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Wednesday, 5 February 2014

Will corruption finish the Russian economy within three years? Russian economist Evgeniy Arsyukhin thinks it will, in an opinion article for Komsomolskaya Pravda!

It is hardly a secret that my lovely wife Olga comes from Russia; a country that I had the pleasure of visiting on a number of occasions.  

Of course, Russia is very much in the spotlights nowadays, because of the Olympic Winter Games in Sochi and the pomp and circumstance around it.

Currently, the discussion in the West and especially in The Netherlands is very focused upon the Russian ‘anti-gay legislation’ and a number of other issues, which would not be unbecoming in your typical ‘cold war day at the office’ in the eighties of the last century.

The old-fashioned polarization between East and West is 'back en vogue' in the Western world; Vladimir Putin is an ideal Russian president in that respect, as all prejudice about him seems to be true.

One aspect of the Olympic Games has NOT been mentioned very much in the host of Western news about Russia lately: the ubiquitous corruption that has surrounded the building process of the Sochi venue. With €40 - €50 billion in total expenses, the Olympic games in Sochi will be – by far – the most expensive games in history.

At the same time, there have been the wildest guesses with respect to the amount of money, which has been embezzled during the building process. Some people in Russia guess that this is amounting to somewhere between €10 and €20 billion.

In an opinion article in the Russian online newspaper Komsomolskaya Pravda, the Russian economist Evgeniy Arsyukhin sheds some light at how such frauds take place.

Arsyukin is very negative about the chances for survival of the Russian economy: he states that this kind of widespread corruption will bring it down within three years, as all state funds have run out at that time.

I will print here the largest part of this KP article. It has been initially translated by Google Translate and afterwards improved by Olga and me, to get the ‘Double Dutch’ out of it…

Our economic commentator Evgeniy Arsyukhin believes that "the process of decomposition of the ‘state machinery’ has a clearly defined end":

Even the officials admit corruption – which is tragic for our country. 

Money leakage causes a 20% loss within the Russian GDP: these estimates come from government documents, although government officials have deployed smokescreens about this. 

Does this mean that this process of corruption can go on indefinitely? And that in ten or fifty years certain people still will be stealing and people with low wages will still complain about the high prices in Russia?

I don’t think so. In my opinion, the decomposition process of the ‘state machinery’ has a clearly defined end. There is a limit beyond which corruption will simply start to eat the economy. Here's why.

The thesis, that “people in Russia have always been stealing" is incorrect.

The current wave of corruption has emerged quite recently: since about the year 2000. Since then we can recognize the patterns in the statistical data that corruption started to distort the Russian economy

Please take a look at the following paradox. Worldwide, government contracts are a dream for businesses. Businesses battle with their competitors to acquire such contracts. The state always pays its bills, which means guaranteed financing – and that is very good.

However, if you read an official Russian government contract, you will think: ‘What kind of fool will sign such a contract?!’. The terms of the government contract could ruin your business. Nevertheless, in Russia there are hundreds of ‘fools’, who enter into a seemingly very unfavourable contract with the government.

The reason that they do so, is because there is a snag in such contracts: they open the floodgates for stealing. The government official, who makes up such an unfavourable contract, leaves a few loopholes in it, which make it possible for him AND the contractor to steal.

Around 2003 the government seriously wanted to stop the payment of kickbacks in Russia. They did so by making the terms of government contracts so unfavourable, that nobody wanted to sign them anymore.

In a counter movement to this, a new kickbacks system formed around 2004; a time when the oil price increased dramatically. This soaring oil price led to inflation in Russia, as especially building materials quickly rose in price.

State contracts often took a long time to develop. When a contractor for instance subscribed to building a dam for €1 million and he started to build it, it could be that the price of his building materials doubled in the meantime. This would leave him with a loss of say €500,000 at the end of the project.

Then the Rusian state – probably with the best intentions – introduced a system in which the price of the object could go up during the building process. In other words: “if your building costs will rise, the state will pay a higher price for it”.

Barely a few months after this system had been introduced, it had grown into a “business”.  Officials drafted contracts in such a way, that these seemed totally unprofitable in the eyes of unsuspicious contractors. This circumstance scared away all contractors, who were not “in the loop” of the government official.

The people who were in the loop, however, understood the contract and entered into it. During the project, the involved contractors charged construction rates, which were 5-10 times higher than the original budgeted expenses. And in the end, the contractor and the official splitted the difference of the excess margin: everybody happy.

In this way, the country has been robbed for ten years, blowing the public investment resources to smithereens. The investment money of state companies is gone now. In 2009, we took the money from the anti-crisis aid fund and its also gone now. 

The only money that we have left now, are sovereign wealth funds. This money was stashed outside Russia, but this year we will start using this money too. And in a few years it will be gone.

People come up with all kinds of fake projects: ‘bridges to nowhere’. These projects should be paid from the Russian National Welfare Fund. Let’s say that such a project costs €2.5 billion. "We" make a request for the money and we get it. I’m not exaggerating. This is how things happen.

Until now, officials declare that the government-lended money should come back on delivery / sale of the object and that not all the fund money from the National Welfare Fund will be used in the process.

Unfortunately, however, the projects are already reaching the limits of this National Welfare Fund. And what about the repayment of the borrowed money? That is easy. The contractors just point at the current crisis and state that they can’t repay the borrowed money anymore. These debts are often retracted then. This has happened many times already.

It is easy to calculate, that at the current spending rate of the National Welfare Fund's money, the fund will run on empty within three years. And this will be the final frontier, beyond which there is no place to retreat.

When this happens, the Russian economy would be completely sucked dry, and you could even state that the economy of the country would simply cease to exist.

Once ... I talked to one senior public servant, and he told me:
"Do you remember the administrative reforms, which happened in 2004?"  

In that year federal officials had to cut their expenses ferociously. You could say that the Russian government almost stopped working during that year. Is it coincidential, that the Russian GDP grew with the highest rate in a long time, during that year?  

In other words: it is better for the Russian economy when the government doesn’t work. I have been told officially! Should we not do something about this?

This is a shocking story to read for everybody that bears symphathy for Russia and especially the middle-class and lower class Russian people. You see that their money is squandered in this ubiquitous corruption.

Especially in the vast rural areas of Russia with their extremely awkward climate, these state budgets are indispensable for the necessary bureaucracy, education, healthcare and social security for the people living there. 
Circumstances like poverty, unemployment, desperation and alcohol abuse are widespread in those areas. When the state money is gone, the consequences there could be devastating.

You should not forget that the void between Moscow & St-Petersburg and the rest of the country is unbelievable in Russia. The splendour of these two cities is world-famous and attracts the richest people and investors from around the globe. However, non-touristical visitors of the country, who took the time to look beyond these cities, know that there is a different Russia.

You only have to drive 50 kilometers away from the ‘tinseltowns’ Moscow and St-Peterburg, to get into another world: you leave the outrageously luxurious GUM department store on the Red Square and enter towns and villages with wooden houses. The people who live there, must do without supermarkets, running water and even without a gas connection. These are towns where employment and possibilities for growth are scarce and where Czar Vodka already has ruled for decades and will rule for decades more.

Although the thesis, that the Russian economy will run dry of money in three years, is perhaps a little bit too pessimistic, I consider this article nevertheless a warning statement.

I hope – against better knowing – that the Russian government will take it to heart.

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