Putin?€™s Vertical of Corruption

I have been wondering lately: How much of Russia’s gross domestic product is lost to bribes taken by government officials?

Consider an ordinary example — the price of housing. The standard rule is that the price per square meter for an apartment equals one or two times the amount of an average salary. With salaries averaging $500 to $1,000 per month, apartments should cost anywhere from $500 to $1,000 per square meter. In fact, they cost an average of $5,000 per square meter these days. That is five to 10 times higher than they should cost.

It is obvious that the price of apartments in Moscow reflects the amount that builders must pay in bribes to the officials. Contractors must fork over enormous sums simply to obtain the necessary permits, and those costs are reflected in the selling price. Also, the officials receiving the bribes do not invest their income in their businesses (their chief “business” is extorting bribes). Instead, they go out and buy more apartments, only fueling the cycle of ever-increasing prices.

Let’s look at another example — airplane tickets. I recently paid $500 for a five-hour flight from Moscow to Madrid in economy class on Iberia Airlines. Before that, I paid about $950 for a three-hour flight from Novosibirsk to Chita. The math is simple: domestic flights cost two to three times what comparable flights abroad cost.  

And what about medicine? A pharmaceutical drug that I buy in Europe for 50 euros costs exactly twice that amount in Russia.

These are just trivial figures taken from everyday life, but when you multiply these examples of corruption across all of Russia, it creates a horrifying picture. In the “vertical-power economy” established by Vladimir Putin, bribery accounts for at least 50 percent — and more likely 70 to 80 percent — of GDP. That cost rivals the 70 percent to 80 percent of GDP that the defense budget accounted for in the Soviet Union of the 1980s.

That level of loss to the economy is evidently one of the reasons that the ruble remains strong. The value of the ruble is rising because the price of oil remains high. As a result, imported goods are more expensive. The cost of imports has increased even further since officials continue to demand the same (precrisis) exorbitant bribes to allow imports to cross the border. As a result, supermarket and department store shelves have become more empty because fewer people can afford imports.

The 1998 default and ruble devaluation led to a boom in domestic production, but this was not the case with the 2008 crisis. In Putin’s Russia, import duties are lower than the money that bureaucrats extort from domestic manufacturers. Thus, it is cheaper to pay customs duties once than to pay an endless procession of bribe-taking officials who perform endless inspections on the production process.

How stable is such a regime? History shows that such regimes remain stable up until their leader dies. Spanish dictator Francisco Franco’s nearly 40-year hold on power ended only when he finally died. Similarly, Chinese leader Mao Zedong endured for more than 30 years until his death in 1976. Such regimes cannot end before the death of their supreme leader, nor can they continue after his death.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.