by Alexander Fürstenberg and Sebastian Starystach

Cliché or system? Whoever wants to do business in the Russian Federation has to expect to be asked eventually to provide irregular payments. Corruption remains endemic in Russia and large parts of the post-Soviet region. For decades, Transparency International has shown Russia in deep red in the lowest quarter of the world ranking of the Corruption Perception Index, currently ranked 138th out of 180. Despite extensive anti-corruption efforts, there is no improvement in sight. And yet: foreign corporations are not afraid to further do business in the Russian market.

In corruption scandals, companies operating in Russia regularly refer to individual perpetrators in their own workforce who are said to have acted against the will of the concern in order to enrich themselves personally. However, there is widespread suspicion that individual perpetrators often acted merely as fall guys in order to protect the company from prosecution, and to maintain the image of successful  corporate and governmental anti-corruption efforts. It is therefore not surprising that bribery is still seen as essential, if a company is willing to survive in the Russian market.

However, not only corrupt manners are responsible for multinationals repeatedly becoming involved in scandals. We would like to show that organizational deviance [1] and a corruption-promoting environment like in Russia can mutually reinforce each other. Both are based on informal power networks that fit smoothly.

Siemens’ business in Russia

Siemens is regarded as one of the most prominent examples of a company confronted with a long list of bribery allegations in Russia. And this trend has not stopped recently, as in the case of the company’s own medical technology division. For example, the Bavarian authorities became aware of Siemens’ price cartels in Russia. According to information from SPIEGEL, the files of the public prosecutor’s office in Augsburg indicate that CT scanners and other medical technology products were “marketed” through systematic bribery of Russian officials and hospital staff. What is clear so far is that a businessman associated with Siemens bribed several civil servants between 2007 and 2011 in order to win customers for high-priced Siemens products. According to his own statements, he acted as an intermediary between the company and Russian officials. It is not yet clear whether the latter had facilitated the granting of licenses or fiddled with government contracts. Some of the money is said to have benefited the ruling party “United Russia.” While civil servants were convicted in Russia, the proceedings against the businessman in Germany – who confessed to the bribery – have been discontinued after the payment of a fine. Siemens itself publicly distanced itself from accusations of systematic bribery. According to media reports, the US Securities and Exchange Commission (SEC) is already investigating Siemens in similar cases in Brazil and China.

However, this is not the first case in which Siemens draws attention to itself with its Russian business. In 2008, there were international headlines after officials of the Moscow Transport Authority were bribed to acquire lucrative contracts between 2001 and 2007. The bribes were part of at least 4,283 payments worth approximately $1.4 billion that Siemens had payed worldwide to win contracts according to the SEC. The SEC noted this in its accompanying press release:

 “[T]he company’s tone at the top was inconsistent with an effective FCPA compliance program and created a corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company. […] Siemens used numerous slush funds, off-books accounts maintained at unconsolidated entities, and a system of business consultants and intermediaries to facilitate the corrupt payments.”

Without acknowledging any wrongdoing, Siemens paid a total of $1.6 billion in fines to the U.S. Department of Justice ($450 million), the SEC ($350 million) and the Munich State Attorney’s Office (€596 million/$854 million). Furthermore, in 2009 the Russian subsidiary “Limited Liability Company Siemens” was excluded from all World Bank tenders for four years.

In 2017, there was another scandal: In 2015, Siemens delivered four gas turbines to Russia for the use in power plants. Despite international sanctions, these were then transferred to the Crimea annexed by Russia. Siemens denied knowledge of these transfer plans and referred to contractually agreed regulations prohibiting transport out of Russia. Siemens blamed its Russian customer TechnoPromExport for the breach of the sanctions and has so far unsuccessfully sued that the contract had been reversed, leaving the order volume at the equivalent of €213 million.

Despite all the scandals, Siemens seems to feel comfortable in Russia, where according to the annual report it currently employs 2,900 people and operates four joint ventures in addition to eleven subsidiaries (as of September 30, 2018). In 2017, the Russian market generated the equivalent of €1.1 billion in sales. Media reports point out that personal contacts with Russia’s political leaders are also excellent. Meetings between high-ranking Siemens representatives and top government officials are not uncommon. Just how important personal connections between the Russian government and the company is, is underscored by press statements such as those of the President of Siemens Russia: “In Russia, more happens with presidential support than without” (Welt 2010).

The Russian Sistema

In order to understand the recurring scandals in Russia, we need to take a look at the interdependence of economics and politics, which even a multinational like Siemens has to deal with. Since the Tsars and continuing through the Soviet Union to the present Russian Federation, politics and economics cannot be easily separated. Although there are formal regulations, such as corruption laws, which are intended to limit the influence of politics on economic processes, they are undermined by informal power networks made up of political and economic elites. This form of informal governance, known as the “Sistema” (Ledeneva 2013), secures elites´ and market participants´ capacity to act. At the same time, however, it reproduces insecure property rights, corruption and bureaucratic inefficiency, which in turn make it necessary to refer back to informal control. It is therefore a self-reinforcing and self-preserving system.

In this context, however, the formal side of the Russian state is not just a façade, but is regularly instrumentalized in order to get rid of members of the power network who have fallen from grace. Rules are also bent and circumvented to strengthen the political network, in order to bind those economic actors who directly or indirectly serve the interests of the members of the network. Power centers within these networks can be identified, but “Sistema” is centrally characterized by exchange economic principles, i.e. granting mutual advantages, and not by market economic principles. In view of the resulting mutual entanglements, the influence of individuals, including Vladimir Putin, must be relativized.

However, companies are also falling into this “informality trap” (Vasileva-Dienes 2019), as the threat of formal government sanctions prompts them to continue to resort to informal networks when problems arise. Large enterprises have a special role in the “Sistema”. Profitable informal cooperation with multinationals such as Siemens is essential for maintaining a high position in the network. In Russia, for example, despite formal market liberalization, decisions about the large business continue to be made in the background.

Organizational Deviance and endemic corruption

In order to maintain a secure place in the “Sistema” as a foreign company, it is therefore necessary to be prepared to commit oneself to informal rules that conflict with formal rules in the country of origin or with international law. The granting of mutual benefits between civil servants, politicians and companies is centrally supported by sophisticated kickback payment structures. The one-off, targeted bribery of individual civil servants is not sufficient for a connection to the political system and thus for successful access to the Russian market.

Organizational deviance is now characterized by the fact that extensive informal shortcuts, such as those used in the Russian “Sistema”, are already a central component of the corporate culture. Just like the Russian “Sistema”, deviant companies are based on informal power networks, which are characterized by exchange economic principles and mutual entanglements: Organizational deviance primarily serves the company, but the accompanying success is a currency within the organization that enables employees to assert themselves in micropolitical battles within the network or to produce valuable dependencies.

Companies characterized by organizational deviance therefore prove to be particularly suitable for informal expectations directed at them. They can not only “correctly” interpret the requirements of a market based on informal power networks, but can also provide the means, such as “black funds,” to meet expectations.

In this way, companies shaped by organizational deviance and Russia’s informal political structure can become intertwined, but also become interdependent far beyond the securities of a constitutional state. The result is sobering: recurring corporate scandals and an economic system that defies all international efforts to combat corruption.

 

[1] see also our blog article Cling together, swing together? VW and Audi: Why companies cheat

References:

Deutsch-Russische Auslandshandelskammer (2019): Siemens.

Handelsblatt (2009): Weltbank bestraft russische Siemens-Tochter.

Handelsblatt (2019): Milliardenauftrag für Siemens-Zugsparte – und neue Korruptionsvorwürfe.

Handelsblatt (2019): Siemens erhält 290-Millionen-Auftrag aus Russland.

Ledeneva, Alena (2013): Russia’s Practical Norms and Informal Governance: The Origins of Endemic Corruption. In: Social Research, Vol.80, No.4: 1135-1162.

Luhmann, Niklas (1964): Funktionen und Folgen formaler Organisationen. Berlin: Dunkler & Humblot

Nürnberger Nachrichten (2019): Siemens: Schmiergeldzahlungen an russische Regierungspartei?

Siemens (2018): Geschäftsbericht 2018.

Spiegel Online (2019a): Siemens soll auch in Russland ein Preiskartell betrieben haben.

Spiegel Online (2019b): Hinweise auf erneute systematische Bestechung bei Siemens.

Spiegel Online (2019c): Computertomografen, Mittelsmänner, Schmiergeld.

Standford Law School (2019a): Foreign Corrupt Practices Act Clearinghouse.

Standford Law School (2019b): Foreign Corrupt Practices Act Clearinghouse.

Transparency International (2019): Russia.

U.S. Securities and Exchange Commission (2008): Litigation Release No. 20829, December 15, 2008. Accounting and Auditing Enforcement Release No. 2911, December 15, 2008. Securities and Exchange Commission v. Siemens Aktiengesellschaft, Civil Action No. 08 CV 02167 (D.D.C.).

Vasileva, Alexandra (2016): Gefangen in Informalität. Kleine und mittlere Unternehmen im russischen. In: RUSSLAND-ANALYSEN, 310: 2-10.

Vasileva-Dienes, Alexandra (2019): Informality trap. a foundation of Russia’s statist-patrimonial capitalism, Contemporary Politics, 25:3, 334-352.

Welt (2010): Wie Siemens Russland im Alleingang modernisiert.

 

 

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