The Coup in the Kremlin
How Putin and the Security Services Captured the Russian State
As countries grow economically, they often invest in huge public works projects. Grand infrastructure undertakings, such as Germany’s Autobahn, Japan’s bullet trains, and the United States’ Hoover Dam, showcase a country’s mastery of technology; they become a symbol of a country’s ascendance as a world power.
Over the past ten years, the BRICS—Brazil, Russia, India, China, and South Africa—have built hundreds of such projects. The industrial parks, highways, overpasses, pipelines, dams, and sporting venues came to symbolize their rise. But as these governments emphasized speedy, showy results, they paid less attention to quality and underestimated the costs involved. Opaque procurement processes allowed corruption to thrive and standards to fall.
The results have not just tarnished the reputations of these new economic powers; they have also cost lives. And they call into question the group’s most recent creation, the New Development Bank. Originally funded with $50 billion, most of it from China, its advocates hoped that the bank—meant as an alternative to the World Bank and the regional development banks—would provide quicker access to funds for infrastructure. But it is likely, given the failure of these countries to deliver accountability in overseeing their domestic infrastructure projects, that the New Development Bank will repeat the same costly mistakes.
Goldman Sachs analyst Jim O’Neill first grouped Brazil, Russia, India, and China together in 2001, when he argued that they were the countries that would most likely produce rapid economic growth over the next decade (South Africa joined in 2010). But today another phenomenon binds the BRICS together: in every one of them, corruption scandals have hit state-funded infrastructure companies and the projects they’ve overseen.
In Brazil, a massive corruption scandal involving the semi-state petroleum company Petrobras and the country’s top construction companies has thrown the nation into political and economic chaos. The country’s four biggest infrastructure companies—Odebrecht, Camargo Corrêa, OAS, and Andrade Gutierrez—developed an elaborate plan to collude in bribing and overcharging Petrobras for procurement and construction contracts to the tune of $3 billion. They were able to get away with it because the bidding processes for the projects were closed from public scrutiny; national laws mandated that local companies provide anywhere between 37 to 55 percent of content for investments in Brazil’s off-shore, pre-salt oil deposits; and because those four companies were the only ones large enough to bid for many of the projects. The proceeds of their ill-gotten gains found their way into the pockets of at least 200 politicians across 18 parties, including $1.5 million to allegedly finance the political campaign of Michel Temer, the former vice president and now the interim president, who replaced Dilma Rousseff as she undergoes impeachment hearings.
The corruption isn’t limited to Petrobras. Bids for the construction of Brazil’s largest dam, the controversial Belo Monte dam, allegedly generated $41 million in illicit campaign contributions from three of the big four mentioned above: Andrade Gutierrez, Odebrecht, and Camargo Corrêa. And as the country prepares to host the 2016 Summer Olympics, the safety of Brazil’s infrastructure has come under scrutiny. During the 2014 FIFA World Cup, an overpass collapsed, killing two people and injuring 22, and in April this year, a new, 2.5-mile bike bridge collapsed, killing two.
Corruption scandals have plagued India’s planned $1 trillion, ten-year infrastructure investment plans.
In Russia, President Vladimir Putin’s friends have enjoyed a windfall from inflated public construction contracts, often at several times the estimated cost. The Sochi Winter Olympics in 2014 were a boon to Arkady Rotenberg, Putin’s Judo partner, who garnered over $7 billion in Olympic construction contracts. Putin awarded other friends deals worth $15 billion; many of the people who won them had little experience in construction. Former President Dmitry Medvedev’s ski instructor earned $2.5 billion for his services, although how exactly he merited such a large sum remains unclear. The most notorious cases of corruption came during the run-up to the Olympics, when the state lost at least $245 million thanks to malfeasance and unexplained cost overruns in the building of just one ski-jump. One opposition leader estimated that in all, $30 billion disappeared as a result of corruption related to hosting the games. But more prosaic corruption occurs every day. According to a recent report by the consulting firm Grant Thornton, the cost of fraud in Russia’s construction industry will reach $1.5 trillion by 2025.
In India, meanwhile, in the latest in a long series of construction projects gone awry, a shoddily built overpass in Calcutta collapsed in March, killing more than 20 people. According to a World Economic Forum report, infrastructure and construction are the two sectors in the country “more affected by corruption than other industries.” Corruption scandals have plagued India’s planned $1 trillion, ten-year infrastructure investment plans. In March, the opposition accused Union Minister Nitin Gadkari of “crony capitalism” when it was revealed that he had allocated the contract to build a tunnel between Jammu and Kashmir to the sole bidder for the project, IRB Infrastructure Developers, Inc., a company with ties to his son. The contract was later suspended. The $13 billion Golden Quadrilateral highway project to link four Indian cities has also been at the center of a corruption scandal after an engineer, Satyendra Dubey, raised suspicions over corruption. Dubey was later killed in suspicious circumstances by a rickshaw driver.
One opposition leader estimated that in all, $30 billion disappeared as a result of corruption related to the Winter Olympics in Sochi.
The building boom that accompanied—and in many ways symbolized—China’s return to the world stage was the result of a close alliance between the state and a small network of construction firms, many of them obscure and untraceable. The government occasionally chooses to highlight public malfeasance. For instance, a report by the Communist Party’s anti-corruption watchdog found that officials at the Three Gorges project, the world’s largest hydroelectric dam, were guilty of nepotism, dubious property deals, and corrupt bidding procedures. But normally, censorship of the media and strict limits on public discussion mean that the accounts are hard to come by or confirm. An NPR story on an epidemic of collapsing bridges quoted Zhu Lijia, a professor at the Chinese Academy of Governance in Beijing, saying that bid rigging is the norm and that there are no checks or balances in the procurement process. Since 2011, eight bridges have collapsed around China because of faulty construction and substandard materials, including one in the northeastern city of Harbin that killed three people in 2012. After the Harbin bridge collapse, state authorities claimed that they couldn’t find the contractors responsible for the project. And in one of the worst cases, when an earthquake struck Sichuan province in 2008, 700 children were crushed when a school collapsed in Hanwang. Another 1,300 children and teachers died in similar circumstances at Beichuan Middle School.
Similar scandals have hit South Africa. A constitutional battle erupted there over the $23 million renovation of President Jacob Zuma’s house, complete with an amphitheater, a cattle enclosure, and a movie theatre. The construction company in charge of the project had close links to the government and had recently won a series of public contracts, including a project to build 20 housing units for the police. Although the company is not accused of any wrongdoing, Zuma had actively lobbied to prevent other companies from competing in both projects. The matter became a broader political issue after the president refused to respect the public prosecutor’s decision that he should repay the state for his lavish housing upgrade, which the Constitutional Court ruled was a violation of Zuma’s constitutional responsibilities. Elsewhere in South Africa, the Kwa-Zulu High Court suspended an aqueduct project awarded by the eThekwini (Durban) municipality on the grounds that there had been “unlawful and unconscionable misconduct by officials.” And in the wake of the country’s hosting of the 2010 FIFA World Cup, South Africa’s Competition Commission investigated 65 more bid-rigging cases totaling more than $1.8 billion.
Cronyistic relations between construction companies and governments are not unique to the BRICS. In the aftermath of the wars in Afghanistan and Iraq in the early 2000s, the U.S. government squandered between $31 billion and $60 billion in taxpayer money, according to the congressionally-mandated Commission on Wartime Contracting, through waste, fraud, and abuse in projects including a police station in Iraq and highways in Afghanistan, many of them poorly built and plagued by cost overruns. Many of the contractors that benefitted from the flood of public money, such as the oil services company Halliburton, had close ties to government officials. These examples, show that developed nations are not immune from corruption. When vast sums of money chase too many ambitious and possibly unrealistic goals, with poor oversight, fraud tends to follow.
In the BRICS countries, rent-seeking by public officials and closed, monopolistic markets for contracts are not new. But over the past 20 years, the booming global economy injected billions of dollars into public construction investments without transparent and well-regulated processes. The lesson from the string of failed, grandiose infrastructure projects is simple. Hubris, profligacy, and a misguided sense of destiny—without the proper regulatory structures and a more competitive system for bidding—will backfire.
In the more democratic countries, such as Brazil, India, and South Africa, these revelations are rocking governments and sparking mass anti-corruption movements. The Chinese government has conducted a selective political witch-hunt to show that it’s taking the problem seriously, and Putin has blamed the United States for revelations about his corruption.
If the BRICS have learned from their mistakes, in the New Development Bank they will establish a well-regulated, transparent process for evaluating projects and overseeing their implementation. The World Bank and regional development institutions such as the Inter-American Development Bank and the Asian Development Bank adopted similar procedures after years of trial and error, and some tragic disasters. Yet it was these checks that led to the bureaucratic delays that the BRICS countries complained about and that resulted in the creation of the New Development Bank. It may not be possible to square a more nimble, responsive development bank with the demands of transparency and the appropriate checks and balances.
In April this year, the New Development Bank issued its first loans: $300 million to Brazil, $250 million to India, $180 million to South Africa, and $81 million to China, all for projects related to renewable energy. If those projects proceed smoothly, it will be because the bank has broken with the practices of its benefactors. If they don’t, the New Development Bank will find itself crippled by the same political turmoil and economic inefficiencies that afflict its founders.