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ELSEVIER Communist and Post-Communist Studies 40 (2007) 107-122
www else\ ier coinilocdte postcornstud

Corruption networks as a sphere of

investment activities in modern Russia
Serguei Cheloukhine*, Joseph King
Depurtment OJ Luw, Police Science und C J A , John Juy College qf Crirninul Justice,
889 Tenth Avenue, Room 422 T , N Y 10019, USA
Available online 29 January 2007

Abstract

This paper studies a new phenomenon, the ‘top to bottom’ corruption networks of
organized crime, law enforcement and Government officials in Russia. We examine the Soviet
roots of corruption and its transformation during transitional period. By focusing on contem-
porary Russian corruption networks this paper explores the complex of state-run oligarchic
structure with established rates, well organized inter-institutional groups incorporated by
common ideas of extracting profits. The danger is in the existence of extensive and stable
corruption networks, which not only profit by their illegal activities between Organized Crime
groups and Law Enforcements, but invest in further corrupt developments to control the
government. We argue that corruption in Russia, for a long time, has been imbedded in the
system of social relations and, by the majority of citizens, was not considered to be a crime.
Presenting arguments against existing simplified understanding of corruption, this study
elucidates corruption networks as an expansion of Organized Crime in all spheres of post-
totalitarian Russia. It also shows that a magic circle of corruption closely intertwines with
the inefficiency of power and the inefficiency of rule of law.
0 2007 The Regents of the University of California. Published by Elsevier Ltd. All rights
reserved.

Ke2vwords; Russian transition; Corruption networks; Contract of elite; Oligarchic structure; Rule of law

* Corresponding author.
E-mail uddress: serpucic(cojjay.cuny.cdu (S. Cheloukhine).

0967-067)</$ - see front matter 0 2007 The Regents of the University of California. Published by Elsevier
Ltd. All rights reserved.
doi: 10.1016/j.postcomstud.2006.12.005
108 S. Cheloukhine, J . King 1 Communist und Post-Communist Studies 40 (2007) 107-122

The Soviet roots of corruption

Corruption and bribery during Soviet times were a kind of universal system, and
in this sense, the roots of present corruption were already established back then. But
at the same time, there are significant distinctive features of present Russian corrup-
tion (Moody-Stuart. 1997; Kolludon, 1998).
The fundamentals of Soviet corruption were structured by a totalitarian system,
and, in particular, by the system of resource allocations during conditions of con-
stant shortages of goods and services. Therefore, the major spheres of corruption
were infrastructure, capital investments, and the drawing of plans and reports on
their performance, accompanied by huge falsifications of figures. This system,
from one viewpoint, was a social illness corrupting the values of society. From
another viewpoint, the plan-distribution system in the economy could not function
without this ‘lubricant’, without decisions being made in the allocation of funds
and “1imity”-favorable changes in financing and productions plans of state enter-
prises (Montias and Rosc-Ackcrman, 1981).
At the household level, the Soviet distribution system led to the practice of giving
all kinds of gifts from scarce goods to services. Small bribes, ‘gratitude’, and gifts
were perceived by the masses as practically the norm, as the natural form of relation-
ships between people. A significant difference between Soviet-type and contemporary
corruption is in the limited expansion of direct monetary payments. To a greater
degree, this promoted a wider development of the exchange of services, material
gifts, and favors.
This feature was unusual throughout a greater portion of the Soviet period,
though it was supplemented during Brezhnev’s time in power by the payment of
large sums, ‘purchases’ of administrative positions, large-scale swindles, and the
development of a shadow economy.
In the beginning of the 1980s, alongside traditional protection, nepotism, and fal-
sifications, ‘gangster-type socialism’ was developing in the form of a state-like mafia,
and the marriage of corrupt and criminal structures.
Nevertheless, in viewing the entire Soviet period, the major feature distinguishing
the Soviet corruption from the present was a low level of wages and services. However,
there was a fear of not only being prosecuted and punished by the courts, but also
pushed out of the system arranged by nomenclature. There were periodically arranged
show processes, but even without them, all officials knew that the system could destroy
them. Thus, obeying the rules of the game, following the norm of political loyalty and
state hierarchy gave officials a certain degree of security in their corrupt activities.
The function of limiting the scope of corruption was carried out by the nomencla-
ture system. Belonging to a certain level of the Soviet bureaucracy was a way of gain-
ing a number of benefits inaccessible to an ordinary person. Accordingly, in order to
climb the bureaucratic ladder, a perfect reputation and party membership were ne-
cessities. Someone involved in the nomenclature bureaucracy for their entire life,
who obeyed the required rules and norms, could look forward to a promising future.
The pre-Brezhnev period successfully retained corruption in relatively comprehen-
sible frameworks, using a repressive system. The party bureaucracy, itself panicky,
 S. Cheloukhine, J . King Communist nnd Post-Communist Studies 40 (2007) 107-122 109

was afraid that corruption would gobble it up from within, and counteracted in
a strange, but effective manner. Special services, including KGB, carefully traced
all deviations from the norm. It was not necessary to conduct any criminal investi-
gations. People were immediately discharged from their posts.
Corruption under socialism as the “sale of status opportunities, or the sale of the
socialized property rights” (Acemoglu and Verdure, 1996) has framed the structure
of present corruption. It also has grown from allocating, regulating and supervising
the functions of the state, combined with the illegal privatization of all state
property.
If in other countries capitalism grew from the development of private entrepre-
neurship, in Soviet Union and especially in post-Soviet countries, it has grown
from a direct robbery of state property. At the same time, the degree of state control
over entrepreneurs and other economic activities still is very similar to the Soviet
style. Moreover, many procedures and regulations were created that provided the
opportunity for corrupted transactions. By having such a system, wherein it is nec-
essary to steal, the bureaucrat is on a hook.
Corruption, with immeasurably great volumes of payment, became more wide-
spread and extremely cynical. For example, during the Soviet time the practice of
‘buying’ an administrative, even party post was not that widespread. The system
of the staff selection did not allow that. In order to be appointed as a factory man-
ager, it was necessary to pass personal security checks conducted by the Ministry of
Internal Affairs, KGB, Communist party and the ministries. Nowadays, the head of
an administrative region appoints the head of customs and tax officers by his sole
decision. To appoint the right person as the factory CEO of a unitary enterprise,
a bribe of $500,000 to $1,000,000 should be paid (Davydova, 2000).
A significant distinction between modern corruption and that of the Soviet regime
is that the “benefit from the transaction” (Mlenik, 2000; Interpol, 2001) has grown
immeasurably. At the same time, the risks of being punished and the degree of
negative consequences have decreased substantially.
Corruption in Soviet times, as all social costs, did not affect either the state deci-
sion-making or the acceptance of systemic goals. Present corruption already inter-
feres with strategic and security issues.

Transitional period

The central authority pretended to be blind to numerous infringements in the

union republics, especially in Central Asia and Caucasus. In return, the peripheral
elites not only remained loyal to the system but also tried to preserve it. Investiga-
tions of bribery among the leaders of union republics in Central Asia, started by
Y. Andropov and continued by Mikhail Gorbachev, were viewed by elites as a signal-
ing the end of the ‘previous contract’.
To shed light on the consequences of this initiative, we have to turn to debates
about the form and method of transition from Communist regimes to democracy
and market economy that have taken place in the West and in Russia since the
110 S . Cheloukhine. J . King 1 Communist und Post-Communist Studies 40 (2007) 107-122

perestroika years and post-Communist radical economic reforms. The principal

question of the debates was how to make the ruling nomenklatura agree to political
and economic reforms if it was doomed to lose its power (Sergeev, 1997).
The most important cause of corruption growth in this period (1988-89) was the
creation of joint ventures and favorable conditions for illegal capital exports. During
the same period, the ‘wild privatization’ was on its way. In this context, the idea of
a power buyout, that is exchanging power for property, was born (Winiccki, 1991).
Under this concept, democratic movements had to reward the nomenclature with
a certain portion of state property for its readiness to leavc the political scene. Dur-
ing the same time, the former Prime Minister Nicholai Ryzhkov’s economic reform
led to the managing directors (‘red directors’) being able to appropriate profits from
economic activities, but simultaneously shifted all problems and costs to the state.
It was also time when the current forms of authority and business merged. In the
beginning of the 1990s (mainly 1992-93), experts noticed the first splash in the use of
corruption in political campaigns. Since then, the fight against corruption in govern-
ment slowed down because any charges in corruption were considered as a political
persecution which, from time to time, was taking place.
It is important to note that the initiatives of economic reform by the government
were taking place in an alien environment. For example, the creation of cooperative
enterprises took place in conditions of market economy but with preservation of the
state prices. Cooperatives, by bribing the state officials, were buying materials and
goods at wholesale prices, and then selling them back to the state enterprises at mar-
ket prices. Thus, at the earliest stage the economic reforms themselves caused a flurry
of corruption which promoted fast enrichment. Simultaneously, a law-enforcement
system was thrown into havoc: cooperatives were a favorite child of party and gov-
ernment, and, consequently, the fight against corruption in cooperatives fell under
a charge of anti-party conspiracy. As a result, Russia experienced a marriage of
law enforcement bodies with both, businesses and criminals.
The second source of new authority was the practice of the KGB, directly con-
nected to the mechanisms of financing the Communist Party of the Soviet Union
(CPSU) shadow activity. In fact, spies did not carry money in suitcases, but created
banks. Therefore, in 1991 these people came to Yeltsin and said: “Well, it is abso-
lutely necessary to defeat communists! Do we need money, yes? And how to make
them we now will teach you” (Klich, 1996). Unfortunately, in the new democratic
Russia, this cancer cell had already been implanted.
When discussing the specifics of the transitional period (1987-95), which has
caused enormous growth in corruption, it is necessary to point out the problem of
personnel. The most motivated and professional officials left for businesses and
less qualified people ‘have rushed to a feeding trough’. The democrats coming to
power did not transform the system of power, but were rather absorbed, and corrup-
ted by it. Destitute officials were now in charge of the allocation of huge amounts of
money through state funds. Lack of control, a weakening of law-enforcement
system, and moral degradation eliminated any moral barriers.
The elementary actions related to business registrations and licensing were depen-
dent just upon official decisions and mercy. Anyone acquainted with the habits of the
 S. Cheloukhine, J . King Communist und Post-Communist Studies 40 (2007) 107-122 111

Soviet bureaucracy knew the solution: you had to pay, especially since the required
payment was quite reasonable. Among economic factors aggravating corruption
were:

- a shadow economy and the huge redistribution of property without precise

regulations;
- a confused tax system, which literally transformed all people into infringers;
- mixed ownership with extremely inefficient control over the use of state property
shares; and
- a weakness of financial system based on barter.

During the transitional period, corruption played a ‘greasing’ role in facilitating

the reforms. Even law enforcement stressed that if at the beginning of reforms an
effective combat against corruption was provided, any transition to capitalism in
Russia would not take place. From this point, corruption has played, strangely
enough, a positive role.
In the USSR, corruption as a part of the contract of elites was tolerated for the
system’s preservation. In contemporary Russia, it began with similar purposes, as
a means of loyalty to the new system. At the same time, corruption was considered
as a method of control over the state official’s actions, and then as a factor favorable
to promotion. Today, again, corruption acts as a process of maintaining loyalty.

Factors promoting corruption

One of the most important factors that stimulate corruption is the poor regula-
tion of the property rights system. Instead of functional property rights, there exists
a very complex system of mutual relationships between governors, law enforcement
officials, and the courts. Such relationships are implanted in the social fabric of
a society which was formed within the last decade and grew rapidly in the transi-
tional period. At the same time, within the period of private property formation,
the privatization of state property took place. The rights on the supreme power
and state resources allocations have become the property of the new elite. These
new ‘rights’ of old elite and bureaucracy in property distribution embraced the
army, the right to collect taxes, the courts, and even the right of printing money
(Matusovskii, 2002).
Most of the socio-economic factors promoting corruption were generated during
the transitional period. Among them were the growing poverty and property differ-
entiations as a result of ill-thought state property privatization, instability in the
economy, 1998 financial crisis, and the last but not least, non-restrictive business
ethic principles in all spheres of economic activity. Thus, a hope that economic
growth might be a mean in reducing corrupt activities must be cast away.
With the disintegration of the old Soviet system, a need for new economic struc-
tures in establishing tight relationships with the old elite led to absorption of the old
elite into new structures. Many oligarchic groups had employed top management
112 S . Cheloukhine, J . King Communist and Post-Communist Studies 40 (2007) 107-I22

from former senior KGB staff, the Ministry of Internal Affairs, and the central gov-
ernment. An official version of this policy was the ‘continuity of professionalism’.
But it was more likely to assist in retaining the worst Soviet traditions, including
the old system of mutual relationships based on the rendering of services. In new eco-
nomic conditions, it has continued to strengthen the growth of corruption.
The disintegration of the old political and economic systems generated a huge
legal vacuum and, at a later stage, confusion. For example, the tax regulations
were neither clear and specific, nor well developed. Many essential tax laws were
missed, making many economic relationships practically illegal. The system of taxa-
tion, which was adopted by Yeltsin’s government, placed the Russian people not
only in immoral, but also in criminal position. Thus, keeping the population in
semi-criminal condition was the means of maintaining power by the ruling elite.
This led to a crisis in law-enforcement agencies. Having lost ideological principles,
they ceased to work for the state, but not for society. Instead, they started working
for self-preservation, and then for personal enrichment, gradually turning criminal
justice system into a commercial structure.
Corruption, which is deeply rooted in Russian culture, can be seen through a re-
cent interview.
The interviewer: Let us assume that corruption is not at present in our society.

The expert: With the current laws?

The interviewer: Yes.

The expert: If the existing laws were fully obeyed, it would be a catastrophe. It
would mean that society would stop in its development, the economy would
collapse (Kuzminov, 2000).
Corruption in Russia is interwoven into societal relations and the problem is that
with removal of corruption the economy could collapse. Corrupt networks between
state authorities and businesses exist at every level throughout the society, from gar-
bage cleaning to school textbook supply.
It is important to note the corruption practices of local and top officials. One of
the distinctive features is that the local officials, who receive bribes, are simply
commercializing state services. At the top level, generally speaking, there are
long-term corrupt relations, which merge government with private business
interests.
However, between the two, strong relationships exist in practice. First of all, petty
bribery existed throughout the entire Soviet regime. Secondly, local corruption
developed as a consequence of upper level corruption. The state system created a sit-
uation for the officials and businessman where without bribes it was impossible to
achieve anything. Such rules of the game grew from top to bottom. Thirdly, there
was a public belief that “if high-ranking officials and politicians are taking so
much, then we not only can but must do the same” (Kuzminov, 2000). In addition,
growth of the corruption at the local level was stimulated by general poverty and low
moral.
 S . Cheloukhine, J . King Communist and Post-Communist Studies 40 (2007) 107-122 113

For the large number of officials involved in corruption, a pyramid network

continues to exist. It affects, for example, top-level officials of the Ministry of Inter-
nal Affairs who cover-up bribery and racketeering of local officials involved in the
‘control’ of prostitution and drug trafficking.
Such rapid growth of corruption is a consequence of demolition of the old social
system and controlling institutions. Radical reforms were doomed to foster criminal-
ization, legal vacuum, instability, lack of rule of law and a backwardness of the
judicial system. This was accompanied by the further disintegration of moral values.
Within such a structure, a corrupt philosophy developed-“grab everything you can,
and run before you got caught”.
It is, however, wrong to consider corruption in Russia as universal. There were
and still are many people in Soviet times and now who do not steal or take bribes
under any circumstances. If approximately ten percent of the people never deal
with their moral values and another ten percent steal, then the remaining eighty per-
cent most likely invent fair ways to earn more, rather than to bring dishonor upon
ones name (Davydova, 2000).
Today there is the new tendency, not to grab and escape, but to take greater
sums less often. People think in the long-term, caring more about keeping the po-
sition they have than about the short-term benefits of small bribe transactions. Part
of the profit is taken by corrupt networks from their activities and re-invested back
to strengthen and develop the networks themselves. The illegal and corrupt behav-
ior became a norm in Russian society. For example, five years ago many people in
state security have experienced limits which they cannot surpass. If military officers
felt an infringement of the state or personnel interests were involved, they stopped.
Today, as ex-KGB agent Litvinenko’s poisoning case showed, everything is for
sale, from radioactive materials to a human life. For police officers more often
then not, moral standards are even dimmer than for other state officials; and
with each successful transaction the appetite is growing and so is corruption.
This immorality, which has become a norm, has substituted moral values of the
people in business management. Concepts such as ‘honest-dishonest’ and
‘decent-dishonorable’ have special meanings. Conducting illegal transactions may
not be considered wrong. However, it is immoral to break a promise and not execute
the condition. In other words, it is normal to kill, but it is impossible to betray or
deceive on the personal level.
In everyday Russia’s life, decency and incorruptibility are considered as a syno-
nym to clumsy, failure and simple stupidity. On the contrary, bribes in form of gifts
are valued as a form of gratitude, or blagodarnost for services rendered and, to reap
the state is even an honor. Thus, from this standpoint, the law is something that was
imposed by the state and does not need to be obeyed and only fairness generates
a moral standards.
Two major factors play an important role in changing the society’s corrupted
morals. One is a political will of the higher authority of the state that could signal
to the population and corrupted officials that the policy must be changed. The other
is the media, which should publicize each act of anticorruption as well as the suc-
cesses made in counteracting corruption.
I14 S . Cheloukhine, J . King 1 Communist and Post-Communist Studies 40 (2007) 107P-322

Corruption and Public service

In determining the factors causing corruption in public services, such issues as:
low salaries, lack of social guarantees at retirement and legal vulnerabilities must
be included. Some bureaucrats, experts say, realize that they probably got their
bureaucratic power for just two-three month of probation period and could be
thrown out of the system. The same experts say that at the beginning of 1990s
an official salary decrease in law enforcements was done in order to get rid of
the experienced and uncorrupted professionals. At the same time, government of-
ficials (mostly high ranking bureaucrats) are fairly well protected. They have free-
of-charge government summer dachas, full health coverage, prestigious cars and
subsidies for better food.
Others argue against a direct influence of salary on the level of corruption. They
state, for example, that regional authorities have established for themselves much
greater salaries than those of the federal authorities, and yet this has not stopped
them from taking bribes. There is a third argument that bribes always will be
larger than the salary, regardless of how high it is. As to the question of whether
there is a risk for officials who digress from corrupt practices, the opinions are di-
vided. Some believe that outsiders, disassociating themselves from corrupt activity,
will be pushed out of public service. Others believe that to such officials, there
is nothing to be afraid of, especially there is no need to be afraid of physical
punishment. A third group believes that such officials will be bypassed since they
are not corrupt, or used ‘blindly’. In reality, all opinions are true (Kudryavtsev,
2000).
There is a buying and selling of positions in the high ranking government, from
a minister and a chief of a department to the secretaries. Two thirds of ministers
and almost all vice-premiers are ‘non-commercial’ posts because they have no
authority over financial and natural resource allocation. Therefore, the positions
of secretaries, heads of departments and those who draft decision proposals are
much more valuable. The sums vary widely. The bribe for the post of deputy minister
varies from $50,000 to $500,000; and, 1 million dollars for the post of a minister (Iva-
nov, 2005). The final price to be paid depends on the departmental structure and the
associated and implied powers.

Some cases of corruption

The ideological connivance in corruption was accompanied by a number of insti-

tutional changes that inevitably lead to a considerable growth of corruption. The
first of these changes was the practice of licensing the export of raw materials and
products in their primary processing stage (oil, fuel, ferrous metals). The prices of
raw materials, although growing, were still low and close to those of the Soviet years,
while the rate of the ruble dropped tenfold and then many-hundred-fold. No control
existed over the large sums obtained from exports. Contracts were signed for ridic-
ulously low prices, which suggested that large sums of monies were being paid
directly to the Russian officials involved (Sergeev, 1997).
 S . Cheloukhine, J . King / Communist and Post-Communist Studies 40 (2007) 107--122 115

Among the recent cases of corruption, experts (Davydova, 2000) specify the
following:

- buying and selling high positions within the government of the Russian
Federation;
- allocating quotas on crude oil export;
- releasing or selling shares in publicly held enterprises at a loss profit level by the
regional governments;
- violating property rights;
- bribing decision-making officials at the arbitration courts;
- filing deliberate bankruptcies of enterprises, in order to intercept the property;
- bribing tax police to arrest competitors, with the property often being resold to
the briber;
- using law enforcement as ‘roofs’ for organized criminal groups; and
- illegal termination of criminal prosecutions.

The following is an attempt to rank the most corrupted spheres of the Russian
economy, starting with the most corrupt (Cheloukhine, 2000):

- licenses and quotas on exports (oil, metals, energy resources);

- Ministry of Finance tax offsets;
- social sphere (service of budgetary accounts);
- barter and natural offset of debts in regions (plundered 30-40% of total debts);
- railway transportation (the cost of transporting the same cargo can differ signif-
icantly, depending on the arrangements made with the local public official);
- agricultural sphere (preferential financing, write-off of debts).

Corruption and politics

Corrupted activities are widely used for political campaign financing, personnel
assignments and appointments. At the same time Russian political campaigns are
litmus tests that identify levels of corruption. Political competition inevitably makes
any actions public, which leads to corresponding public opinion and civic pressure
towards corrupted politicians.
In 2004 State Duma elections a new approach dominated the campaign: ‘buy
and sell’ deputy mandates either at the level of one-mandate districts or at the
level of party candidates. For example, one oligarch confirms that for approxi-
mately $200 million it is possible to buy half of the State Duma and have 200
dedicated people in it. But it is too expensive, he said. There are 30-40 influential
deputies in the parliament. This is enough to push through necessary laws (Ivanov,
2005).
If in the first years of democratic elections, the oligarchs invested their financial
resources in themselves, to be elected. At the present time, they prefer simply to bribe
already elected deputies in order to lobby their interests. The reason for this change
116 S. Cheloukhine. J . King Communist and Post-Communist Studies 40 (2007) 107--122

of strategy is simple. During the first period of Russian reforms, non-state structures
did not have enough financial resources. In contemporary times, corruption net-
works invest significant financial resources in obvious favorites. Russian oligarchic
structures no longer concern themselves with who will win the elections. Investing
in all election campaigns became too expensive, unpredictable, and at the end less
profitable. Therefore, they bribe an elected deputy for lobbying.
Experts explain such developments by the lengthy transitional period, shortcom-
ings of the electoral legislation and, in particular, by the financing process. Practically
each action of a Russian legislator has its price. For example, the appointment of the
deputy to the post of a committee chairman will cost approximately $30,000. The
price for any bill submission and its consideration by the State Duma of the Russian
Federation is about $250,000. Deputies of such key committees as, for example, bud-
getary, receive approximately $30,000 per year from illegal, corrupt transactions;
whereas their legal wages are approximately 1/15th to 1/20th of the bribes (Klyankin
and Timofeev, 2000).
There is almost a competitive market of corruption services and bribes in the State
Duma. Lobbyists are constantly at work to discover the rates of each deputy’s ser-
vice and for each voting. The state budget is the major issue that, on a regular basis,
is lobbied in the State Duma through corruption networks. In many cases, this sys-
tem of decision lobbying in the Russian Parliament is rather convenient for executive
authority. There is no necessity to build a long-term political relationship with all
deputies. To bribe some of them is much easier and cheaper.
Privatization of large state property structures, especially the monopolies of
natural resources, is one of the areas where the state decisions inevitably collide
with both, political and economic interests of oligarchic groups. Such decisions
are not just about the increase of economic management efficiency, but rather
on what oligarchic groups will control the most profitable branches of the Russian
economy.

Corruption networks

Corruption in Russia has entered the phase whereby individually isolated criminal
transactions have formed a well organized and coordinated corruption networks.
The patron-client relationships form certain networks of individual ties between
officials and particular corporate interests in commercial and financial spheres.
Sometimes these connections involve the bribing of a particular bureaucrat in the
interests of a specific organization. But in most of the cases, officials must join a net-
work of shared services where no bribes are received or passed on. In such situations,
the obligation to join a corruption network is accompanied with mercenary tempta-
tions: as a rule, compensation is a stake in the network profits. These are illegal
payments which are in proportion to the official’s government position and function
in the corrupt transactions (Rimsky, 2004).
These are groups organized and set up for the joint extraction of profit from cor-
rupted activities. The corruption networks formed are both vertical and horizontal.
 S . Chcloukhine. J . King 1 Communist and Post-Communist Sludies 40 (2007) 107-122 117

The vertical relationships are informal, illegal interdependences between bureaucrats

within one organization. The horizontal ones are between different agencies and
other structures. These relationships are used for organized implementation of cor-
rupt transactions that are aimed at: personal enrichment; allocation of budget funds
in favor of the networks; enhancement of the networks’ illegal profits; or, receipt of
competitive advantages by financial and commercial structures within the corrupt
network to generate future earnings. Obtaining financial resources is practically al-
ways the leading goal of each corruption network.
These interrelationships are specifically directed to the fulfillment of corrupt
transactions, distribution of state funds in favor of its structure and profitability,
or receiving of competitive financial advantages for members of the networks
(Kurer, 1993). Often, corruption networks coordinate the activity of the organized
criminal groups or even merge with them. For example, the leader of a corruption
network does not necessarily hold a high post in the regional or federal power struc-
tures. One can be a president of a joint-stock company in which there will be one or
more shareholders who control an administrative region. In the hands of the leader,
the power of infinite financial resources obtained by criminal activity, forces the
regional administrator to do anything he is told to.
The main threat to a transitional society is posed by the system of mutual obliga-
tions through the granting of joint services in corruption networks and criminal
groups. As a rule, such joint services have been formed on a voluntary basis (‘you
scratched my back I’ll scratch yours’) back in the Soviet time. Once an official asked
for a favor, he or she is obliged to pay back, more often with highest price. Especially
for a politicians having come to power with criminals financial support. However,
both parties may resort to blackmail and/or the threat of using compromising evi-
dence as a last resort.
It is important to stress that the accumulation of financial resources and the in-
volvement of federal officials in allocating them from the federal source in favor
of corruption networks is the main goal of each network. This financial structure
transfers money to confidential accounts and then redistributes the funds among
the network members (Mendras, 1998). Generally, the holders of these accounts
use free economic zones throughout Russia, such as Ingushetia, Kalmyk and Far
East regions (Malyshenko, 1999).
It often occurs that the same financial structure simultaneously finances several
corruption networks. For instance, one bank department conducts business with
a specific ministry, other departments of the same bank, with another ministry. Ini-
tially in Russia, the only means to generate capital was from the rights to oversee
banking transactions and state ownership of industry. Therefore, corruption net-
works in Russia developed from the basis of existing state structures, which, before
privatization, were in control of the state. Corruption networks were created for
financing operations by the structures engaged in the export of raw materials. These
networks simply tried to undermine the state structures that were bringing in the fast
earnings.
Thus corruption networks receive financing from the export of oil and gas, metals,
energy, transportation, defense subsidies and the maintenance of Armed Forces.
I18 S . Cheloukhine, J . King Communist und Post-Communist Studies 40 (2007) 107-122

They also receive profits from the illegal manufacturing and trade of vodka, gasoline,
and medicines. Practically every region has such manufacturers and a greater part of
these incomes finds its way to a regional corruption network.
Each Russian corruption network includes three basic subsystems: the commer-
cial or financial branch; government officials; and, law enforcement. The commercial
branch converts the received privileges into cash. The government officials provide
cover at the decision-making level. This group includes officials whose status guaran-
tees the desired outcomes. Because most of these decisions are coordinated between
several ministries, there are also interdepartmental groups. However, the relation-
ships and decisions are usually shaded by ‘the state interests’, which makes them
very difficult to detect. The protection of corruption networks is provided by law en-
forcement, which provides information, destroys compromising files, or even closes
criminal cases. Such actions would be used in instances where a threat to a corruption
network exists. The system of network protection is not that complicated. It relies on
the personal obligations of its members to each other, assurance that each member
carries out his responsibilities, and even instructions for using technology to inter-
cept conversations.
All enforcement agencies and their departments in Russia are interconnected with
each other and their interests are crossed. Customs is intertwined with the Federal
Security Service (FSB), the tax police and the Ministry of Internal Affairs. If anyone,
for example, from the State Customs Committee took bribes just for himself, he
would not survive even two weeks in the office. Thus, in order to solve some prob-
lems, one would need support in the FSB, the Ministry of Internal Affairs and the
tax police. Thus, the vertical structure is created. In order to receive profits, the
organization should make earnings and for such purpose those who directly con-
nected by bribes taking are joining the vertical structure.

An example of a typical corruption network

A large company was created in a form of multiple structures, including an off-

shore corporation. It is owned by former Russian citizens, leaders of two criminal
groups and two influential businessmen. A good example of such a corporation
can be seen in Gasprom, the Russian United Power Systems and LUKoil.
The company literally controls one of the Russian Federation regions, i.e.,
completely determines the results of elections, legislative processes, supervises
law enforcement bodies, and large and small businesses in the region. It owns
large business in some other region and through its governor supports the oppo-
sition to the government. Through the Moscow-based banks, a company provides
direct communication with the President of the Russian Federation administra-
tion. As a result, all company structures, with enormous networks, operate in
sphere of business, financial institutions, and federal and regional government
structures.
In practice there are two ways to form a corruption network. One is from below
and the other is from above. To form a corruption network from below, a successful,
expanding business company needs a relationship and contacts with higher-level
 S. Chelimkhine. J. King / Communist nnd Post-Communist Studies 40 (2007) 107-122 119

officials. Such connections and contacts are made through expensive gift giving and
bribes. Therefore, officials lobby the interests of a few companies, banks, and
businesses. If the official does not have enough authority, he or she starts seeking
connections with higher level bureaucrats. Thus, local or regional corruption net-
works gradually grow into networks at the national level. These national networks,
as a rule, are very large and the same official can simultaneously be a member of dif-
ferent networks.
To form a corruption network from above, high-ranking officials select loyal and
dedicated subordinates who, operating with line authority, construct the network.
The purpose of such actions is to maintain strict personal relationships focused on
certain operations for the sake of the organization. Gradually, this type of corrup-
tion network, built from above, provides direct allocation of financial resources.
These methods are supported by the corrupt relationships in those departments
where recently employed members quickly adopt the principles of experienced col-
leagues or family-type nepotism.
The practice whereby individual subordinates took bribes and transferred por-
tions of them to higher officials existed only in the first five years of market reform.
Later, structures were established where the access to higher officials was carried out
through subordinates. The purpose of such strategy was to limit access of competi-
tors to the high level officials. Eventually, financial resourses of oligarchic groups
increased and intermediaries in networks become superfluous.
For example, the Chairman of the Dagestan Republic Peoples Assembly,
Mr. Aliev, openly admitted that there is no single bureaucracy position in the republic
where the appointment would not involve bribes. The amount of bribes varies from
position to position. The appointment of a regional governor costs approximately
$1 50,000, a ministerial position or representative of the federal tax chief at the repub-
lics level costs anywhere from $500,000 to $1,000,000 (Vyzhutovich. 2005). The
price-tags are high because positions are structured on the corrupted hierarchy cen-
tered in Moscow. A trait of some corruption networks is a so-called clan-ethnic re-
lationship whereby businesses do not lobby and bribe specific bureaucrats, but work
through family clans. As a result, at the present time, small-time corruption is sep-
arated from the large corruption networks. For example, at the local level, traffic po-
lice, motor vehicle licensors and inspectors, and other local government employees
are simply engaged in extorting monies from the general population. Part of this
money could be transferred to higher officials, but it is no longer the main source
of income for the latter. (the higher officials). Today there is a reverse situation
wherein higher-ups in the corruption structure share their profit with
subordinates. Support of subordinates in the structure assures the maintenance of
operations as well as loyalty.
As a result of such interaction between higher and local levels, the mafia-type war
of criminal groups relating to the elimination of competitors gradually stopped.
Since all businesses are in some way controlled by the state structures, the struggle
for the market niche is simply between structures providing security or ‘roofs’ for
corruption networks, Thus, the competitive struggle is firmly a war of these ‘roofs’
among themselves.
120 S. Cheloukhine, J . King / Communist and Post-Cornmunist Studies 40 (2007) 107-122

Conclusion

Losses from corruption

Economic losses from corruption can be examined from two perspectives. There is
money which remains in the country and is invested, ultimately being spent on goods
and services. There is also a direct outflow of capital abroad, which is close to $2 bil-
lion per month. In some cases, 90% of the international loans escape abroad, both in
the form of illegal appropriations and embezzlement, and in the form of kickbacks to
the international officials responsible for the loan decisions. Therefore, the problem
of corruption is directly linked to capital exports and money laundering (Mlenik.
2000).
Despite the negative impact, most of Russian businessmen agree that corruption
creates the mechanism for overcoming its complicated legal and administrative sys-
tems. In conditions where transaction costs are unacceptably high, the corruption is
actually a salvation. With existing state economic mechanisms, if customs officers do
not accept bribes, then there is a probability that half of the goods simply cannot
pass through the borders.
Corruption is not just a problem of bribes. It is also a problem of system ineffi-
ciency. Causes which generate corruption (that is, lack of laws, principles and
methods of economic regulation) lead to enormous economic losses. But, on the
other hand, the same corruption is a spontaneous method of indemnification of these
causes.
Corruption became a norm of behavior, a style of relationships within a very
branched-out and organized structure, which requires constant maintenance of
such order. Post-Soviet corruption networks is an oligarchic structure with certain
rates, well organized inter-institutional groups incorporated by common idea of
extracting profits. Thus, to press criminal charges against a specific person costs
5 to 10 thousand dollars (charges can be connected to drugs or soliciting minors).
To close a criminal case and destroy files costs 50.000 and up to one million dollars.
The price tag depends on a public resonance, law enforcements involved (judges and
police usually work as a team), and its status in the State Prosecutors office.
Political losses from corruption are expressed in political instability and in
constant threat to democracy in Russia. It leads to privatization of the state by ol-
igarchic groups, and the state, as a result, is not capable of providing systemic
work either in economic or social spheres. The state became simply incapacitated.
By virtue of corruption, it constantly collides with opposition attempting to unify
state policy.
The specific feature of Russian corruption is in engagement of executive power
with legislative branch when there is a need to approve a compulsory bill.
The state, rooted in corruption, becomes defenseless against internal and external
threats. The war in the Chechen Republic has shown the complete inability of the
federal power to put things in order, as well as in other areas of the Russian Feder-
ation (for example, as mentioned above in Dagestan and Karachaevo-Cherkessia).
As a result of corruption, law enforcement sustained huge personnel losses and
 S. Cheloukhine, J . King 1 Communixt and Post-Communist Studies 40 (2007) 107F-122 121

the most qualified professionals left service. Others, in order to survive and support
their families, started consulting corruption networks and after Yeltsin’s departure,
there was no high-ranking officials accused in corruption.
There was only one case in court in 2006 against of Mr. Mikhailov, chair of a com-
mittee in the Finance Ministry, who received a Mercedes for passing out classified
information to his network. He was convicted and received a ten years prison
sentence.
All businesses found themselves in a situation where they were forced to join cor-
ruption relations, participate in bribery, not pay taxes required by law, and forced to
work by guesswork. This is the way for the Russian business community and state to
survive.
The most serious loss is a drastic fall of morale in the country. For example, in
1991 (Maksimov, 2000), most male teenagers wanted to become racketeers and their
female peers prostitutes. Now boys want to be officers of the Ministry of Internal
Affairs or FSB, and girls are tax inspectors or customs agents. Teenagers expect
that in these positions they will get every opportunity to best support their families.
In order for the fight against corruption to become effective, in our view, the
following steps should be done in the Russian legislature:

- the banking privacy act must be changed in the favor of federal revenue services
and their ability to check the offshore accounts of state officials and those of their
family members;
- all state officials must file their income tax declarations as well as their spouses
and children (who are still exempt from filing taxes);
- bring state procurator back into civil and arbitration courts dealing with redis-
tribution of state and disputed property;
- create internal affair units in Federal administration structures, courts and
prosecutors.

The nature of corruption in Russia is that, for a long time it has been imbedded in
the system of social relations. This system is tightly bound with other social relation-
ships that make corruption a systemic factor. This demonstrates how complex it
would be to attempt to counteract the problem. The danger of contemporary corrup-
tion is in the existence of extensive and steady corruption networks, which not only
profits by their illegal activities, but invest in further corrupt developments.
One may argue that there is nothing original in this, and that the previous proto-
types of USSR corruption are merely being modified to suit the new conditions.
However, there is a vital distinction. These illicit groups are establishing the rules
of the game. In the Soviet system many state bureaucrats used the second economy
as a safety valve, quietly recognizing the input of those who controlled black market.
In contemporary Russia, corruption is intended not to defeat the inefficiency of state
controlled economy, but to guard criminal organizations from prosecution. As some
members of the political elite have willingly or unwillingly accommodated those who
have the power to hurt and the wealth to purchase support, a new type of relation-
ship with sectors of the state apparatus has emerged in which organized crime is the
122 S . Cheloukhine, J . King 1 Communist and Post-Communist Studies 40 (2007) 107-122

dominant force. Indeed, systemic corruption as an instrument of organized crime has

helped to maintain a safe home base within which criminal organizations can func-
tion unrestricted and from which they can ever more engage in corruption network
activities.

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