Recent developments in fighting corruption and waste during government procurement in Russia

Recent developments in fighting corruption and waste during government procurement in Russia

It is no secret that the Russian economy is in a difficult situation due to the exchange of sanctions with Western countries, the devaluation of the ruble and the oil price slump. With the oil currently trading around $40 per barrel, the fulfilment of the 2016 budget – which is calculated based on the Urals oil price at $50 per barrel – is now at risk. The government is therefore considering certain measures aimed both at increasing revenue and decreasing expenditure of the federal budget. One such measure is the government effort to fight corruption, waste and inefficient spending in government procurement.

The government’s desire to save money amid the economic crisis is not surprising. Large state-owned corporations like Rosneft, Gazprom, RZhD, Rosatom and others dominate the Russian economy. Government procurement accounted for almost RUR 25 trillion in 2015 or about 31% of GDP. But it is noteworthy that the other reason for the government’s drive is purely political. Fight against corruption and waste during government procurement has always been important for the Russian non-systemic opposition, a Russian term meaning opposition operating outside of the official political establishment.

For instance, Alexey Navalny, one of the most well-known Russian opposition bloggers and anti-corruption activists, came to prominence after his investigations of alleged waste, abuse and fraud during government procurement. He also investigated the suspicious enrichment of some Russian officials. The ‘Party of crooks and thieves’, a derogatory term for Edinaya Rossiya (United Russia), the Russian ruling party, was popularised by Navalny and was widely used in the early 2010s.

Therefore, the government’s course on fighting procurement corruption  should be seen not only as a measure to increase the effectiveness of budget spending. It is also designed to improve the image of the ruling elite and to deprive the non-systemic opposition of its monopoly on the use of anti-corruption rhetoric.

This is particularly noticeable in the work of the People's Front for Russia (the ONF), an influential network-based non-governmental pro-Putin social and business platform founded in 2011. The ONF recently launched a programme explicitly titled ‘For Fair Procurement – the Fight against Corruption and Waste in Government Procurement’. In November 2015 the programme was supported by Vladimir Putin himself.

The ONF and its anti-corruption programme are dealing primarily with issues at the regional level. The Fair Procurement Programme calls for monitoring and control of regional governors’ spending. As Alexey Anisimov, the head of the ONF’s executive committee, noted in April 2014, fighting corruption is the organisation’s main objective. It is also noteworthy that in October 2015 the Ministry of Economic Development (MED) introduced a bill to oblige the executive branch ‘to discuss strategic planning documents’ with the ONF.

In March 2015 Alexander Khoroshavin,  then the governor of Sakhalin Oblast, was arrested by the Federal Security Service on suspicion of bribery in connection with a state contract for the construction of a power station. Khoroshavin was detained immediately after receiving a $5.6 million bribe from the contractor.

Shortly before his arrest, Khoroshavin was criticised by the ONF for spending a large amount of money on the renovation of the Sakhalin government’s building, a new luxury car, and PR activities. As early as 2013, the ONF had referred the case to Putin, who publicly warned Khoroshavin about his activities.

The Khoroshavin case was seen by some observers as a direct warning and a message to other governors, regional elites and other senior officials. The government often turned a blind eye to senior officials’ misappropriations and small scale corruption. But excessive bribes which damage the government’s reputation and key procurement projects would not be tolerated.

More mundane daily work to curb corruption, waste and other abuses in government procurement is carried out primarily by the MED and the Federal Antimonopoly Service (the FAS). This is centred on modifying and fine-tuning the regulatory framework. The fundamental Government Procurement Act (GPA, No 94-FZ), adopted in 2005, was supplemented in 2011 by the SOE Procurement Act (No 223-FZ) which regulates procurement procedures of state-owned companies, corporations and enterprises. In 2013 GPA was replaced by the Government Procurement Contract System Act (No 44-FZ). According to Vedomosti, a prominent Russian business daily, in 2013-15 the government procurement regulatory framework was amended by no fewer than 115 directives of the government and various ministries.

In November 2015 the MED introduced a bill to toughen procurement procedures for state-owned enterprises and companies participating in large projects financed by the government. Among other measures the ministry wants to oblige state-owned companies to publish final versions of state contracts on the publicly accessible website of government procurement tenders. At the moment final versions of contracts are published only occasionally, which leaves room for corruption and other abuses.

In 2016 the government also plans to unify and standardise maximum limits on the price of cars, smartphones, furniture and other goods purchased by government agencies and state-owned enterprises for their own use. This measure should limit a practice by which officials acquire luxuries, such as expensive imported cars. Such acquisitions often provoke outcry among the opposition and the general public, especially when initiated by officials in small, poor or ineffective municipalities and regions.

Another initiative of the MED was proposed in December 2014. The ministry wants to toughen control over the starting price in government procurement tenders. According to some estimates, now the starting price is usually 10-15% percent above the average market price. This presents opportunities for certain forms of corruption, including kickbacks.

In March 2016 the MED and the FAS complained that the proportion of state contracts signed as in non-competitive sole source purchase processes increased from 18% in 2014 to 21.7% in 2015. The MED and the FAS are now working on measures to make sole source purchases more transparent and less frequent.

It is also noteworthy that in January-September 2015 the total number of FAS investigations connected with government procurement increased by more than 300% (from 2,767 to 11,121) year-on-year. While the total amount of tenders increased in 2015 by mere 10%.

The total amount of fines imposed by the FAS increased January-September 2015 by about three times year-on-year. However, in absolute terms the total amount of fines in the period does not appear to be significant – increasing from RUR 27.1 million to RUR 83.6 million, or $410,000 to $ 1.3 million. But these meagre figures are probably explained by the fact that the FAS is reluctant to impose high fines on state-owned companies.

Government procurement is receiving more attention from the FAS. This might be seen as a sign of increased control from the state and, simultaneously, increased competition among suppliers. Amid the economic crisis and the decline in many industries, participation in government procurement becomes even more attractive to private businesses. New players have come into the market, including those who were previously discouraged by corruption and widespread collusion practices.

Overall, the government’s undertaking to use taxpayers’ money more transparently and effectively is highly commendable. However, it remains to be seen how recent government initiatives  will improve the situation with corruption in government procurement which is often seen as an innate problem and one of the most severe in the current Russian political system.

By Prokhor Tebin Research Associate, Business Intelligence
Published: 31st May 2016