One of the most well-known Russian economists, Sergei Guriev, spoke about Russian corruption and Western enablement at De Rode Hoed in Amsterdam on October 16. He explained the effects of corruption on the Russian economy and citizens, and what the West should do to fight it.

The video recording of the lecture

The level of corruption

When we discuss the level of corruption in Russia, people want to hear something tangible. I’ll give you some examples of corruption. The first happened exactly ten years ago: the top Russian business newspaper decided to pick photos that they have of Russian bureaucrats, and check how expensive their watches are. That was a big deal, and I was surprised because I never knew that watches could be so expensive. The most expensive watch in that picture was worth around a million dollars. A top Russian banker had a watch which was worth $200,000. In that universe, Mr. Putin was actually a modest person with a watch of only $10,000. But he was giving that watch as a gift to people he met in various campaign events. He would shake hands with a worker, and the worker would say “What a nice watch you have!” and Mr. Putin would give this watch to him. As you might know, Mr. Putin’s salary is around $100,000 a year, so giving out watches worth $10,000 is a strange habit.

If you ask people in Russia what corruption is and what they know about it, they would talk about one particular video published by the leading Russian anti-corruption activist and opposition politician Alexei Navalny, which focuses on Dmitry Medvedev, the Russian Prime Minister and former President. This video, which shows the 7 palaces of Mr. Medvedev, his winery in Italy, and other things that he uses his money for, was watched by 32 million people. This was by far the biggest viewership of an anti-corruption investigation in Russia. Even though I was advising that government, that video was a big revelation for me. I never thought that something of this scale this would be going on. I was always somewhat disappointed that the reforms we were discussing were not implemented. By now I understand that these people were very busy with other things, such as setting up structures to safely store their money, or buying palaces and expensive wine.

CV Sergei Guriev

Member of the President of Russia’s Council on Science, Technology, and Education (2008-12)
Member of the President of Russia’s Commision on the National Projects (2010-12)
Member of Government of Russia’s Commission on Open Government (2012-13)
Board Member of Sberbank, Moscow (2008-2014)
Rector New Economic School, Moscow (2004-2013)
Chief Economist at the European Bank for Reconstruction and Development, London (2016- September 2019)
Professor of Economics, Sciences Po Paris (2013 - today)

This is not the only video. You can go through Alexei Navalny’s YouTube channel and see many videos with over 10 million views each. There is a video about Russian prosecutor general Chaika and his sons, who happen to be very successful businessmen in industries connected to the state, but also connected to organized crime. You would also see videos about Mr. Putin’s palaces. He doesn’t have one palace, but 20, and some of them are more or less secret. Another video is about Russian oligarch Oleg Deripaska (who is now sanctioned by the US) welcoming deputy Prime Minister Sergei Prikhodko and discussing with him how they would influence American politics. The whole story is fascinating because most of the material was shot on a smartphone by an escort lady, who then wrote a book about it.

The videos show the different facets of corruption, which come out of adventure novels. You don’t believe how such widespread corruption can happen today, when everything is so transparent.

Alexei Navalny's video about Dmitry Medvedev, which was viewed 32 million times.

The cost of corruption

Some numbers are very small, for example if you look at the ratio of the Russian shadow economy to its GDP. The size of the shadow economy is approximately 20% of the GDP. This is not trivial, but it is not huge either. Some other numbers are larger. For example, if you ask Mr. Medvedev how much of government spending is embezzled, he would tell you 20% of government spending is embezzled, while government spending makes up 10% of the country’s GDP. As a result, 2% is stolen by government bureaucrats.

Then, when we talk about the amount of money that has been taken out of Russia, we are talking about $800 billion to $1 trillion. Is that a lot or little? In total, Russians have around $2.2 trillion. Therefore, approximately half of Russian wealth is offshore. This wealth is not distributed evenly. It is concentrated among a small number of individuals.

Russia is as corrupt as countries which are twenty times as poor

Another important measure is the level of corruption in Russia relative to countries with similar income levels and levels of development. There are many surveys that try to ask business people, experts, and citizens whether one country is more corrupt another. The World Bank aggregates those surveys and ranks countries, resulting in worldwide governance indicators. There, you can see that rich countries are generally less corrupt. The cleanest countries are Nordic countries and New Zealand. Then there are some rich countries which are quite corrupt, such as Middle Eastern monarchies. In this ranking, Russia is much more corrupt than countries with similar level of development. The difference is one standard deviation, which means that Russia is as corrupt as countries which are twenty times as poor. This means that Russia is as corrupt as Mozambique and Madagascar.

The impact of corruption

How do we measure the impact of corruption? The EBRD has firm surveys, and these try to measure which firms are likely to be corrupt, and which characteristics predict corruption. Then they try to figure out whether corruption causes lower firm growth. The EBRD estimates that every standard deviation in corruption costs 1.4% of growth. Their estimates suggest that if Russia reduced its governance gap towards advanced economies and became like Croatia, which is a reasonably clean country, Russian economic growth would be faster by 1% per year. This means that when the Russian government talks about the need to accelerate economic growth, it could gain a lot by fighting corruption.

guriev 1Guriev lecturing in De Rode Hoed. Photo's copyright free

The impact of corruption on citizens

Corruption creates long-term problems. One big issue is of course the business and investment climate. When I mention money taken offshore, this is money that could have been invested in Russia. On average, around 4% of the GDP is taken out of Russia. That money could have brought faster economic growth in Russia and raised investment. It could have brought new technology to Russia, but it has not done so.

The top 1% of Russians own 55% of all wealth in Russia, while the top 10% own 82% percent of wealth

Another effect of corruption is its creation of inequality, which is very hard to fight in the short run. In Russia, income inequality is not very high. Its Gini coefficient tends to be between 35 to 40. 40 is the level of the US or China, so Russia is not very unequal compared to them. However, Russia struggles with inequality of opportunity.

The Gini coefficient is a measure of inequality in a given country. On the scale, which measures from 0 to 100, a higher number means a greater level of inequality. A Gini coefficient of 0 would mean complete equality in a country (everyone has the same amount of wealth), while a coefficient of 100 would mean complete inequality (one person owns all of the wealth in a country). 

A large part of its inequality is dictated by circumstances of birth, gender, and parental background. If you were born in the ‘wrong’ family, and if you have a ‘wrong’ gender, and if you are born in the ‘wrong’ place, then you are less likely to make it to the top. This form of inequality translates very strongly to the distribution of wealth in Russia, and in this sense, Russia is one of the most unequal countries. According to the global wealth report, the top 1% of Russians own 55% of all wealth in Russia, while the top 10% own 82% percent of wealth. In a country like Netherlands or France, the top 1% own around 20% of wealth. When we relate that back to offshore wealth, the trillion dollars of offshore wealth is likely owned by the top 10%.

Why is so much money owned by so few people?

In a corrupt system, you cannot trust courts or bureaucrats, which creates what we call 'institutional economies of scale.' People who are more influential have preferential treatment and access to 'justice'. I call it 'justice' in quotation marks because it is not really justice. The idea of justice is that everybody is treated equally. But in Russia, if you are more influential, you have better political connections. Your political connections go to a higher level, making it easier to bribe courts, media, and political parties, so that you become even more powerful. In Russia, corruption drives this wealth inequality, creating oligarchs and rich government officials whose wealth is not recorded by Forbes magazine.

People who see corruption in their everyday life are more likely to say 'I distrust democracy and I distrust markets'

At EBRD, we looked at the biggest businesses in different countries, and tried to see where the richest people made their money. From this research, two facts stand out. First, the post-communist region, and Russia in particular, are disproportionately overrepresented in the list of global billionaires. Russia has more billionaires than it is supposed to have, given that the Russian economy is only one and a half times larger than that of the Netherlands. What is even more striking is that in many post-communist countries, billionaires make their wealth in specific industries, namely natural resources and regulated industries. In the rest of the world, billionaires do not get rich from natural resources because they are taxed heavily. They do not get rich from regulated industries, with some exceptions, because governments usually make sure that people who are regulated by them do not become super rich. This means that a lot of wealth is made in retail, services, finance, entertainment, and IT. Russia stands out as a country where billionaires get rich because of their connections to government.

Another long-term implication of the status quo in Russia is that Russians distrust market reforms and the market economy. This is something I did research on. We show that people who see corruption in their everyday life are more likely to say 'I distrust democracy and I distrust markets'.

Why doesn’t the government fight corruption?

There are two possible answers to this question. One is they don’t know how to do it, and the other is they don’t want to fight. Many people say that Russia has always been corrupt, and that it cannot be solved. This is wrong, because all countries which are clean today were once corrupt.

Moreover, there are very strong examples of transformation. One of the countries which went this way was Georgia, which became much cleaner over the last ten years. The government of Putin and Medvedev closed their eyes to that, even though it was happening in a neighboring country. Today Ukraine, which is culturally very similar to Russia, and very corrupt, is undertaking many reforms which Russia doesn’t want to undertake. I personally feel very strongly about this because in 2012, I was part of an effort called Open Government in Russia. We prepared a report on how to fight corruption, in which we borrowed best global practices from countries like Georgia or Singapore. We were bluntly rejected. Part of our presentation was censored, and other parts were never used, even though solutions do exist.

Russia remains a very corrupt country, but not because solutions don’t exist or because the Russian government doesn’t know about those solutions

A few solutions to the problem of corruption are being implemented in Russia. There are pockets of meritocracy in Russian bureaucracy, and some government services are provided through digital means with limited corruption. There is also an improvement in Russia’s place on the Doing Business Rankings by the World Bank, due to the improvements of certain services for businesses. Russia remains a very corrupt country, but not because solutions don’t exist or because the Russian government doesn’t know about those solutions. I was part of a group which tried to tell the Russian government what to do. But as I mentioned before, Mr. Putin and Mr. Medvedev were busy doing other things.

guriev 2

Informational autocracy

What is the problem? It is not a personal or psychological problem, or an urge to consume. It is a structural problem. In Russia, the system uses corruption as an important tool to govern the country. That is because Russia is, as we call it with my co-author Daniel Treisman, an 'informational autocracy.' Russia is not a democracy, but Russia is not also dictatorship. There are political prisoners, but not many. People don’t get executed en masse, like they would be in Stalin’s years. But even though elections are held, they cannot be lost by the government. This is not achieved by fear, but by popularity.

Corruption is a co-optation device of the elites. It’s a very important part of the game

Of course, Russia is a very educated country, and many people understand what is going on. What I’m telling you is not news to many Russian people. There are many smart people, and so they have to be silenced. You can either censor them, put them in jail, or co-opt them. This last option is the most common, and the result is that many people are completely aware of what I’m saying, but don’t want to fight the regime. The regime bribes them. Then the question is “Can you actually co-opt people without corruption? Can the regime give you a nice way to earn money in a legal way?” This is not possible, because people need to be aware that they owe their nice lives to their cooperation with the regime. They need to know that they are on the hook, they depend on the someone. In this way, corruption is a co-optation device of the elites. It’s a very important part of the game. That’s why corruption will not just disappear.

Now the main battleground of corruption is of course media, and most importantly online media. I have a paper which shows that internet does communicate facts about corruption, as long as it’s not censored. This happens not just in Russia, but around the world, where autocrats try to fight internet because it facilitates critical messages. Some governments are very effective in censoring the internet, and that is one of the main battlegrounds today.

The role of the West

One big feature of Russian society is that it aims to be a European country, and Russian elites want to save their money in Europe. They want to send their kids to Western schools. They don’t want to stay in Russia, because they know the system is not sustainable. They know this is not going to end well. And by the time things end, they want to be away in a nice place in Europe. This is a challenge for them, and helps to explain why they store a trillion dollars offshore. Interestingly enough, they do not store their money in a random place.

You hear a lot about London and Miami, but actually the Netherlands is the number two destination in many statistics, with number one being Cyprus. If you look at Foreign Direct Investment coming from Russia, Cyprus is a destination for $200 billion. By comparison, the Netherlands receives around $60 billion, Switzerland receives $20 billion, and Luxemburg receives $18 billion. Germany, France, and the UK are far behind.

You hear a lot about London and Miami, but actually the Netherlands is the number two destination in many statistics

In terms of investment from the West to Russia, most investment is coming from Cyprus. You can imagine that Cyprus is not a huge economy. Its GDP is $20-25 billion, while its stock of investment to Russia is $145 billion. This shows that some of the money is moving around the world, and Cyprus plays an important role. Again, Netherlands comes second in this regard, with $54 billion, and Luxemburg is a close third. Switzerland, France, UK and Germany are far behind Luxemburg and Netherlands. With regard to investment to and from Russia, both numbers are around half a trillion dollars, and the Netherlands is accountable for 10% in both dimensions. This makes it a huge partner.

Why the Netherlands?

Russian companies are registered here due to specific benefits of Dutch legislation, such as a zero-tax rate for holding companies not earning money in Netherlands. Quality of life is high, but these people don’t live here, they mostly live in London. The legislation is such that it seems to be more convenient for Russian businesses to be here.

guriev 3

Whataboutism

Is it part of foreign policy by the Kremlin to corrupt Western elites, and particularly Dutch elites? Is it part of a strategic plan to destroy the West? Yes and no. The most important goal of Russian regime is to stay in power, to make money and to spend it in Europe. And for that, the elites need a number of things to be communicated to Russian citizens, such as whataboutism. They need to say that although Russia is corrupt, Europe is too. They point at the Netherlands, saying that since their company is registered in Netherlands, they must be clean. They want to escape criticism because, while they are not clean, neither are EU members such as Cyprus or Luxemburg. And then of course they give every possible example of corrupt Western politicians. That is part of the game.

Elites need to say that although Russia is corrupt, Europe is too

Another issue is of course that Russian elites want to undermine the EU. They want to divide and rule, and they think that they can play European countries against each other. That is also important for the narrative that EU is in decline. At some point, this money is used in foreign policy strategies. And the Netherlands is an example of this, since it looks like Putin’s money was used in the referendum against an association agreement with Ukraine, which was a very important part of the Ukrainian Revolution of Dignity in 2014. The whole revolution was about integration with Europe, which has played a very important role for Ukrainian economy and involves a commitment to fighting corruption. Luckily, this interference didn’t work. But it is an example of corrupt money being used to influence political decision-making in Western countries.

What should the West do?

If a Western politician asks me what to do, then first I would say that you have strong laws. Enforce them. Apply the laws to corrupt individuals, no matter how influential and rich they look. You also need to tighten anticorruption laws, and introduce radical transparency about who owns what. This is finally becoming an issue in London, where we will soon know who owns which real estate. I guess that will bring some rich Russians out of London to other Western countries.

Another dimension is of course individual sanctions against people who violate principles that Russia commits to, because Russia is not a dictatorship. It does have a constitution. It does commit to principles of Council of Europe. In 2012, the Americans introduced the Magnitsky Act, which says that if you violate human rights, your assets in the US can be frozen and your visa to the US can be suspended. That infuriated Kremlin, and one of the major foreign policy objectives for Russia became to attack the Magnitsky Act and take it down. Instead, the Magnitsky Act spread to other countries, and the European Parliament has asked member states to think about introducing it in individual member states.

The West has strong laws. Enforce them

Individual sanctions are very popular in Russia. Whoever hears about them and understands why they’re introduced against corrupt individuals, the Russians support that. These corrupt individuals are of course running the country, so they get compensated by the Russian budget at the expense of taxpayers and pensioners. However, they are still unhappy because they cannot store the cash that they accumulate. If they’re under sanctions, they cannot put this cash into the West. They also can’t put this money in Russian banks, because the elites fight each other. Bank clerks are paid off by other elites, so the moment these elites take their dollars to a Russian bank, a team of FSB officers comes in, grabs the dollars, and runs away with the money.

Alternatively, elites can buy an apartment and store their dollars there in cash. This is a true story. A former FSB colonel was arrested and they found something like $150 million in cash in his apartment. A retired FSB officer was so desperate he actually dug a hole in his courtyard and buried there five million dollars. And then organized crime figured out that that must be the case. They tortured the official to tell them where exactly he hid this container with money. He gave up and gave them the cash, but then they were caught by another government body. Both parties denied that they had ever seen this money.

The lives of these people are not easy. But they try hard, and there are people in the West who help them. Lawyers, bankers, public relations consultants, political consultants, real estate agents. These people sometimes do everything legally, but they have to be exposed and shamed. Some of them break Dutch or English laws, others don’t. They should be named and shamed for what they do, because they know that they are helping a corrupt and non-democratic regime.

Finally, to politicians from EU member states, I would recommend: support Europe, support the Council of Europe, support the European Court for Human Rights. By Russian law, the European Court for Human Rights is the top legal authority, so their decisions are above any court in Russia. This is the only rule of law and source of justice that Russian politicians can have.

Ukraine

Besides this, the West should support reforms and anticorruption efforts in Ukraine. Ukraine remains a very corrupt country, but it also does many things right. Success in Ukraine destroys the argument that there can be no anticorruption successes in Russia. This narrative should be undermined, and it will be undermined if Ukraine succeeds.

Finally, since this is an informational dictatorship, informational autocracy, the battleground is information. Europe should fight disinformation and Russian propaganda. Europe should try to project its own soft power by bringing Russians to Europe, especially students, by facilitating access to European visas or going even further and relaxing visa restrictions to make sure that people who are not corrupt can enter Europe. Those who are not sanctioned can enter Europe and see that it is not falling apart. It functions better than Russian TV tells you.

Russia is an informational autocracy, the battleground is information

You need to understand what’s going on in Russia. Russian propaganda is very sophisticated, and its impact, especially on conservative voters, is very high. Therefore, it is important to study Russia and understand how it works. Russia is not going to disappear. It’s a declining power, but it will continue to be the huge country neighboring Europe. Until it democratizes, it will be against European values. Understanding how exactly the Russian regime works is important.

To end on the optimistic note, there is no need to panic. The Russian regime doesn’t have an attractive model. Dutch and Chinese citizens don’t run to Russia. A famous French actor, Gérard Depardieu, moved to Russia, received two pieces of real estate, sold them, and moved back. This shows that Russia is not something which can communicate an attractive future. The Soviet Union had an ideology, but a Russian ideology doesn’t exist today.

I remain optimistic because Russia is attached to Europe. If you ask Russians about their knowledge of Chinese poetry, they would blank. However, they would know a lot about European culture and history. They think about themselves as European. Russia has never been a democracy, but this was once the case for most European countries which are democracies today. And in that sense, proximity to Europe will eventually help. Even though Russia is corrupt today, examples of other countries, show that this battle can be won and will be won.

See also the interview Sergei Guriev recently gave to the popular Russian vlogger Yuri Dud

An interview with Oliver Bullough (in Dutch) about his book Moneyland can be found here.