BUSINESS AND CORRUPTION 2005

Creating Tools for SMEs to Combat Corruption and State Capitalism

The project supported by the Center for International Private Enterprise (CIPE) is devoted to analysis of the situation renting or buying office space or buildings, getting construction permissions for building production facilities, buying land for non-residential constructions, etc.

The main project’s objectives are as follows:

  1. To create effective and practical anticorruption instruments for entrepreneurs that would help them to oppose corruption accompanying access to non-residential premises and land. Close integration of the activities with regional partners is essential in this respect. It is necessary to involve people, who are likely to be interested in solving the problem, into the work so that the project results were immediate instruction for them.
  2. To develop and disseminate business cooperation mechanisms for opposing corruption in the particular sphere. It is also important to help with implementation of anti-corruption recommendations for small and medium-size businesses. The project “Business and Corruption: How to Combat Business Participation in Corruption” laid basis for general SME anticorruption policy based on collective algorithms. The next step is to design anticorruption mechanisms in specific spheres of business activities.
  3. To draw attention of regional executive and legislative branches of power towards the problem and the most prospective directions of improving administrative practices and legislative regulation of such relations. In this context, building constructive long-term relations with regional executive and legislative powers is also among the top priority of the project.

The target audience of the project is small and medium-size entrepreneurs. The project period is September 2005 – August 2006. The research part will be carried out in three Russian regions: Moscow, Permskaya Oblast’, and Smolenskaya Oblast’.

Background

Corruption is one of the major impediments to the democratic development in Russia. Its negative impact is very complex, but two of the problems are of particular importance for the project. First, it slows down economic development of the country by limiting opportunities for SMEs and thus delays the development of the middle class. Second, corruption is a very convenient means to manipulate public opinion and to gain non-democratic control over country by threatening that no significant results can be achieved without delegation of more authority to the person in power. Besides, it is very tempting to use corruption as a means to get rid of political opposition or other opponents.

People involved in corruption (public officials, businesspeople, or common citizens) become extremely vulnerable to pressure – they understand that their counteragents are likely to possess evidence of the corruption crimes against them. Thus, if a person once got involved into corrupt relations, it is extremely difficult to break up with such past. Corruption became a system and now it is even more difficult for a businessperson to find support and protection in law-enforcement organs or among peers.

As a result, corruption not only causes erosion of civil society by weakening and dissociating it, but also shifts preferences of people towards stronger control over public life. One of such manifestations is recent governmental switch to state capitalism policy. The main leitmotif was inability of Russian business to do business in a “civilized” manner and to build partnership with society. However, it seems to be just an excuse, not the true motivation.

Thus, anticorruption efforts are of vital importance for successful development of Russia. It provides necessary support to the civil society institutes, economy, and political sphere setting the goals and means for further development and giving some practical method of achieving the goal of balanced social development.

The recent project “Business and Corruption: How to Combat Business Participation in Corruption” carried out by INDEM with the support of CIPE was devoted to decreasing corruption affecting small business through development of anticorruption mechanisms for small businesses and through generating of recommendations for practical implementation of such mechanisms.

The project was built upon the previous INDEM research: "Diagnostics of Russian Corruption: Sociological Analysis" (1999-2001), "The Corruption Indexes of Russian Regions" (2002, in cooperation with Transparency International Russia) and other studies. This provided methodological and factual basis for weighted approach towards the problem.

The main project’s activities were to analyze small businesses’ operations in Russia, to analyze laws influencing operation of business in Russia and to assess the corruption potential of such laws, to analyze interactions between business and public officials (analysis of corruption practices), and to develop and disseminate anti-corruption recommendations for small business. The main purpose of all the project activities was to provide ground for massive grass-root anticorruption activities.

The analytical part of the Project was based on a series of in-depth interviews with businesspeople in Irkutsk, Saratov, and Moscow regions. The respondents represented a selection of small business owners and top managers recommended by the regional partners of INDEM Foundation (Regional Chambers of Commerce or OPORA). As far as there was no need of building representative sample, the research focused on the most active and willing to cooperate businesspeople. The main goal of the analysis was to review the practices of most active businesspeople that both encounter corruption in their everyday activities and try to avoid it under certain conditions. The conditions that stimulated businesspeople to oppose corruption were of particular interest for the researches. For this purpose fifty-seven respondents were interviewed, more than seventy-two hours of informative conversation were transcribed, and approximately one and a half thousand pages were analyzed.

The present situation with corruption was thoroughly inspected. The analysis confirmed that there are several common problems in all regions. In many cases, these problems and difficulties are artificially created by people attempting to get “administrative rent” using their official positions, e.g. with sole purpose of extorting bribes. It is worth noting that this can be not only public officials but also different authorities in many organizations involved into provision of public (or state) services. Sometimes such problems are caused by accidental mistakes or poor analysis of administrative decisions. However, virtually in every situation there is someone benefiting from state malfunction. When it comes to businesspeople, we must admit they also use “unofficial” methods to get their business rolling. The key here is administrative practices because nowadays they effectively preprogram corrupt behavior of businesspeople, who have to adapt to life if they want to stay in business. Still in certain situations businesspeople willing to work without corruption have opportunities to avoid it even if it is difficult.

The research outlined the following major problems for small business in Russia:

  1. Access to commercial premises. According to Russian tax system, municipalities can get additional finance practically only from rent paid by local business - most taxes go to the higher levels of budget. Thus, municipalities are interested in getting as much rent as possible from the existing facilities.
  2. Getting construction permissions etc. Local administration is losing control over business when give permission to build their own facilities. Loss of control for them means loss both in official and unofficial payments. Thus, it is a real problem to get such permissions.
  3. Control of business operation and overregulation. There are some state organs that feed themselves controlling businesses. Such control is based on a system of overregulation it is very difficult to follow all the rules. Therefore, businesses in most cases are guilty of breaking some of the numerous regulations.
  4. Corruption as a means to get uncompetitive advantage. Some businesses can use corruption to secure their position in competition though this relates mostly to medium businesses.
  5. Ineffective operation of business association. Civil society institutes are of greatest importance for successful anticorruption policy implementation. However, nowadays their work is significantly hindered by state overregulation, administrative barriers, and other problems.

These issues were addressed in the recommendations and small business anticorruption strategy. The proposed actions are structured into several categories: individual and collective, short-term and long-term. It is a complex system of instruments and tools to ensure anticorruption position of each and every participating business and to provide collective anticorruption advocacy to those in need. The strategy starts at the level of what can be done right now and here and proceeds to the activities at the regional and federal level.

The present project addresses directly the first and the second of the five problems outlined above. This is reportedly the most difficult and painful problem for many businesses virtually everywhere in Russia. The difficulties for business stem from the easiness with which different entities can gain control over a company that does not own office or production facilities. Renting is poorly regulated in Russia, different malpractices are widely spread in this field. These relations are vulnerable to corruption and it is very easy to “blackmail” such companies by threatening to leave them without office. Also Russian entrepreneurs have many difficulties with renting or buying office space or buildings, getting construction permissions for building production facilities, buying land for non-residential constructions, etc. All these situations can easily be used to extort bribes and other unofficial payments in favor of public officials.