#12
The Russia Journal
March 1-7, 2002
Corruption is in the eye of the beholder
By AJAY GOYAL

If one were to believe the unrelenting blather in the Western media about the Russian government over the past few years, one would think the country were irreversibly mired in a Dark Age of corruption, while Western corporations are the holy ark of morality that will save Russia from its doomed destiny.

But between the two rotten systems that have characterized Russia in living memory – Soviet Russia and former President Boris Yeltsin’s privatized Russia – and the kind of treatment they have received from international risk assessment and credit-rating agencies, one cannot help but spot an irony: It was the corrupt Soviet Union – not the new Russia, trying to overcome 70 years of ideological insolvency – that received first-class AAA ratings from lenders and bankers. Based on these ratings, by 1991, the "Evil Empire" had notched up some $100 billion in foreign debt from Western bankers.

Once the mercurial Yeltsin threw the yoke of communism aside, the confidence of the global business community in Russia started looking like a dried prune. With the old system gone, the world business community started imposing new strictures. They wanted audited accounts, transparent companies, a stable political system, a sober president, a GAAP system of accounting and a raft of other legal and accounting requirements. As Western accounting, auditing and law firms moved into town, taking up the finest office space and hanging out shingles advertising to portfolio investors and other bargain hunters, capital moved in. As Russia moved towards new depths of decay, Russian bonds and equity were the hottest buy on Wall Street. By 1998, when the Western capital markets’ romance with Russian bonds and equity ended in defaults by federal, regional and corporate debtors, some $150 billion had fled Russia for offshore havens.

Not a day has gone by in the last 10 years in Russia without the blame for the economy’s woes and lack of investment falling squarely on the lack of corporate transparency and functioning capital-market regulation. But, with time and effort, Russia’s government, legislators and businesses have now built a most modern system of corporate transparency.

Some of the principal beneficiaries of this massive drive – which was also funded by public-relations campaigns paid for by auditing and consulting firms – have been these very auditing firms, particularly the Big 5, for whom business has boomed. They employ hundreds of people and pay large salaries. Partners in these firms earn millions in bonuses, yet their own lack of corporate transparency make al-Qaida look like a publicly listed company.

But surely, if 80 percent of the country’s businesses are now in private hands and, after a decade of "Western-style" business, things have changed! The West has exported the best of business through top consultants and auditors, not just fly-by-night operators looking to make a fast buck! Moscow, at least, has had thousands of foreign corporations open offices within its borders. Millions of dollars have been spent in training courses and seminars organized by auditing and law firms to offer guidance about doing business free-market style.

Why, then, is capitalist Russia still so corrupt? Because Western capital has not been able to bring one key ingredient of business to Russia – the honor that comes with integrity.

For all its flaws, the Soviet Union had men and women of patriotic fervor who would not cross certain lines out of a love of their land. The post-1991 era brought the polyglot, young, brash and Western-educated prodigy of the former communist functionaries. Western capital found a common language with these men, who were without honor and self-esteem, devoid of love for their own nation and willing to auction off for pennies everything the country had spent 70 years building.

The market was thought to be a panacea, but little did Russians know of the moral bankruptcy that greed and affluent decadence had brought to Western market institutions themselves. Russians were awestruck by the opulence of corporations like Enron. Little did they, like ordinary investors back in the United States, know that the greed that lies at the heart of such flashy success is no different from the lust of the extortionist communist bureaucrat. For years, in the Russian media auditors would get respectful bows from people, their opinions were headline news and Russians saw them as agents who would bring positive change to their corrupt system. To ask questions of the rabbi was not kosher.

Now, in the aftermath of the Enron scandal, Russians, as well as Americans, are waking up with a disenchanted feeling about the market – the same feeling of disillusionment they had developed for Yeltsin and his reformers.

Russia, in fact, was a fertile ground for many of these "aggressive and creative accountants and lawyers." When they were making out like bandits, laws were unformed and oversight by government institutions non-existent or incompetent. Government officials frequently used strong-arm tactics to stop capital flight and white-collar crime because they could not employ expensive thugs to serve as lawyers for the state. It was easy to smear them because they had no Ivy League neckties and could not redescribe theft in fine-sounding terms. When cases were filed by Russian tax authorities against holy cows of business like Johnson & Johnson, Independent Media and even the big auditing firm of Ernst & Young, Western anger against Russian "corruption" reached a fever pitch. Russia was threatened with loss of "foreign investment" unless it stopped its "anti-market" activities.

In 1991, Russia rid itself of the dark legacy of communism. But it was a rude awakening when it came face to face with the brute strength of corruption that thrives within the market system as well.

The first commission on a deal that was demanded of me after 1991 came from a Swiss company’s executive in Moscow. I saw a deliberate breach of legislation and customs regulations of two countries on the part of this bluest of blue-chip companies as its $650-an-hour auditors and lawyers told it its practices were merely exploiting loose laws but were "not illegal." The company was literally smuggling in goods because its executives were arrogantly certain they would not be caught. Over the last three years, in media business, I have been coming across a most disturbing trend: Demands for cash bribes are coming increasingly from employees of foreign companies, and not always from Russian nationals. In unethical behavior, foreign businesses are competing with their Russian counterparts. The first manager to demand articles in return for advertisement was an auditing firm’s European partner and the second an American general manager of a five-star hotel.

It is not the auditor who is to blame for all the ills in the Enron debacle or Russian capital flight. The collective vocal conscience of a group of people is the best defender of morality and fairness in the conduct of governments and businesses. Unfortunately, in the United States, the public became complacent as big business bought government and media influence. In Russia, people have yet to learn they are the front line of defense against corruption – not laws passed by the Duma.

The public has a right to audit the Western holy cows that abetted the fleecing of Russia. Russia went bankrupt like Enron in 1998. It is high time to make public the high crimes committed by the "geniuses of business" that brought it about.

And, meanwhile, businesses and investors do not have to wait for new laws and accounting principles to be written. Auditors can not tell us what our own consciences can.

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