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Difference between revisions of "Otkat (Russia)"
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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<ref>Ledeneva, A. 2013. Can Russia Modernise? Sistema, Power Networks and Informal Governance. Cambridge: Cambridge University Press</ref>). ''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<ref>Ledeneva, A. 2013. Can Russia Modernise? Sistema, Power Networks and Informal Governance. Cambridge: Cambridge University Press</ref>). ''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<ref>Bayley, D. 1966. ‘The Effect of Corruption in a Developing Nation’, The Western Political Quarterly 19, (4): 719-732</ref>). 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<ref>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</ref>). 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<ref>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</ref>). 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<ref>Business Environment and Enterprise Performance Survey 2013: BEEPS At-A-Glance 2011 Russia. Washington, D.C.: The World Bank Group. | |||
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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, cf. Ledeneva 2013: 100f). 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). 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). | |||
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. | 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. | 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. | ||