Corruption in the Russian Defense Sector, Especially the Toughest Issues
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Corruption in the The WPF Seminar Series Russian Defense Sector The World Peace Foundation, an by Polina Beliakova and operating foundation affiliated solely with The Fletcher School, Sam Perlo-Freeman aims to provide intellectual May 11, 2018 leadership on issues of peace, justice and security. It believes Introduction that innovative research and The World Peace Foundation, an teaching are critical to the operating foundation affiliated Today, Russia is the world’s fourth largest military spender and second solely with the Fletcher School at challenges of making peace largest arms exporter. Their arms industry is probably the third largest in around the world, and should go Tufts University, aims to provide the world, after the USA and China. The Russian arms industry, despite its hand-in-hand with advocacy and intellectual leadership on issues current strength, must be viewed within the legacy of the USSR. The current of peace, justice and security. It practical engagement with the Russian state inherited a significantly wounded, but still powerful system believes that innovative research of arms production and export. However, along with an aging industrial toughest issues. It regularly and teaching are critical to the infrastructure and global relations with importing countries, Russian convenes expert seminars to challenges of making peace leaders were endowed with an arms industry rife with corruption that pre- address today’s most pressing around the world, and should go dated the fall of the USSR and metastasized in the chaotic years that issues. The seminar, “Water and hand-in-hand with advocacy and followed. Today, corruption still constitutes a significant problem facing the Russian arms industry. This report discusses publicly available st practical engagement with the Security in the 21 Century” was information on corruption in the Russian defense sector, especially the toughest issues. To respond to held March 5 & 6, 2015. arms industry, identifying key cases of corruption that have become visible organized violence today, we not in recent years, in particular since 2008, when Russia’s current set of This seminar note is organized only need new instruments and military reforms, and major rearmament drive, began. around prominent themes that tools—we need a new vision of peace. Our challenge is to emerged throughout the seminar. Any discussion of corruption in Russia, including in the defense sector, reinvent peace. must take into account the central role of corruption in the Russian state. Section 1 discusses the role of corruption in the development of the post- Soviet Russian economy and state, and the centralization and politicization of corruption under President Vladimir Putin. It also briefly discusses the development of the post-Soviet Russian arms industry within this context. Section 2 presents a general discussion of corruption problems in the Russian defense sector, in the light of the previous discussion, including such information is available on the extent of the problem, as it is measured and investigated by Russian authorities. This focuses in particular on corruption in military procurement through the State Defense Order (SDO, gosoboronzakaz, GBZ, in Russian). Section 3 then presents a number of key cases of corruption in the SDO that have reached the public domain. Section 4 considers corruption in international arms trade performed by "Rosoboronexport" – the Russian defense export monopoly, which is itself part of the giant defense industry conglomerate, “Rostec”. Section 5 discusses anti-corruption efforts in the defense sector in Russia, and Section 6 concludes. Appendix I presents the legal and administrative framework governing corruption and anti-corruption efforts in the military sector in the Russian Federation. 1. The Russian arms industry privatized en-masse. While initially all citizens were given ‘vouchers’ for shares in formerly public enterprises, the and corruption in the post- desperate economic situation combined with a lack of Soviet context experience with share trading meant that most of these shares were sold off cheaply to the wealthy, who thus acquired dominant economic positions. The re-election of 1.1 Corruption and post-Soviet Russia President Yeltsin in 1996 accelerated the rise of the oligarchs; fearing the challenge of Yeltsin’s Communist Russia is sometimes described by western and Russian opponent, oligarchs such as Boris Berezovsky agreed to commentators as a ‘kleptocracy’, where the personal throw their weight (including media ownership) behind enrichment of the ruling elite is the primary, or a primary, Yeltsin, in return for his subsequent economic favors. goal of regime policy, and the resources of the state are Following the election, more state assets were privatized, systematically plundered for the benefit of this ruling elite. this time directly to the oligarchs, at bargain basement In such a system, corruption is not a ‘problem’ within the prices.3 system, it is the system. 1 For instance, Transparency International’s Corruption Perception Index (CPI) that After Vladimir Putin became President as Yeltsin’s chosen scores countries on how corrupt their public sectors are successor in 2000, he acted to centralize political and seen to be, consistently places Russia among the most economic power, breaking the political influence of the corrupt countries in the world. In 2017, Russia’s rating was oligarchs, while making their continued economic position joint 135th out of 180, level with the Dominican Republic, dependent on their loyalty to the regime.4 Thus, those who Honduras, Kyrgyzstan, Laos, Mexico, Papua New Guinea, stayed out of politics, such as Roman Abramovich, and Paraguay, just below Ukraine, Iran, Myanmar and Sierra continued to thrive, while those such as Michael Leone, and just above Bangladesh, Guatemala, Kenya, Khordokovsky who displayed political ambition in Lebanon, and Mauritania. This situation is neither new nor opposition to Putin, became the target of ‘anti-corruption’ surprising – since first being included in the CPI in 1996, campaigns.5 Khordokovsky was arrested in October 2003, Russia has occupied a position towards the bottom of the charged with fraud, and jailed in 2005 before eventually list among the world's most corrupt countries.2 being pardoned by Putin in 2013, whereupon he went into exile.6 Since few of the oligarchs had acquired their extreme The 1990s in Russia, following the collapse of the USSR, saw wealth by purely legal means, with corruption built into the the emergence of the so-called ‘oligarchs’, a few dozen men system from the beginning, any of them could potentially who were able to concentrate enormous wealth, combined become a target for anti-corruption crackdowns. The with significant political influence. Some of these started message was clear, and most thereafter toed the line. out as Soviet company managers in the early years of economic reform, or Perestroika in the late 1980s, where their position at the head of state-controlled businesses 1.2 Official data on corruption enabled them to gain a head-start as private entrepreneurs. In modern Russia, corruption pervades all spheres of In the early 1990s, so-called economic ‘shock therapy’ saw government which arguably gives the Kremlin leverage severe economic collapse, while state assets were 1 For a discussion of the nature of this arguably White. "The rise of the Russian business elite." Communist kleptocratic rule in Russia, see for example Miriam and Post-Communist Studies 38, no. 3 (2005): 293-307. Lanskoy and Dylan Miles-Primakoff, “Power and plunder 4 Rutland, Peter. "Putin's path to power." Post-Soviet Affairs in Putin’s Russia”, Journal of Democracy, vol. 28 no. 1, 16, no. 4 (2000): 313-354; Monaghan, Andrew. "The January 2018. vertikal: power and authority in Russia." International 2 Corruption Perception Index. Transparency International. affairs 88, no. 1 (2012): 1-16. Retrieved February 21, 2018 from 5 Goldman, Marshall I. "Putin and the Oligarchs." Foreign https://www.transparency.org/research/cpi affairs (2004): 33-44. 3 Yavlinsky, Grigory. "Russia's phony capitalism." Foreign 6 Sakwa, Richard. Putin and the oligarch: The Affairs (1998): 67-79.; Kryshtanovskaya, Olga, and Stephen Khodorkovsky-Yukos affair. IB Tauris, 2014. 2 over the ministries. For instance, in 2011 Novaya Gazeta Department at the Supreme Court of the Russian published a report with a rating of the most corrupt Federation, 12,779 people were sentenced for corruption- ministries of the Russian Federation in 2010. related crimes in 2016. To compare, in 2014 and 2012 Unsurprisingly, experts rated the Ministry of Defense as the respectively 10,784 and 6,014 people were sentenced for most corrupt. They particularly underscored the ministry’s corruption-related crimes. (See figure 1). high "corruption potential" due to the secretive nature of procurement. The Ministry of Transportation was ranked The most common corruption crime in 2016 was bribing a the second with most government funds being stolen in the domestic or foreign officials with 3,707 (29% out of a total road construction projects. The report states that to explain 12,779) convictions. The comparable figures for 2014 and Figure 1: Convictions for Corruption-Related Crimes 2012-2016 2012 2014 2016 0 3500 7000 10500 14000 Bribing officials Receiving bribes Other the increase in spending and decrease in productivity of 2012 were 4,700 (43% of the total) and 1,980 (32%) road construction, about 80% of funds