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Ed Dolan's Econ Blog

Latest Arrests Highlight Dangers Facing Russian Business Leaders Who Join Anti-Corruption Campaign

On Wednesday, the Russian news agency RIA-Novosti  announced that Konstantin Yankauskas, a deputy of the Moscow city council, had been placed under house arrest. At the same time, the agency suggested that the arrests of two businessmen, Vladimir Ashurkov and Nikolai Lyaskin, were immanent. All of them are active in the anti-corruption campaign led by blogger and political activist Aleksey Navalny, and all are charged with embezzling funds from Navalny’s 2013 campaign for Mayor of Moscow—an intentionally vicious accusation, since, as I detailed in this earlier post, the fight against corruption was the principal plank in Navalny’s campaign.

Ashurkov’s name will be familiar to readers who remember an interview with him that I posted here two years ago. For those who came in late or have forgotten the details, Ashurkov was a star student in the American business school where I taught in Moscow in the 1990s and later earned an MBA at Wharton. After returning to Russia, his career blossomed, and he ended up as a top asset manager at Alfa Group, a Moscow investment powerhouse run by Mikhail Fridman, one of Russia’s richest men.

A few years ago, Navalny’s anti-corruption campaign caught Ashurkov’s attention. Although he had not previously been active in politics, he began to work with Navalny on corporate governance cases. His boss, Fridman, was at first OK with that, as long as it was done in his spare time. However, the political situation in Russia became more tense during Vladimir Putin’s campaign for a third term as president. As it did so, Fridman’s attitude changed. He told Ashurkov that he would either have to drop his work with Navalny or quit his job. As Fridman later explained in a radio interview,

When we parted ways, he [Ashurkov] had the right to a choice: Either not engage in politics or leave the business. He decided for himself to go the political route. . .  We live in Russia, and there is no question that in our Russian conditions, involvement in such an active political life is, as a general rule, not altogether appropriate for business.

Ashurkov accepted Fridman’s position. “I guess that is a rational decision if they see a political risk of my association with the company. It’s an employer’s right to terminate a relationship for any reason, so I have no grudge against him,” he told me. He resigned his position at Alfa Group and signed on full time as executive director of Navalny’s Anti-Corruption Fund.

Unfortunately, the situation in Russia has now taken a turn for a worse. The right to choose freely between business or politics seems to have disappeared. The choice is now to leave politics or face arrest.

Navalny’s mayoral campaign appears to have been a turning point. On election day, he received more than a quarter of the vote. Many observers think that without manipulation of the count, the 51 percent accorded to the Kremlin’s candidate, Sergei Sobyanin, would have dropped low enough to require a humiliating runoff.

Navalny was clearly a thorn in Putin’s side. Earlier this year he was placed under house arrest on embezzlement allegations officially unrelated to the campaign. The terms of his arrest include termination of the right to Internet access, although he continues to communicate via social media with the help of supporters. In my view, this restriction shows that the current regime in Russia is as much afraid of what people say as of what they do.

Now the pressure has moved on to Navalny’s associates. Typically, today’s Kremlin does not just bundle its enemies into a black car in the middle of the night. Instead, it seeks to undermine their reputation at the same time it removes them from the stage. What better way to besmirch the reputation of bothersome anti-corruption campaigners than to accuse them, themselves, of fraud, embezzlement, or some other corrupt act?

The charges brought against Yankauskas, Lyaskin, and Ashurkov this week center on the innovative financing of Navalny’s 2013 campaign for mayor. Instead of seeking large sums from a few deep-pocket contributors, Navalny and his team did something  new in Russian politics: They sought thousands of small donations made mostly through Russia’s leading on-line payment service. The targets of this week’s operation are accused of diverting several million rubles of campaign contributions to their own accounts. (The sums inquestion are not really all that large, considering that 1 million rubles is worth only $29,000)

According to an item posted yesterday on Navalny’s blog, the contribution strategy itself, as much as the three individuals, may be the Kremlin’s real target:

They decided demonstratively to punish them for what we, at that time demonstrated: It is possible to finance a large electoral campaign on the strength of ordinary people, rather than oligarchs or Kremlin “black cash.”

Honest money, collected in small sums from thousands of people—that is a crime in Putin’s eyes. It is a great danger to his regime. What? Just go out and collect millions without our permission?

Of course, the very fact that Navalny is offering vigorous support to the people accused of stealing from his campaign, rather than disowning them in outrage, does a lot to undermine the credibility of the charges.

In Ashurkov’s words, “Corruption, both political and economic, is the foundation of the political system in Russia.” Putin holds his team together by offering them opportunities to  enrich themselves through corruption. From time to time, if they don’t toe the line, or if they simply outlive their usefulness, the Kremlin exposes someone’s graft in one of the official anti-corruption campaigns it carries out for public relations purposes. But woe betide anyone who makes an honest, grass-roots effort to fight corruption—especially if they are business insiders who know how things work, how to read between the lines of complex financial statements, and how to expose the true nature of the system. They are a real threat.

From an economic point of view, the saddest thing is that all this corruption is not just a zero-sum game in which some people win and others lose. Instead, it is debilitatingly negative sum. It distracts managerial attention that would be better spent on production and innovation. It discourages investment by shortening the time horizons of business owners who cannot feel secure in their property rights from one year to the next. It promotes capital flight and discourages foreign investment. In short, a political system founded on corruption not only stymies the development of democracy, but at the same time, systematically undermines the foundations of the economy.

 

3 Responses to “Latest Arrests Highlight Dangers Facing Russian Business Leaders Who Join Anti-Corruption Campaign”

windrivenJune 13th, 2014 at 10:31 am

" In short, a political system founded on corruption not only stymies the development of democracy, but at the same time, systematically undermines the foundations of the economy."

Who said anything about democracy? Putin, of course, mouths democratic-sounding platitudes when it is politically convenient, but meaningful democracy never took root in that country and will never take root without another cataclysmic upheaval.

As to the systematic undermining of the foundations of the economy, who cares? The Chinese found limited capitalism a useful tool – but no one who has spent any time in China mistakes it for a capitalist economy. So too Putin who has used the economic 'reforms' that accompanied the collapse of the Soviet Union to simply build a new feudalism in Russia. Putin is tsar, the oligarchs are boyers, and the narodny are still peasants.

In much of the West we tend to see the economy as an end in itself; a rising tide lifts all ships and all that. Both China and Russia recognize the economy as a political tool wielded to political effect. China is just better at it and more subtle than their neighbor to the north. So long as the economy performs well enough to fuel Putin's pretensions there won't be a problem. The Russians themselves have long resigned themselves to lives of penury.

Vladimir Lenin predicted that capitalists would sell the rope that communists used to hang them. I bet he'd be surprised to find Xi Jin Ping holding the other end 😉

TomUsherJune 18th, 2014 at 10:23 am

You didn't mention the issue of Aleksei Navalny's nationalism and history of ethnically bigoted statements.

In addition, I would like to see some documentation for the claims made about how Vladimir Putin handles things "through corruption." I haven't seen any remotely hard evidence against him in quite a few years, and it wasn't financial even then.

He does live like a very wealthy king (multibillionaire). We'll have to see how he lives after leaving office.

I'm open to evidence of current corruption of the type alleged in your article, Ed.

Thanks.