Russia's growth stifled by corruption

Months of protests preceded Vladimir Putin's re-election as Russia's president in March 2012

President Vladimir Putin has said he wants to make Russia the fifth-biggest economy in the world.

It currently stands at number 11.

He wants to boost foreign investment as part of his new economic plan.

But some foreign investors are worried about Mr Putin's return as head of state for another term of six years after allegations of vote-rigging and protests both before and following his re-election.

Furthermore, despite Russia's rich resources and its place among the world's fastest-growing economies, there remains a general feeling that the country is underperforming and falling far short of its potential.

According to Angus Roxburgh, former BBC Moscow correspondent and later a public-relations adviser to the Kremlin, there is one overriding reason why Russia is failing to achieve its economic potential and failing to attract outside investors: corruption.

Worsening scenario

"It is something the government acknowledges but seems powerless to combat, despite a regular stream of anti-corruption decrees and initiatives," he says.

"In fact, it gets worse year by year. According to official figures, the average bribe in Russia is more than $10,000," he notes.

Transparency International, which ranks countries according to perceived levels of corruption, says Russia has slumped from 46th place in 1996 to <link> <caption>143rd in 2011</caption> <url href="http://cpi.transparency.org/cpi2011/results/" platform="highweb"/> </link> .

That makes it one of the most corrupt countries on earth.

Bureaucrats in charge of state tenders routinely ask for enormous bribes from companies bidding for the contracts, which adds to the cost of the bills that the state pays.

"A year or so ago, three seniors officials were convicted - a rare occurrence - for demanding $1m to take the Japanese company Toshiba off a fictitious blacklist, which was preventing the company bidding for a contract," Mr Roxburgh recalls.

The case of Sergei Magnitsky, the lawyer employed by a western investment fund, who exposed corruption and then found himself thrown in prison by the very people he had accused, and who then died in prison, has served as a dire warning to all potential investors.

Wrong approach

Russian businessmen hate the climate too.

"Dozens of entrepreneurs are in prison on charges trumped up by officials trying to get their hands on their companies," says Mr Roxburgh.

The Central Bank reported capital flight from Russia in the first four months of 2012 of $42bn.

The answer seems clear: root out the corrupt officials.

"But how do you do that if, as most Russians say, the fish rots from the head down."

Leaders in the Kremlin are aware of the paradox.

During his four years as President, Dmitry Medvedev made it his priority to modernise the Russian economy by creating the conditions for manufacturing and especially for hi-tech industries to develop.

"His approach was rather top-down though. He founded an innovation centre in Moscow in a suburb called Skolkovo, which he hoped would become a Russian Silicon Valley," Mr Roxburgh points out.

"He also appointed a former Kremlin chief of staff to establish a global financial centre in Moscow," he says, "But is that how innovations really come about?"

Conquering the difficulties

Some people have managed to prosper despite the real or perceived corrupt climate.

Serguei Beloussov, the founder of Parallels, one of the largest software companies in Russia, says it is always difficult to build a multi-hundred-million-dollar company in any country.

"The difficulties are just different," he explains.

"For example, in the US there are certain difficulties, such as access to talent, and costs and competition," he says.

"And in Russia, when we were starting our business in 2000, there were other difficulties such as lack of infrastructure, bureaucracy, but it wasn't particularly difficult," he maintains.

He acknowledges that political instability can affect his business.

"I don't think that's a serious concern right now in Russia. Imagine how difficult it would be to do business, for example, in Egypt." he says.

"When I drive from the airport and see how the city looks today, how many large superstores, car dealerships, expensive cars and restaurants you see along the way, and you think how bad the same route was during the Soviet Union, you see how a capitalistic and more democratic system can make a huge return," he says.

"In fact, people in Russia now live in the best way they ever lived in the last 1,000 years in terms of both freedom and in their material wealth."