Property rights in Russia after 2009: from business capture to centralized corruption?

ABSTRACT

Since about 2009, increasing budgetary constraints forced the Russian state to become notably less tolerant of lower-level corruption and predatory behavior by state agencies. In this paper, we argue that after a first stage of decentralized corruption and state capture during the 1990s, and a second period of decentralized corruption and business capture during the 2000s, Russia has entered a third stage of more centralized corruption since 2009. We build our argument on a detailed discussion of property rights relations in Russia, and support it with indicative quantitative data, suggesting that raiding attacks on businesses and corrupt behavior by state agencies have become less frequent and more centralized between 2009 and 2016. The sustainability of this move towards a more centralized mode of corruption remains questionable, however, mainly due to the lack of a long-term vision for the development of the country.

KEYWORDS:

• Corporate raiding
• property rights
• decentralized vs. centralized corruption
• authoritarian politics
• limited access orders
• Russia

Introduction

On 15 February 2016, President Vladimir Putin announced the creation of a new high-level working group at a meeting with Alexander Shokhin, the president of the Russian Union of Industrialists and Entrepreneurs, to solve conflicts between entrepreneurs and Russia’s state security agencies.¹ The working group was to be headed by the then chief of staff of the presidential administration, Sergei Ivanov, and included the heads of Russia’s leading business associations,² representatives of Russia’s security agencies,³ as well as the two personal aides to the president responsible for the economy and law enforcement, Andrei Belousov and Larisa Brychyova.

The creation of the new working group followed remarks made by Vladimir Putin during his Annual Address to the Federal Assembly in December 2015, where he expressed his concern that during 2014, nearly 200,000 cases against entrepreneurs had been opened by the investigative authorities. According to Putin, however, only 15% of these cases resulted in a conviction:

“At the same time, the vast majority, over 80 percent, or specifically, 83 percent of entrepreneurs who faced criminal charges fully or partially lost their business – they got harassed, intimidated, robbed and then released.”⁴

In other words – although these numbers probably have to be taken with a grain of salt⁵ – during the year 2014 alone, 166,000 entrepreneurs fully or partially lost their businesses because they were attacked by predatory state agencies, according to the Russian President.

The problem of corporate raiding and predatory pressure on Russian business is nothing new, and has been extensively documented in the literature (see, e.g., Firestone 2010; Rochlitz 2014; Kazun 2015; Rochlitz, Kazun, and Yakovlev 2016; Shelley and Deane 2016; Frye 2017; or Osipian 2018). The negative economic consequences of insecure property rights and state predation in Russia have also been discussed (Levina et al. 2016; Frye and Yakovlev 2016; Rochlitz 2017; Marques et al. 2020). What has not yet been covered in the literature are a series of initiatives by the Russian government since 2009 to limit the predatory behavior by low- and mid-level state officials, with the working group created in early 2016 being only one example from a whole array of measures undertaken during the last 10 years.

In the following (second) section of this paper, we document these new initiatives, before using some first indicative data in a third section (quantitative evidence) to test if they have been successful. We find that the measures implemented seem to have been indeed at least partially effective in limiting lower-level, decentralized corruption between 2009 and 2016. Based on these results, we offer a categorization of the way corruption and property rights have evolved in post-Soviet Russia, from the 1990s until today. We argue that three stages of property rights relations are discernible. After a first stage of decentralized corruption and state capture by business elites during the 1990s (Frye 2002; Volkov 2002; Hellmann, Jones, and Kaufmann 2003), the 2000s were characterized by a second stage of decentralized corruption and business capture by the state (Yakovlev 2006; Gans-Morse 2012; Markus 2015). From about 2009 onwards, property rights relations seem to have taken on again a new character, which we describe as a more centralized form of corruption, accompanied by a crackdown on corrupt and predatory behavior of lower-level state officials.

We argue that this new stage is closely linked to increasing budgetary restrictions after the economic crisis of the years 2008/2009, as well as to a perceived threat of popular unrest after the Arab Spring and the political protests in 2011–2012. In a fourth section (from decentralized to centralized corruption), we describe how during these years, the two most important groups among Russia’s ruling elites felt the need to limit lower-level predation, because of two principal reasons – a shrinking pie of available resources for redistribution, and the risk of popular unrest from below. To address these problems, some fundamental changes have been introduced in the way the system works, in particular a number of restrictions on the predatory behavior of lower-level state officials. In the new system, lower-level officials have been subjected to tighter control, while corruption has become more centralized, with access to rents being increasingly restricted to higher-level elites.

In theoretical terms, this change could be described as a move from decentralized to centralized corruption (Shleifer and Vishny 1993), or as a more centralized form of a limited access order (North, Wallis, and Weingast 2009). The theoretical literature on centralized and decentralized corruption predicts that such a move can result in higher rates of economic growth, if higher-level state officials coordinate their actions to ensure that businesses are no longer pushed out of the market by prohibitively high informal payments, or uncoordinated predatory behavior by lower-level agents of the state (Shleifer and Vishny 1993; Bliss and Di Tella 1997; Olken and Barron 2009; Popov 2015; see also Mancur Olson’s theory (1993) of roving vs. stationary bandits).

Other than predicted by the theory, Russia’s continued economic stagnation suggests, however, that despite lower levels of decentralized predation, the shift towards a more centralized mode of corruption did not translate into higher rates of growth and economic dynamism. In the fourth section of the paper, we propose two possible – and complementary – explanations for why this might be the case. A first explanation is the selective application of the anti-corruption campaign at higher levels. While the campaign has been relatively homogenously implemented at lower levels, at higher levels of the Russian state the “fight against corruption” is mainly used as a pretext to keep the political and economic elite under control, rather than to limit higher-level corruption. In other words, while the selective – and sometimes apparently random – arrests of high-level political and economic elites are a useful tool to signal to all members of the elite that they are politically vulnerable, these arrests also reduce incentives for Russian and foreign business leaders to invest in the Russian economy. In addition, a second reason is the lack of a long-term development vision for the country, especially after Putin’s re-election to the presidency in March 2018. This lack of a longer-term time horizon reduces the incentives for Russia’s elite groups to enforce tighter control over their various lower-level clients, leading already in the late 2010s to a renewed increase in decentralized corruption, and putting the long-term sustainability of the move towards centralized corruption under question.

Our paper is organized as follows. Section 2 (property rights) provides a detailed discussion of the evolution of property rights relations in Russia during the last 30 years, and introduces our conceptualization of three distinct stages in the relation between business and the state. Section 3 (quantitative evidence) uses four different sets of indicative data to document a shift towards a model of more centralized corruption during the first half of the 2010s. In section 4 (from decentralized to centralized corruption), we discuss what elite groups might stand behind the measures to limit decentralized corruption, and discuss the long-term sustainability of the new property rights regime. A final, fifth section concludes.

Property rights relations in Russia from the end of the Soviet Union until today

Decentralized corruption and state capture in the 1990s

Russia’s continuing problem of insecure property rights for investors and entrepreneurs can be traced back to the early 1990s. With the end of the Soviet Union and as a result of the ensuing economic crisis, the ability of the Russian state to maintain the monopoly of violence on its territory was seriously weakened. During the early 1990s, competing criminal groups emerged in almost every city, with businesses having to make regular payments to protection rackets or private security agencies to be able to continue their activities (Varese 2001; Volkov 2000, 2002; Stephenson 2015; Galeotti 2018). These extortion activities remained largely decentralized, with businesses having to fight off both criminal groups as well as corrupt police officials and various regulatory and tax agencies, all of which tried to maximize the rents they collected.

Apart from the decentralized nature of rent-seeking, a second characteristic of the 1990s was the capture of state resources by a newly emerging class of influential businessmen. After uncontrolled insider-privatization threatened to get out of hand, Russia’s government tried to regain control by initiating a comprehensive voucher-based privatization program between 1992 and 1994 (Boycko, Shleifer, and Vishny 1995), which was later complemented by the infamous loans-for-shares scheme during the time of Boris Yel’tsin’s re-election campaign in 1995 and 1996 (Treisman 2010). The idea to create a widespread ownership base as foundation for a new market economy failed, however, so that by 1997 a large part of the assets owned by the Russian state had been privatized and acquired by insiders such as the “red” directors appointed to top management positions in the Soviet period, and a small group of businessmen who smartly navigated the different stages of privatization, the so-called oligarchs (Hoffman 2002; Barnes 2006). Especially at the beginning, most of the oligarchs’ economic activity remained extractive rather than productive, as exemplified by the Logovaz scheme of oligarch Boris Berezovsky.⁶

During the late 1990s, Russia’s new class of businessmen started to consolidate their economic holdings. This consolidation coincided with the emergence of a phenomenon that would become characteristic for the 2000s, i.e., the use of corporate raiding attacks to acquire, eliminate, or plunder competing businesses. In order to streamline bankruptcy procedures, the Russian state had introduced a new bankruptcy law in 1998, which permitted state arbitration courts to initiate bankruptcy procedures against firms whose outstanding debts exceeded the amount of 500 minimum wages (about 1500 $US in 1999), if the debts had not been repaid within a period of three months (Volkov 2004; Radygin 2010). At the same time, the new law made it very easy to appoint a temporary external manager, once a court had initiated bankruptcy procedures against a firm. While in theory this external manager was supposed to improve the performance of the firm, in practice the extraordinary powers given to external managers were often abused to expropriate former owners and take over entire companies (Volkov 2004, 533). According to a widely cited claim by the Chairman of the Federal Service for Financial Restructuring and Bankruptcies (FSFO), Tatiana Trefilova, already in 2001 about 1,400 bankruptcies (30% of all bankruptcy cases under the new law) were related to hostile company takeovers and the illegitimate redistribution of property (Volkov 2004, 532).

At the end of the 1990s, the oligarchs had thus acquired a position of comprehensive control over the Russian economy. After Yel’tsin’s re-election in 1996, they had also gained significant political control over the Russian state, to the point that they were confident of being able to install a technocrat they could control as Yel’tsin’s successor to the Russian presidency. As is well known, this tactic backfired, with Vladimir Putin quickly becoming independent from the oligarchs and initiating a new stage of property rights relations shortly after his election to the presidency in March 2000.

Decentralized corruption and business capture during the 2000s

After Putin had come to power, he focused on re-establishing the control of the central state (Brown 2001). In June 2000, November 2000, and October 2003 the leading oligarchs Vladimir Gusinsky, Boris Berezovsky, and Mikhail Khodorkovsky were either forced out of the country or arrested, a move that effectively ended the influence of the oligarchs on Russian national politics (Goldman 2004; Sakwa 2014). Central control over the regions was re-established (Ross 2003), sometimes with the help of a number of business leaders who had started to cooperate with Putin (Orttung 2004; Shurchkov 2012). The economic upturn that had already started in 1999 provided Putin with sufficient resources to substantially increase funding for the Russian security forces, which were subsequently able to re-establish the monopoly of violence on the territory of the Russian state (Taylor 2011; Petrov and Rochlitz 2019). Many of the former criminal groups that had competed with the police for the control of rents during the 1990s now legalized their activities, by becoming private security agencies (the so-called Сhastnie okhrannie predpriyatii, or Chops).

Putin’s re-centralization featured one important paradox, however. While the Kremlin gained the upper hand in the competition with the oligarchs and Russia’s regions, corruption and rent-seeking by Russia’s state agencies remained largely decentralized. Initially in cooperation with the former criminal groups that had now become private security companies,⁷ but increasingly also by themselves, low- and mid-level members of Russia’s state security services started to attack, extort, and expropriate profitable businesses with the help of various corporate raiding schemes (Gans-Morse 2012, 2017; Rochlitz 2014). As a result, an increasing number of entrepreneurs found themselves arrested and ended up in jail, often on trumped-up charges.⁸ By the mid-2000s, these attacks had become so frequent that books, movies, and TV series about corporate raiding attacks had become a well-established element of Russian popular culture (Rochlitz 2014, 110). The attacks also had a measurable negative effect on investment (Levina et al. 2016), forced entrepreneurs into the informal sector (Kennedy 2016; Rochlitz 2017), and contributed to an overall business climate in which businessmen preferred to “keep a low profile” (Kennedy 2016, 33) and “stay under the radar”⁹ of predatory police officials.

The fact that rent-seeking during the 2000s remained decentralized had two principal reasons. During the early years of Vladimir Putin’s rule in Russia, public support for the regime was ensured by high rates of economic growth (Treisman 2011), with an implicit contract providing the population with steadily increasing incomes, as compensation for a lack of possibilities to participate in politics. The problem of political control within the regime, on the other hand, was addressed by providing all members of the state hierarchy – “from the President down to the lowliest traffic cop” (Pomerantsev 2015, 107) – with an access to rents, resulting in high levels of decentralized rent-seeking and corruption throughout the state apparatus (Dawisha 2014; Lanskoy and Myles-Primakoff 2018).

The second reason was the intense competition for the control of rent sources among Russia’s many security services.¹⁰ According to various observers, it is quite possible that this competition and infighting was consciously maintained by Putin, as it permitted him to play the role of final arbiter, and to keep the security services divided and under control (Galeotti 2016; Reddaway 2018; Rochlitz 2018; Soldatov and Rochlitz 2018). From a model of decentralized corruption and state capture by Russia’s oligarchs during the 1990s, the nature of property rights relations in Russia had thus evolved towards a model of decentralized corruption and business capture by the state during the 2000s (Yakovlev 2006).

To keep a system based on intense rent-seeking sustainable was possible above all because of the more than sixfold increase in oil prices between 2003 and 2008 (from below 20 USD per barrel before September 1999 to 133 USD dollar per barrel in July 2008 (Figure 1)). This massive influx of resources, in combination with an economy that at the end of the 1990s had a lot of underused potential, permitted the Russian economy to grow at an average rate of 6.9% between 1999 and 2008, despite high amounts of rent-seeking at all levels of the state. Once oil prices collapsed after the economic crisis in mid-2008, however, it became apparent that the existing model was no longer sustainable, and had to be changed.

Figure 1. Trend of the crude oil price from 1995 to 2020. Source: World Bank Commodity Price Data, average crude oil price, monthly prices in nominal US dollars per barrel

A move toward centralized corruption since 2009

Already in July 2008, a couple of months after assuming office as Russian president, Dmitry Medvedev had emphasized that Russia’s security services and state agencies had to stop to “scare” (koshmarit) Russia’s businesses.¹¹ After the collapse of the oil price and the economic crisis that followed shortly afterwards, Medvedev published the programmatic article “Forward, Russia!” in September 2009, in which he outlined a new economic vision for the Russian state, based on modernization and innovation.¹² Medvedev’s new program contained both elements to stimulate innovation, such as the Skolkovo Innovation Center near Moscow (Radosevic and Wade 2014) and increased investments in high-technology sectors such as nanotechnology (Connolly 2013), as well as a series of measures to limit predatory pressure against businesses.

Medvedev’s initiative was the first time that the Russian state acknowledged in earnest that predatory pressure on businesses from the side of the state was a problem, and needed to be addressed. A first concrete step was a new law adopted in 2010, which made it illegal to arrest entrepreneurs during an ongoing investigation. In 2011, the NGO Business against Corruption was founded with the support of the state, to offer firms that were under attack a possibility to defend themselves (Yakovlev, Sobolev, and Kazun 2014). During the same year, the Agency for Strategic Initiatives (ASI) was established as a platform to represent the interests of medium-sized businesses.¹³ More fundamentally, a police reform that came into force on 1 March 2011 stipulated a personnel cut of 20%, as well as substantial increases in salaries,¹⁴ better housing benefits, and centralization of financing, in an effort to fight corruption within Russia’s law enforcement agencies (Galeotti 2012; Taylor 2014).

Although Putin’s return to the presidency in March 2012 was accompanied by a tightening of the screws for the domestic opposition, a more conservative discourse in domestic politics, a strengthening of the role played by the security services (the so-called siloviki), and a more confrontational stance with the West (see Shevtsova 2015 for an overview), the efforts to limit predatory behavior and to improve the business climate were also further extended. Already before Putin’s re-election, a “Program of 100 Steps” to improve Russia’s position in the World Bank’s Doing Business ranking was announced in February 2012, together with a plan for the ASI to work out a concrete road map to achieve these objectives. Once Putin was re-elected, gubernatorial elections were re-introduced in the regions (Golosov 2012; Goode 2013), together with new performance criteria for regional governors that put the focus on attracting investment and improving the regional business climate.¹⁵ These were supplemented by a yearly ranking of the regional investment climate that was introduced in 2014, to create incentives for regional governors to improve conditions for businesses in the regions.¹⁶

In June 2012, Vladimir Putin appointed Boris Titov to the newly created post of “Presidential Commissioner for Entrepreneurs’ Rights.” On Titov’s initiative, an amnesty for jailed entrepreneurs was announced in July 2013, to reduce the high number of businessmen in Russia’s prisons.¹⁷ The amnesty was complemented in 2015 with a law to suspend regulatory inspections of small businesses until the end of 2018, as these inspections were often used as a pretext by law enforcement agencies to prey on businesses (Kennedy 2016, 7). Finally, as a reaction to Putin’s speech to the Federal Assembly in December 2015, the high-level working group cited in the introduction was founded in early 2016, to sort out conflicts between Russia’s business community and the law enforcement and security services.¹⁸

All of these developments were accompanied by a long-term campaign to fight corruption, which had been started in 2009 with a law obliging a large number of Russian government officials to disclose their assets and sources of income, as well as those of their close family members.¹⁹ The law was subsequently amended several times and strengthened,²⁰ so that by 2015 all government institutions had to post the income disclosures of their staff on the internet. In December 2013, a new Directorate to coordinate the fight against corruption was put in place at the presidential administration, headed by Oleg Plokhoy, a former member of the KGB and FSB (Orttung 2014). According to Szakonyi (2018, 21), at least at lower levels the anti-corruption campaign was implemented in a way that resembled a “broad, more or less even-handed cleaning house of unscrupulous local elites,” rather than “a selective, targeted purge of unwanted opponents.” At higher administrative levels, however, persecutions remained much more selective, and also contained elements of a political purge.²¹

The fact that the disclosure law was relatively equally applied to about 1.5 million low- and mid-level government officials from 2015 onwards,²² while enforcement at higher levels remained much more selective is probably the strongest indication that an attempt to limit decentralized corruption was indeed taking place, in order to move towards a more centralized model of rent-seeking. The various measures aimed at protecting entrepreneurs from arbitrary and predatory attacks by lower-level security officials can also be interpreted along these lines. The question remains, however, to what extent these efforts have been successful in limiting predatory pressure against businesses. The section that follows offers a range of indicative quantitative data to test for the effectiveness of the various initiatives described above.

Quantitative evidence

Measuring the exact extent as well as the evolution of violent and administrative pressure against entrepreneurs in Russia remains difficult. While a general consensus seems to exist in the Russian media that the problem is widespread, most numbers of raiding attacks cited in the press are based on subjective estimates by experts and officials. These numbers range widely, however, from several hundred cases per year to the 200,000 yearly cases mentioned by Vladimir Putin in December 2015, up to an estimate of 700,000 yearly cases that was published in Rossiiskaya Gazeta in July 2015.²³

Official law enforcement statistics are also only of limited use, as they do not contain direct information on raiding attacks or violent pressure on business. While using indirect indicators (such as the overall number of criminal cases against entrepreneurs) might make it possible to approximate the amount of violent pressure, it is difficult to disentangle cases where indicted entrepreneurs are victims of predatory behavior from cases where entrepreneurs actually committed a crime. In addition, Russia’s system of official criminal statistics suffers from significant systematic bias, as agents in law enforcement are promoted for the numbers of cases investigated and cleared (with the previous accounting period as a benchmark), providing them with strong incentives to increase the number of investigations year after year (the so-called palochnaya sistema; see McCarthy 2014; Paneyakh 2014; or Kosals and Pavlenko 2018).

In the absence of usable official statistics, the academic literature studying institutional quality and corruption in Russian regions is relying mainly on expert evaluations and survey data from various sources – see Libman and Kozlov (2013) for an overview of indicators measuring corruption and Baranov et al. (2015) for measures of institutional quality. Perhaps the most useful way to obtain a general picture on the development of corruption across countries and over time is the Corruption Perceptions Index, compiled annually by Transparency International, and based on surveys and expert-opinions.²⁴ For Russia, the index does indicate a significant improvement between 2010 and 2012, as well as a subsequent stabilization at, however, still relatively low levels (Figure 2).²⁵ The graph also nicely illustrates the improvement resulting from Putin’s initial reforms in the early 2000s, and the reversal after the Khodorkovsky case in 2003 and the onset of increased state-led raiding attacks (Gans-Morse 2012; Rochlitz 2014).

Figure 2. Corruption Perceptions Index (Russia, 1996–2019). Source: Transparency International. 0 = highly corrupt, 100 = very clean

A good source of data to study more precisely the effect of the measures implemented since 2009 are the Business Environment and Enterprise Performance Surveys (BEEPS), jointly conducted by the World Bank and the EBRD.²⁶ While the survey waves conducted between 1999 and 2005 use a slightly different set of questions, survey waves IV (2008) and V (2011) employ the exact same questionnaire, with a number of questions specifically focusing on corruption, regulatory pressure, and property rights security. This makes it possible for us to compare answers before and after the start of Russia’s government-led campaign to limit lower-level corruption and pressure on business.

Table 1 shows how the percentage of firms paying for their own security – for example, by hiring a private security service – has decreased from 78% in 2008 to 65% in 2011, suggesting that protecting a firm from raiders might have become less of a concern. Corruption is also seen as less of a problem in 2011 than it was in 2008. This is reflected by a decrease in the overall and average numbers of regulatory controls, and a decline from 29% to 13% in the number of firms reporting unofficial payments to public officials to “get things done.” Interestingly, however, for those firms that still had to pay a bribe, the percentage of annual sales spent on informal payments increased, suggesting that it had become riskier for corrupt officials to demand a bribe (with, as a consequence, the price per bribe increasing, although less bribes were demanded on average). A similar development can be observed for unofficial payments made to secure government contracts.²⁷

Table 1. Firm-level perceptions of property rights security, regulatory pressure, and corruption in Russia (2008 vs. 2011)

	2008 (BEEPS Wave IV)	2011 (BEEPS Wave V)
Percentage of firms that pay for security (e.g., equipment, personnel, or professional security services)	78	65
Percentage of annual sales used for security payments (all firms)	1.9	1.6
Percentage of annual sales used for security payments (only firms that indicated making such payments)	3.0	3.1
Percentage of firms indicating that corruption is not a problem	21	40
Percentage of firms visited by tax officials during the last year	63	48
Average number of times firms were inspected by tax officials during the last year	3.2	2.6
Percentage of firms reporting unofficial payments to public officials to “get things done”	29	13
Bribes as a share of annual sales (all firms; in percent)	1.7	0.9
Bribes as a share of annual sales (only firms that reported making at least one unofficial payment; in percent)	4.6	7.3
Percentage of contract value typically paid in unofficial payments to secure a government contract (all firms participating in public procurement)	4.6	3.5
Percentage of contract value typically paid in unofficial payments to secure a government contract (only firms that actually reported paying a bribe)	11.5	15.2

Data obtained from World Bank (2013). Wave IV of the survey was conducted between August 2008 and March 2009, and included 1,004 randomly selected Russian firms. Wave V of the survey was launched in August 2011, and included 4,220 randomly selected Russian firms. Variables are weighted to account for the differences in sample composition and sample size between waves IV and V.

While Figure 2 and Table 1 provide a first indication that the measures to limit lower-level corruption had at least some effect, it is more difficult to find existing surveys and data on the evolution of corporate raiding, and the role of state agencies in this respect. In the past, we have therefore relied on two additional data sources to study this question. One potential source of information is the Russian press, as both regional and federal newspapers are, despite the limits on media freedom in Russia, still surprisingly active in reporting about economic crimes. Using an online database (www.integrum.ru) of 2,441 regional and federal Russian newspapers, Rochlitz (2014) identified 312 raiding cases that took place between 1999 and 2010. We have now updated this database and were able to identify additional 688 cases for the years 2011 to 2016.

A second source of information are appeals for help that businessmen who are under attack can address to the NGO Business against Corruption, founded in 2011 (BaC; see Yakovlev, Sobolev, and Kazun 2014 for a detailed analysis of the NGO). If a case is judged by the public council of BaC to be a genuine raiding attack, a defense is organized and coordinated. BaC has a website with detailed information on each application, with 1,063 entrepreneurs having applied for help between 2011 and 2016.²⁸ A quantitative analysis of raiding cases based on this data is provided by Kazun (2015).

Although both sources of data also have their limitations,²⁹ they enable us to identify some longer-term trends with respect to the evolution of raiding over time. Figure 3 presents the overall number of attacks reported in the press in a given year, as well as the number of appeals to BaC. As can be seen, the number of cases reported in the press falls from about 200 in 2011 to 100 in 2014, and then remains stable. As BaC took up its work in late 2011, it is not surprising that the number of appeals is highest in 2012, with 404 appeals (most probably due to a backlog of cases that had to be addressed). The number then falls to 121 appeals in 2014, after which it increases again to 187 in 2016. Overall, our data suggest a decrease in reported raiding attacks until about 2014, followed by a stabilization and a slight increase in 2016.

Figure 3. Raiding cases reported in the press and appeals to Business against Corruption. Source: http://www.nocorruption.biz/; www.integrum.ru

By using information on the specific nature of appeals to BaC, we then also try to conjecture on the relationship between decentralized and centralized corruption. Violent pressure by law enforcement agencies can be sorted into three distinct categories. The first type is informal pressure, without a formalized investigation, for example, when police officers bully a business-person into making a concession or paying a bribe but do not file an official case. The second type is an ongoing formal investigation, which has however not yet been brought before a judge. The third type is a formal trial in court.

The application data published by BaC enable us to clearly distinguish between these three different types of cases. After classifying each case, we use the extent to which a criminal investigation has been formalized as a proxy for the degree of centralization of a raiding attack. The first type of informal pressure is a good proxy to identify contexts of decentralized corruption. Such forms of informal pressure remain mostly invisible at higher levels, with the advantage that the proceeds do not have to be shared with senior officers. The second type of pressure is already more difficult to hide, as every case has to be documented and reported to a senior officer, with whom illicit earnings have to be shared. Finally, a case that has made it to court becomes visible at least at the regional level, where different ministries have to coordinate their actions, if the case should be used as a means to extract resources from the victim. In other words, the more advanced the given case of predatory raiding, the more coordination is involved, and the more difficult it becomes for lower-level government agents to independently act in a predatory way.

Figure 4 outlines the percentage share of appeals to BaC with criminal prosecution (type 2), as well as the percentage share of appeals where the case was subsequently sent to court (type 3). As can be seen, over time the share of type 2 cases increases from about 40% of all applications in 2011 to over 95% in 2015 and 2016 (reciprocally, the number of cases only characterized by informal pressure decreased from 60% in 2011 to less than 1% in 2016). The number of type 3 cases also increases from about 20% in 2011 to above 50% in 2013 and 2014, but then decreases again to about 40% in 2016. Overall, the data suggest that cases where entrepreneurs complain about predatory pressure from law enforcement agencies have indeed taken on a more centralized form from 2011 onwards. As with the number of appeals to BaC (Figure 3), however, one can note a slight reversal of the trend for type 3 cases from 2014 onwards.

Figure 4. Characteristics of appeals to the NGO Business against Corruption. Source: http://www.nocorruption.biz/

From decentralized to centralized corruption? Mechanisms and sustainability

In sum, the relatively large number of measures implemented from 2009 onwards to limit decentralized corruption point towards a coordinated move by the Russian government to address the problem, during the first half of the 2010s. The data we present in the section on quantitative evidence suggest that at least until about 2016, these measures had indeed some success in limiting lower-level corruption. According to the BEEPS data presented in Table 1, the percentage of firms that had to pay a bribe in their dealings with state officials decreased notably between 2008 and 2011, while those state officials still demanding bribes charged higher prices, suggesting that corrupt behavior had become riskier. Our data on raiding attacks similarly suggest that the various forms of violent pressure against businesses had become more centralized between 2011 and 2016 (Figures 3 and 4). Finally, the way Russia’s ongoing anti-corruption campaign has been implemented since 2009 – relatively homogenously at lower levels, but more selectively at higher levels – also points toward a move in the direction of a more centralized model of corruption (Holmes 2018; Szakonyi 2018; Aburamoto 2019; Petrov and Rochlitz 2019).

If this change towards a different form of state–business relations in Russia was indeed a conscious policy choice by the Russian leadership, who were the principal players advocating such a move? This question addresses an apparent paradox, as with Putin’s return to the presidency in 2012 those same security services (the so-called siloviki) who had been responsible for the increase in raiding attacks during the 2000s did visibly gain in power and influence (Shevtsova 2015; Galeotti 2016; Rochlitz 2019). Nevertheless, the policies initiated under President Medvedev to limit decentralized corruption continued to be implemented after 2012, and were even reinforced, most notably with the appointment of Boris Titov as business ombudsman in June 2012, the amnesty for jailed entrepreneurs in July 2013, the law to suspend regulatory inspections of small businesses until the end of 2018, and the high-level working group introduced in early 2016.

Who stands behind the move toward centralized corruption?

At the risk of somehow oversimplifying the actual picture, we argue that two groups in particular were responsible for the shift in policy. On the one hand, the so-called “liberal block”³⁰ around figures such as Alexei Kudrin, German Gref, Andrei Belousov, and Elvira Nabiullina was acting out of a conviction that after the economic crisis of 2008–2009, Russia had to change its underlying economic model to remain competitive. The strategy pursued by leading actors of this group was to limit the predatory nature of the state, to introduce transparent Western management practices in both private and state-owned firms,³¹ and to continue with Russia’s relatively stable, predictable and orthodox macroeconomic policies.³² Many of these ideas have been enunciated in the “Strategy 2020,” a long-term vision for the development of the country elaborated under the direction of Vladimir Mau and Yaroslav Kuzminov.³³ While the publication of the strategy coincided with the “return of the siloviki” in early 2012 and therefore never had the desired impact, some of its elements were nevertheless reflected in the measures to limit decentralized corruption we describe in this paper.

The other influential group responsible for limiting predation by the state was, somewhat paradoxically, the siloviki themselves. Russia’s security services were alarmed by the Arab Spring in 2011, and the political protests that took place in Russia shortly afterwards (Petrov and Rochlitz 2019), with both protest waves having been at least partially caused by frustration of the public with high levels of rent-seeking and corruption (Cook, Moretti, and Rudin 2012; Robertson 2013). The siloviki were also concerned that Russia’s economic stagnation might put the country’s rearmament plans at risk (Bradshaw and Connolly 2016; Oxenstierna 2016; Golts 2018). Finally, a probably at least equally important concern was that a shrinking economic pie could reduce the resources available for rent-seeking (Dawisha 2011; Yakovlev 2014).

As a consequence, at least with respect to limiting the pressure on business, the objectives pursued by the liberal block as well as by a number of leading siloviki began to coincide during the early 2010s. Their methods, however, continued to differ. While the liberals emphasized the importance of civil society, as well as mechanisms of defense such as the business ombudsman Boris Titov or the NGO Business against Corruption, the siloviki believed in the necessity to increase control by the state, both with respect to lower-level state officials and their rent-seeking activities, but also more broadly with respect to civil society and the political opposition (Shevtsova 2015; Libman and Rochlitz 2019, chapter 4). This focus on control led, from 2012 onwards, to an increase in investigations and arrests of in particular lower-level state officials in the security services, but also elsewhere, paralleling – although with a lower overall number of arrests – the anti-corruption campaign started by Xi Jinping in China (Lorentzen and Lu 2018; Petrov and Rochlitz 2019).

In sum, we argue that the move towards a more centralized mode of corruption was based on two interrelated types of pressure – the economic downturn after 2008, leading to a reduction in rent flows and an awareness that the existing economic model was no longer sustainable, and the political pressure resulting from a demand for higher quality of governance, which erupted into public protests in December 2011.

The Russian state reacted to this double challenge from within and without by, on the one hand, a severe crackdown on the political opposition, and a turn towards “patriotic mobilization” based on anti-Western rhetoric and massive state-propaganda, a move that resulted in the accession of Crimea and the ensuing Ukraine crisis (Pomerantsev 2015; Shevtsova 2015). On the other, however, the Kremlin tried to tighten control over the state apparatus, by strengthening the fight against corruption, limiting violent pressure on business, and trying to improve the business climate. It is this second element that can be interpreted, in our view, as a shift from decentralized to centralized corruption, in terms of Shleifer and Vishny (1993).

How viable is the move towards centralized corruption?

We argue that at least two interdependent conditions are necessary to make this shift towards centralized corruption sustainable. First, the pressure from without and within would have to continue, as it serves as an important factor of elite consolidation. Second, the elite needs some kind of understanding of the direction into which the political and economic system is developing, to make investments into an equilibrium based on collective self-restraint worthwhile. The peak of external pressure, in this respect, was reached in the years 2015–2016, when the serious negative impact of international sanctions became clear, while another sudden and sharp drop in the oil price (Figure 1) forced the regime – for the first time since the 1990s – to significantly reduce real incomes.

It was in this situation that an active search for a new development model took place. In 2016 it had become obvious that the model of a “besieged fortress,” as advocated, for example, by the so-called “Izborsky Club,”³⁴ a think tank closely associated with various siloviki agencies, was no viable solution for the future. In April 2016, the liberal block reacted to the need for a new development model with Alexei Kudrin taking over the direction of the Center for Strategic Research (CSR),³⁵ which began a dialogue with academics, civil society leaders, and businessmen to develop a short-term (until 2024) and long-term (until 2035) development strategy for the Russian Federation. At the same time, the expert and business community started a series of discussions about the country’s future on the platform of the “Stolypin Club,”³⁶ under the direction of business ombudsman Boris Titov. One underlying consensus of these discussions was, however, that no political decision would likely be taken before the presidential elections scheduled for March 2018.

Unfortunately, by 2018 the oil price had recovered sufficiently to make the need for fundamental change seem less urgent (Figure 1). The intense discussions of the two previous years therefore did not result in any tangible political outcome. Worse, after Putin’s re-election the new government under Dmitri Medvedev looked almost exactly like the old one, even though many of its members had already been discredited by the relentless anti-corruption investigations of Alexei Navalny’s Anti-Corruption Foundation.³⁷ Together, these two factors left the country’s elite with an impression of growing political uncertainty, with the lack of a long-term development vision leading to a shortening of time horizons for individual actors. As a result, it did not take long until instances resembling the violent redistribution of economic assets during the 2000s started to appear again, as for example the Baring Vostok case around US investor Michael Calvey, who was arrested in February 2019. By the end of the 2010s, the viability of Russia’s new model of more centralized corruption was thus again put into question.

Conclusion

The theoretical literature on the move from decentralized to centralized corruption predicts that a more centralized system can have beneficial effects on economic dynamism and growth, if the ruling elites are able to coordinate rent-extraction in a way that businesses are no longer pushed out of the market (Shleifer and Vishny 1993; Olson 1993; Bliss and Di Tella 1997; Olken and Barron 2009; Popov 2015). It was exactly this kind of intra-elite consensus – in combination with a shared understanding that economic development is an absolute national priority – that led to high rates of economic growth in such countries as South Korea under Park Chung-hee (Amsden 1989; Khan 1998), or Indonesia under Suharto (McLeod 2000), despite significant levels of centralized corruption.

In this paper, we argue that during a brief window of opportunity between 2009 and approximately 2017/2018, a comparable consensus existed within Russia’s ruling elites, based on the idea that decentralized corruption and violent pressure against businesses had to be limited, should Russia’s economy stay competitive. While available data remain limited, we provide a set of indicative variables suggesting that the measures introduced by the government between 2009 and 2016 to tackle decentralized corruption had indeed a noticeable positive effect.

After Putin’s re-election in March 2018, however, a slightly better economic situation – together with the lack of a long-term development perspective for the country – put this elite consensus at risk, initiating again a trend towards more decentralized corruption. This, in combination with the unpopular pension reform in 2018 (Brand 2018) and the fading of the “rally around the flag effect” that had followed the accession of Crimea (Kazun 2016) led to a renewed rise of public pressure on the regime, which became most visible during the protests around the Moscow Duma elections in the summer of 2019.

The replacement of the government in early 2020 was most likely a reaction to this renewed pressure from within. The new government under Prime Minister Mikhail Mishustin contains a number of young technocrats, and Mishustin has already declared his intention to digitalize the Russian government to make it more effective. Somewhat symptomatically, however, while many members of the economic block of the government have been replaced, almost all siloviki have kept their seats. Rather than providing a strong signal for a change of Russia’s underlying political and economic model, this points toward a continuation of the old system, which remains heavily based on pressure and control of the business community by the security services. Against this background, it remains doubtful if the shift toward a model of more centralized corruption will remain sustainable for long.

Additional information

Funding

The study has been funded within the framework of the Basic Research Program at the National Research University Higher School of Economics (HSE) and by the Russian Academic Excellence Project “5-100.”

Notes

1. http://en.kremlin.ru/events/president/news/51329

2. The Russian Union of Industrialists and Entrepreneurs (RSPP), Delovaya Rossiya, Opora Rossii, and the Chamber of Commerce and Industry of the Russian Federation.

3. The Ministry of the Interior, the Investigative Committee, the Federal Security Service (FSB), and the Prosecutor General.

4. http://en.kremlin.ru/events/president/news/50864

5. It remains unclear from where exactly Putin obtained these numbers, although one alleged source is Boris Titov, the Presidential Commissioner for Entrepreneurs’ Rights.

6. Berezovsky had worked as a consultant for the largest Soviet car manufacturer AvtoVaz, where in 1989 he set up the company LogoVaz. LogoVaz bought cars intended for export at fixed state prices, and re-sold them at much higher prices inside Russia, where at the time cars were in short supply. Berezovsky then used his profits from LogoVaz to expand his activities to the sectors of banking and oil (see, e.g., Klebnikov 2000).

7. During the early 2000s, many of the former criminal groups that had become private security agencies offered their services and know-how to firms and entrepreneurs who were interested in mounting corporate raiding attacks against competitors. While Privalov and Volkov (2007) speak of several dozen professional agencies active throughout Russia in the early 2000s, according to Aldabergenova (2010) in 2004 no less than 100 such groups were offering their services in Moscow alone.

8. According to the BBC, about 3 million Russian entrepreneurs were arrested between 2002 and 2012, many of them unjustly (https://www.bbc.com/news/magazine-18706597). See also Yaffa (2013).

9. In an interview conducted by one of the authors of this paper in December 2009, a successful mid-level Russian entrepreneur stated that “to keep your business, you have to keep a low profile and ‘stay under the radar’ of predatory police officials.”

10. Although evidence of the intense inter-agency infighting only rarely emerges to the surface (as, for example, in 2007, when the head of Russia’s Federal Drug Control Service Viktor Cherkesov publicly voiced his frustration with intra-agency feuds in the newspaper Kommersant), the competition between in particular the FSB and the MVD is said to be fierce (see, e.g., Reddaway 2018).

11. http://special.kremlin.ru/catalog/keywords/40/events/993

12. http://kremlin.ru/events/president/news/5413

13. https://asi.ru/

14. According to an article in the Moscow Times (2011), after the reform a police lieutenant was supposed to earn “33,000 to 45,000 rubles ($1,170 to $1,600) a month, compared with the current 10,000 rubles ($360).”

15. Decrees No. 1199 (August 2012) and No. 1276 (September 2012) by the Russian President (http://kremlin.ru/events/president/news/16280; http://kremlin.ru/events/president/news/16453).

16. https://asi.ru/eng/investclimate/rating/

17. https://www.reuters.com/article/us-russia-amnesty/glimmer-of-hope-for-russias-jailed-entrepreneurs-idUSBRE9680P420130709

18. www.kremlin.ru/events/president/news/51343

19. Federal Law No. 273 “On Counteracting Corruption,” signed on 25 December 2018.

20. These amendments included Federal Law No. 329 from 11 November 2011; Federal Law No. 280 from 29 December 2012; Federal Law No. 231 from 3 December 2012; and Federal Law No. 431 from 22 December 2014 (Szakonyi 2018).

21. https://carnegie.ru/2018/01/30/rotating-elite-kremlin-s-new-personnel-policy-pub-75379; https://www.foreignaffairs.com/articles/russia-fsu/2018-05-31/putins-secret-services

22. According to Putin’s then chief-of-staff Sergei Ivanov, in 2015 the declarations of 1.5 million state officials had been checked, of which 4,000 had been subject to disciplinary measures, and 272 fired (https://www.kommersant.ru/doc/2845756).

23. https://rg.ru/2015/07/07/reyderstvo.html

24. https://www.transparency.org/research/cpi

25. In 2019, Russia was at the same level as Uganda, Liberia, and the Dominican Republic – better than in 2010, when it shared a ranking with Tajikistan and the Central African Republic, but still far below other former Soviet republics such as Georgia, Belarus, or Armenia, let alone countries with a similar level of GDP per capita, such as, for example, Argentina or Romania.

26. https://www.beeps-ebrd.com/

27. See also Yakovlev (2015) for a discussion of this phenomenon.

28. http://www.nocorruption.biz/(last accessed on 25 January 2019). Unfortunately, from 2017 onward BaC no longer makes the application data publicly available. We therefore focus on the period 2011–2016.

29. Reports on raiding attacks by the media (available on Integrum) depend on the existence of a searchable online archive and are influenced by regional levels of media freedom. They can also be subject to bias and manipulation, especially if a case is only mentioned by a single source. While applications to BaC are less likely to be influenced by regional levels of media freedom, they depend on how well the NGO is known in a given region, as well as on the perceived probability that an appeal to BaC can result in a successful defense for an entrepreneur under attack.

30. However, some of its members were not liberal economists in the Western sense of the word, as, for example, Andrei Belousov, who is a strong advocate of state-led industrial policy. Nevertheless, members of the liberal block are usually assumed to have a professional background in economics, and to be less ideologically driven than other factions of the Russian leadership.

31. As director of the state-owned bank Sberbank since 2007, German Gref has been relatively successful in introducing modern management practices to the bank. Another well-documented case are the corporate governance reforms in the leading Russian holding company AFK Sistema (see Dolgopyatova, Libman, and Yakovlev 2018; Libman, Dolgopyatova, and Yakovlev 2020).

32. Here, Elvira Nabiullina has played a central role as chairwoman of the Central Bank of Russia since 2013.

33. http://2020strategy.ru/. Vladimir Mau is rector of the Russian Presidential Academy of National Economy and Public Administration (RANEPA), and Yaroslav Kuzminov is rector of the Higher School of Economics (HSE).

34. https://izborsk-club.ru/

35. https://www.csr.ru

36. https://stolypinsky-club.ru/

37. https://fbk.info/english