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. Last Updated: 07/27/2016

Private Sector Ethics

Faced with overwhelming evidence of corruption in Russia's government, establishment politicians such as Yevgeny Primakov and Sergei Stepashin are staking out the issue, promising reform. They must recognize that Russia's efforts to establish a capitalist, free market economy is threatened by corruption at every level. Corruption has undermined privatization and other market reforms by distorting competition, inflating transactions costs, spurring capital flight and asset-stripping, diverting public spending and deterring investment.

In other countries, successful anti-corruption reforms occur only when the private sector decides to take the lead and make business ethics a priority. In order to combat corruption here,Russia's private sector must also take the initiative to establish and observe ethical practices that are on par with international standards. Corruption - in particular bribery - is a two-way street: The briber is as responsible as the bribed.

In light of Russia's long history of corruption, it is obvious that the government will not reform itself. Through Soviet history and back through the tsars, the traditional priority of a government functionary was always to take care of himself first by exploiting the resources of the state. Under Soviet central planning, state resources were exploited by those with access to power - the members of the Communist Party.

Russia's transition from communism has certainly not been an exception to this institutional corruption - it has, in fact, even modified it a bit. During the transition to a free market, the Russian economy has been pervaded by what economists call rent-seeking behavior. Rent-seeking is conducted by political elites in transition economies who use their access to power to privatize state property at nominal prices. These power-broker elites convert their access to assets into cash by renting the assets to business. At times, rent-seeking takes the form of a demand for a bribe or extortion. Often, however, rent-seeking is quasi-legal.

Historically, Russia's public officials have shown no inclination to relinquish the unilateral powers of interpretation and enforcement of the law, and that gives them the insider discretion to exploit the system for personal gain. Despite repeated rhetorical commitments, the Russian government has failed to counter the tide of graft. And the lack of an independent judiciary capable of prosecuting government officials, and an independent press capable of fostering investigative journalists, makes it exceedingly difficult to hold public officials accountable.

In Russia today, the corruption barrier can be removed only by joint, voluntary action by private sector leaders to promote business ethics and transparency. Joint action will be difficult to achieve. The financial-industrial groups that benefit the most from Russia's crony capitalism will not consider such self-regulation. And the government has little incentive for reform when public outcry about corruption seems to be so muted.

But Russian small businesses and foreign multinationals have a strong incentive to undertake voluntary commitments. During Russia's transition to a free market, small business has been severely hindered by government rent-seeking and corruption. The most mundane business activities are subject to licensing and reporting requirements. Taxes are imposed not simply on profits, but also on revenues and the mere movement of capital and goods. The majority of multinationals operating in Russia must comply with the international "Convention on Combating Bribery of Foreign Public Officials in International Business Transactions," which prohibits companies from the 28 member countries of the Organization for Economic and Cooperative Development from bribing foreign officials.

Russian business associations have begun to accept the challenge of combating corruption by promulgating voluntary codes of business conduct. Such codes entail a commitment by an individual company or industry sector to refrain from bribery and to observe ethical and transparent business practices. By helping to build voluntary organizations and reinforce traditional ethics, such steps will ultimately help shape government institutions.

Leading small businesses and multinationals in St. Petersburg have created the Declaration of Integrity in Business Conduct, a voluntary statement of commitment to ethical principles. By adopting the declaration, a company undertakes a no-bribery pledge and must implement a code of ethics.

Between June and September 1999, more than 100 businesses signed the Declaration of Integrity in Business Conduct. The Association of St. Petersburg Contractors, the St. Petersburg Chamber of Commerce and Industry, the St. Petersburg International Business Association and the St. Petersburg Rotary Club, which have a combined membership of over 1,200 companies, supported the declaration and presented it to their members for signature.

Russians must accept the fact that government corruption is endemic. The private sector must find its own path to root out corruption, using the multitude of positive values and ethical traditions found in Russian culture. The St. Petersburg declaration is but one example of a process whereby the private sector is integrating Russia's strong moral traditions with international standards of business ethics.

Through a commitment to repudiate bribery on the supply side, Russian businesses can lead the government to take reciprocal actions to reduce opportunities for demanding bribes. Such voluntary steps will also help create "social capital" - that is, the trust and shared values among individuals, businesses and government officials that are the very foundation of a successful market economy.

Matthew H. Murray is president of Sovereign Ventures, Inc., a management consulting firm specializing in direct investment and small business development in Russia. He contributed this comment to The Moscow Times.