Corruption drags down Russian economy

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MOSCOW | The Hotel Moscow, an icon of Soviet architecture, is today a monument to another pervasive aspect of Russian reality: crony capitalism.

Seven years ago, the city government decided to demolish and rebuild the towering, thousand-room structure just off Red Square, and awarded the contract to a U.S.-registered developer. But the deal was annulled under murky circumstances, investigators say, in favor of business interests well connected to officialdom and organized crime. Financial irregularities have since delayed the project’s completion.

The fate of the hotel is emblematic of Russia’s troubling business culture. A string of similar high-profile cases in which bureaucrats, police and justice officials are suspected of using their authority to pressure or swindle foreign companies has caused an increasing number of investors to pull out, with potentially dire consequences for a flagging economy.

Foreign investment is down 22.9 percent compared with last year, according to the Noviye Izvestia newspaper. In the second half of 2008 alone, an estimated $7 billion in foreign capital exited Russia.

Russia also was ranked 146th out of 180 countries last week in Transparency International’s annual survey, which measures corruption in government and business - a drop of nearly 30 places since 2002.

The watchdog group estimated that bribery costs Russia $300 billion a year, or about 18 percent of its gross domestic product.

“With the current level and volume of corruption … we cannot move forward,” Transparency International said in a statement last week. “If corruption stays as it is now, it will continue to eat up the resources” that Russia could invest in its future.

President Dmitry Medvedev has acknowledged the problem, lamenting the “legal nihilism” that has rotted the system. In a major speech earlier this month, he said corruption needed to be tackled from many directions but that a solution would take time: “We won’t solve the problem in a single bound, but we have to dig in.”

Russia analysts say implementation of promised reforms has been scant.

Dmitri Simes, president of the Nixon Center, a Washington think tank, and a frequent visitor to Russia, said that “senior government officials do not hide their wealth” and can be seen wearing watches worth tens of thousands and even hundreds of thousands of dollars.

“This systemic corruption makes it very difficult to introduce meaningful political change,” Mr. Simes said at a recent forum on Russia.

In July, Robert Dudley, the chief executive officer of a joint venture between BP PLC and Russian oil company TNK, left the country in the face of harassment. Masked agents raided the company headquarters, BP staff members suddenly were denied visas on dubious grounds, and Mr. Dudley faced threats over what appeared to be bogus labor law violations.

The week after his departure, Russian stocks plummeted 12 percent. JP Morgan lowered its stock rating from “neutral” to “below market,” citing the risk of state interference.

When Ikea, the Swedish retailer, began opening stores across the country, it faced extortionate rates from utility companies. Rather than pay, it rented private generators to power its stores, only to find that the Russian executive in charge of the generators was inflating prices.

Ikea claims it lost nearly $200 million over two years and has suspended all investment in Russia.

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