The Unfortunate Reality of Russia: a Thoroughly Corrupt Society

Insight on the News, Oct 18, 1999 by Paul J. Saunders

Despite the impressive scale of alleged Russian money laundering at the Bank of New York -- by some accounts, up to $15 billion may have been moved through accounts there -- the case represents little more than the tip of the iceberg of corruption, fraud and economic crime in today's Russia.

This perhaps is illustrated most clearly by a recent study of the country's insurance sector, conducted by state-controlled insurer Ingosstrakh and reported in the Russian press. According to this analysis, some 80 percent of the life-insurance policies written in Russia are used in fraudulent "wage schemes" and do not represent insurance at all. Thirty-five to 40 percent of risk insurance and 15 to 20 percent of property insurance is similarly fabricated; on average, 47 percent of all insurance is fictitious. The premiums collected on these policies totaled an estimated $1.25 billion in 1998.

The purpose of the wage schemes is quite simple -- tax evasion. Rather than providing insurance, many Russian insurance companies earn commissions of 8 to 12 percent from enterprises seeking to avoid payroll-tax payments, such as those to the Russian pension fund, by channeling money to their employees through bogus policies. This has the side benefit of allowing the enterprises' employees to avoid paying taxes on their income as well.

In some cases, enterprises take out insurance policies to protect them from being unable to pay their employees -- and then do not pay them. The insurance company then pays out the benefit of the policy to the workers. Another strategy allows workers to receive inflated health-insurance payments for minor ailments such as colds.

The corruption of Russia's insurance sector is important for several reasons. It is important to note in this context that the leaders in the Russian life-insurance market accused of fraudulent practices, such as Spasskiye Vorota ("Kremlin Gates"), are not minor companies by Russian standards. Moreover, they are linked to major political and economic figures in contemporary Russia and not just in the Yeltsin camp; Spasskiye Vorota is tied to the Media Most conglomerate run by Vladimir Gusinsky.

Wage schemes also clearly show the damage done by corruption to Russia's economic and political transition. Tax evasion is one of the principal factors behind the government's poor balance sheet and substantially contributed to the country's August 1998 default.

Finally, and perhaps most important, Russia's insurance sector shows the profound difference between surface impressions of Russia and the country's unfortunate realities. For years, the Clinton administration has proclaimed the success of its policy toward Russia in a barrage of statistics; the number of enterprises privatized, the growth rate in particular sectors of the economy and similar figures have been advertised as "proof" that Russia was "on the right track" or had "turned the corner." In the political sphere, Russia's "democratic" elections were similarly promoted.

Unfortunately, most observers have come to recognize that Russia's elections have been largely free, but not at all fair. Incumbent officials at all levels mobilize the full force of the state to promote their candidacies through influence over the media, distribution of scarce resources to supporters or potential supporters, intimidation of challengers and outright fraud. While some elections probably are better man none, Russia's postindependence electoral history hardly justifies naming the country a democracy.

In the economic sphere, the fact that Russia has new commercial organizations called "banks" and "insurance companies" does not mean that it is on the way to becoming a market economy. Most of the "lending" done by Russian "banks" has been either lending to the government (through prearranged deals in which the government would fail to repay the loans and then hand over substantially undervalued enterprises as collateral) or to related companies within so-called financial-industrial groups. Most of the "investments" were in either the inflated Russian debt market or convenient offshore accounts.

The Clinton administration is now piously recounting its "concern" about Russian corruption and even has gone so far as to prepare a list of statements since 1995 by the president and other officials mentioning the problem. Ironically, the list itself demonstrates the administration's difficulty apprehending the difference between appearance and reality. The United States cannot build an effective foreign policy on this kind of self-deception.

Paul J. Saunders is director of the Nixon Center for Peace and Freedom.