption is for the country. At the same time, however, this law is also precisely an example of that personal and non-consensual decision-making style that so permeates Russian business and political life. Indeed, like so often, it sprang from the populist reaction of one man – Vladimir Putin – to recent scandals concerning the ownership of foreign assets by senior public servants.

It is not surprising therefore, that this ban on foreign investment does not target the causes of state corruption, but only one of its visible and embarrassing consequences - asset flight. Why should not a senior official be able to hold assets abroad as long as they have been legitimately earned? He might of course be called “unpatriotic” for doing so, but it should be legally possible for him to take this risk. The underlying reason why this law now makes it illegal is, of course, that the huge wealth amassed by many Russian politicians and civil servants is suspected to be the proceeds of graft. It is worth keeping in mind that, at a minimum, 10% of the value of state tenders of around 10 trillion rubles ($350 billion) per year are lost in this way. It is sometimes said that leaders should lead by example; ironically, this is perhaps exactly what they are doing in Russia, albeit unintentionally. Thus, attempts to reduce state corruption should be made also because of the likely beneficial effect for the whole society.

But, if corruption at state level is now truly a concern for the authorities, they should start by upholding existing laws, rather than creating new ones. If this happened, then firstly, senior officials would not be able to get their hands on as much wealth as before, and secondly, they would feel less need to funnel money abroad because they would perceive Russia as a safer place in which to invest. That the most powerful and well-connected people in Russia – those who best know the system – must be prevented by law from transferring funds abroad is indeed a worrying sign of the difficulties facing Russia.

A more fundamental question is: Would such a law be necessary if the political system wasn’t pervaded by career politicians and life-long civil servants? Corruption feeds on permanent bureaucracies that allow close personal relationships and long lasting business ties to be established. Both in Russia and abroad, the wealth of a career politician should always be seen with suspicion, unless it comes from inheritance. If all political terms in office and public service mandates were limited to, say, a maximum of two reelections or reappointments, graft and cronyism in government would undoubtedly decline.

Such term limitations are sometimes discussed in the media but are obviously rarely implemented, since they disserve the very persons who can pass them into law. Naturally, public servants will resist all changes that are not in their interest, and it is therefore surely not a coincidence that the final version of the bill signed by Putin exempts ownership of foreign real estate. Indeed, houses on the Riviera and apartments in Miami have been the preferred type of foreign investments by wealthy Russian public servants, and this will likely be the case also in the future, if the recent drop in house prices are considered.

Term limitations is not of course not the only way of impacting the level of state corruption; there are other measures, though there is no time to review them in this article. What such measures have in common, though, is that they generally target the causes, not the consequences, of state corruption.

The new law limiting foreign investments of senior officials should, therefore, not be cheered too enthusiastically since it can metaphorically be described as only a bandage on the gunshot wound of state corruption from which Russia suffers.