Russia’s corruption tsar
(Business New Europe – bne.eu – Ben Aris in Moscow – October 25, 2012)
Boris Titov would eschew the title “Russia’s Corruption Tsar”, but if he achieves half of what he is setting out to do, then that is what he will become.
Appointed Russia’s new ombudsman for business by President Vladimir Putin in July, Titov’s job is to try and make life easier for regular businessmen and at the moment that means doing something about the endemic corruption.
Russia has been corrupt since the time of the Tsars and didn’t get any better under the Communists. But corruption really took off in the middle of the last decade, illustrated by Russia’s 1998 ranking in the Berlin-based Transparency International “Corruption Perceptions Index” dropping from 76 in 1998 out of a total of 182 countries, to a nadir of 154 in 2010. After Dmitry Medvedev launched his anti-graft drive in 2008 while president, things have improved a little and Russia’s ranking has improved to 143 this year but corruption is still a huge problem and an enormous drag on economic growth. “The main problem in the naughties has not been raiders or corporate wars, but the pressure of the administration on business based mostly on corruption. The state officials are capitalising on the opportunity to grow their personal wealth. It is the number one problem for business in Russia today,” says Titov, sitting in his suitably small and unimpressive office in the business centre at the back of Moscow’s World Trade Centre complex.
Titov made his money as a champagne producer with the Krasnodar-based Abrau-Dyurso company and even sent 5,000 bottles of his finest vintage to the Kremlin in May, with which the collected dignitaries toasted Putin’s health at his inauguration as president. But he is better known as a leading member of Delovaya Rossiya, a non-governmental organization set up by independent businessmen not involved in the oil sector to lobby the government. Titov was also a member of the Right Cause liberal opposition movement. Nevertheless, his pragmatic approach to lobbying won him the ear of the government, which has increasingly worked together with the organisation to tackle some of Russia’s worst problems.
Delovaya Rossiya went into a more formal partnership with the Ministry of Economic Development and Trade a year and half a ago, before Putin decided to create the position of ombudsman this summer.
The reluctant knight
Fittingly, Putin announced the creation of the new post of ombudsman for business during his keynote speech at this year’s St Petersburg Economic Forum in June. Technically, the role of the ombudsman is to deal with any issue that makes business more difficult to do, but Titov’s job as he sees it is to provide a mechanism outside of government that people and entrepreneurs can turn to if they are victims of pressure from state officials who are attempting to extract a bribe from them. All the issues concerned with cutting through red tape or introducing electronic tax returns can wait for later, says Titov.
The process starts with a citizen filing a complaint to Titov’s office. And since he was appointed four months ago, Titov says he has already received more than 500 cries for help. “Our job is to help the honest businessman,” says Titov, swivelling in his chair in an open necked shirt and jeans. “The problem is that not all businessmen in Russia are honest. The first thing we have to do is check the complaint to make sure it is real.”
Once this due diligence is complete, then Titov starts his own investigation to gather evidence before taking action usually taking the case to court, but often he will also go directly to the ministry involved and pressure them to act. Despite only being on the job for four months, he says his team has already scored several successes. “We have already got seven people out of jail because of our work. The first steps have been taken, but I can see the problem is bigger than I first thought,” says Titov.
In a typical case, a judge in Kostroma was recently disbarred for stealing RUB1.5m ($50,000) and her accomplice, the head of the local Federal Security Service (FSB), was sacked thanks to Titov’s intervention. In another case, Titov received three separate complaints from small businessmen in Nizhny Novgorod, all of whom were fighting off criminal investigations launched by the local interior ministry. “When we investigated, it turned out that all three complaints came back to the same official in the ministry, so we complained to the local head of the ministry, which launched its own investigation and fired the official,” Titov relates.
New powers
The creation of the ombudsman position is part Putin’s attempts to build up a more liberal pro-business cabinet, even if he personally keeps control of the most important sectors in his hands and under the auspices of the presidential administration by appointing his mates to the boards of the biggest state-owned companies.
After he retook office in May, Putin swept out the old guard from the top tier of government and largely repopulated the cabinet with young liberals; Titov says that on the highest rungs of the ladder there is a new commitment to clean out the stables, but the difficulties lie in the fact that most of the corruption happens amongst mid-level officials in the regions far away from the capital. “The top men in all the ministries are new and they are all committed to cleaning out these corrupt people from their ranks. The trick is actually doing it,” says Titov.
And Titov’s powers are about to be dramatically increased. At the start of December, the Duma is due to vote on a draft law that would give the office of ombudsman some real teeth: from January, Titov will be able to order any state body to give him any information he requires and he will have the power to halt any investigation or court process if he believes it is an abuse of administrative power.
These powers could make a huge difference. One of the problems both Delovaya Rossiya and Titov have had until now is that they rely on the state’s own organs to take the fight to the corrupt officials: when he uncovers an abuse, the most he can do is to send a request to the local administration to act. “What happens then is the head of the administration gets a request to do something to help a businessmen, say, Ivan Pupkin but the first thing he asks is, “who is Ivan Pupkin?” So he sends an order down the chain of command for more information. Of course, this usually lands on the desk of the very official that the complaint is about and the answer comes back up, ‘He is a nobody there is no problem here’.”
In Soviet times, the classic question was “who is to blame” when one of the Gosplan’s targets were missed and the wrong answer could land the scapegoat in the Gulag. This mentality is still pervasive today, but Titov’s new powers should sidestep this problem. “If the law is passed, then it will take away the problem of responsibility: if the head of the administration acts on my request and things go wrong, then he is to blame; if he acts on my orders and if things go wrong, then I am to blame,” says Titov with a shrug of the shoulders. “We will be inside the system and these guys will understand that the system is now working against corruption so the relations are totally different.”
However, this doesn’t mean that Titov is going to be some sort of Elliot Ness-like policeman. At his last meeting with Titov in the middle of October, Putin was very explicit that the power of the ombudsman will come from being able to tap into the existing judicial system, “to defend business people whose rights have been violated without replacing courts.”
“I would like Boris Yuryevich Titov and his colleagues who will work in the regions to defend business people whose rights are being violated, not lobby for the interests of businesses and defend those who are really violating the law,” Putin said at one of his regular meetings with Titov. “All tools you create, all instances should not replace courts. The main thing is that you need to find your niche in the work aimed at improving the business climate.”
In other words, it sounds a lot like Putin is attempting to make the rule of law in Russia work a bit better, with Titov as the point man to oversee the effort. Perhaps not surprisingly, Titov himself doesn’t seem very convinced it will entirely work. Certainly he expects to make progress and maybe even to make a difference, but he punctuates the conversation with maybes and probablies; he is under no illusion that the task ahead is going to be very difficult indeed. In an optimistic moment, Titov says he believes there are a lot of honest and decent people in the mid-tier of most ministries where most of graft happens, so his work won’t be in vain.
New economic model
Part of Titov’s scepticism is due to his belief that corruption is a symptom and not the cause of Russia’s problems. This is one of the places where he disagrees with Putin strongly, but fixing this particular problem lies entirely outside his brief as ombudsman. “To get real change in Russia we have to change the Russian economic model. Today, 80% of revenues is from the export of natural resources. The private sector is actually shrinking, as only 5% of the population are directly connected to the main source of money in the country and competition is low. Private people are superfluous to the economy and the government needs to do something about it. But what is its answer? More state jobs,” says Titov, becoming increasingly animated once on the topic of economic policy reform.
In his 12 years in power, Putin has delivered on a promise of economic prosperity, which is the foundation of both his popularity (Putin’s ratings were over 60% again in a poll conducted in October) and his political power. However, much of the increase in personal incomes have come from windfall oil profits; the state’s continuing heavy presence in the economy provides for an extremely efficient “trickle down” mechanism that passes much of the oil money to the population. As a result, the size of the state has continued to expand on Putin’s watch and now numbers almost 2m state employees about twice the size of the Soviet-era peak. “The balance of power is with the government,” says Titov. “The main policy of the Putin government is macroeconomic stabilisation and the economy is stable now. We are calling not for stability, but development and growth.
As Titov sees it, after the chaos and stealing of the 1990s Putin brought badly needed order and control at the start of the last decade that led to Russia’s renaissance and the subsequent boom that began in about 2004 or 2005. “Putin took over and brought the control that was needed. [Finance Minister Alexei] Kudrin came in and reformed the budget and tax system and imposed central control of the state’s finances. Plus there was more political stability,” says Titov. “All this was fire fighting. But by 2005 the economy was doing every well. We should have changed model to go for growth and development. The government should have let go, but they stuck to the fire-fighting style for too long.”
It is no coincidence that corruption also took off again in about 2005. As the economy recovered, the state should have stepped back, handing the baton to private enterprise. But the state continued to expand and tighten its grip even more, culminating in the Law on Strategic Sectors in 2008 that banned foreign investment into nearly 40 of Russia’s most attractive industries (a law that has since been undone). Corruption flourished, fed and watered by the torrent of cash flowing through the state’s hands as oil prices rose from a long-term average of $25 a barrel to the peak of near $150 in just a few years.
Kudrin’s stranglehold over the country’s finances was the tonic a sick Russia Inc. needed immediately after the 1990s, but it is becoming increasingly problematic now. As such, Titov would like to see a new economic model and, unlike most western observers, welcomes Kudrin’s departure from the government. Russia, he argues, needs to promote non-resource businesses that is supported by a revamp of the tax code. However, this would also mean the state has to abandon its grip on the oil sector and reduce its own size and control of the economy, which is a risk he doesn’t believe the government is prepared to take.
Titov’s talk of the need for a “new economic model” echoes the talk of the liberal economists that staff Russia’s cabinet now. Sergei Guriev, rector of the New Economic School and the intellectual force behind Russia’s reform programme these days, has called for exactly the same change: a switch from the state’s “big push” to revive growth to “nurturing” the economy. But like Titov, Guriev is sceptical and doesn’t believe the Siloviki (the security/military services old guard) is willing to give up its control over the economy.
Indeed the phrase “new economic model” was on the lips of most of the speakers (mostly liberal ministers from the new government) at the annual “Russia Calling” investment summit held by state-owned investment bank VTB Capital. Even Putin used the phrase during his panel session at event. But Putin has also stacked the presidential administration with his buddies from the Siloviki, which has left economic policy caught between these two worlds.
Roadmap to somewhere
The upshot is that Russia will do what it always does: meander along, making some progress but not enough to make anyone really happy. However, this time the plan is to at least have a map for the journey.
The most visible manifestation of the new economic model being pushed by the liberals are the various roadmaps that the government is drawing. These give some more detail to the reforms of various key sectors. Four have already been submitted to the government for approval, and in the case of the power sector the previous plan was canned completely in September only a year after being adopted by the government after much blood and tears; the responsible ministry ordered to go back to the drawing board and produce a new plan by 2014.
Titov too is getting a roadmap, which is being thrashed out now. He has already set up a methodology to deal with complaints and this August he toured the country appointing regional level ombudsmen as his representatives in the regions. In October, Titov revealed to the Moscow Times that by the end of the year the “Red Button” programme will literally feature red buttons on state websites that direct complainants to Titov’s organisation and provide instructions for filing a complaint. Working groups have also been set up at the interior ministry and the General Prosecutor’s Office, Russia’s top policeman, but Titov realises he is at the very beginning of the task. “There are lots of problems on the way,” says Titov. “Enforcement is the key. I will have my own powers to and can go to court on behalf of people or companies, and I can order any government process to stop while that case is going on. Then I can also ask for the help of the interior ministry and the general prosecutor, but the problem is the system has to fix itself.”
Russia is currently a horse and cart labouring along the road and Titov has been charged with greasing the wheels, he says of himself. However, what is needed is to change to a car, “otherwise you will only ever have one horse power.”
Still, at the end of the day, if he produces any results it will make a difference and then his office could be flooded thousands of complaints on a monthly basis. “It’s true,” says Titov. “That is why it’s more than just me. That is why we are building a system.”