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IN BRIEF Corruption in Russia: an Overview

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IN BRIEF Corruption in Russia: an Overview October 23, 2017 IN BRIEF Corruption in Russia: An Overview Endemic corruption is a defining characteristic President in his goals throughout all sectors of of the Putin regime. While the president is the the economy. prime beneficiary, cronies maintain this system of corruption. These loyal supporters are neces- Some examples of these cronies include Sergei sary for Putin to ensure the status quo and they Chemezov, CEO of Rostec; Sergei Gorkov, often pursue the government’s illicit interests, Chairman of Vneshekonombank (VEB); Yury which it cannot fulfill itself. Kovalchuk and Nikolai Shamalov, Co-Owners of Rossiya Bank; Alexei Miller, CEO of Gaz- This publication presents a succinct overview of prom; Sergei Roldugin, a Putin proxy alleged to the systemic corruption present in Russia. Un- control much of the president’s offshore finan- like corrupt systems where oligarchs rule and cial empire; the brothers Arkady and Boris Ro- compete with one another over power and tenberg, owners of energy construction firm wealth, Russia has developed a top-down struc- Stroygazmontazh; Igor Sechin, CEO of Rosneft; ture of corruption, where the political and busi- Vladislav Surkov, current Deputy Prime Minis- ness success of elites is dependent almost en- ter of Russia and former Deputy Chairman of tirely upon their relationship to the President. the board of directors at Alfa-Bank; and Genna- Although these elites continue to be called “oli- dy Timchenko, owner of Volga Group. garchs,” it is no longer appropriate to think of them as such. Rather, they ought to be thought In his 2014 report, The Tsar and His Business of as “cronies.” Serfs, Ilya Zaslavskiy, a scholar of the Russian political system, writes, “Total and unquestion- Putin’s Cronies able loyalty to Putin and the Kremlin is the ul- The original oligarchs emerged in the 1990s, and timate capital of Russian business elites, not included the likes of Mikhail Khodorkovsky, their billions, assets or prerogatives, all of which Boris Berezovsky, and Roman Abramovich. can be lost very quickly after a perceived act or However, the Russian oligarchy waned in im- word of betrayal or defiance.”1 portance as Putin consolidated power. In many instances, former insiders, who have Today, the President’s most loyal friends from found themselves isolated, faced tragic ends. In his days in St. Petersburg and the KGB inhabit 2014, Senator Roger Wicker, currently Chair- the most critical roles in his kleptocracy. Cro- man of the Helsinki Commission, called on the nies entrusted with state-run corporations must U.S. Department of Justice to investigate possi- demonstrate absolute loyalty, rather than com- ble wrongdoings by Mikhail Lesin under the petency. The Putin-era cronies that enrich U.S. Foreign Corrupt Practices Act (FCPA) and themselves on the backs of Russians aid the Anti-Money Laundering (AML) statutes, citing Lesin’s connection to Yury Kovalchuk.2 Alt- works as the executive director” and the owners hough no investigation commenced, allegations of nominally private firms are “mere divisional gained traction in Russia and led Lesin, the managers, operational managers of the big, real founder of state television network Russia To- corporation.”6 day (RT) and former media czar, to step down from his position at Gazprom Media. Corruption as a Tool of Statecraft Putin’s cronies are critical to the operation of Lesin was found dead on November 15, 2015 at the Russian state. This system is an amalgama- the Dupont Circle Hotel in Washington, DC, tion of corrupt practices that stem from the So- following media reports of his ousting at Gaz- viet Communist party, the KGB, the FSB, and prom Media. At the time of his death, Lesin was organized crime networks. in the process of moving his assets and immedi- ate family to the United States and had pur- Putin’s regime entrusts cronies to carry out var- chased real estate in Los Angeles worth over $28 ious tasks, domestically and internationally. million.3 Authorities initially ruled his death an These responsibilities range from financing accident, but a recent investigative report by elections and supporting local political figures, Buzzfeed News cited evidence from a Washing- using money coming from the state budget via ton D.C. metropolitan police report that procurement orders, to buying international showed that Lesin died from blunt-force inju- support and strategic investments abroad. Addi- ries to his head, neck, and torso. Lesin had sup- tionally, cronies sometimes must execute stra- posedly been in contact with the Justice De- tegic projects that might not make commercial partment and the FBI to schedule an interview sense, and can be tasked with the laundering of about the inner workings of RT the day after he Putin’s own assets. died, which raised questions about the involve- ment of his former Kremlin allies.4 For example, Putin attempted to obtain interna- tional recognition for Russia as a great power by Business continues to thrive for those cronies hosting the 2014 Winter Olympics in Sochi. This who remain loyal to Putin. The fall of the Soviet politically-motivated mega-event—the most system in the 1990s created opportunities for expensive Winter Olympics in history—was a oligarchs to steal government assets under the great opportunity for grand corruption, with the pretense of privatization, and the ensuing chaos Rotenberg brothers alone receiving $7 billion ensured impunity. Today, the Kremlin condones worth of contracts.7 asset stripping to the benefit of Putin’s cronies. A more contemporary example of grand corrup- According to economist Anders Åslund, an ex- tion with strategic importance is the bridge to pert on transition economies, this behavior has Crimea. The bridge, illegal under international effectively been legalized. Through re- law, will connect mainland Russia to Crimea, nationalization of the Russian economy, cronies bypassing mainland Ukraine. Putin called the have gained control of major state-owned firms bridge to Crimea a “historic mission,” symboli- such as Gazprom, Rostec, Rostneft, and cally connecting mainland Russia to the an- Vnesheconombank (VEB). Åslund has further nexed territories.8 SMG Group (Stroygazmon- claimed that the state sector expanded from 35 tazh), a corporation owned by the Rotenberg percent of the gross domestic product in 2005 to brothers, is constructing the 12-mile bridge 70 percent in 2015.5 across the Kerch Strait.9 Economist Clifford Gaddy, an expert on Russia, The Rotenbergs are subject to both U.S. and EU claims, “[Putin’s] vision of the country’s entire sanctions, and the United States has specifically economy is ‘Russia, Inc.,’ where he personally targeted the construction of the bridge, which is Corruption in Russia: An Overview 2 Commission on Security and Cooperation in Europe scheduled to be completed by 2018. In an inter- investigate political corruption. The work of his view with The New Yorker’s Joshua Yaffa, Am- Moscow-based Anti-Corruption Foundation has bassador Daniel Fried, former Coordinator for largely been credited with inspiring the waves of Sanctions Policy at the U.S. Department of anti-government protests that rocked Russia on State, said, “We never thought we could prevent March 26 and June 12 of 2017. In addition, the the bridge, but we could try and make it mas- release of the Foundation’s documentary film sively costly and radioactive, so that Crimea “Don’t Call Him Dimon,” which accused Prime never pays for itself, that it turns out not to be a Minister Dmitri Medvedev of embezzling $1.2 war prize but a liability.”10 billion, stirred protests in March.12 To avoid sanctions, Putin’s cronies take ad- In an interview with “CBSN: On Assignment,” vantage of the secrecy provided by Western off- aired on August 5, Navalny estimated his chanc- shore havens to secure stolen funds abroad. For es of assassination at 50 percent.13 During the example, the Panama Papers implicated Sergei July 20 briefing, Åslund deemed Navalny’s focus Roldugin as one the primary caretakers of on the corruption of Putin’s inner circle, steer- Putin’s hidden assets, as well as Kovalchuk, link- ing clear of the President himself, as “very wise,” ing the pair to a $2 billion offshore trail, which referring to the 2015 death of opposition leader the leaked documents from Mossack Fonseca Boris Nemtsov. Nemtsov was gunned down reveal.11 outside of the Kremlin in February 2015 after vocally criticizing Putin. Any anti-corruption measures implemented in the West undermine Putin’s kleptocracy. At a Navalny is credited with the revitalization of the July 20 Helsinki Commission briefing titled Russian opposition, following the death of “Kleptocrats of the Kremlin: Ties between Busi- Nemtsov and the pro-Putin wave of popular ness and Power in Russia,” Ambassador Fried support that followed the annexation of Crimea. spoke about the need to screen foreign invest- ment for national security purposes in order to As demonstrations erupted during Putin’s 17th reveal Russian strategic investment in the West. year in power, many of the protesters were too Åslund, who was also on the briefing panel, young to remember a Russia without Putin. Un- supported this proposal and called for strength- like the older generation, many of whom revere ened transparency and beneficial ownership Putin for reversing the hardships of the tumul- laws. tuous 1990s, many young people do not re- member the chaos of the Yeltsin era. For the Cronyism and the lack of rule of law and clear young Russians who have taken to the streets in property rights in Putin’s Russia make possible a the past months, Navalny’s ban from appearing system that can distort markets, politicize on state television is not necessarily an obstacle, courts, erode democratic governance, and pro- as the tech-savvy can watch him broadcast on mote corrupt norms and values.
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