Viewpoint August 27, 2009, 2:44PM EST

Corruption: Russia's Economic Stumbling Block

American and European anti-corruption laws could help solve a longtime problem in Russia

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Corruption as a transnational threat was high on the discussion agenda in early July when U.S. President Barack Obama traveled to Russia. It is clear that Russia needs to add anti-corruption to the long list of issues it must tackle to be considered a global economic powerhouse.

International investors fled in droves from Russia last summer: First, there was Russia's brief war with Georgia. Then Prime Minister Vladimir Putin conjured up memories of the demise of Russian oil giant Yukos with a cryptic suggestion that steel giant Mechel (MTL) should be investigated for tax evasion. Coupled with the chilling effect of the TNK-BP and Telenor (TEL.F) disputes over corporate governance, these events have curbed investors' appetite for Russia.

Those events played into ongoing fears and frustrations over Russia's reputation for seemingly pervasive corruption. The nation ranked No. 147 out of 180 countries in Transparency International's 2008 Corruption Perception Index. According to a 2008 U.S. State Dept. report, corruption amounts to an estimated $300 billion annual tax on investment and is one of the greatest barriers to foreign investment. Roughly 50% of Russians believe corruption is a permanent fact of life, stemming from official greed and immorality, according to a recent nationwide survey. According to TRACE, a U.S.-based anti-corruption nongovernmental organization, 41% of reported demands for bribes are from government officials and employees, and 50% are demands from the police or the military.

Despite these dismal statistics, Russia has launched some significant initiatives to mend its reputation. For example, soon after his election, Russian President Dmitry Medvedev made it clear that tackling corruption is foremost on his agenda. Last year he surprised critics by delivering on his promise and signed the new anti-corruption legislation package. The legislation was a good first step. According to the Investigative Committee of the Russian Prosecutor General, since the start of this year, 106 investigations have been initiated, and 12 corruption cases were tried involving bribes and damages totaling approximately $29 billion. The accused include Interior Ministry officials, customs agents, Audit Chamber members, prosecutors, and local officials. Recent convictions include the sentencing of a former Russian government investigator to nine years in prison for bribery.

What's Missing in Russia's Anti-Corruption Law

But the legislation falls short because it does not criminalize the offering of a bribe—only completed acts of bribery. This is a significant problem because many enforcement actions begin when an honest official reports that he or she has been offered a bribe. Another defect of the new law is that it does not target judicial corruption. This is a serious shortcoming, since both the police and the judiciary are perceived by many Russians to be highly corrupt. A recent Transparency International progress report for the Organization for Economic Cooperation & Development (OECD) Anti-Bribery Convention quoted a popular Russian saying: "The severity of Russian laws is balanced by the fact that its enforcement is optional." Until Russia puts in place a system for systematically enforcing its anti-corruption laws, it will matter little how well or poorly those laws are drafted.

Russia's culture of corruption may simply be too deeply entrenched for the country's leadership to tackle on its own. But help might come from two unlikely rescuers: the U.S. Foreign Corrupt Practices Act (FCPA) and the OECD Anti-Bribery Convention.

The FCPA forbids anybody within its sweeping jurisdiction to make or promise a bribe to an official to obtain business. This wide net reaches U.S. persons, non-U.S. companies with U.S.-listed securities and anyone who, however briefly, plots or carries out a bribery transaction while in the U.S. or using U.S. communications or transportation facilities.