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Difference between revisions of "Otkat (Russia)"
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</ref>). 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. | </ref>). 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). 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. | 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<ref>Yakovlev, A. 2001. ‘'Black Cash' Tax Evasion in Russia: Its Forms, Incentives and Consequences at Firm Level.’ Europe-Asia Studies 53, (1): 33-55 | ||
</ref>). 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<ref>Grigorieva, E. 2007. ‘Strakhovie Otkaty.’ RBK. 22 August, http://rbcdaily.ru/finance/562949979049244</ref>). 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<ref>Lonkila, M. 2011. Networks in the Russian Market Economy. Basingstoke: Palgrave</ref>). | |||
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). 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). 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). 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). 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. | 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). 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). 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). 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 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). 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). 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. | ||