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By Rushworth M. Kidder

What does corruption cost?
Ask Russia

Institute for Global Ethics*
Ethics Newsline
October 05, 1998 Volume 1, Number 29

Looking back, it's now clear that the world crossed an ethical watershed on August 17.

Two extraordinary things happened that day. In the United States, President Clinton went public with admissions of guilt in the Monica Lewinsky scandal. In Russia, President Boris Yeltsin withdrew support for the ruble. In the U.S. media, Yeltsin's problems were all but eclipsed by Clinton's perils. For the global business community, however, the events in Russia were far more significant. The free fall of the ruble, following a $4.8 billion infusion from the International Monetary Fund (IMF) and linked to Yeltsin's firing of his reformist prime minister and cabinet, precipitated the current downturn in global markets. Yes, Japan's markets were already on the edge, and Indonesia's economy had already come apart. But it was Russia that sparked the famous 512-point one-day drop in the Dow.

Looking around Russia these days--as I did during a two-week visit in mid-September--the effects of economic collapse are evident. Victim of a haggard harvest and a slump in industrial production, Russia's economic activity is now based 70 percent on barter. Mail is piling up in airports because the post office has failed to pay its air carriers. More than 90 percent of the nation's railway cars are said to be unaccounted for. In some regional cities, electricity and water come and go. Meanwhile, as winter approaches, imports of food are shrinking for lack of foreign currency.

What has brought this spirited nation so abruptly to its knees?

I put that question to Grigory Yavlinsky during a meeting in Moscow. As head of Yabloko, the liberal opposition party in the Duma, it was he who suggested the name of Yevgeny Primakov as candidate for prime minister -- a compromise accepted by both Yeltsin and the Duma. A key political figure, Yavlinsky is also a remarkably clear-headed analyst.

He traces the current crisis to 1992, when Russia accepted Western economic advice, and 1993, when a rewriting of the constitution gave Yeltsin "extremely authoritarian" power. While Yavlinsky is not ducking responsibility--he insists that the economic failure is "all our own"--he faults international lenders on two ethical grounds. First, their economic advice came with no political warnings that Russia's legal system couldn't support a Western market structure. Second, more damningly, the IMF, when it made its loans, silently ignored corruption in the Russian financial system.

That's a serious charge. Explaining it, Yavlinsky points to the oligarchy of fabulously rich Russians who were allowed to buy state-owned industries, salting away huge windfalls in the West instead of reinvesting in Russia. Western observers, he says, shrug off this kind of activity as "crony capitalism." Rejecting that expression as far too "soft," Yavlinsky points to utterly destructive patterns of monopoly building and "the incest between money and power." Corruption, he says, was "the main reason our system in August was destroyed." The IMF, in his view, should have said, " `We are not willing to deal with a corrupt government.' But instead, we heard silence." That very silence, he concludes, has led to a situation in which Russia is now "at a crossroads between open markets and a criminal state."

That view was echoed last week when Boris Fyodorov, the reformist tax chief who was dismissed September 28 from Primakov's cabinet, went public with his concerns. Asked by journalists how the Western nations could help Russia, he reportedly called on them to "demand from Russia drastic economic reforms. Giving us drugs in the form of more money does not help Russia."

If there's any silver lining here, it lies in the fact that, with the Russian example, the world now has an all-but-irrefutable case study of the devastating impact of corruption. Until now, multinational executives could too easily downplay corruption--the use of public position for private gain--as a kind of hidden tax, a cost of doing business, an annoying but tolerable nuisance. It can now be seen for what it is: a fatal ethical flaw that can destroy an entire national economy and threaten to drag the whole world into recession.

To their credit, multinational lenders are finally putting corruption high on their agendas. And the 29 member states of the Organization for Economic Cooperation and Development (OECD), along with five other nations in Eastern Europe and Latin America, are now considering a treaty--akin to the 1977 Foreign Corrupt Practices Act in the United States--that would make it a crime for multinational executives to bribe foreign officials.

But there's still a lot of resistance to factoring ethics into international finance. Fortunately, Russia's watershed example makes it easier to refute the once-fashionable view that ethics is merely optional for sound management. August has made it clear that any multinational that thinks it can survive the 21st century with the bribery and corruption of the 20th century had better think again.

*The Institute for Global Ethics (http://www.globalethics.org) is a nonpolitical, nonprofit organization promoting ethics through public discourse and practical action. The Institute, with offices in Camden,
Maine; Toronto, Canada; and London, England was founded in 1990 and is supported by members throughout the world. It publishes a weekly online newsletter, Ethics Newsline (http://www.globalethics.org/newsline) and occasional reports; consults with corporations and educational institutions in the United States and overseas; and conducts frequent ethics seminars.

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Institute for Global Ethics
Ethics Newsline
October 05, 1998 Volume 1, Number 29

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