Otkat (Russia)

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Otkat
Location: Russia
Russia map.png
Author: Prof. Alexandra Vasileva
Affiliation: University of Amsterdam

Original Text: Prof. Alexandra Vasileva

Otkat is a colloquial term used to describe a form of corruption in Russia. It literally means ‘rolling back’ and is the equivalent of the English term ‘kickback’. Otkat is the diversion of part of the money allocated for a purchase to the person responsible for the purchase, for example to an employee of a state administration or a company. As the result of collusion between a person in charge of a purchase and a supplier, otkat implies embezzlement and results in the overpricing of goods and services. Otkat emerged as a practice in the 1990s following the collapse of the Soviet Union, and proliferated in Russia during the 2000s as the state's role in the economy expanded, resulting in the creation of state corporations. The practice grew further as a result of the general economic upturn and the respective increase in resources associated with the oil boom.

Otkat is widely used in public procurement: the state allows itself to be overcharged, and the bureaucrats responsible for the purchase pocket the difference between the actual price and the stated price. As a result, part of the public funds gets diverted for private gain. According to the Russian law on public procurement, state purchases must be conducted via transparent competitive tenders according to the principle of obtaining the ‘best quality for the lowest price’. However, in reality, numerous techniques are employed to evade the procedure, thus undermining honest competition and allowing the practice of otkat to flourish. During the tender process a company affiliated to the bureaucrat often makes the winning bid. In 2013, the Russian Court of Auditors concluded that 70 per cent of the largest tenders were awarded without any competitive process (Zamakhina 2013[1]). Moreover, otkat is a widespread practice in the procurement procedures of big state-owned conglomerates and by monopolies such as the state gas giant Gazprom. Similarly, the suppliers of goods and services involved in the kickback schemes may be affiliated to the conglomerate and, in some instances, have been identified as its (shell) subsidiary, opaque in terms of ownership and registration.

As a result of an otkat scheme, the resources of the state or a state-owned company get embezzled: the contractor returns a certain percentage of the deal to the client - in most cases, in cash. Unaccounted ‘black cash’ is generated through encashment (obnalichivanie), - an illicit informal practice that involves bogus companies, often affiliated with banks (Yakovlev 2001: 38f[2]). For a certain ‘fee’ (around 7 per cent of the total sum) these sham companies generate both the cash and the respective paperwork necessary to cover up the illicit scheme. In some cases, otkat takes more sophisticated forms: rather than a straightforward cash payment, money is transferred for imaginary consultancy work or ‘market research’ to a shell company owned by the person responsible for making the order.

Otkat is also widespread in Russian inter-business relations, where it causes a typical agency problem as rank-and-file managers cheat the company by pocketing some of its resources. For example, managers of purchasing departments buy overpriced goods or services, charging the supplier an illicit ‘commission’. In some sectors, such as corporate insurance, otkat is widely used to make corporate clients pay higher premiums than the market price (Grigorieva 2007[3]). As a rule, otkat is negotiated clandestinely between the representatives of the two firms in advance and paid as a ‘gratitude fee’ by the contractor to the person representing the purchasing company. Vague language is used during otkat negotiations (the Russian internet in fact is full of ‘instructions’ for using the practice): an otkat-giver might suggest ‘being ready to make concessions’, ‘making a very good offer’, ‘giving you a personal discount’ or ‘paying particular attention to your needs, whereby ‘you’ is deliberately used ambiguously to refer both to the company and to the person in charge (Lonkila 2011: 66f[4]).

Along with other forms of corruption, otkat is openly acknowledged as a problem by the Russian leadership. For example, in his 2010 annual address, President Medvedev condemned the embezzlement of state funds, including the practice of otkat, and estimated losses at one trillion roubles annually, which corresponds to about 15 percent of state purchases (Medvedev 2010[5]). Similarly, President Putin regularly declares the fight against corruption a priority, and has acknowledged that otkat, as a percentage of contract volume reached 50 per cent of public procurement contracts (NTV 2013[6]). Otkat is also a widely discussed topic in the Russian media, deemed to negatively affect both business and public procurement. Using the Integrum database, Lonkila examined the frequency of the term ‘otkat’ in printed media in Russia since the early 1990s. It was found that the term became more commonly used during the 2000s (Lonkila 2011: 68[7]). On the Internet, websites and blogs dedicated to the techniques, advantages and disadvantages of otkat schemes abound. The term ‘otkat’ sometimes seems to be used in a broader sense in these sources, and is often (falsely) used as a synonym for bribe, if the size of the bribe is fixed as a percentage of a deal. However, as a form of corruption, otkat differs from bribery. While a bribe represents an illicit money flow to agent A from agent B, otkat involves a formal legal payment from a budget overseen by agent A (but not owned by him personally) to agent B, and a subsequent illegal, private re-payment of part of that sum back to agent A. Therefore, for example, a payment received by a supermarket manager from a wine supplier for displaying the produce prominently is a bribe rather than an otkat. But if the supermarket manager colludes with the supplier of wine and receives in return an informal ‘personal bonus’ in cash of some 10 per cent of the ‘on-paper’ purchase sum, the correct name for the informal practice is otkat.

Another practice related to otkat is raspil (literally meaning ‘sawing through’), which refers to the theft of budget money through hugely overpriced state purchases, with those in charge of procurement ‘sawing off’ a cut of the money for themselves and disguising it through creative accounting (Ledeneva 2013: 277[8]). Raspil is a broader and simpler concept than otkat as it implies only one agent (the bureaucrat who embezzles state funds from a public project), whereas otkat necessarily involves two agents working in different organisations.

Otkat has several adverse implications for the economy and society. In public procurement, the spread of otkat implies private appropriation of public funds: as a result, the total amount expended for public purpose diminishes (Bayley 1966: 725[9]). Interestingly, although business-to-business otkat falls under article 204 of the Criminal Code as a ‘commercial bribe’, the practice of otkat in public procurement is not directly specified in the legislation, which makes it hard to prosecute corrupt bureaucrats. Another adverse effect of otkat is inflated prices: goods, services and equipment procured with otkat become more expensive than they would have been without it. The consumer often ends up paying an excessive price. Examples include increased tariffs for monopoly services, such as electricity, or having to pay inflated prices for wine in a supermarket. Moreover, by defrauding fair competition and promoting businesses affiliated with the bureaucracy, otkat disadvantages outsiders, especially smaller firms. The 2005/2006 reform of the law on public procurement in Russia required an increase in the share of state purchases to be made from small and medium-sized firms. However, according to surveys by the Higher School of Economics, the reforms have had little impact (Yakovlev 2009[10]). Finally, otkat can result in the provider cutting corners or sacrificing quality in order to finance the otkat payment, which in itself can be more costly for society in the long run. For example, in the case of a company using otkat to secure a road building contract, lower quality materials may be used, with the result that the road will have to be repaired more often and may even result in accidents.

Otkat is typically measured as a percentage of the contract volume. Researching the scope and average size of otkat is difficult given the informal nature of the practice; however, several methods may be used. The first method is to establish the use of the practice through a business survey: company managers are asked about the occurrence of kickbacks in their business practice. For example, surveys by the Higher School of Economics show that the share of firms encountering otkat increased between 2005 and 2009 from 34 to 40 per cent (Yakovlev 2009[11]). The World Bank’s business surveys found that between 2008 and 2011 the average sum of otkat increased from 11 to 15 per cent of the contract volume (BEEPS 2013: 7[12]).

Another method used to research the scope of otkat in the sphere of public procurement is estimation based on expert opinion, used in conjunction with a comparison of market prices with actual expenditure. For example, the head of the National Anticorruption Committee, Kirill Kabanov, estimates the scope of otkat in public procurement at 30-40 per cent of the contract volume, while in particularly non-transparent cases, such as purchases made by the Ministry of Defence, it is estimated to reach at least 60 per cent (Makarov 2011[13], cf. Ledeneva 2013: 100f[14]). According to the late Boris Nemtsov, at least half of the $51 billion USD cost of the notoriously expensive 2014 Winter Olympic Games in Sochi can be attributed to corruption, and in particular to otkat (Nemtsov 2013[15]). Many lucrative contracts for building the Olympic facilities were won by close friends and associates of President Putin: for example, his friend Arkady Rotenberg alone procured construction contracts worth $7 billion USD; more than the entire budget of the 2010 Vancouver Olympics (Arkhipov and Meyer 2013[16]).

Finally, in-depth interviews with entrepreneurs may be useful for gaining a better understanding of specific otkat schemes and their mechanisms. Interviews conducted by the author with small and medium-sized entrepreneurs in Russia revealed two otkat scenarios: some contractors were paid from lavishly inflated public procurement budgets and thus had no difficulty in completing the work while also meeting the requirements of otkat; others were forced to cope with budget cuts and struggled to stay profitable as a result of paying otkat. In one instance, a company in St Petersburg won a tender for building a road. The successful bid was for 18 million roubles; however, the state officials responsible for the project offered to pay 28 million roubles, with specific instructions to the company that ‘eight [million] you will bring back – in cash. We are not interested in how you are going to do the obnalichivanie, but all the documents need to be waterproof!’ (Author interview 2014). Conversely, a Moscow construction company that had been undertaking works for the upper chamber of the Russian Parliament for years reported difficulties in dealing with budget cuts: ‘A new team arrived, new guys, a hungry lot. They summoned all contractors one by one: 'Roll back 20 per cent'. They said it in plain text. The budgets are being slashed. But we want to have a profit’ (Author interview 2014). Filing a formal complaint was not an option, as it would have resulted in the company being ‘blacklisted’ and being debarred from future bid- making opportunities.

Otkat remains an under researched practice both because of its informal character and due to the involvement of state bureaucracy. However, it has implications for the political economy as a whole: by participating in otkat schemes, firms not only need to generate illicit black cash, but they also have to deal with an inevitable mismatch between the actual and ‘on-paper’ transactions, which in turn requires further illicit operations and concealment techniques. Viewed from this perspective, otkat deserves more scholarly attention, as its prevalence may be key to understanding the endurance of the shadow economy in Russia and in other emerging economies.

Notes

  1. Zamakhina, T. 2013. ‘Schetnaya Palata Uznala Strashnoye: 70% Goskontraktov Zaklyuchayutsa v Seroy Zone’ Moskovskij Komsomolets, 16 August http://www.mk.ru/economics/article/2013/08/15/900166-schetnaya-palata-uznala-strashnoe-70-goskontraktov-zaklyuchayut-v-seroy-zone.html
  2. Yakovlev, A. 2001. ‘'Black Cash' Tax Evasion in Russia: Its Forms, Incentives and Consequences at Firm Level.’ Europe-Asia Studies 53, (1): 33-55
  3. Grigorieva, E. 2007. ‘Strakhovie Otkaty.’ RBK. 22 August, http://rbcdaily.ru/finance/562949979049244
  4. Lonkila, M. 2011. Networks in the Russian Market Economy. Basingstoke: Palgrave
  5. Medvedev, D. 2010. Annual Address to the Federal Assembly. http://kremlin.ru/events/president/news/9637
  6. NTV 2013. ‘Putin Ozvuchil Rastsenki Otkatov v Raznikh Sferakh.’ 30 October, http://www.ntv.ru/novosti/694857/
  7. Lonkila, M. 2011. Networks in the Russian Market Economy. Basingstoke: Palgrave
  8. Ledeneva, A. 2013. Can Russia Modernise? Sistema, Power Networks and Informal Governance. Cambridge: Cambridge University Press
  9. Bayley, D. 1966. ‘The Effect of Corruption in a Developing Nation’, The Western Political Quarterly 19, (4): 719-732
  10. Yakovlev, A. 2009 ‘Pravila Igry: Otkaty pod Zakaz.’ Vedomosti, 13 November https://www.vedomosti.ru/opinion/articles/2009/11/13/reforma-sistemy-goszakupok-ne-umenshila,-a-tolko-uvelichila-korrupciyu
  11. Yakovlev, A. 2009 ‘Pravila Igry: Otkaty pod Zakaz.’ Vedomosti, 13 November https://www.vedomosti.ru/opinion/articles/2009/11/13/reforma-sistemy-goszakupok-ne-umenshila,-a-tolko-uvelichila-korrupciyu
  12. Business Environment and Enterprise Performance Survey 2013: BEEPS At-A-Glance 2011 Russia. Washington, D.C.: The World Bank Group.
  13. Makarov, S. 2011. ‘Reiting Korrumpirovannosti Ministerstv i Vedomstv Rossii ot “Novoi Gazety”’, http://novayagazeta-nn.ru/2011/191/reiting-korrumpirovannosti-ministerstv-i-vedomstv-rossii-ot-novoi-gazety.html
  14. Ledeneva, A. 2013. Can Russia Modernise? Sistema, Power Networks and Informal Governance. Cambridge: Cambridge University Press
  15. Nemtsov, B. 2013. ‘Zimnyaya Olimpiada v Subtropikahk.’ Ezhednevnij Zhurnal. 31 May, http://buro.ej.ru/?a=articles&id=50
  16. Arkhipov, I. and Meyer, H. 2013. ‘Putin Buddy Gets $7 Billion of Deals for Sochi Olympics.’ Bloomberg, 19 March, http://www.bloomberg.com/news/2013-03-18/putin-buddy-gets-7-billion-of-deals-for-sochi-olympics.html