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Thursday, December 21, 2006

Russian Corruption: A Case Study

The Carnegie Center's Nikolai Petrov offers a case study in what Russia's fundamental corruption, as documented ad nauseam on this blog, means at street level in Russia:

The case of the Federal Mandatory Medical Insurance Fund provides the likelihood that wolves will be exposed as wearing sheep's clothing -- or at least dinner jackets or medical gowns. This looks set to take place on a grand scale, might involve whole networks of illegal activity and affects a significant number of the country's regions.

And it's safe to say that the whole thing started in the regions. This summer, budget and finance specialist Pavel Voronin, one of the "Duma-saurs" from United Russia, called on the Prosecutor General's Office to check on the activities of the insurance fund in his native region of Stavropol. The ensuing investigation dovetailed with the new chief prosecutor's plan for a systematic review of all federal ministries, services and agencies. The second contributing factor behind the scale of the scandal is the enormous debt for drug deliveries that the federal government has incurred; the federal government's subsequent appeal to a number of regional governments for additional funds to cover those debts; and investigations made by the federal authorities that revealed large-scale "violations of fiscal discipline" in insurance fund documentation for 2005. These are primarily related to the "additional medical services" program set up in 2004 in conjunction with the replacement of some social benefits by cash payments.

In short, the program lets people receive free medicine -- instead of the money to buy it -- as part of their social welfare benefits. At first, 12 million people were recipients of the free drugs under the program. In 2005, many of these recipients opted out of these packages altogether. Thirty billion rubles, or $1.14 billion, were allocated from the federal budget for the remaining 7.5 million recipients. Not only was this money spent long ago, but a debt of 21 billion rubles has also been accumulated. And the cost for this year is expected to grow, as 2.5 million more people have joined the program.

The scam under investigation was simple: Contracts to deliver drugs within the framework of the program were purportedly awarded without tender s, or with only the appearance of one, to companies close to Health and Social Development Minister Mikhail Zurabov. These firms then purportedly furnished the drugs and equipment at inflated prices, splitting the profits with officials. Hence the budget overruns and the shortage of cheaper drugs. A severe shortage of these drugs was reported last month in the Vologda, Ryazan and Sverdlovsk regions, for example.

Criminal proceedings were initiated in early September as a result of the investigation. At the end of October, law enforcement bodies in a number of regions conducted simultaneous inspections of the final link in the pharmaceutical market chain -- pharmacies. The operation included document seizures and large-scale confiscations of counterfeit products. Inspections of domestic drug manufacturers were also conducted.

Then, in November, came the turn for the insurance fund, along with the main companies involved in the suspected scam. The prosecutor's office carried out hundreds of searches and seized documents in almost 20 regions, including Voronezh, Smolensk, Tomsk and Primorye. It is worth noting that, in addition to the insurance fund's main headquarters, the organization works out of about 90 regional centers and more than 800 branch offices. A second wave of inspections followed initial arrests in the Moscow headquarters, and investigations are continuing in every regional fund division.

Regional authorities had long been dissatisfied with affairs in the additional medical services program, particularly the huge debts for drugs that had been delivered, and with the fact that major Moscow players had taken control of the pharmaceutical market. One of the few exceptions has been Imperia-Farma, a company widely reported to be linked to the son of St. Peterburg Governor Valentina Matviyenko. Imperia-Farma controls about 3 percent of the national market.

There is both a strong business and political component to all of these events. Financially, the program generated $2 billion in annual profit, which was paid out by the federal budget. As a result, the restructuring of this market is inevitable, and analysts are suggesting that the whole system might be nationalized.

The political component is even more obvious. The program plays a role in President Vladimir Putin's national health project and affects millions of pensioners, who represent the Kremlin's primary voter base and the main focus of their attention since the move to replace benefits with cash payments in 2005. The current campaign against corruption has the markings of struggle between power clans and also constitutes a serious strike by the federal authorities against regional governors and mayors.

At a recent meeting dedicated to the battle against corruption, Putin's harsh words indicated the likelihood of continuing anti-corruption operations, including further investigations into the activities of staff in the capital and regions. Similar meetings were held earlier at regional and federal district centers. Significantly, the increased political attacks against corruption come just ahead of the 2007 and 2008 election cycle. The result may not be a change in the system, but instead the exchange of corrupt officials for more honest ones.

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