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RUSSIA: Cleaning Up Russia´s Culture of Corruption Dmitri Velichkin is just the kind of entrepreneur that experts say is key to Russia´s economic salvation. In the past five years, he transformed a run-down pavilion that once heralded the feats of Soviet workers into a computer and digital technology business that employed more than 100 people. That is, he was that kind of entrepreneur. Then he ran afoul of the police. Velichkin, 40, said that after he refused to pay a police major a $20,000 bribe in March, the major and three other officers returned with a group of men and took six truckloads worth of computers and computer parts from his storeroom. That was the last he saw of inventory worth $100,000, he said -- and probably the last of his business, at least for now. "Entrepreneurs are not forgiven for such things in Russia," said Velichkin, who managed to get the police major fired but has not been able to retrieve his goods. "Entrepreneurs are expected to pay and to beg. I´ve been in business for 10 years, and I simply got tired of paying." Suddenly, the Kremlin also seems tired of business being done under the table. As part of his campaign to reform Russia´s economy, President Vladimir Putin has declared that corrupt and overlapping bureaucracy is choking the growth of small businesses, which breathed life into other post-communist economies. "Our hope that small business would become the engine of reform and would take its proper place in the economy has not yet come to pass," Putin said earlier this month. He laid the blame squarely on the government, especially on permit-givers, inspectors and regulators "who feed off small business at every stage of its development" and who limit the growth of businesses by "constant extortions." The Kremlin is also worried about other obstacles to small businesses, including high taxes and banks that run oil companies but don´t make loans. This year Putin pushed through parliament most of a plan to create a Western-style banking system, although experts question how quickly or vigorously the new rules will be enforced. Putin´s finance minister, Alexei Kudrin, also promises new tax measures to help small business. But Putin´s biggest challenge, small-business experts say, will be to alter the culture of corruption. Alexander Ioffe, who co-chairs a small-business lobby group, said most small and medium-size businesses pay bribes in one form or another. Instead of simply handing over envelopes of cash, though, they might now be instructed to buy fire extinguishers from a certain firm, or hire a particular company for advice on sanitation control, he said. "There is essentially a state racket at work," said Ioffe, of the Russian Entrepreneurial Organization´s Union and who with other lobbyists discussed the problems of small businesses with Putin earlier this month. "The president has sent a signal that the attitude of the government is changing," he said. "But what lies ahead will be very difficult, very painstaking work because it will mean depriving officials who are financially doing pretty well." At issue, many say, is nothing less than the future of the Russian economy. In Poland and Hungary, entrepreneurs rushed to fill the void left when the communist system of state-owned factories and centrally run economies collapsed. Russia was different: Entire industries, from oil fields to nickel mines, passed almost seamlessly from the state into the hands of relatively few barons. The barons have the political muscle to cut through a smothering state bureaucracy. Russia´s small-business owners, on the other hand, are at its mercy. Putin´s economic adviser, Andrei Illarionov, recently held up a chart on national television depicting the more than 500 steps that are legally required to start a business here. Hundreds more agencies then regulate almost every aspect of business life, he said. Each step in the bureaucratic chain presents an opportunity to extract a fee, a gift or a gratuity from a businessman or woman whose existence depends on government approval. According to government statistics, Russia has fewer small businesses than it had in 1994. That is no doubt an exaggeration, because many businesses hide their existence to avoid taxes. But financial experts say it is nonetheless true that a far smaller percentage of Russia´s population is employed in small to medium-size businesses than in Western countries. Alexei Moisseev, a financial analyst for the Renaissance Capital brokerage house, said about 17 percent of Russians work in small business, compared with 54 percent of Americans. Putin calls the state of Russian small business "alarming." Yuri Perepelkin co-owns a Moscow sauna that is so busy that people must make weekend appointments several days in advance. The sauna is open 24 hours a day, advertises on cable television and takes in about $5,500 a month. On paper, though, it is simply a private sauna for other workers in the building, operated by an employee named Perepelkin. The building owner doesn´t want Perepelkin to operate officially because the owner would have to follow suit -- and that would mean paying taxes on the rent he collects, Perepelkin said. The tax inspectors apparently haven´t caught on yet, but police officers and fire inspectors make regular visits. It´s a rare day, said Perepelkin, when the police don´t reserve a few free hours at the sauna. He estimates their visits cost his business $200 to $350 a week, depending on how long they stay. The fire inspector comes less often and is more easily dispatched. When he showed up last summer, Perepelkin said, his partner whisked him into his office and gave him $200. "Everything was settled in a matter of minutes," said Perepelkin. Christian Courbois, an American who runs an express mail service in St. Petersburg, said he does not pay bribes -- at least not what he calls bribes. He does pay, he acknowledges, "fines" that go to certain people. And he pays the police department $200 a month to protect his firm from criminals. The firm is equipped with an alarm system, and the police are supposed to come in three minutes if he pushes the panic button. "If you look at it from a Western point of view, you should never have to pay the police to get protection from criminals," he said. "But they´ve created a whole system to get money out of you, and you don´t have a choice." The owner of a toy factory outside Moscow said he once kept a lawyer on staff to negotiate such deals. Then he decided he was a better bargainer himself. Sergei, who asked that his last name not be used, said he gave a sanitation inspector about $200 for a tool that measures air quality, but asked him not to show up again for at least 12 months. He gave the fire inspector $330 to host a dinner for his boss, with the same proviso. A criminal gang that offered protection extorted the most money. Sergei said he gave them $1,000 a month for eight years until he paid people in the government to get rid of them. In the end, though, Sergei said he saves money through graft. Even if he tried to insist on aboveboard dealings, he said, "I would still have to pay. You cannot escape without payment." This is what everyone tells Velichkin, the owner of the computer business. He would have been better off giving the police the $20,000 they demanded than to risk his entire business, which has annual sales of $8 million to $10 million. Moscow Mayor Yuri Luzhkov has apparently taken the side of the police. An article published this month in the mayor´s office newspaper said that Velichkin´s inventory was seized because he was selling unlicensed goods. The article accused Velichkin of slandering and threatening honest police officers. But the local prosecutor seems to have sided with Velichkin. He refused to charge the businessman with a crime and instead began a criminal inquiry into the actions of the police. In addition to the police major who was fired, three officers were demoted or disciplined. Nonetheless, Velichkin is all but out of business. His staff of more than 100 is down to seven people, all of whom work on his legal complaints. He figures his business lost about a half-million dollars. Only a fifth of the equipment the police seized is still in the government´s warehouse. The rest of it was stolen, according to both Velichkin and the police. What he has salvaged, by standing up to his extorters, is his pride, Velichkin said. "I am not afraid of being poor," he said. "I am afraid of not having respect for myself, of no longer being proud of what I am doing in life."
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