"Second To
None In Corruption;How Russians Write the Book on Tax Evasion," by Paul
J. Saunders
from the Washington Times, September 21, 1999, p. A21
Despite the impressive scale of alleged Russian money-laundering at the Bank of
New York - by some accounts, up to $15 billion may have been moved through accounts there
- the case represents little more than the tip of the iceberg of corruption, fraud and
economic crime in today's Russia.
This is perhaps most clearly illustrated by a recent study of the country's insurance
sector conducted by state-controlled insurer Ingosstrakh and reported in the Russian
press. According to this analysis, some 80 percent of the life-insurance policies written
in Russia are used in fraudulent "wage schemes" and do not represent insurance
at all. Thirty-five to 40 percent of risk insurance and 15-20 percent of property
insurance is similarly fabricated; on average, 47 percent of all insurance is fictitious.
The total premiums collected on these policies totaled an estimated $1.25 billion in 1998.
The purpose of the wage schemes is quite simple - tax evasion. Rather than providing
insurance, many Russian insurance companies earn commissions of 8-12 percent from
enterprises seeking to avoid payroll tax payments, such as those to the Russian pension
fund, by channeling money to their employees through bogus policies. This has the side
benefit of allowing the enterprises' employees to avoid paying taxes on their income as
well.
In some cases, enterprises take out insurance policies to protect them from being unable
to pay their employees - and then do not pay them. The insurance company then pays out the
benefit of the policy to the workers. Another strategy allows workers to receive inflated
health-insurance payments for minor ailments such as colds.
The corruption of Russia's insurance sector is important for several reasons. It is
important to note in this context that the leaders in the Russian life-insurance market
accused of fraudulent practices -such as Spasskiye Vorota ("Kremlin Gates") -
are not minor companies by Russian standards. Moreover, they are linked to major political
and economic figures in contemporary Russia, and not just in the Yeltsin camp; Spasskiye
Vorota is tied to the Media Most conglomerate run by Vladimir Gusinsky.
Wage schemes also clearly show the damage done by corruption to Russia's economic and
political transition. Tax evasion is one of the principal factors behind the government's
poor balance sheet and contributed substantially to the country's August 1998 default.
Finally, and perhaps most important, Russia's insurance sector shows the profound
difference between surface impressions of Russia and the country's unfortunate realities.
For years, the Clinton administration has proclaimed the success of its policy toward
Russia in a barrage of statistics; the number of enterprises privatized, the growth rate
in particular sectors of the economy, and similar figures have been advertised as
"proof" that Russia was "on the right track" or had "turned the
corner." In the political sphere, Russia's "democratic" elections were
similarly promoted.
Unfortunately, most observers have come to recognize that Russia's elections have been
largely free, but not at all fair. Incumbent officials at all levels mobilize the full
force of the state to promote their candidacies through influence over the media,
distribution of scarce resources to supporters or potential supporters, intimidation of
challengers, and outright fraud. While some elections are probably better than none,
Russia's post-independence electoral history hardly justifies naming the country a
democracy.
Similarly, in the economic sphere, the fact tat Russia has new commercial organizations
called "banks" and "insurance companies" does not mean that it is on
the way to becoming a market economy. Most of the "lending" done by Russian
"banks" has been either lending to the government (through prearranged deals in
which the government would fail to repay the loans and then hand over substantially
undervalued enterprises as collateral) or to related companies within so-called
financial-industrial groups. Most of the "investments" were in either the
inflated Russian debt market or convenient off-shore accounts.
The Clinton administration is now piously recounting its "concern" about Russian
corruption and has even gone so far as to prepare a list of statements by the president
and other officials since 1995 mentioning the problem. Ironically, the list itself
demonstrates the administration's difficulty apprehending the difference between
appearance and reality. The United States cannot build an effective foreign policy on this
kind of self-deception.
(Paul J. Saunders is Director of The Nixon Center.)
