Corruption in Russia and Its Effects on the Investment Climate

Introduction

This chapter provides the background to the study. It details the problem statement, purpose, and significance of the study, research objectives, and questions, as well as rationale for the study.

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Backgroung on the Study

Corruption can be defined as dishonest behavior by those in positions of power, for instance, managers or government officials. Corruption involves giving or accepting bribes or inappropriate gifts, under-the-table transactions, double-dealing, manipulating elections, laundering money, diverting funds, and defrauding investors. Currently, corruption remains a major problem for investors and businesses in Russia. According to a survey conducted by Transparency International (TI) in 2011, the Corruption Perception Index, Russia was ranked the 143rd nation across the globe out of 183 nations. This was far below the 90th position in 2004.

According to the survey, Russia has become an illiberal democratic nation in which Mr. Putin and his allies patronize everything so as to build vertical power. He rewards those who are loyal to him and punish those who are not. Given that Russian’s economy is not diversified and is mainly dependant on the prices of oil and gas, most businesses are linked to oil and gases and are highly managed by the government through the state corporations; this results in very limited competition. To make the situation worse, facts indicated that the economy is monopolized by companies belonging to the state or Mr. Putin's friends.

Those private companies with no links to the Kremlin find it almost impossible to get access to attractive, profitable contracts, especially if they have to do with commodities, such as oil and gas. Even small businesses are struggling as they constantly have to pay bribes to government officials so they are not closed. For instance, some private companies, especially those getting really big, are attacked and taken over by the Federal Security Service (FSS) or even forced to accept to be resold at an unfair auction.

Justice in Russia has already taken out of hand. Currently, it does not really have a rule of law as the decision made by a judge at a court depends not on laws but on those who give a higher bribe to a judge or who have better connections in the Russian government. Judges are not independent. As a result of it, even though businessmen who have businesses in Russia are not interested in investing in their business in the long run as they always have a feeling of uncertainty. There is a massive outflow of capital from the country each year. International investors are not interested in investing in a country because they are aware of the situation, and they know that even though there is a lot of talks on the fight on corruption among the government officials, in practice, very little is done.

Amazingly, this happens at a time when the Russian economy is not able to grow at the same speed as it did from 2000-2008 based just on soaring oil and gas prices. Frankly speaking, there are needs for investments into the infrastructure through the deregulation of economic terms. Though the Russian government is a signatory of the UN convention against corruption, the OECD Anti-Bribery Convention, and the Council of Europe's Criminal Law Convention on Corruption, the corruption level continues to soar daily, and the effects are significantly witnessed regularly. Corruption raises the cost of living and the risks of conducting businesses. It has a great corrosive implication on both domestic and overseas business, as well as investment climate. In Russia, it has deterred international-based investments, distorted oil and gas prices, stifled spontaneous economic growth witnessed in Russia before 2007 and undermined the rule of law.

Moreover, according to the NGO Information Science for Democracy (INDEM) report that was released 2009, bribes and corruption costs Russia's economy an equivalent of one-third of GDP annually. Scholars and researchers have made an extensive research work on the corruption level in Russia and its effect on the economy, but little has been significantly found out to explain the magic behind the investment climate in Russia and corruption. Most investors and economists across the world argue that the Russian based market presents some of the ever promising investment opportunities. However, any investor planning to invest in Russia must navigate through the extraordinary complicated and fluid-based sets of challenges ranging from corruption weak judicial system and excessive governments’ red tape.

The Russian government through President Medvedev stated to the entire world that the foreign investor's critical essentialness in the country's future economic development would be recognized and encouraged by removing some administrative based barriers and other established special economic zones, high-technology parks or investment kind of promotion funds imposed by previous régimes. However, corruption got into the backbone of most of the government officials, and therefore, these actions were shuttered down by the corrupt officials. It was evident after international organizations continued in 2011 to rank Russia as one of the most corrupt nations and found it to be difficult for investors to do any business.

Therefore, there is a gap concerning the effects of corruption on the investment climate in Russia. Investors, government agencies, and other scholars have not adequately unveiled the secret behind the rampant corruption level in Russia. Several investors, such as Khodorkovsky and Magnitsky, lost their lives, ended to permanent imprisonment through backcourt doors, or even ignited some investors to be arrested and unnecessarily prosecuted. In any case, corruption weakens the investment platforms of the country, and if not curtailed in advance, there are serious impacts cited. In the case concerning Russia, the situation seems deplorable, and therefore, the thesis aims at studying the impact of corruption on the investment climate.

Statemente Of the Problem

Corruption has serious devastating effects on the investment climate. This is evident through much of the global-based investment communities such as the U.S based companies and private investors have decided to run away from the country. Since the entry of Mr. Putin into power, most of the companies have been awarded contracts on the oil and gas fields through back doors. The court's decisions are made based on how a person pleases the judicial system or is influential in the government. Un-founded imprisonment and murders are part of the daily activities in businesses. In addition, most of the oil and gas companies are owned by Mr. Putin’s close allies. The foreign companies found to expand are put under the stringent trade environment. Bribes in the government offices to get contracts are also eminent.

Therefore, there are suggestions that the ever promising investment opportunities in the country may come to standstill. Economists argue that investment climates are thrilling in an environment where openness, transparency, and integrity rule. Moreover, it is through the serene investment climate that competition for contracts and opportunities yield economic growth. Thus, the statement problem is the relationship between the investment climate and the corruption level in Russia.

Research Questions

  1. What are the effects of corruption in Russia’s investment climate?
  2. What are the factors that have contributed to the high corruption level in Russia?

Hypothesis

  1. Corruption has serious effects on Russia‘s investment climate.
  2. Several factors have contributed to the high corruption level in Russia.

Objectives of Study

  1. To investigate the effects of corruption in Russia’s investment climate;
  2. To determine the factors that have contributed to the high corruption level in Russia

Purpose and Significance of the Study

The study was geared towards the effects of corruption on the investment climate in Russia. It is evident that corruption in the country has cut across domestic and foreign businesses. Most of the foreign investors have lost wealth and assets through ruthless government actions that favor the president and prime ministers’ close allies. In addition, the rule of law seems to be one-sided instead of being neutral. No wonder through the favors based court decisions that such people as Khodorkovsky had lost billions of dollars before they were charged and imprisoned.

Whenever corruption knocks in an economy justice tend to be ignored and investors walk away. A close examination of the corruption scenario in Russia and investment opportunities may yield some benefits that can be relied on by other governments, courts, other researchers, investors, and other stakeholders in addressing a corruption problem in their territories or countries. Through the study, the various government agencies from different countries stand to benefit from the solutions suggested by Transparency International and the researchers on the corruption reduction.

Secondly, the study provides an adequate analysis of the various losses expected to be traced in Russia if corruption continues to prevail. Investors are provided with adequate information about the current corruption level in the country and how the Russian government under Prime Minister Putin has shuttered the economy. Moreover, the study highlights some of the instrumental opportunities found in the country under the oil and gas industry for future investment purposes. Also, the study aims to clearing out the effects of corruption on the investment climate in Russia.

Therefore, it instrumentally serves other upcoming researchers with a foundation to further research on corruption. Moreover, the study provides the other stakeholders in the society with some creative measures that President Medvedev has decided to adopt in combating corruption in the country. This helps the government and society to weigh out the effects of corruption against the limited benefits that some few individuals enjoy when the entire society wallows in poverty.

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Literature Review

Introduction

This chapter discusses the literature related to corruption and its effects on Russia’s investment climate. It focuses on two substantive literature aspects: theoretical reviews of the conceptual theories so far advanced in the corruption field and the empirical review for evidence concerning corruption in Russia and the rest of the world.

Theoretical Review

Investment Climate Statement

The Russian based investment market presents exemplary investment opportunities that attract both international and local investors across the globe. However, capitalizing with these investment opportunities seem to be the greatest challenge because all the firms and individuals ready to invest must navigate through strict and complicated sets of challenges, such as corruption, the weak judicial system, and excessive based government’s red tape. Though the entire Russian community recognizes the critical role of investments in the country’s economic growth and development, leaders under Prime Minister Putin seem to do the opposite.

Economists have advised foreign investors to be attracted by eliminating corruption and creating special economic-based zones that the Russian administration has not done yet adequately. The high technology parks and investment promotion funds are controlled and issued by Putin’s administration. This happens despite the Russians have stated clearly in their constitution’s goals of combating corruption and improving the level of investment opportunities in the country. Several organizations, such as Transparency International, continue to rank Russia as one of those few nations in the world that pose difficult economic conditions for doing business.

Statistically, Russia does not do well in economic performance and, hence, there are low investment opportunities. The country was adversely affected by the 2008-2009 financial crisis with a drop of 7.9% in GDP in 2009. However, in 2004-2008, the country experienced spontaneous foreign direct investment (FDI) inflows with a 75 billion dollars rise in 2008. According to the Prime Minister, the FDI inflows fell for the first ten months to half that is 36 billion dollars in 2010. Secondly, the country enjoyed a net capital outflow of 133.9 billion dollars in 2008, which fell to 56.9 billion dollars in 2009, and in 33.6 billion dollars in 2010.

However, in 2011, there was an acceleration of the capital inflow to 85 billion dollars. This is attributed to the external factors, such as U.S companies engaged in oil and gas production. Investments are prone to corruption, and therefore, the fall in capital inflows and FDIs can be attributed to it. The World Trade Organization (WTO) repeatedly talked to President Medvedev and his Prime Minister Putin to improve Russia’s business climate and also attract some of the foreign-based capital and especially through the high technology-based sectors. The country has a great solid base of expertise in various scientific fields. If combined with the sizable markets, as well as investments in Russia, several companies from the U.S and the rest of the world would compete for acquisition and investments in the future.

Despite the corruption and rampant government’s red tape, dozens of U.S based companies and firms are made several intentions by placing requests to invest in the Skolkovo Innovation Center. The following center is one of Russia’s initiatives to create one of the high tech cluster cities modeled such as the Silicon Valley; though, it will be situated in Moscow’s outskirts. However, the investment climate in the country has been harbored by the slow pace taken by the government to make reforms in the judicial system and reduce corruption. Some of the sectors, such as energy, are highly affected by corruption through awarding of oil and gas contracts un-procedural. The past governing regimes are blamed for having caused the rampant increase in warring for resources among foreign investors and weakening the judicial system.

Rule of law, transparency, as well as governance respects for human rights and property, are termed to be other key factors that should be considered by foreign investors. Though the Russian government implemented some legal framework on intellectual property protection in 2010 and 2011, effective enforcement is highly required so as to meet foreign investors’ requirements. The high corruption incidence has resulted in the high liabilities in business operations, thus leading to bankruptcy, which, in turn, affects the investment climate adversely.

While the country contains a clear constitution stipulating out the legal structures on foreign investment, the laws are practiced, and therefore, few government officials and allies use them to exploit investors. Some of the policies include:

  • the 1991 Investment Code
  • the 1999 Law on Foreign Investment
 

that allows all foreign-based investors to enjoy equal investment rights just like Russian local traders. Unfortunately, the judicial system seems to side with corrupts and government officials to ruin and exploit foreign investors. The Foreign Investment Advisory Council has been quoted severally blaming the judicial system for allowing the Russian government to use it as a puppet and hence deny the foreign investors necessary legal rights. The council has warned of a significant worsening of the investment climate in the country. The country's investment dispute resolution mechanisms remain poor in dispute, and it has been quoted to result in a non-transparent based unpredictable process.

The Russian regime officials have repeatedly been advised that foreign investment and technology-based transfers are quite essential in the current Russian’s based economic modernization steps. The government has failed to adopt some of the new policies given by the international organization on how to curb corruption and boost the foreign investment level in different sectors of the world.

In May 2008, the Foreign Investment Advisory Council provided the Russian regime with the Strategic Sectors Law Act containing over 42 activities that can transform the country's national defense and security significantly. According to the Act, investors wishing to invest above a certain threshold should seek permission from the office of the prime minister. However, the investors faulted the prime minister’s office for being an official referee for corruption. Barely, the investors were right because the government used the laws in this act to restrict some of the foreign investors’ access to the sectors, such as energy. Over 128 out of 136 applications made on foreign investments were approved by the office, and they mainly comprised close Mr. Putin’s allies. The European Bank for Reconstruction and Development warned of a decline in the amount of Russian private-sector GDP from 70 to 65% from 2004 to 2008.

The Russian government was, therefore, requested to sell off some of its significant share blocks in most of the private enterprises so as to reduce corruption and boost investment level. This did not happen until October 2010 when the Russian Cabinet approved a major Privatization Plan. In accordance with the following plan, the government was expected to sell over $60 billion of government stakes to over 1000 private companies. The Russian government owns over 6,467 companies in the country something found to trigger more corruption levels. The government was expected to have just controlling stakes in these companies; though, to some companies, such as Russian Railways, Rosneft, banking giants, Sberbank and VTB, it was expected to hold 100% share stakes. Currently, the privatization process has been slowed by some Russian officials vowing to make sure that it does not continue in the future.

Today, the new privatization of foreign investment measures have been inconsistent. Although the 2011-2013 Privatization Plan has been found to promote investments, the foreign investors in the Russian based privatization sales are confined to a very limited number of positions. Several investors are currently testifying that the corporate governance policies do not accommodate investors to spent resources in the oil and gas industries. Whenever potential foreign investors are taken to the appropriate local, regional or federal based government agencies on investment registrations, they are subjected to bribe and tedious ruthless policies that eventually make them lose hope.

Privatization Frauds during the 1990th

In the 1990s, the Russian economy was at crossroads with the oligarchies led by Boris Yeltsin elected as Russian president in 1996 fighting for control of resources with the Kremlin. Boris Yeltsin was supported by the Davos Pact. The following pact included: media mogul Vladimir Gusinsky, Boris Berezovsky, as well as Roman Abramovich among others. The whole ideas behind these figures were to eliminate communists by privatizing the state-owned companies before amassing some wealth for themselves. President Boris Yeltsin announced massive privatizing of the state resources by saying that this was to make the Russian economy more competitive and efficient, hence a higher demand for their products in the market. The government claimed that it should have a higher controlling power in the economy. Some of the companies listed for privatizing include:

  • Rosatom;
  • VEB;
  • Russian Railways;
  • United Shipbuilding Company;
  • United Aircraft Company.

The Federal Agency for State Property Management was assigned the task of selling the public-owned companies. Some of the companies, such as Gazprom, were sold at the throwaway prices to close allies of the president. The Control Directorate of the Presidential Administration stated that the value of these assets was worth tens of trillions of rubles. Within a period of four years, President Boris Yeltsin and his close allies amassed over 40 trillion rubles from the privatization process as personal wealth. However, the privatization climax came with Mr. Putin and his close allies in the 2000s who sold public resources at the knockdown prices while making the media not disclose the corruption level in the country.

The Oligarchies and Privatization in the1990s

The oligarchies were very powerful in the 1990s. They used the privatization process to amass fortunes from the ashes of Russian based communism. The communism based delegation was in a state of being hysterical. The corrupt and other gangster based tycoons found to be behind the process. They included Boris Yeltsin, media baron V. Gusinsky, B. Berezovsky, M. Khodorkovsky, M. Gorbachev, and R. Abramovich. Some in the group, such as Berezovsky, miraculously became wealthy and were listed as the richest people in the country. According to B. Berezovsky, the tycoons were just the nation’s saviors, yet they undermined freedom of speech, religion, and media. In addition, they colluded with other politicians to rig elections in 1996. Berezovsky admitted that they made media and other anti-corrupts pave the way for robbing the public resources.

Prime Minister Putin’s Regime and Corruption

Vladimir Putin, the Russian Prime Minister, who a decade served Russians in power and his close allies have marked in most of the minds of Russians and foreign investors as a sign of corruption and abuse of human rights. In 2010, Russia was ranked the 154th nation to be corrupt by the Transparency International out of over 178 states globally. Really, several years down the line, Russia moved up the rank to the 140th most corrupt nation in the whole world before topping in the G20 nations. The mentioning of Russia as the most corrupt nation among the G20 countries was a big gesture of how foreign investors have been undermined under Putin’s regime. The investors and other economists started comparing it with some African states, such as Egypt, that are found to some extent find it difficult to control corruption. Close allies to Mr. Putin’s regimes claimed that under Putin’s governance a lot had been achieved.

Therefore, the claim that he has brought sanity in the judicial system was just mere shatters. Countries are ranked and rated in corruption based on the corruption perception index (CPI). It is worth noting that in the scale, the absence of corruption indicates 10 points, but unrestrained corruption means 0 as indicated in Table 2. From the following table, Russia’s based CPI has been calculated for several years since 1996 when Prime Minister Yeltsin came to power. However, since then, an interesting analysis has been made. The average based CPI indicates that Yeltsin’s rule corruption index was around 2.4. The figures continued to improve by rising up to around 2.6 immediately after Putin had come to power. However, Putin came in with their own staff arrangement that saw corruption rise in the country; hence, a drop in the corruption perception index to 0 was observed.

Things worsened further when Putin secured his second election term because his allies knew it was the last chance to amass wealth. The government apparatus started to deliver poor services; a complicated tax system was imposed on foreign investors; as well as excessive authoritative measures were taken on those who contravene government new investment policies among others. By the end of 2010, some changes had been seen. For instance, the CPI index rose from 2.1 to 2.6. The energy sector in which numerous foreign companies saw frauds and bribes that are of unprecedented based magnitude occurred in Russia, hence overtaking the necessary several countries in corruption ranking. Initially, Putin’s supporters had frequently asserted that corruption incidences in the ’wild based years of the 1990s’ were not less than the current position. Though, the factual information provided by Transparency International proves the opposite of that the truth.

The Russia Bureau of Statistics (RBS) based Rosstat’s data on the level of crimes that involved corruption testified the current corruption status by stating that over 2700 cases were linked to corruption in 1990 while 13,100 were witnessed in 2009. Therefore, from Table 2, there cannot be a clear comparison between the corruption level during the regimes of Yeltsin and Putin. Putin’s regime was worse and never cared about the foreign investors, especially those found to pose some competition in the oil and gas industries. Therefore, this deteriorated the bright investment status of the country.

Some of the greatest examples of corruption incidences during Putin’s regimes include that of Luzhkov and Baturina’s families in the 1990s. The families had been assigned a contract to install the Luzhniki pitch with plastic seats. The Moscow government advertised the tender. In the process, the tender was given to close family relatives; the amount was around $700,000. There were a lot of protests in the city, but Putin’s regime did not take any action. In the year 2008, some other tenders were advertised. Among them, there were repair and some refurbishment of various cultural sites, such as V. Mukhin’s famous based statue of the great Worker and also the Peasant Girl tenders. In this round, the Baturina’s family members won them. No reasons were given forwarding a $100 million tender, yet it was not of that amount.

In addition to that, there were other contractors who were more qualified, but they were withdrawn without genuine reasons. Also, there came the Writers’ Affair based saga wherein 1997, Putin’s regime developed some form royalties amounting to $90,000 for paying government employees whose companies had been privatized. The scandal led to protests from people who doubted the essence of privatization and demanded the employees’ compensation. This continued with Putin’s regime rewarding his aides with the multibillion-dollar contracts. Moreover, most of them were not sacked in case of any incidence but rather protected through transfer from one department to another.

Amazingly the corruption statuses are worse now than before. For instance, Mr. Resin, Moscow Deputy Mayor, who has never worked or owned a business, was seen wearing a watch that costs $1 million. This amazed economists and other Russian government advisors because the present government does not get worried and investigate the matter of how he has acquired such a watch. Oversight researchers are terming corruption in Russia as a system instead of a problem because every corner of the country is a place full of corruption. Every government agency dreams of bribes, favor, or murder so as to conceal some information or award tenders to the close allies. There are warnings that corruption in the country may completely destroy the economic and social life of the Russians if investors from other countries and even those situated locally decide to relocate. Millions of workers may lose jobs, get starved, or even suffered acute products and services shortages.

According to a report released by Information Science for Democracy (INDEM), the annual based turnover of all corruption incidences in Russia are currently around 300 billion dollars. Moreover, the Foundation for Investigation and Diagnostics of the Corruption Level in Russia released fundamental information about the 2001 to 2005 corruption status. It was found that from 2001 to 2005, the corruption level value rose from around 33 to over 316 billion dollars. This is just equivalent to around 25% of the state’s based GDP.

The rise in corruption value brought in some numerous implications on the Russian economy. The tremendous increase in tariffs and commodities prices was to some extent linked to the ever-rising corruption level rampant among the civil servants. On the other hand, some economists noted that the government based industrial Putin’s based monopolies were also a key factor to the ever-rising prices. It is the reason why it did cost Gazprom company three times cost level to construct a pipeline that was equivalent and similar to those pipelines in Europe. The undersea part of the North based Stream pipeline did cost around $10.7 million per kilometer; hence, a total of over 12 billion dollars was spent for 1128 kilometers meaning that a value of $2 billion could not be accounted for.

In addition to that, the construction of the pipelines involved embezzlement and several backhanders that comprised billions of roubles. The bribes that were needed to facilitate home-based building amounted to around 30% of the total cost. To cover up their ever-rising based costs, the government monopolies and relevant corrupt based authorities constantly sky-rocketed the charge for various facilities, hence leading to the exorbitant prices rise across the whole process. In turn, it was the Russians who had to service the charges imposed by the fraudulent and corrupt based acts of Putin’s base power deed.

The transparency international report went down the history to define Putin’s governance system as highly ubiquitous and highly embedded in using the society’s resources to amass family wealth, as well as reward friends without considering the various impacts created by corruption on the budgetary expenditures of the country. It was argued that Putin’s ignorance and total opacity might bring the Russian bright economic performance into heels.

In order to practice corruption without fear and ruin in the Russian economy, several Putin’s parliamentary close allies decided to bring a motion in the parliament that saw media censored and the total based annihilation of the parliament really affected the economy adversely. The failure of media in reporting some of the parliamentary and Putin’s actions reinforced the decline of integrity and an excellent based cultural thought of corruption prevailed at an alarming rate because there were no lawful outrages. In addition, corruption grew to the judicial system and police sector, hence weakening the law based enforcement system. Most of the police officers saw a personal enrichment as part of their first priority, instead of taking care of the public resources.

This was witnessed when Lieutenant Bokov who headed the Coordination Bureau to Combat the Organized Crime and Criminal Activities within the CIS in the country ended up in imprisonment in January 2011. A file had been opened accusing him of the fraudulent activities that amount to around 46 million dollars. An operation was conducted in his fifty rooms bungalow seated on five acres piece of land, meaning he was tremendously wealthy, yet he was not so much paid. Such actions revealed how corruption penetrated in the country at an alarming rate such that control will only amount to a total overhaul of all sectors in the government. Administrative pressure from the top made the legal and judicial system dependent on the corrupt decisions. Therefore, this led to the vertical power of the civil servants, and Putin’s regime remained to control court decisions.

Corruption has already made Putin’s regime continue to be remaining power, and therefore, allies can have everything from Putin including grabbing of public resources while those opposing the government just report to where they want. Obedience, submission, and respect of the rule of law were just a new vocabulary to Putin’s followers who believed in one thing - amassing wealth. The supreme based principle running down their minds and actions was personal loyalty, meaning that if people stay loyal to Putin, there will be the freedom to steal without seeing the jail doors.

President Medvedev started up by setting some commissions for reducing and prosecuting corrupts. However, the results of the commission yielded nil results. The main reason was that Putin’s regime was taking care of corrupt members, and hence, they can do anything to ensure that nobody gets jailed. The Supreme Court President Mr. V. Lebedev stated in one of the judicial reports that the defendants in all those cases presented by the commission and revealed by the judges were 65%, and therefore, no one among the ten thousand convicted people got jailed.

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As to the rest of the world, numerous countries have successfully managed to combat corruption. Some of these countries have very stringent measures that Putin’s regime failed to follow. They include Norway, Italy, Germany, Spain, Singapore, the United Kingdom, and the USA. Recently, Georgia has been successfully listed among the corruption-free countries in the whole world. The man behind corruption-free Singapore was Lee Yew. He has ended up eliminating corruption and also creating some fantastic factual based economic success. In one of the interviews when Lee Yew was hosted by The Vedomosti in 2005, he gave just three principles that must be achieved to solve the corruption problem in any country. Yew stated that, firstly, any regime should ensure that honest and clean people are within the ruling positions. Secondly, stringent corruption measures, such as death or even life sentence, should be imposed on the corrupt. Moreover, it was essential to ensure that the civil servants and other agencies are well paid and rewarded to the best of their desires.

However, none of these policies had the Russian regime implemented to facilitate the high corruption level in the country. Therefore, it can be argued that the corruption problem can be solved only by cleaning up Putin’s regime. Usually, it is said that a fish mainly rots not from the tail but the head and the Russian government has really caused the problem of corruption to emanate and spread in the country. The problem of corruption can only be resolved through ensuring that the kleptocracy based people at the top of Putin’s administrations are eliminated. For that reason, the Russian based corruption fighters must embrace general corruption solutions so as to solve the problem across the board. It is clear that all the involved parties can be traced and, therefore, challenged to stop it through jailing or even advised.

If the corruption problem is not solved, Russia’s eternal backwardness, especially on economic matters, will definitely come into reality. The citizens are subjected to poverty and everlasting disenfranchisement. In the next subsections, we look into the present based incontrovertible source of evidence on how the unprecedented levels of corruption to the top of echelons and towers power base in the country. We describe how Prime Minister Putin’s cronies from the one known as the Ozero condominium changed from being run mill based businessmen into big dollar billionaires. This evidence represents the luxurious deeds in which leaders in the country live an expensive based lifestyle using people’s pockets. We also address how they eventually manage to make us service it without us deriving any benefit.

The Rise of Ozero (lakeside) Dacha Condominium Members to Richness

Corruption in Russia stinks, and if there is an area to be linked with it, the Ozero (Lakeside) Condominium, which is on the seashore of Komsomolsk located within the Priozers- Leningrad Region, may be named. This area was set up in1996 by Vladimir Putin, Vladimir Smirnov, Vladimir Yakunin, Yuri Kovalchuk, Viktor Myachin, Andrei, Shamalov, and Sergei Fursenko. In 2000, Putin, a founder of the lakeside, became the president through the Federation Party of Russia. Suddenly, Putin’s close allies magically became very rich. To single out some of them, Kovalchuk and Shamalov are to be mentioned. Currently, they are boasting of being in the top list of Russia’s billionaires who control respectively over 33.5% and 12.7% of all shares in AKB, a Petersburg based bank.

Towards the beginning of Putin’s regime, AKB Rossiya bank was very small with a capital base of around one billion roubles. However, it is not clear what happened because, in several years, the bank surpassed all other top 100 best banks in the country and became the biggest bank in Russia. It was found out that the Russian based government sold the bank some of the large financial assets and liabilities that had been initially owned by the public company called Gazprom at a knock-down price. In detail, this happened in 2004 when Gazprom, a public company started its own firm known as Sogaz, which is a Gas Industry based Insurance Company and one of Russia’s largest based insurers.

It finally ended up under the hand of AKB based Rossiya Bank. Over 50% of all the Sogaz’s based shares were on sales by Gazprom at a price of $58 million, yet the estimated current value was to be more than $2 billion. In two years, Sogaz Company, purely under the control by Rossiya Bank, bought 75% and one share of the Lider company that initially managed the Gazprom’s pension fund. Currently, Gazfond Company is one of the largest Russian private pension fund companies with over 300 billion dollars roubles.

What is amazing is that in the year 2006, Lider Company made a profit of around 1.2 trillion dollars roubles, yet it was sold at 880 million roubles. Rossiya Bank owners were highly prepared for the deal because it was to provide them with the pension fund. Corruption in the Rossiya Bank went further to get heightened through the appointment of Yuri Shamalov, who was a son of one of the Rossiya Bank shareholders and a member of the 8 people who owned the Ozero Condo, as the chairperson of Gazfond.

As a result, Shamalov, Jr., as a leader of Gazfond made sales shares at the lowest price possible so as to benefit his father. After winning Gazfond, AKB Bank continued to gain control over the rival Gazprombank, which was one of Russia largest banks at that time. The government continued to under the other rival banks to Rossiya Bank by forcing Gazprombank to sell all shares through Rossiya Bank. Eventually, all the banks were to borrow from Rossiya Bank. In order to purchase the rival bank, Gazprombank, the government through Gazfond (then controlled by Rossiya Bank) purchased over 50% plus one share, and therefore, the 8 people of the lakeside stood in a better position to control the economy. Bribes and personal interest continued to prevail and in this round.

The NTV, TNT, and Gazprom-Media Group television-based channels were then sold to the Gazprombank. Later, Gazprom Company was just paid around 166 million dollars for all shares. The vice-president Dmitri Medvedev raised an alarm that was quite different about the value of Gazprom at the Media station at 7.5 billion dollars. If that was a true value of the media stations, then Gazprom sold its assets for just forty-five times fewer what the shares could have actually cost. All the various deals signed by the owners and companies involved OAO based Gazprom’s executives' directors; most of them were government representatives.

It was found out that Putin’s government had given an instruction that the channels must be purchased, and therefore, anyone found to contradict the order may face serious consequences. In summer 2004, the various Gazprom assets based share transferred through the Rossiya AKB Bank took place after M. Kasyanov, a great anti-government corruption activist and the chairman of the Russian Government had already resigned.

The manipulated acts of taking assets from Gazprom, which is a publicly owned company, and giving it to AKB Rossiya, which is a private based organization, were found to be one of greatest corruption acts that have ever happened in Russia under the Putin’s régime. In 2004, the assets of the company rose from 6.6 billion roubles to around 231.6 billion in 2010, hence making the AKB Rossiya bank rise from the 70th to the 19th position among the largest banks found in the country. Economists termed the act as a matter at which state ownership has been removed from the public to individuals based hands of Putin’s allies, the 8 friends with whom they owned the Ozero .D. Condo. Secondly, it was found that these corrupt deals did not only make Putin’s friend wealthy, but also some of his family relatives.

Putin’s relatives did benefit significantly from the corruption incidences concerning Rossiya Bank shareholdings. According to the sources from the bank, Mikhail Shelomov, Putin’s great-nephew, owns over 3.9% of all the shares in Aktsept Company, which is situated in Petersburg. Mikhail Shelomov is one of Ivan Shelomov’s grandsons. Shelomov Ivan is an elder brother of Maria Putina who is Vladimir Putin’s Mother. Initially, Ivan Shelomov headed the 7th based department of GUPT of the former USSR directorate. In addition to that Shelomov owns around 12.5% of Sogaz Company shareholding, one of the insurance public owned company that was privatized at a throwaway price in 2004. Also, another great-nephew to Mr. Putin, Mikhail Putin, got the position of the deputy chairperson of the board in Sogaz Company. Before the appointment, Mikhail Putin headed Gazprom Company from 2004-2007 as the senior medical director. He was once associated with the sale of medical equipment at a cost of $100 million, yet that was not a real value.

Corruption makes few in society to process a lot of wealth while the larger percentage of the society wallows in poverty. Through the transfer of the government based and approved deals based assets and liabilities from Gazprom to AKB based Rossiya’s authority, some of the Ozero condo owners and founders, such as N. Shamalov and Y. Kovalchuk ended up becoming the top-listed official Russia’s billionaires. Others in the list include Gennadi Timchenko, who is one of the owners of the oil company with Mr. Putin and a holder of 9.6% of all Rossiya based Bank’s stocks, got a position through the handsome profit acquired when Gazprom assets were sold at knockdown prices in 2004. Some government agencies and close allies to Putin were also found in the billionaires' lists immediately after Putin had risen to power.

For instance, Dmitri Gorelov, who is also the current chairperson of the Petromed holding; a sole founder of ZAO Petromed company; as well as a co-founder and committee member of foreign-based economic relations organization in St. Petersburg based Mayor’s Office led by V. Putin, is now in the 182-nd position in The Finans Magazine that lists all the richest people in Russia. His wealth amount to around 18 billion roubles, yet five years ago, he was a poor man. Moreover, Dmitri Gorelov’s senior son Vasili has been owning jointly with Nikolai Shamalov one of the Vyborg Shipbuilders since 2006, after being purchased by them through an award of fifty-nine billion-rouble based Gazprom contract. The Shipbuilders were assigned tasks of building two sea-based platforms belonging to the Shtokman based field. For over ten years, the Vyborg based Shipbuilders had no single order, but immediately after Putin had come to power, the company amassed several orders.

Another serious corruption saga in the Russian economy is linked to Nikolai Shamalov’s youngest son called Kirill. Just in four years after graduation (when he was 26 years old), Kirill Shamalov was given the position of the vice-chairperson of the Sibur based Oil and Gas company. In this company, he had strong administrative based business support from the government officials. This is because the company was highly instrumental in the absorption of various government funds from the oil and gas sectors. Such an appointment was termed as pure brotherhood by economic analysts. Kirill had little experience to hold and head such a position and organization respectively. As if that was not enough, Putin’s few close allies continued to sneak into other senior government positions and state-controlled parastatals, meaning that Putin was there to ensure that they benefit.

Putin’s billionaire friends continue to penetrate in the government through special appointments placed secretly by Putin. In 2000, Vladimir Yakunin was appointed the Deputy Minister of Transport. Initially, he was the vice-president for OAO based Russian Railways before being rewarded with the ministerial position. Vladimir Smirnov, a former director of the Federal State-based Unitary Enterprise, was involved in supplying with information the management directorate of the President of the Russian Federation. As a reward for being submissive to Putin’s authoritative regime, he was appointed as the Minister of Atomic Energy. Smirnov was to meet and manage some companies, such as Tekhsnabexport, which is one of the largest companies in the whole world that supplies atomic energy. The company controls around 40% of the world’s total uranium riches.

In 2007, Vladimir Smirnov was promoted further. He became the senior advisor to the controller of atomic energy in the whole country. This was another corruption incidence because the action was taken after some consultative discussions between him and Putin had taken place. This happened when Putin and his regime knew it well that Vladimir Smirnov had previously been associated with the mafia businessman Vladimir Barsukov jailed since 1994 for corruption and murder incidences when he was heading the Petersburg based subsidiary German firm called SPAG. Barsukov had also been accused by the German Federal Criminal and Intelligence Service for organizing money laundering, participating in drug dealing from Columbia, and organizing other crimes across the country.

To make the matter worse, Vladimir Smirnov served in the board of directors appointed by Barsukov. Smirnov could be also a suspected person if the law were to take its course. Putin ignored the human rights activists who wanted to prevent Smirnov from holding the position. Thus, corruption and brotherhood dominated during Putin’s regime. Vladimir Smirnov was later found to be a close friend to the president who had helped Putin to win the presidential elections. The position appointed was also called reward for the previous help and support. It was suspected that Vladimir Smirnov might use the position to influence the judicial system to reduce the sentence awarded to Barsukov in Germany because they had had a common business.

The two billionaires own and control a security firm called the Rif, which had been contracted by Putin and his other 7 men to provide security in the Ozero D. Condominium based estate. Thus, such a person as Vladimir Smirnov and the owner of a security firm were given tasks relating to the atomic asset matters. A spread of firearm smuggling from the state-owned weapon warehouses led to insecurity within the country. In a summary form, it started with Rossiya Bank becoming richer than other banks in the country.

hen the close friends and their families to the founders of the Ozero Dacha Condominium became extremely rich, yet the rest of Russian people continued to lose jobs, as well as suffer from the high cost of living among other problems. The most senior positions in the government and even in their family companies were headed by close family members. The government privatized most of the public-owned companies by selling them at the throwaway prices. This happened within the period when Mr. Putin was the prime minister before moving up to become the president. The investors fear that posing competition to these companies may trigger conflict with Putin and his close allies, hence bring losses in the future.

The story concerning corruption and close allies getting rich through back doors in Russia does not end with the 8 people from the Ozero Dacha Condominium. For instance, Mr. Timchenko has been a close friend to Mr. Putin and Rottenberg brothers, known to Putin since when they were young boys. They grew together whereby they used to go in for judo. Mr.Putin and Gennadi Timchenko met in the late 1980s when Gennadi Timchenko was working in a low paying job that involved the sale of oil abroad. However, the real business that they conducted together was in the 1990s when Putin was the mayor of Petersburg. In the process, there were no enough medicine, food, and other consumer-based goods in the town.

Thus, the mayor office of Petersburg ended up securing some areas to sell some metal and other oil-based exports in exchange for food. This was done in the courtesy of Gennadi Timchenko, a close friend to Mr. Putin. This was conducted through Golden Gate Company, which was started by the foreign ministry department, Mr. Timchenko’s organization, and the office of Petersburg’s mayor. The company managed to sell over 100000 tons of oil products leading to the over $70 million funds that was later used to buy foodstuff for the citizens. Suddenly, some allegations came up stating that Putin had been involved in the corruption saga through the sale of oil. A commission was convened to probe the matter under Marina Salye and another group of councilors.

Eventually, the fraudulent dealings were concluded, and the councilors proceeded to court where they filed a petition that had never materialized. Timchenko appeared in The Fican Magazine as one of the few billionaires who magically amassed wealth since Mr. Putin raised to a power. His wealth is always put into question. As Timchenko is living in Finland, he just sells mere oil product that cannot enable him to be placed the 17th wealthiest man in Russia with 10 billion dollars based assets. New Oil Plenipotentiary Company sources indicated that Timchenko owns and controls a third of all Russian based oil exports. In addition to that, he was mentioned to influence decisions of the oil state-owned companies, such as Gazpromneft and Rosneft, without any probing or conflict with the government hence corruption.

Timchenko owned a company known as Novatek, which is the largest supplier of the gas products. This company entered into an agreement with Arkadi and Boris Rotenberg who owned StroiGasMontazh Company. This was done to facilitate some several corruption incidences to be discussed later. By 2008, the StroiGasMontazh Company had won several contracts from the government departments. It was a sign of friendship between Putin and Timchenko. An incident happened to a contract tendered by the government to construct the North Stream pipeline.

The contract was won by the two brothers even when they had applied for tender, yet it was three times expensive to handle. In addition to that, they had been awarded another contract on the Dzhugba.L.Sochi Olympic pipeline even before they applied for by the government. This means that Putin’s regime was ready to enrich those who are close to it. The government was also accused of inflating the oil and gas prices annually without any reason. It is considered as a move to reward the oil and gas close allies’ company owners and controllers.

It is worth noting that the Rotenberg's control over eleven alcohol-based production factories in the RosSpirt industry, but the government has not been taxing them for some years. People protested that the government should tax the drinks, but Putin stated that his regime was not after Alcohol and vodka tariffs. Economists and other anti-Putin regime participants tried to clear out the reasons behind the low taxes on vodka in Russia. The reasons are evident Putin could not tax his friends. The government never worried that if alcohol becomes constantly cheaper, more people will drink. Therefore, the population will end up sinking into alcohol. This can be concluded to mean that the Russian regime under Putin was keen to benefit friends at the expense of the citizen.

The scandalous stories about the Moscow regime under Mr. Putin did not end with the oil and gas industry, as well as friends or even government parastatal. Putin had been never involved in direct sagas before, and he only used his friends and other senior government officials under his instructions to commit sagas. However, he directly committed himself in the Moscow-St. Petersburg toll-road scandal. The road was made to connect the two cities through the Khimki Forest. Putin visited the unveiling of the road map and he instructed the Ministry of Roads to have it constructed through the forest. The public protested condemning destruction and invasion of the forest, but Putin stood hard and ordered that it would be constructed. President Medvedev tried to stop the building of the road at that time, but it was too late because the Prime Minister had ordered engineers to do it.

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The investigation was commissioned, and in the process, it was cleared out that the contract was amounting to 63.3 billion roubles given to the Rotenberg. Putin’s regime was to support the construction process with 23 billion roubles. Eventually, the toll-based income was supposed to go definitely to Putin and the Rotenberg. Therefore, using the long term relationship with Mr. Putin, the Rottenberg brothers happened to protect most of their multi-billion businesses and eventually continued to rob the Russians state own wealth. In the process, they spent wealth that they had amassed from the road construction on buying shares of Novorossiysk port. This port is one of the largest Russian based oil terminals into which billionaires who are a close friend to Putin and their family members have invested. Putin feared direct wealth amassing, especially from the state-owned enterprises, hence relied on friends.

Putin’s Regime and Luxury Assets

In any instance, most of the Russian based officials concentrated on the purchase of expensive assets that consumed heavily the public resources. Vladimir Putin never minded about 70% of the total population dwelling in poverty, but rather he was determined to uplift the wealth status of his friends at the expense of the luxury goods and services. Some of the exceptional based incidences of misusing the public resources happened in 2011 and other prior years. In 2011, the Office of President’s Affairs spent over 26 million sterling pounds (41 million dollars) from the public account to buy the president a yacht known as the Sirius. It was very expensive compared to other presidential yachts purchased in the next years. As this was not enough, the VIP speedboat, which costs $3 million, was also purchased during the 300th anniversary. The following year the president ordered jewelry that costs $50 million. This jewel in the crown of the Kremlin fleet of yachts was to be the Olympia.

According to analysts, this yacht was one of the 100s best and largest yachts in the whole world. Misuse of public funds through the purchase of the luxury assets did not end with the yacht, but also it went out to touch on palaces and villas. Each of the top men in power is awarded 5 residences that comprise 26 luxury premises rooms. In addition, they also have other ten estates used to housetop leaders. However, the leaders are not satisfied with that. Mr. Putin ordered to have other presidential offices in Russki Island at a cost of around 7.7 billion roubles ($250 million). The residence was to occupy around 400 acres of land along the Boyarin Bay. The choice of the island was that it was adjacent to the Baltic seashore based in Kaliningrad, one of the best resort areas in the east of Prussia.

Media sources revealed that Altai’s lovely mountain scenery also attracted Vladimir Putin. He instructed the construction of the 21 kilometers mountain-based road that cost 190.5 million roubles per kilometer. Overall, 4 billion roubles were spent on the following project. Ralif Safin, the Altai senator, said that the road construction and actual based building works were carried out without the proper approvals from the necessary government agencies. The ecologists warned that the constructions carried out on the mountains would cause the detriment of the landscape. Thus, the 40 archeological sites in the area have already been seriously disturbed. After the conflict, Mr. Putin put off the desire to have a luxury restaurant in the mountain. He decided to put a luxury town near the Black sea. It was expected to be covered with enormous Italianate buildings, a health complex, palatial gates topped by a two-headed eagle, a 3-seater helicopter pad, and elevators down the base of the beach. This was carried out after some pine natural trees had been cut down under the guard of some local police and privately hired security guards.

As the above yachts and palaces scandals were not enough, another watch scandal emerged in 2009. The Vedomosti, a newspaper, unveiled and published an investigation that had been lodged by the activists concerning the expensive watches worn by the civil servants. The report indicated that the senior civil servants on Putin’s regime had a love for expensive watches. The scandal began when the activists saw A. Ulyukayev, the deputy of Central Bank governor, wearing a $78,800 watch. Secondly, S. Naryshkin, the head of the presidential administration, had a watch costing $29,700 in the market. Lastly, the Minister of Finance Kudrin had a watch that goes for $14,900 in the market.

However, Vladimir Resin, the deputy Moscow mayor, broke the record by wearing a watch that goes for $1 million in the market. This shocking news amazed the public and other Russian economic parties. Really, it revealed that there were some scandals going on in the government. Russian leaders did not end up with the watch scandals. Putin came in to give twice Blancpain watches worth $10,500 each to a son of a shepherd from Tuva and a one to fitter in Tula. He had also been seen wearing expensive watches such as gold Patek Philippe that goes for $60K; other brands include A. Lange & Sohne at a cost between ($20-30K) and gold Patek Philippe Calatrava at a cost of $20K. The prime minister’s income declaration revealed that he had a monthly salary of 4,622,400 roubles, as well as a military pension of around 100,600 roubles.

This indicates that the prime minister’s annual salary is less than the price of the watch; hence, a lot of questions raised about his income sources. As a result of publishing the report, some editors, such as Andrei Vasiliev, were mysteriously fired because they published some photographs with the president’s wife wearing an expensive Breguet that goes for $30K in the market. Initially, The Vedomosti reported that on a trip to Ukraine, the president’s wife was wearing a $28K Glashütte. When the Vedomosti editors questioned the press secretary, the response given indicated that it was someone’s private life, and therefore, they cannot interfere with the president or prime ministers’ life. The press secretary added that no one has a right to ask questions regarding the income and expenditures of the president and prime ministers.

Khodorkovsky and Magnitsky’s Case and Corruption in Russia

Mikhail Khodorkovsky, one of the greatest Russian oligarchs, was imprisoned since 2003 after he had been charged tried and even convicted. In, four years, he was reconvicted on engaging in fraudulent based taxes and other fund based charges. His imprisonment was a subject that haunted many human rights activists who saw that the judicial system and Mr. Putin concluded to dodge responsibilities. They stated that Khodorkovsky was jailed because he challenged the Russian strong man, Mr. Putin. He stood out to condemn the government for fueling corruption in the country. Secondly, he argued that Mr. Putin did not respect the rule of law. In the ruling, Mikhail Khodorkovsky was accused of stealing the Russian natural-based resources that eventually elevated him to be the richest man in the country.

The judging panel quoted the case of Yukos Oil Company owned by Khodorkovsky, and therefore, no sympathy could be awarded to him. However, in the real sense, Khodorkovsky was jailed because he traded and became an executive for William Browder. He was a grandson of Earl Browder, who was one of the prominent, early American known communists. William engaged in the fraudulent businesses in Russia through his company Browder’s Hermitage Fund. He was termed as one of the greatest shareholder activists by hiring some investigators in the stock exchange who unveiled some of the corruption oligarchs within the Russian government before informing media.

However, Browder was acting differently because the prices of stocks were to increase through the corruption incidences in the country surrounding the trading of shares. He concluded that he was happy for the arrest because the government was fighting corruption and disciplining the few signors it had build. This reveals that Khodorkovsky was just crucified by the government and Browder to imprisonment. Foolishly, Mr. Browder continued with his share-based agitation without knowing that the government officials had been angered with his manners to report about corruption matters to media houses. Though he thought to have pleased the government officials through unveiling corruption incidences, Khodorkovsky in the real sense he had angered them.

In 2005, his offices were raided in Moscow, blocked from entering the country, and his official company documents taken by the government officials to register a new company. In order to return the company, the Russian government officials requested 24 hours tax refund of around $230 million. Therefore, in a summary form, Mr. Khodorkovsky was sacrificed by the government to show the public that they were in a great fight for corruption, yet they are not. Something termed by economists and activists as scheming tactics for the corrupt governments.

In order to untangle the mess, Browder hired seven prominent lawyers; among them, there was Sergei Magnitsky. Sergei Magnitsky pursued so well the case such that he ended up testifying to the government officials that they participated in corruption, hence angering them further. Russia’s plutocrats decided to stop the lawyers and Browder through un-stringent measures. Instead, the seven lawyers felt that something was to happen, and six of them fled out of Russia. Though Browder organized an asylum for Magnitsky, he refused to leave Russia because he was just 36 years and had a young family. The government officials were ready to destroy those planning to fight them in corruption acts. They hunted Magnitsky, and in 2008, he was arrested and accused of the tax evasion incidences and sent to prison. Held without any hearings, his health worsened in prison. In August 2009, because of the operation made and bad treatment, Magnitsky died.

Oleg Silchenko, a senior internal based ministry official, was found to be responsible for Magnitsky’s detention, abuse, and death. The death amazed and angered many citizens and close Sergei’s family friends because he was not an oligarch but a person who tried to do his lawyer’s job. Therefore, in a summary form, the three years from 2005 to 2008 indicated that Putin’s regime concentrated on eliminating those found to expose corruption actions to the public or media. Real points are observable from Khodorkovsky’s based illegal jailing, then Magnitsky’s death, and killings or beatings of troublesome journalists. On the other hand, the plutocrats were free to jail whistle-blowers, steal companies, or even extort individuals with impunity.

To these government officials, the rule of law was nothing. They preferred stealing public resources and killing those who ask many questions. In 2011, the rule of law based accountability act of 2012 was drafted in the United States so as to impose sanctions on all those individuals responsible for detention, death, abuse, and infliction of Sergei Magnitsky. Moreover, the case was filed to arrest those who engaged in defrauding the Russian Federation Taxation departments before placing lawsuits against Hermitage. The act was also to capture violations of human rights under Mr. Putin’s regime where journalists were killed and even jailed. The Senate and House of Representatives of the USA were to engage in the process.

Several organizations conducted investigations to unveil the death of Sergei Magnitsky. Among them, there was the Public Oversight Commission of the City of Moscow for the Control of the Observance of Human Rights in Places of Forced Detention. This is one of the organizations protected and empowered by Russian law to monitor prison conditions. In their report, the organization concluded that firstly, Mr. Magnitsky’s detention was politically motivated. Secondly, the Russian Federation regime under Mr. Putin’s close allies and police officers manning the prison never took it as their responsibility to look after his health. Moreover, Mr. Magnitsky was termed as a great threat to state officials whom he had initially testified for the involvement in impunity and corruption.

Lastly, there was a false accusation level against Magnitsky, such as embezzlement or misappropriation of funds from the Russian Treasury because he was a lawyer and he had never worked in the treasury. Therefore, the case of Sergei Magnitsky was termed as a breach of human rights. Another report about his death was also tabled by the Civic Supervisory Commission by reaching the conclusion that he had been experiencing physical pressure and psychological tortures in custody. For instance, in the wards of Butyrka, he was beaten by the masked police officers. The report requested the international community to made Russia punish f all those involved in Magnitsky’s case.

Immediately after Magnitsky’s death, President Dmitry Medvedev formed a commission to investigate his death. The commission found that the Russian police had fabricated false corruption claims against r Sergei Magnitsky before detaining and torturing him to death. In reality, the 37-year-old lawyer died after pre-trial detention in November 2009 because he exposed the multimillion-dollar fraudulent activities against Browder and Mikhail Khodorkovsky. The latter was a great business magnate and a major critic of Mr. Putin’s regime. Khodorkovsky was jailed at the end of 2010 until 2017. This reveals that the Russian Plutocrats were ready to murder or imprison all those found to be anti-corrupt in the country by detaining them in Matrosskaya Tishina Prison based in Moscow. It was revealed that there was no mercy for those found to contradict the government's close allies even if they had families and young children. They could not spare Mr. Magnitsky for his young family of two sons and wife. Even after his death, the family continued to be harassed by the police officers who invaded the rooms for random searches.

Apart from the death and torture of Sergei Magnets, other tragic and unresolved murders of several critics include the death of Nustap Abdurakhmanov, unresolved murders of Maksharip Aushev, Akhmed Hadjimagomedov, Natalya Estemirova, Paul Klebnikov, Magomed Y. Yevloyev, the death in custody of anti-corruption lawyer, Vera Trifonova, as well as the disappearance of Said-Saleh Ibragimov and Mokhmadsalakh Masaev among others. Other activists, such as Mikhail Beketov, Arkadiy Lander, Oleg Kashin, and Mikhail Vinyukov, were subjected to near-fatal based beatings in custody. These indicate the grave based matter of corruption in Russia under the Government of the Russian Federation headed by Mr. Putin as the prime minister.

Suggestions on how to Fight Corruption in Russia

Experts revealed that the corruption level in Russia amounts to around 20% of the total GDP. In order to eradicate it, several measures have been proposed. To begin with, some changes in governance, especially on Putin’s regime, must be undertaken. The studies reveal that corruption in Russia has been spread by Mr. Putin and his close allies. Therefore, if removed from power and several changes made within the government offices, the corruption level may decline. Moreover, the companies aspiring for changes in governance should also implement some protective corruption reduction strategies, such as a bottom-up approach that help to create awareness among the employees and society on the corruption threats.

Secondly, the lawmakers in Russia should make some amendments to the present anti-corruption policies so as to ensure all state officials undergo anti-corruption based tests, some classes on anti-corruption introduced in schools and colleges, or even form the commission to scrutinize all the state officials before pushing them to declare their wealth status and sources. Moreover, the Anti-corruption Act should be amended to limit the legislator’s rights of owning assets abroad and state officials to stop privatizing the public-owned companies.

Thirdly, fighting corruption in Russia will require an independent judicial and reformed police system that is willing to do everything without government interference. The Russian judicial system is very weak with the judges colluding with few government corrupt officials to deny foreigners and anti-corruption lawyers and activists rights. Moreover, people who do not aim at enriching themselves should hold government offices. This can only be achieved by holding the government accountable for all acts done; otherwise, it should be replaced through votes. Lastly, the civil society in Russia must rise and protest against corrupt government officials. In most countries, it is the duty of civil society to unveil corruption deeds and also keep the government rule in accordance with law.

Summary Statement

Systematic based corruption poses a great threat to the investment level and security in the country. The capital flight is highly rampant with over $38 billion in 2010 termed to have got lost. Three hundred thousand entrepreneurs, investors, and other economic specialists emigrate from Russia annually to the neighboring European and East Asian countries. This is observed by economists and investors as a move to ruin the business based activities in the country. The monopolization of the various industries in the country, the higher concentration of Putin’s friends, and other acquaintances in the government, as well as a fascinating rise in oil and gas prices, pose a great threat to the investment level in the country.

Investors fear that the government may exploit them, tax some of the resources heavily, or even influence the rule of law in case of any conflict. The government has severally influenced court decisions, as well as detained and deprived the right of some investors, such as Browder. The Financial Times reported that colossal corruption in Russia may ditch the country to a third world country. It compares the corruption level in the African states to that in Russia. This has made investors move out of the country and invest in neighboring states.

The economists and other anti-corruption officers have called on national programs to be implemented so as to combat corruption. In order to sustain the economy, Mr. Putin and his regime increased taxes and privatized some of the state-owned companies at the knockdown prices. Secondly, the Russian government should protect the conditions of equal competition by ensuring that tenders are given based on a competitive basis. However, the Russian government had been keen to appease friends by awarding those tenders even when they had not applied for them. The investment climate is not conducive, and there are possibilities that local investors in medium and small businesses prefer to move to other nations. The ongoing poor political will and dishonest happen to make investors fear to invest in Russia. Every commission formed to investigate the death of investors or other government critics’ ends up mentioning some of Mr. Putin’s close allies.

Any investor found to compete with Putin’s regime ends up being imprisoned or even killed. The simple question that should be answered is how corruption in Russia has impacted the investment climate in the country. It is evident that corruption weakens economics, leading to limited investment opportunities, and hence, investors are made to move out of a country. The main aim of this study is to prove that corruption affects the investment climate in Russia. Other previous studies have not answered the above question, and therefore, this study adequately unveils the statement problem. The study embraced secondary data sources, such as World Bank Reports, so as to ensure that the report obtained is factual and adequate for the future studies and analysis by the government and other anti-corruption officials.

Methodology

This chapter describes and justifies the data gathered on corruption in Russia and its effect on the investment climate. Moreover, it addresses how the data will be collected and analyzed.

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Research Design

In the study, we elaborate on the effects of corruption on Foreign Direct Investment (FDI) Inflows in Russia. The Foreign Direct Investment (FDI) Inflows represent a dependent variable while corruption is the main independent economic variable found to influence the FDI inflows. In order to explain the Foreign Direct Investment (FDI) inflows adequately, there are other extraneous standard-based economic variables, such as GDP per capital, Inflation, Civil liberties, Labor productivity, Population, and Past FDI inflows added progressively to make the study more consistent. Civil liberties involve the rule of law, personal autonomy, individuals’ rights, expressions, beliefs, and other rights among the Russians. The data was collected from secondary sources, such as World Bank statistical reports, books, and journals.

Research Model

A mathematical model that linked the Foreign Direct Investment (FDI) inflows, corruption, and other independent economic variables were established. A Foreign Direct Investment (FDI) inflow was treated as an exogenous variable while the independent/explanatory variables were treated as exogenous, meaning that they determine the investment level in Russia. The framework for evaluating the relationship between the FDI inflows, corruption, and other determinants is presented below:

Υit = α + βΧit + γΖit + uit.(1)

From equation (1) above, Υit measures the FDI inflows in Russia (i) at a time period t. α refers to an autonomous variable. Χit is an index that represents corruption in Russia (i) at a time period t. Moreover, it indicates the control variables in Russia (i) at a time period t. They include, GDP per capital, Inflation, Civil liberties, Labor productivity, Population, and Past FDI inflows added progressively to make the study more consistent. With more additional information, the above model can be used to generate more reliable parameter based estimates. It should be noted that the effect of corruption on the FDI inflows is highly emphasized so as to establish how the Russian economy was influenced. Therefore, a benchmark based FDI equation in a linear form and some constant terms can be provided as follow:

FDIi,t = α + β1Corruptioni,t-1 + β2GDP per capitai,t-1 + β3 Civil Libertiesi,t-1 + β4Populationi,t-1 + β5 Labor productivityi,t-1 +ui,t.(2)

Where i is the country (Russia), Bs are parameters to be estimated while ui,t denotes the disturbance based terms. In most cases, the explanatory variables are lagged one year to avoid some simultaneity with the dependent variable and also to take into consideration the fact that investments take some time. Moreover, these solve some of the endogeneity based problem linked with the causal relationship between the Foreign Direct Investments (FDI) inflows and some of the right-hand side based variables. The five specifications for the determinant of the FDI inflows s are discussed in the next subsections.

Corruption

The main interest of the various empirical results obtained is a sign and marginal effect of the corruption based variable on the FDIs inflows. The explanatory based variables are also statistically important and are expected to represent the same sign except for the GDP per capita. Corruption behaves like a tax on investment that is lowering the profitability level. The analyzed data tries to confirm the findings by Mauro (1995), Smarzynska and Wei (2000), and Al-Sadiq (2009) that the FDI inflows have a negative relationship with corruption in any host country. The Corruption Perceptions Index (CPI) score shows the index score for the corruption rate in each country with a scale from 10 (highly clean) to 0 (highly corrupt). Russia's CPI scores are close to 0(zero), hence highly corrupt.

GDP per Capital

The coefficient of GDP per capital for the developed countries, such as Russia, is not significant as it is in the developing countries on the FDIs inflows. In the developed countries, it is negative instead of being positive, yet rationally, the higher the GDP per capita is, the higher the FDIs are. For the last decade, the FDIs in Russia have been not completely marketing seeking. Multinational companies are increasingly investing in the efficiency-based FDIs and marketing based seeking FDIs in many developed countries. However, it is included in the benchmark model as a control variable because 1% per capital level in models led to some significant effect.

Population

The high population level in Russia means high manpower to foreign investors; hence, it determines FDI inflows. If the researcher excludes the population from the explanatory variables, the other control variable will become highly insignificant. The population-based coefficients are all significant at the 1% level. A large population is beneficial to the FDI inflows because the investors get an abundant large labor force and high market size.

Labor Productivity

It is expected to display a similar sign and a significant level of 1% in most of the models for the developed countries. MNCs found that FDIs are highly interested in countries with a large number of workers, skilled labor force, and professionals. Russia is a country with high labor productivity that may attract FDIs inflows.

Civil Liberties

They comprise the freedom of association, rule of law, freedom of religion, speech and press, personal autonomy, and other human rights in Russia. In most cases, it is positive and highly significant in showing the FDIs impacts on the developed countries.

Sample and Population Description

A sample of five years statistical data on the Russian economy’s corruption expectation index, GDP per Capita, labor productivity, Civil liberties, and the population was collected from secondary sources, such as the International Finance Statistics and Balance of Payments Statistics Yearbook from the World banks and the International Monetary Fund (IMF), World Investment Report by the United Nations Conference on Trade and Development (UNCTAD), the International Direct Investment Statistics Yearbook by the Organisation for Economic Co-operation and Development (OECD), and,y the European Union Direct Investment Yearbook compiled by EUROSTAT.

The five years run from 2008 to 2012. It is essential to note that though most of the corruption incidences took place from 2000 to 2011, the FDIs were adversely affected at the climax level. Moreover, the recent five years reveal that are valid and reliable to make the decision on how corruption in Russia has negatively affected the FDIs. The researcher found it essential not to rely on one source of secondary data in order to enhance comparability and reliability. Each of the sources has some limitations. For instance, the OECD and EUROSTAT have had a limited number of the yearly updated yearly on Russia since 2008.

Data Collection Methods

An analysis of the effects of corruption on Investments (FDI inflows) requires adequate, complete, and valid data. It was, therefore, to rely on secondary sources of data from the books documentaries, and World Bank archives among other sources. The data was collected from several sources, such as the International Finance Statistics from the International Monetary Fund (IMF), the World Investment Report by UNCTAD, the International Direct Investment Statistics Yearbook by OECD, and the European Union Direct Investment Yearbook by EUROSTAT among other sources. It is essential to point out that secondary sources contain valid and accurate information about investment and labor productivity, corruption, GDP per capita, and population for the developed countries like Russia.

In the World Bank reports, Data on the FDIs are shown based on net terms. Population, GDP, and labor productivity data are shown in billions or millions. Moreover, the corruption level is indicated through the perception index. There are no direct ways of measuring corruption because it is too secretive. If it were measurable, then it could be eliminated. However, the published sources, for instance, the Control of Corruption Measure from the World Bank’s Governance Indicators database (WB) and the Corruption Perception Index by Transparency International (TI index) have tried to measure it.

Pre-test

The researcher embraced comparability of the secondary data taken from different sources, which have been already mentioned, to ensure that the data is tested in advance. This ensured valid and reliable figures being used in the analysis stage. Moreover, the study results and data were compared with the previous studies so as to claim for validity, accuracy, and reliability.

Data Analysis

The data collected from the secondary sources concerning the five exogenous variables and their effects on the FDIs were analyzed using Statistical Package for Social Science (SPSS). Later the data was coded and edited, and the results were drawn from it. It should be noted that the software runs the data individually so as to establish how each explanatory variable is related to the FDIs in Russia.

Results and Findings

The interaction between the Foreign Investment Investments (FDIs) corruption and other control variables, such as GDP, labor productivity, population, and civil liberties has been analyzed using Multiplicative based regression with the civil liberties acting as a dummy variable. All the independent variables were lagged against the FDIs as indicated in the model and Table 1. It is necessary to state that the statistical significance and correlation coefficient signs are the most vital areas to indicate the relationship between the FDIs and the independent variables.

Corruption

Firstly, the model indicated corruption as the main independent variable is found to influence the Foreign Direct Investments. The regressed data analysis indicates corruption has a beta coefficient of -4.16494, Standard error of 0.000, and at-statistics at 0.056. The results indicate that Foreign Direct Investments are inversely related to corruption in Russia. This conclusion can be derived from the fact that the sign of the beta coefficient is negative. The strength of the results is at the 95% significance level. Moreover, the strengths of the findings can be underpinned to a large extent with the R-square value at 0.5378447.

Given that the corruption effects on the FDIs are the major interest, the results match exactly what has been happening in Russia. Most of the investors are pulling out of the country and settling in the neighboring countries. The correlation coefficients indicate that the effects of the corruption level have a great impact on determining the investment climate of the country in the future. The marginal error recorded is 0%. The following case can be used to reveal that corruption in Russia is a serious pandemic to deal with the condition that the government plans to boost the future investment level in the country.

Gross Domestic Product (GDP)

Secondly, in the regression process, Gross Domestic Products (GDP) proves to have a positive significant impact on the FDIs; though, the effect is very small. The correlation coefficient of 0.25 reveals a positive relationship. The t-statistic is given by 5.666754**. The lower explanatory power of the correlation coefficient reveals that as GDP increases, the Foreign Direct Investments (FDIs) increase and vice-versa. This means that the output level in the production sector of the country determines the number of investors planning to set up firms in the country.

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Investors are attracted by the presence of an adequate output level. In Russia, most companies will be attracted by the high GDP level obtained from oil and gas companies. However, there is slow growth in the GDP level as primarily reflected in the extremely low R-square value at 0.5378447. Though the t-statistics indicates a high significance level of the relationship established between the two variables. However, in some less developed countries, it is essential to caution the researchers about GDP having a negative relationship with the FDIs.

Labor Productivity

The correlation coefficient of 7.649 indicates that FDIs are positively related to labor productivity. This means that as labor productivity increases, the Foreign Direct Investments from MNCs increase, as well. It is statistically significant at 95% as provided through the t-statistic of 4.456544**. The standard error is 0. This means that the Multinational Companies (MNCs) from the other countries that transact oil and gas companies should take into account the level of labor productivity. Investors target highly productive abundant and less costly labor. They prefer to set up premises where there is abundant labor productivity so as to minimize labor costs.

Therefore, labor productivity ends up positively affecting the abilities of the Russian based FDIs level. It is found that if labor productivity is higher, the level of skilled and professional workers is higher, as well. As a result, the output is high. Most of the foreign investors do not outsource a labor force in the country because Russia enjoys a highly-skilled hardworking labor force that promotes companies to harness new ideas and yield high profits. Therefore, FDIs in Russia will continue to be positively related to labor productivity.

Population

The regression results indicate that the population positively correlates to the FDIs in Russia. The higher the population level is, the higher the FDIs are in the country. This can be testified through the positive correlation coefficient of 2.31486 and a t-statistic of 3.666436**. The population is generally used as a measure for the country’s demand and labor force. If the population level is higher, the market available for local and internationally manufactured products is higher, as well. This is inconsistent with previous empirical studies that have revealed that the population level is one of the FDIs determinants The market seeking the FDIs is enhanced through high demand created by the ever-rising Russian population. Therefore, the sign of the correlation coefficient depicts a positive correlation between the FDIs and the population level.

Civil Liberties

It was a dummy variable because it cannot be quantitatively measured. Civil liberties embrace openness, personal autonomy, democracy, and the rule of laws. Researchers indicated that there is a negative relationship between the civil liberties and the corruption level, but there is a positive correlation with the FDIs. Countries that have matured through free civil liberties tend to have higher FDIs compared to those who have not. Investors prefer that their assets, resources, and rights are upheld accordingly. They believe that upholding rule of law means a lower corruption level in awarding tenders, investment opportunities, and documentaries. It is found that corruption declines if civil liberties get better, and hence, more Foreign Investors are attracted to a host country. Currently, the investment level in Russia declines because the freedom of belief, expression, association, openness, rules of law, and individual rights, seem to decline, as well.

Summary and Conclusion

Summary of the Findings

This study attempted to investigate the effects of corruption on the investment climate in Russia. Specifically, the study is to establish whether corruption in the country has deleterious or beneficial results on the FDIs. Corruption in Russia seems to have expanded spontaneously from 2000 to 2008, under Mr. Putin’s regime. Mr. Putin’s close allies amassed wealth through privatization of the public-owned companies, employment of family members in senior government positions, and awarding of tenders and contracts based on how much knowledge the government officials. The climax of the corruption incidences was arrest, death, and brutal disturbance of the few found to expose, prosecute, or detain the corrupt government officials.

The research finding reveals that corruption is negatively related to FDIs in Russia. The high corruption incidences in the country, as well as weakening judicial and police systems have rendered the investors’ resources prone to the losses and, hence, scared them away. Therefore, the significance of the results is that Russia must reduce the corruption level so as to attract FDIs in the country. Secondly, the GDP level in the country portrays a positive relationship; though, it is weak against the FDIs. The Russian government should, therefore, consider improving the GDP of the country so as to improve the investment climates in the country. GDP has reduced the output level of all industries in the country and individuals. Investors find it safe to see the GDP improve as there is economic growth in the country.

In addition, a labor productivity variable within the model is also positive and significant to the FDIs in the country. The FDIs are directly proportional to the amount of the labor force in the country and its productivity. The Russian based investors seem to understand that the productivity level of the available force in terms of skills and professionalism stand high and, therefore, immigrate to the country. The Russian government should come up with robust policies that improve labor productivity. The government should aim at increasing the available fund on improving an education status within the tertiary and technical based institutions.

In addition to that, the Russian regime can collaborate with the firms, as well as foreign investors so as to develop a consistent curriculum found to enhance the professionalism and skills of the labor force. There are calls for the institutes specializing in strengthening and training the recent scientists and engineering graduates on how to improve the oil and gas industry in the country. This can lead to technology transfers, improved service delivery, and reduced corruption levels in the oil and gas industry among others. It is unarguable that if professionalisms and skills of the labor force are higher, the productivity level and, hence, favorable climate is higher, as well.

Lastly, the population level positively influences the Foreign Direct Investment (FDI) in Russia. The country contains a large population density and, therefore, ends up attracting foreign investors in the country. The large population provides a less costly skilled and professional based labor force that tremendously earns profits to the multinational based companies. Given that most of the companies in the country engage in oil and gas production, there are high possibilities of demand for the high labor force, and thus, a lot of population is required. Therefore, the positive correlation reveals that the investment climate in Russia has been affected, to some extent, by the population density in the country.

Conclusion

The results of corruption effects on the investment climate in Russia give some mixed options. The current status of the corruption level in the country does not favor the FDIs in the country, and therefore, it is of great importance to eliminate the Putin’s regime or impose a necessary corruption reduction. Currently, corruption within the government offices and across the tendering process remains harmful not only to the FDIs but also to the entire economy. The negative correlation figure indicates that foreign investors are running out of Russia and settling in the neighboring countries. The government officials are accused of awarding tenders and senior government positions among the few close allies to President Putin. Moreover, the judicial system and police sector do not deliver justice to the aggrieved investors, such as Browder. Heavy taxation policies are imposed within the investment environments endangering future investment prospects.

Essentially, the government must apply some of the foreign-based anti-corruption policies in order to curb the corruption level in the country. Sources, such as World Bank reports, provide detailed policies on how to reduce corruption in Russia. They comprise improving the judicial and police system, asset recovery, openness in awarding of tenders and contracts, technical assistance on reducing corruption, information exchanges, as well as criminalization of those found to engage in corruption among others. Moreover, the corruption status in Russia should also be reduced through the introduction of corruption mitigation classes within the educational centers.

Moreover, there should an independent anti-corruption agency that prosecutes all corrupt in Russia. The agency should be mandated to conduct independently all its duties without interference from the government. It should also have the power to investigate corruption incidences together with the police forces and judicial system. In order to avoid the officers being bribed, stringent measures must be imposed on them. Secondly, they must be paid well compared to government officers. If all these is fulfilled, the corruption level in Russia is likely to drop the paving the way for a favorable investment climate.

Suggestion for Further Research

The estimation of the thesis results should be interpreted with caution as the models designed do not include all the control variables found to determine and influence the investment climate. Due to time period and limited data on foreign direct investment, corruption, and other variables, the researcher suggest further researches on the FDIs and civil liberties, causal relationship between corruption and civil liberties, the FDIs and corruption in the oil and gas industry in Russia, and corruption and the FDIs across different regions across the globe, such as Latin America, Europe, Africa, and Asia, instead of a single country.

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