Corruption drags down Russian economy

• Article
• Comments ()
• Click-2-Listen

By Jason Motlagh

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.