War and Organized Corruption in Russia
October 3, 2022
  • David Szakonyi

    Assistant Professor of Political Science,
    The George Washington University
The combination of economic upheaval, international sanctions, and some key policy development, David Szakonyi argues, is pushing corrupt officials to become more organized in how to abuse their public office and make off with the proceeds.
Prime Minister Mishustin, during his time at the Federal Tax Agency, was one of the strongest advocates of Poseidon, one of Russia's attempts at imitating China’s surveillance state. Source: Wiki Commons
Russia’s war has upended its economy. Key supply and financial chains have been ruptured, hundreds of multinationals have exited, and real incomes continue to fall. Massive subsidies are pouring into industries across the board to prop up demand and employment, but may not be enough to stop the bleeding. And the threat of full mobilization has sent the Russian stock exchange tumbling downward. The country may have survived the short-term somewhat intact, but the relative prosperity of the Putin era is quickly vanishing before citizens’ eyes.

Top-down control over stealing

These earthquakes portend major changes in one of the country’s most prominent ways to get rich: engaging in corruption. The combination of economic upheaval, international sanctions and some key policy development is pushing corrupt officials to become more organized in how to abuse their public office and make off with the proceeds. More organized corruption allows the state to become more actively involved in selecting the “winners” and “losers” from graft and keep the most important elites loyal. This managed, top-down control over stealing may help the regime survive the current domestic political uncertainty.

At first glance, the idea that the war is making corruption more organized and centralized might seem preposterous. Russia’s wartime economy has also become one of absolute secrecy, purportedly for national security reasons. Trade statistics and budget expenditures are now classified. Public procurement for all siloviki agencies is now done behind closed doors. Sanctioned companies no longer have to publish financial statements. The country’s entire real estate cadaster has been all but been anonymized. After years of trumpeting open data as key to the country’s economic development, Russia at war has taken a giant step backwards into the dark.

Yet this drive towards secrecy also hides some unforeseen developments in Russia’s “fight” against corruption. To start, sanctions are finally cutting off the flows of Russian kleptocratic cash abroad. Although holes in the financial straitjacket still exist (here’s looking at you, Dubai), the war has almost cleanly unplugged the laundromats of Western banks washing Russian money.
“Oligarchs and corrupt officials can no longer trust their compromised intermediaries in the West to stash their assets and invest on their behalf."
Although some are still fighting tooth and nail to get sanctions dropped, others appear more resigned to their future in Russia, grabbing market share and currying favor with the regime. Fortress Russia means both people and cash can’t easily leave.

This Western blockade of Russian money finally forces it inward, and importantly right at the time when the government is building out capacity to monitor financial flows. Leading this charge, this past spring President Putin signed the final decree to create the anti-corruption system Poseidon. Operated by the Federal Protective Service (ФСО), Poseidon involves the large-scale collection and analysis of information on government bureaucrats and politicians: tax receipts, bank transfers, asset disclosures, real estate assets, and even social media activity. 

This type of data lake allows, for example, law enforcement to quickly check whether a bureaucrat earns enough to afford that luxury car (s)he just purchased at the dealership. All security agencies will have access, and the list of regions already coming online is fast growing. Poseidon is being positioned as one of Russia’s many imitation attempts of China’s surveillance state. Prime Minister Mishustin has been one of the strongest advocates behind this type of digitalization across the Russian government, most notably during his time at the Federal Tax Agency. Although sanctions could prevent the government from accessing the hardware it needs to develop Poseidon, parallel imports (i.e. sanctions busting) are starting to pick up and an analogue already exists within the defense industry. With time Poseidon could become Putin’s own eye of Sauron. 

Why go through all this trouble? After all, we know from countless investigations that top Russian officials have stolen billions. Why would the state invest in tools and methods to better organize future theft? 

First, information breeds control. Security officials fiercely loyal to and dependent on Putin will gain expansive visibility into personal affairs of the entirety of Russian officialdom. Candidates to government positions can now not just be assessed based on their loyalty to the regime, but also their past financial history. The potential for misuse is rife: Poseidon’s minders can glean information on lucrative opportunities for corruption and extortion based on the personal financial performance of officials throughout the government. Such an abundance of kompromat can keep an unstable regime together far longer than expected by preventing defections. Public declarations by officials of unconditional support are not just overtures to help keep their jobs, but also continue to tap the rent streams and access the enormous amount of money the government is spending to keep the economy afloat.
"To have more, we must produce more. To produce more, we must know more", 1920. Source: Wiki Commons
Soviet methods revisited 

But information alone cannot shape how and to whom the proceeds of corruption flow. To the brain must be added the stick, and the war is helping resurrect several Soviet methods of combatting corruption within the government. A new law from this past March allows officials to expropriate money directly from the bank accounts of officials found corrupt, if the sum exceeds their salary for the past three years and no reasonable explanation can be found

Purges were also a key element of Soviet anti-corruption strategy. It is hard to view the alarming number of leading businessmen and institute directors jumping from windows since early Match as anything but victims of economic turf wars. As the political regime consolidates and centralizes, so do its economic underpinnings as the victors build new inroads to access the remaining spoils. The war has created such uncertainty (and the security services strengthened so much in the past two years), that many would-be corruption officials may prefer to pass up opportunities for graft, lest they become a target themselves.

But perhaps as importantly, finances are sinking in the red and the government now more than ever needs money. The war has cost the government its entire budget surplus, even with the billions earned from continued oil and gas sales. Regional governments are relearning the word “sequester”, with some estimating they will need to cut their 2023 budgets by 30%. The partial mobilization of several hundred thousand more troops, paid as contractors, will deepen these financial holes. And that doesn’t even begin to take into account the enormous costs of rebuilding any annexed territories.
Centralizing corruption limits the number of financial leaks that deplete these reserves and theoretically allows the government to use its remaining cash more efficiently."
The war will obviously not eradicate corruption in Russia. Rather corruption will take different forms in the future. For example, parallel imports open up new opportunities for trade-based smuggling. But as Andrey Yakovlev has convincingly argued, some parts of bureaucratic governance are improving and corruption levels may already be falling at the lower and middle levels of government. A more centralized system may cut out some of the former beneficiaries, while strengthening Putin’s power vertical and partially reducing waste. Those in the inner circle will continue to profit, aided by a biased state machinery that has further honed its capacity to arbitrarily crack down on anyone outside it.

Perhaps the only silver lining is that as the Russian government has teched up, so have the Russian journalists and activists working diligently to expose every dark money corner. Mostly forced into exile, the gloves seem to have come off for investigative journalists, as they are able to access significant financial resources from both the Russian diaspora and the international community. New cross-national connections are being made daily, and the results are an impressive slate of exposés into every rank of Russian officials. The only hope the country has to move past the Putin kleptocracy is for this strong community of journalists and anti-corruption activists to survive and continue their work.
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