Publication: Prism Volume: 3 Issue: 10

Corruption is an endemic feature of federal transfers to Russia’s regions

By Lev Segal

The great eighteenth-century Russian general Aleksandr Suvorov once said that any army quartermaster, after a year of service, could be shot for theft on a colossal scale. At the present time, many high posts in the Russian Ministry of Finance have a similar reputation in Russian business and political circles.

In the Soviet epoch, when money played a secondary role in the economy and there was often an artificially-created shortage of goods, there was a corrupt "shadow elite." It included officials who were directly responsible for the distribution of consumer goods. According to the well-known satirist, Arkady Raikin, they were the "respectable people: the warehouse manager, the store director, and the store buyer."

In post-Soviet Russia, by contrast, there is a severe shortage of funds. Corrupt bureaucrats have an interest in fostering such a deficit in the form of an unbalanced budget, increasing its expenditure side with a view to "increasing the role of the subjective factor in determining financing priorities." Those officials who directly distribute funds from the state budget are likely candidates for today’s corrupt "shadow elite."

According to a well-informed source in the Russian president’s Control Administration, the most corrupt sector of the Ministry of Finance is that which is in charge of the expenditure side of the federal budget. This department is headed by First Deputy Finance Minister Vladimir Petrov. It includes the ministry’s budget department, which plans the federal budget and monitors its fulfillment by the treasury and the government departments concerned with the various sectors of the economy. Petrov also represents the Finance Ministry in the Russian parliament, especially as concerns voting on the federal budget. And while he is in many ways the polar opposite of First Deputy Premier and Finance Minister Anatoly Chubais, Petrov has succeeded in hanging on to his post thanks to the patronage of Prime Minister Viktor Chernomyrdin and, even more important, of the "power" ministers, in particular, Federal Security Service chief Nikolai Kovalev.

Russian regional leaders frequently encounter corruption when they try to collect their transfer payments. In the Russian Federation, teachers, doctors, policemen and other state employees are paid out of the regional budget. With the exception of only a handful of regions, however, regional budgets are dependent on transfer payments from the federal budget. By law, 15 percent of tax revenue goes into the Regional Assistance Fund; from there, money is sent to every republic, krai or oblast (the ten "donor regions" excepted). Theoretically, the budget is law and must be obeyed. In practice, however, it is almost always a headache for a governor to get what he is entitled to by law. It is said, for example, that a bribe of several thousand dollars is necessary to secure an interview with a deputy minister of finance.

Ninety percent of the members of the Federation Council claimed in an anonymous questionnaire that transfer payments are systematically used to put pressure on them. This may amount to political pressure, such as First Deputy Premier Boris Nemtsov’s threat that regions that sabotage the government’s housing reforms will not receive federal support. But that is far from all.

The governor of Tyumen oblast, Leonid Roketsky, made a sensational statement to the upper house on March 5. Let us turn to the transcript:

Roketsky, L.: Why is there a new business flourishing today? If you want to get your transfer payments… Whenever we come here, two or three "specialists" on transfer payments to the regions run up to each one of us. This has been going on for half a year already. We all keep silent about it, but I can’t go on like this.

Chernomyrdin, V.: What kind of specialists?

Voice from the floor: Businessmen.

Roketsky, L.: Businessmen. But it’s a new kind of business: the business of how to get transfer payments. (Commotion in the hall) I can’t go on like this.

Unlike the prime minister, the governors understood their colleague at once. The present author did a little research. It turned out that the governors have a name for these specialists who press their services on any regional leader — they call them zhuchki [literally, "little beetles," a slang term used for speculators]. Usually, they are young people, working for consulting firms, who once worked in the Ministry of Finance and have maintained good relations with the "necessary" people. To put it simply, they serve as intermediaries in paying bribes. Such "consulting" usually costs from five to ten percent of the sum which they procure for the local budget.

One of the aides to the Tyumen governor told the present author a story, to serve as an illustration. Last October, at the height of the gubernatorial elections, when it was especially important for regional leaders to curry popular support, a businessman from Irkutsk, "with good connections in the Ministry of Finance," appeared. He offered his assistance in getting approximately 60 billion rubles — a sum which the federal budget had owed Tyumen oblast for many years, for the construction of servicemen’s housing.

The zhuchok charged ten percent commission, that is, six billion rubles or over a million dollars, for his services. The question was, how do you legalize such a bribe? He proposed making a "side contract" with a dummy organization to perform a list of jobs, including printing campaign posters and leaflets. The posters would be wildly expensive, of course, but a clause could be included in the contract guaranteeing that payment would be made only after the transfer payment came in….

Those in the know say there is no other, non-corrupt, way to get a transfer payment. Governors can try to use political pressure and horse-trading to extract from the prime minister, the finance minister or his deputy an order to give them their due, as per the federal budget. But that does not mean the money will actually be put into their account. When the order reaches the departments of the Ministry of Finance, it always turns out that the leadership has issued far more such orders than there is money in the treasury. A Finance Ministry official finds himself facing a whole pile of payment orders. Which one gets fulfilled and which one gets put off, depends on him alone. Often the bribe received through the mediation of the zhuchok clinches the argument.

Most governors complain about this sort of harassment only in anonymous questionnaires and within a narrow circle of colleagues. The governor of prosperous Tyumen oblast, which is not dependent on transfer payments, is an exception. Most governors, including those elected from the opposition, are forced to accept the "rules of the game." For example, the "red" governor of an oblast that shall remain nameless, told the author that about seven billion rubles of a 30-billion ruble transfer would go to the intermediary. But he had no intention of exposing his extortioners: "Don’t drag me into this," he said. "I still need to get that payment! There are people in my oblast who haven’t been paid in six months."

There are other, almost legal, ways of enriching Finance Ministry officials and bankers at the expense of the state budget, and these occur on an even more massive scale than direct bribery. One is to finance current budget expenses by means of attracting government-guaranteed commercial credits. According to an analysis by the Federation Council’s Accounting Office, 12 trillion rubles in such credits, making five percent of the expenditures in the federal budget, were brought in 1995. In 1966, the figure was 37 trillion, or more than ten percent.

Naturally, the banks receive a reward for offering these credits. The Ministry of Finance simply deducts this from the appropriation. The conditions are very comfortable for the banks. Usually, we are talking about paper credits with a term of not less than six months. The terms of credit and the percentage rates which are to be paid for these credits are set by the Ministry of Finance. Payment fluctuates between 27 and 300 percent annually. And yet the Ministry of Finance’s official reports always show that the budget organizations received the full sum due.

Of course, the Ministry of Finance decides with which banks it will enter into this kind of partnership. In 1995, 90 percent of such credits were from five banks: Menatep, the Moscow National Bank, ONEKSIM-Bank, the international finance company Vozrozhdenie, and Sberbank Rossii. It has been estimated that these five received 5.6 trillion rubles in interest, which amounts to 27 percent of the corresponding budget appropriations.

Another form of enrichment at the expense of the state budget which has become widespread since last September is the offsetting of payments for taxes [denezhno-nalogovyi zachet] (DNZ). Last December, for example, a representative of a Moscow bank appeared before newly-elected Kaluga governor Valery Sudarenkov. He proposed signing an appeal to the government, requesting that the government not collect 234 billion rubles in taxes owed by natural gas industry enterprises in the oblast. The visitor promised that this money would go into the regional budget, eliminating arrears of federal transfer payments. To earn the governor’s trust, the banker showed him a similar appeal signed by the deputy-governor of Samara. But in Kaluga, he was suspected of proposing a dangerous con game, since the intermediary showed no evidence that the enterprise had shared its tax savings with the oblast.

Banks which offer this sort of DNZ always take a discount. Usually, about 80 percent of the expected sum is paid, but sometimes the discount amounts to as much as 50 percent. The enterprise or, in practice, its director, has the right to keep the rest of the tax savings for itself. The standard profit for an intermediary bank is 10-20 percent.

Only a limited number of Moscow banks, according to certain reports, those closely connected with the leadership of the Ministry of Finance, can perform such operations. Each DNZ must be authorized by the Ministry of Finance. The Ministry is misleading not only the public, but also the Russian government, by ignoring the phenomenon of DNZs in its reports on fulfillment of the budget. DNZs are said to be growing so popular that banks are lining up to perform such operations; sometimes the person who controls the line is paid $10,000 to make sure the line moves quickly.

Although, from the point of view of common sense, it is obvious that bank financing of budget expenditures and DNZs is embezzlement of the taxpayers’ money on an especially large scale, formally, such operations do not violate any Russian laws. Experts have no doubt that both the banks and the taxpayer-enterprises to which Ministry of Finance officials offer such exclusive privileges, share their abnormally high profits with the officials who protect them. Often, these profits are also shared with the leaders of the budget organizations, which do not receive all the money to which they are entitled as a result of such operations. This guarantees that all the participants in such machinations will hold their tongues.

Translated by Mark Eckert

Lev Segal is a reporter for Obshchaya gazeta.