1. The Myth of Russian Corruption

In this blog, I have documented how a) corruption in Russia is similar to the average for middle-income countries and b) it has improved slightly under Putin. This is backed by data from the World Bank’s Governance Indicators, Transparency International’s Global Corruption Barometer and World Bank statistics on problems with corruption and bureaucracy.

Nonetheless, the Western media has other ideas. Take their coverage of the Indem report in 2005 by the BBC, for instance, which claims that “Its annual report on corruption says that bribes paid to officials by businessmen may have grown as much as 10 times over the last four years alone” and “the shadow economy at least twice as large as the state budget“. And I can’t say Beebie is the worst. More propagandistically inclined outlets implied that corruption per se increased by an order of magnitude.

Now for the facts. The shadow economy fell from 45% to 37% of GDP from 1998 to 2002. The state’s share of expenditures was 34.1% in 2002 – in other words, it was very similar to the size of the shadow economy. And even assuming there have been no improvements since then (according to ivanivanov333, a contributor, the figure is now 28%, as opposed to gov’t spending of 34.2% in 2007), this is not that different even from Latvia (40%) or even Italy (27%) in 2004. Yet nonetheless it’s supposedly worse than in the late 1990’s, when the media was coming up with books like Sale of the Century and articles like What Russia Teaches Us Now (which described its social contract as an “exchange of unaccountable power for untaxable wealth”).

But let’s look at the report itself – here’s an English language summary.

Firstly, it shows that everyday corruption has declined substantially. (Most Western media outlets concentrated on business corruption, which we’ll come to in a second).

While the share of people who got involved, voluntarily or not, into a corruption situation has remained steady, the number of those who proceded to produce a bribe fell by a third due to a rise in risk. The increase in the average bribe size is actually a positive sign – since risk has increased, fewer bribe-takers will want to take bribes and will thus inflate prices. Growth in the everyday “corruption market” was just 1.6% annually (from 2.8bn $ to 3.0bn$), compared with yearly nominal GDP growth in the period of 25.7% (from 307bn $ to 765bn $). While comparing corruption to GDP is not a rigorous exercise (bribes are transfers, not output), from these figures it can be concluded that relative to economic output everyday corruption has halved from 0.9% to 0.4%.

Furthermore, corruption risk has risen and demand fallen significantly in practically every sector (the one major exception was conscription, where demand rose, but was more than cancelled by rise in risk – the average bribe has risen fivefold and cut conscription services’ share of the corruption market by number of cases by a factor of three). Of those who avoided bribery, the share of those who managed to solve their problems anyway increased from 50% to 68%, while those who neither bribed nor solved their problem fell by a third – an encouraging dynamic, since it means opportunities for working around bribes have increased. Finally, in an increasing amount of cases where bribes do happen is on the initiative of officials.

Now let us turn to business corruption.

As with everyday corruption, corruption intensity in business fell by around 20%. On the other hand, the increase in average bribe amounts, and as such in absolute market volume, have been stratospherically higher – by a factor of 10, which is the most quoted figure. (Fewer quote that that as a percentage of federal budget revenue and nominal GDP, the increase is reduced to a factor of 4). But whatever. Still quite a damning picture, however you look at it. Right?

Well, maybe not.

(1) The figure for the annual volume of business corruption market (USD 316 bln.) appears to us to have been obtained by multiplying the number of active business entities in Russia (approx. 1.3 mln.) by the average annual bribe contribution (USD 243,750). Given the fact that the vast majority of these entities are small businesses which are not likely to generate even annual sales of such magnitude, correctness of the above USD 316 bln. annual volume is questionable. For instance, in 2004 there were approx. 151,000 business entities in the Russian manufacturing industry that sold goods totalling 11.209 trillion RUR (approx. USD 389.07 billion), which on a per manufacturing entity basis works out to average sales of approx. USD 2.6 mln. Thus, such average manufacturing entity should have paid approx. 9.4% of its total SALES (i.e., USD 243,750 / USD 2.6 mln.) in bribes. Of course, unfortunately, there is tax evasion, underreporting of income, shifting of sales to trade companies, etc. Even so, it is much more difficult to understate sales (than it is, for example, to manipulate the expense side), and at large enterprises this practice is less prevalent – therefore, if we were to agree with the average annual bribe contribution amount (USD 243,750), then it would be rather safe to assume that this amount would represent at least 5% of total sales of a relatively large industrial entity which simply would eat up at least 50% of its profit margin. Obviously, for smaller entities USD 243,750 in bribes would simply be unbearable. I would also like to point out that in a 2005 WB survey, only 15% of Russian managers claimed corruption was a major business problem, compared to Poland (15%), Czech Republic (20%), Ukraine (21%) and China (27%). (Source: see Corruption (% of managers…)).

(2) There are a little over 1 mln. government officials in Russia. Thus, on average one public servant should have received in excess of USD 300,000 annually in bribes, which in our estimation is quite unlikely.

(3) Russian official GDP in 2004 was USD 580 bln. Thus, the suggested business corruption market represents 55% (!) of official GDP. We are afraid that this 55% figure is a little high even for Zaire during the rule of infamous Mobutu. Of course, without a doubt there is a significant unreported portion of the Russian economy. However, even if we increase the official GDP figure by 50% (which is what various international and domestic organizations estimate the understated percentage to be) to USD 870 bln. to take into account the shadow economy, business bribes would still represent a staggering 36% of total GDP. One should also keep in mind that the gross profit portion of GDP (which theoretically should form the source for bribes) was officially only USD 210 bln., i.e. much less than the USD 316 bil. annual volume of business corruption market. Even after increasing this gross profit to take the shadow economy into account, it seems that entrepreneurs would be giving away all of their profit as bribes. Of course, one could argue that there can be a double (or even triple) count in the bribe market (see Mr. Satarov’s comment below) or that earlier accumulated wealth might be used as a source, but even so the aggregate USD 316 bln. figure still seems too high. From an economic standpoint a bribe can be considered a sort of informal “tax”, and at a certain point if the levy is too heavy entrepreneurs would prefer just to wind up business than to pay too much. This does not seem to be what is happening with businesses in Russia.

(4) Finally, if annual volume of the consumer corruption market with its tens of millions of participants is estimated at USD 3.014 bln., in our estimation it is questionable that the business corruption market with much less participants can be USD 316 bln., i.e., a staggering 105x (!) difference. And I would also add that it is also rather unlikely for everyday corruption to halve as a share of GDP while business corruption explodes by a factor of four.

In other words, the question of the real extent of business corruption is still open.

2. The Myth of Sham Elections

The Kremlin has barred the opposition from participating in elections, silenced dissent and showered unrelenting praise upon Putin’s puppet, Medvedev, via the slavish state-controlled media. It plans to rig the elections by banning foreign observers, forcing public voters to vote and stuffing ballots. According to straight-talking Kasyanov, the “country has stepped onto the slippery slope towards thievish totalitarianism”. And how can I, a vile Russophile propagandist, argue with such a paragon of integrity as dear old Misha?

Well, I could look at what Russians themselves said about the elections.

3. The Myth of Russia’s Hunt against Traitors

• Following Litvinenko’s death and investigations, Britain kicked up a major international row with Russia, demanding the extradition of their suspect Lugovoi. The media fell in line (e.g., a Washington Post editorial could assert that the poison “dose was almost certainly carried by one or both of the former Russian security operatives — one of them also a KGB alumnus — whom Mr. Litvinenko met at a London hotel Nov. 1.”), while dissent and a calls to refrain rushing to judgement were few and far between. Taking a hint, the author decides to meet up with Russian prosecutors to hear their side of the story.
• Berezovsky, kicked out of Russia in 1999, set about undermining Putin’s government, in which he was soon joined by his former protégé, who helped out by writing books like Blowing Up Russia and consulting for two shady security companies housed at Berezovsky’s.
• On 1 Nov 2006, Litvinenko had lunch with his acquaintance Mario Scaramella at the Itsu sushi bar, who had flown in from Naples the night before. Scaramella handed him some documents. Then he proceded to a meeting with Lugovoi and Kovtun in the Pine Bar in the Millenium Hotel to discuss a business proposal involving Erinys International, one of the security companies in Mr. Berezovsky’s building, following up on a similar meeting two weeks prior. After leaving the Pine Bar, Litvinenko went to Mr. Berezovsky’s office. On that same day he fell ill, and was hospitalized two days later.
• The main, if not only, source for the revenge-murder scenario were people funded by Mr. Berezovsky. A Web site in France, which had received financing from Mr. Berezovsky’s foundation, circulated a report that there was a Russian “hit list” that had Litvinenko’s name on it. Even though the “hit list” itself never materialized, it helped link the death of Litvinenko in the public mind with that of Anna Politkovskaya, the crusading journalist who had been murdered a month earlier, in October 2006, and whose name was also on the putative hit list. Meanwhile, a Chechen website, also supported by Mr. Berezovsky’s foundation, ran stories such as “FSB Attempted to Murder Russian Defector in London.”
• The polonium was discovered two hours before Litvinenko died. His famous, eloquent death-bed statement was released by Goldfarb (Berezovsky’s employee), accusing Putin of the deed. (Never mind Litvinenko was paralysed and that his English was quite rudimentary). British authorities switched the crime scene from the Itsu to the Pine Bar.
• Polonium-210 is a crucial component in early-stage nuclear bombs. Its smuggling into Britain should have rung proliferation alarm bells about dirty bombs, yet officials publicly assumed its only purpose was “nuclear terrorism perpetrated against an individual“.
• The idea that world Polonium-210 production is concentrated in Russia is a myth, since any nuclear state is able to do it and these are all closely guarded secrets. Nonetheless, consent was successfully manufactured in the Western media that it came from Russia.
• The minute amount found in London — possibly no more than one-millionth of an ounce — could have come from many sources, ranging from the American industrial supply and stockpiles in Russia to the remnants of the A.Q. Khan network in Pakistan and the North Korean surplus. So news reports, such as the one in the Washington Post that “Polonium is produced and held almost exclusively in Russia,” are at best speculation.
• In July the Brits issued an extradition request to Russia for Lugovoi. Lugovoi admitted to meeting Litvinenko at the Pine Bar, but rejected involvement in his death. He was contaminated, but so was practically everyone Litvinenko had come into contact with around that time.
• Not only was there no extradition treaty between Britain and Russia, but Article 61 of the Russian Constitution prohibited the extradition from Russia of any of its citizens. Further inflaming matters, Sir Tony Brenton, the British Ambassador to Moscow, suggested that the Putin government should disregard the Russian constitution and “work with us creatively to find a way around this impediment,” since British authorities had “cooperated closely and at length with the Russian Prosecutor General’s Office.” After Russia rejected the extradition request, Ambassador Brenton objected that its decision was not made “on the basis of the evidence,” which implied that Britain had furnished Russia with compelling evidence to back up its request. Then Britain expelled four members of the Russian embassy in London, effectively holding the Russian government responsible for Litvinenko’s death, and began an international imbroglio.
• The author travelled to Russia to meet with the Russian investigators. After surmounting some bureaucratic hurdles, he managed to get access to the secret British documents about the case.
• What immediately caught my attention was that it did not include the basic documents in any murder case, such as the postmortem autopsy report, which would help establish how — and why — Litvinenko died. In lieu of it, Detective Inspector Robert Lock of the Metropolitan Police Service at the New Scotland Yard wrote that he was “familiar with the autopsy results” and that Litvinenko had died of “Acute Radiation Syndrome.”
• Like Sherlock Holmes’s clue of the dog that didn’t bark, this omission was illuminating in itself. After all, Britain and Russia had embarked on a joint investigation of the Litvinenko case, which, as far the Russians were concerned, involved the Polonium-210 contamination of the Russian citizens who had contact with Litvinenko. They needed to determine when, how, and under what circumstances Litvinenko had been exposed to the radioactive nuclear component. The “when” question required access to the toxicology analysis, which usually is part of the autopsy report. There had already been a leak to a British newspaper that toxicologists had found two separate “spikes” of Polonium-210 in Litvinenko’s body, which would indicate that he had been exposed at two different times to Polonium-210. Such a multiple exposure could mean that Litvinenko was in contact with the Polonium-210 days, or even weeks, before he fatally ingested it. To answer the “how” question, they wanted to see the postmortem slides of Litvinenko’s lungs, digestive track, and body, which also are part of the autopsy report. These photos could show if Litvinenko had inhaled, swallowed, or gotten the Polonium-210 into the blood stream through an open cut.
• The Russian investigators also wanted to know why Litvinenko was not given the correct antidote in the hospital and why the radiation had not been correctly diagnosed for more than three weeks. They said that their repeated requests to speak to the doctors and see their notes were “denied” and that none of the material they received in the “joint investigation” even “touched upon the issue of the change in Litvinenko’s diagnosis from Thallium poisoning to Polonium poisoning.” They added, “We have no trustworthy data on the cause of death of Litvinenko since the British authorities have refused to provide the necessary documents.” The only document provided in the British file indicating that a crime had been committed is an affidavit by Rosemary Fernandez, a Crown Prosecutor, stating that the extradition request is “in accordance with the criminal law of England and Wales, as well as with the European Convention on Extradition 1957.”
• The British case is almost entirely based on a “polonium trail” discovered several weeks after they had been in contact with the Polonium-210. While a number of sites correspond to Litvinenko’s movements in October and November, the trail seems to have began in London and then went to Moscow. In London itself, the trail was inexplicably erratic, with traces that were found, as they noted, “in a place where a person stayed for a few minutes, but were absent in the place where he was staying for several hours, although these events follow one after another.” Russian requests for a comprehensive list of all the sites tested were stonewalled, suggesting that the British might be truncating the trail to “fit their case.”
• While the Pine Bar was contaminated, there was zero evidence that that was where the poisoning actually occured. Litvinenko himself initially said that he had been poisoned at the Itsu when he was lunching with Scaramella, nor did he ever mention his meeting at the Pine Bar.
• Not only did the Itsu have traces of Polonium-210, but Mr. Scaramella was contaminated. Since Mr. Scaramella had just arrived from Italy and had not met with either Mr. Lugovoi or Mr. Kovtun, Litvinenko was the only one among those people known to be exposed to Polonium-210 who could have contaminated him. Which means that Litvinenko had been tainted by the Polonium-210 before he met Mr. Lugovoi as the Pine Bar.Litvinenko certainly could have been contaminated well before his meeting with Mr. Scaramella. Several nights earlier, he had gone to the Hey Joey club in Mayfair. According to its manager, Litvinenko was seated in the VIP lap-dancing cubicle that later tested positive for Polonium-210.
• The most impressive evidence is the very high level of Polonium-210 at Lugovoi’s room in the Millennium Hotel – presumably in comparison with other hotspots like Litvinenko’s home or airplane seats. However…
• Such evidence would only be meaningful if the different sites had been pristine when the measurements were taken. However, all the sites, including the Millennium hotel rooms, had been compromised by weeks of usage and cleaning. So the differences in the radiation levels could have resulted from extraneous factors, such as vacuuming, or heating conditions. Furthermore, the Russian investigators also found these levels had little evidentiary value because the British had provided “no reliable information regarding who else visited the hotel room in the interval between when Lugovoi departed and when the traces of polonium 210 were discovered.” As a result of this nearly month-long gap, they could not “rule out the possibility that the discovered traces could have originated through cross-contamination by outside parties.”
• Hospital tests confirmed that Messrs. Lugovoi, Kovtun, and Scaramella and Litvinenko’s widow, Marina, all had some contact with Polonium-210. But it is less clear who contaminated whom. The Russian investigators concluded that the all the radiation traces provided in the British report, including the “high level” cited by “Scientist A,” could have emanated from a single event, such as a leak — by design or accident — at the October 16 meeting at the security company in Berezovsky’s building. But they could not find “a single piece of evidence which would confirm the charge brought against A.K. Lugovoi.”
• Britain may have had more incriminating evidence against Mr. Lugovoi than it chose to provide to Russia. It may not have wanted to share data that would reveal intelligence sources. But why would it refuse to share such basic evidence as the autopsy report, the medical findings, and radiation data? And if Britain wanted to extradite Mr. Lugovoi, why would it send such embarrassingly thin substantiation?
• In conclusion…

Before the extradition dispute, Russian investigators, in theory, could have questioned relevant witnesses in London. Their proposed roster of witnesses suggested that Russian interest extended to the Russian expatriate community in Britain, or “Londongrad,” as it is now called. The Litvinenko case provided the Russians with the opportunity for a fishing expedition, since Litvinenko had at the time of his death worked with many of Russia’s enemies, including Mr. Berezovsky; his foundation head, Mr. Goldfarb, who dispensed money to a web of anti-Putin websites; his Chechen ally Akhmed Zakayev, who headed a commission investigating Russian war crimes in Chechnya (for which Litvinenko acted as an investigator), and former owners of the expropriated oil giant Yukos, who were battling in the courts to regain control of billions of dollars in its off-shore bank accounts.

The Russian investigation could also have veered into Litvinenko’s activities in the shadowy world of security consultants, including his dealings with the two security companies in Mr. Berezovsky’s building, Erinys International and Titon International, and his involvement with Mr. Scaramella in an attempt to plant incriminating evidence on a suspected nuclear-component smuggler — a plot for which Mr. Scaramella was jailed after his phone conversations with Litvinenko were intercepted by the Italian national police.

The Russians had asked for more information about radiation traces at the offices of these companies, and Mr. Lugovoi had said that at one of these companies, Erinys, he had been offered large sums of money to provide compromising information about Russian officials. Mr. Kovtun, who also attended that meeting, backs up Mr. Lugovoi’s story. Such charges had the potential for embarrassing not only the security companies that had employed Litvinenko and employed former Scotland Yard and British intelligence officers, but the British government, since it had provided Litvinenko with a passport under the alias “Edwin Redwald Carter” to travel to parts of the former Soviet Union.

The British extradition gambit ended the Russian investigation in Londongrad. It also discredited Mr. Lugovoi’s account by naming him as a murder suspect. In terms of a public relations tactic, it resulted in a brilliant success by putting the blame on Russian stonewalling for the failure to solve the mystery. What it obscured is the elephant-in-the-room that haunts the case: the fact that a crucial component for building an early-stage nuke was smuggled into London in 2006. Was it brought in merely as a murder weapon or as part of a transaction on the international arms market?

There is little, if any, possibility, that this question will be answered in the present stalemate. The Russian prosecutor-general has declared that the British case is baseless; Mr. Lugovoi, elected to the Russian Parliament in December 2007, now has immunity from prosecution, and Mr. Scaramella, under house arrest in Naples, has been silenced. The press, for its part, remains largely fixated on a revenge murder
theory that corresponds more closely to the SMERSH villain in James Bond movies
than to the reality of the case of the smuggled Polonium-210.

After considering all the evidence, my hypothesis is that Litvinenko came in contact with a Polonium-210 smuggling operation and was, either wittingly or unwittingly, exposed to it. Litvinenko had been a person of interest to the intelligence services of many countries, including Britain’s MI-6, Russia’s FSB, America’s CIA (which rejected his offer to defect in 2000), and Italy’s SISMI, which was monitoring his phone conversations.

His murky operations, whatever their purpose, involved his seeking contacts in one of the most lawless areas in the former Soviet Union, the Pankisi Gorge, which had become a center for arms smuggling. He had also dealt with people accused of everything from money laundering to trafficking in nuclear components. These activities may have brought him, or his associates, in contact with a sample of Polonium-210, which then, either by accident or by design, contaminated and killed him.

To unlock the mystery, Britain must make available its secret evidence, including the autopsy report, the comprehensive list of places in which radiation was detected, and the surveillance reports of Litvinenko and his associates. If Britain considers it too sensitive for public release, it should be turned over to an international commission of inquiry. The stakes are too high here to leave unresolved the mystery of the smuggled Polonium-210.