Corruption Perception Index 2003 score: 4.2, 53 place out of 133 countries Bribe Payer Index 2002 score: not surveyed

On October 2, 2002 the president passed the decree ¹ 500 “On the state program to intensify fight with corruption for the period of 2002 – 2006”

On May 26, 2003 the law “On ratification of Convention on criminal responsibility for corruption” ¹ 199-Ç was put into force.

On November 5, 2003 the Council of Ministers passed the Resolution ¹ 1471 “On adoption of the plan of activities to counteract corruption in state bodies”.

Decree of the president ¹122 as of March 1, 2004 “On signing by the Republic of Belarus the Convention of the United Nations against corruption”.

Decree of the president ¹ 75 as of February 13, 2004 “On adoption the state program of strengthening fight against corruption in 2004 – 2005”.

Legal and institutional changes

Decree of the president ¹ 125 as of March 1, 2004 “On special right (“golden share”) of the state to manage economic entities” further undermined the institution of private property in the country. Belarus is the only country in the world where the government has the right to introduce a golden share (like the institution of eminent domain in western countries) after a firm has been incorporated and privatized. The decree stipulated that the golden share could be introduced into any company where the state owns at least one share. This measure is retroactive as buyers of stocks did not know about this right at the time of incorporation and privatization. The state has the right to veto shareholders’ decisions on restructuring and liquidation of the enterprise, changing its authorized capital, use of net profits, and appointment of the manager. The state introduced golden share in about 25 enterprises. Most of them have no impact on the state of national defense (the confectionary factory in which the state owned just 2.5%). The president ignored appeals of the prime minister, Chairman of the State Control Committee and Chairman of the National Bank to suspend the golden share but the decree ¹ 125 expanded it enabling the state to make decisions in enterprises with a golden share, including in operational matters. The share can be introduced in all companies, which were initially state-owned, even if at present they are 100 per cent private. Hence, the decree increased discretionary powers of local executive bodies, sectoral ministries and concerns.

Decree of the president ¹ 17 as of July 17, 2003 “On licensing separate kinds of economic activities”. This act was to liberalize market entry for businesses and to protect economic entities from arbitrary decision of government officials. The new procedure turned out to be even more cumbersome and difficult. It empowers the bodies that issues licenses and make businesses even more vulnerable. Licensing is commonly used as a tool to stifle competition. The timing of getting new licenses was so tight that thousands of individual entrepreneurs could not physically apply for new licenses. In Minsk 29000 individual entrepreneurs were to get new licenses for retail trade. By May 1, 2004 only a few thousands got them.
The president passed another decree ¹ 2 as of May 3, 2004 to prolong the term of getting new licenses.
    In a number of cases the procedure of issuing a license got more complicated and expensive for a business. For example getting a license to import drugs and medicine a company should have at least two specialists of certain qualification in its staff. But such specialists are too few in the country. Though the term of getting licenses for medical and pharmaceutical activities was prolonged until the end of 2004 the procedure of appraisal is introduced. It got more complicated to get licenses for lawyers, attorneys and accountants. Companies that are in polygraphic and publishing business also had to renew their licenses according to the new procedure. A few companies refused to print independent newspapers as they were threatened to have their licenses revoked.

European Humanities University (EHU) also faced difficulties in getting the license for providing educational services. The authorities insisted on the EHU president Mr. Mikhailov to leave his post and blackmailed the university and its management. Its activities were temporary suspended and then renewed after the license was finally issued. At the same time, there are still many ways to revoke the license (through the procedure of certification of each course). Hence, the procedure of licensing is used both to hamper independent information dissemination, national business assistance to the civil society and to stifle competition. In Belarusian legal environment licensing turns to be the means of corrupting state institutions and businesses.

Decree of the president ¹ 508 as of November 11, 2003 “On some issues of economic insolvency (bankruptcy)”. Debts are piling up in the economy. It is the state sector that generates most of them and aggravates the situation with arrears. The decree effectively blocks the procedure and expands the area of arbitrary decision making of government and local employees. They will have the right to put pressure on banks that will have to “give loans for enterprises for their restructuring before opening the bankruptcy procedure in the court”. On the one hand, banks will seek protection from government employees not to use their funds to support loss-making enterprises. On the other hand, they will seek for insider deals to get control over the most lucrative pieces of pstate property. Representatives of Ministry of defense, Ministry of Interior and KGB will be much more heavily involved in the process of bankruptcy. Initiating the procedure of bankruptcy is impossible without the consent of the executive committee, which also appoints a crisis manager. Over 200 state companies are exempt from the procedure of bankruptcy. Hence, the law empowers government employees to perform all functions: appointment of managers, setting production targets, making decision on financing and trade, granting the right to start bankruptcy procedure. Independent expertise and audit as well as claims of creditors are undermined as means to install financial and payment discipline.

Law of the Republic of Belarus “On the Budget of the Republic of Belarus” ¹ 259-Ç as of December 29, 2003. The budget law creates a sort of a legal umbrella for state bodies at different levels to exercise their power without any constraint and control. It enables the presidential Administration, the Council of Ministers, the regional executive councils (oblispolkoms) and district executive councils (raiyispolkoms) to manipulate fiscal and administrative burden on businesses. Individual privileges for different state enterprises are ensured. Thirteen different government bodies and many commercial structures that are set up by state bodies are immune from parliamentary and public control. Ministry of Trade and Ministry of transportation were added to the list of traditional state structures that are exempt from public control like Ministry of Interior, Ministry of Defense, Ministry for Emergency situations, Ministry of Communication For example, Article 41 of the budget law enables the Council of Ministers to set individual privileges: “to give interest free tax credits and postpone paying fines in the amount of up to one per cent of the revenues of the Republican budget” “to give subsidies and financial means to invest in fixed capital”, “to pay off interests on bank loans…”. Besides, National Academy of Science and Federation of Trade Unions of Belarus were granted the right to form innovation fund in the amount of 0.25% of “production cost of the goods (works and services) of the organizations that do trading and provide household services. It refers to enterprises of all forms of property”. Neither the parliament nor the civil society can monitor commercial activities of these organization and effectiveness of innovation investments. It is the budget law that provides numerous tax breaks for enterprises. For example 12 groups of tax payers are exempt from paying the single tax for agricultural producers support and for users of roads.   - Decree of the president ¹ 186 confirmed the list of data that are state secret of the Republic of Belarus. The decree makes activities of the authorities even more hidden from the public and parliamentary control. The decree makes information «on preparation, signing, the content, execution, suspension and termination of international agreements of the Republic of Belarus” a state secret. The inclusion of the information on “strategy and tactics of external economic (trade, credit, currency and finance) activities of the Republic of Belarus” in the list of state secrets hampers independent evaluation of the economic policy. There is growing concern that Belarusian official statistics fail to reflect the real financial status of enterprises. Belarus has not subscribed to the IMF’s Special Data Dissemination Standard yet. As IMF states, “GDP figures are likely to be distorted by the underreporting of the newly emerging sectors, in particular services, and an active informal sector. A systemic upward bias in measuring industrial output has also led to significant inaccuracy in GDP estimates. In addition, problems remain in calculating holding gains from inventories. Problems continue to exist in measuring the capital stock and consumption of fixed capital. Expenditures of GDP by expenditure categories are still uncertain”[3]. Making a lot of information secret the government effectively shuns public control. The incentives of state enterprise managers, heads of district and regional executive committees, chairmen of state concerns  as well as the government are so strong that you can hardly rely on the data that come from the ground level. Hence the fertile environment is created for corruption and mismanagement of state assets and resource flows.   - Law of the Republic of Belarus ¹ 204-Ç as of June 14, 2003 “On government service in the Republic of Belarus”. The law leads to outflow of professionals from government bodies of power. It protects bureaucracy and prevents the public from controlling its activities. It establishes the hierarchy of 12 posts in the state body but this list does not contain the post of the president. At the same time, members of the National Assembly (two chambers of the parliament) are granted the status “a state employee” which makes them dependent on the executive branch of power. The president has the right to give this status to any other state structure or an organization (article 3). He also endorses all meaningful moves up the state ladder. Leaders of the parliament will decide on what category a member of the parliament should be granted. Hence the law will favor discrimination of some MPs against others. Government employees will have generous pension benefits. Article 54 states that the pension will be set at 40 per cent of wage for any 5 years in the last 15 years in government structures”.

The law violates rights of citizens who choose a job in a state structure. According to the law members of the parliament are state employees. But state employees can not be members of political parties. Formally, members of political parties who are elected MPs should leave their parties. Clause 1.9 of Article 22 states that a government employee “can not use free services of physical and legal entities to pursue private purposes”. There is no clarification of this clause. Clause 1.12 prohibits accepting awards of foreign states without consent of the president. A state employee can not have a bank account in a foreign bank either even it was opened according to law. The law also makes it much more difficult for government employees to travel abroad. Again, an MP should seek approval of the president every time he visits a conference or a seminar. The law has failed to introduce transparency norms for activities of government employees. Neither the parliament nor the civil society (the third sector) is empowered to control financial and administrative activities of appointed and elected officials.   - Resolution of the Council of Ministers ¹ 1471 passed on November 5, 2003 “On adoption of the plan of activities to counteract corruption in state bodies”. The government planned to carry out different activities to combat corruption. For example a normative act to pass shares in authorized capital of commercial organizations to trust management guaranteed by the state should be worked and passed. In fact such legal act was adopted in May 2004. The form of declaration on income and property of citizens of the Republic of Belarus that should be filled out at hiring a person by a state body should be worked out. The government plans to enhance cooperation between force structures of Belarus with their counterparts in other countries. It is also envisaged that representatives of structures that deal with organized crime and corruption should be involved to take part in sessions of local executive councils when fight with corruption is considered. The government plans to generalize the judicial practice on criminal cases opened according to Articles 424-429, 433 of the Criminal Code of the Republic of Belarus. “Unjustified humanization of criminal responsibility for corruption crimes”. The Committee to fight organized crime and corruption of the Ministry of Interior exercises control over execution of the resolution. All the activities planned in the framework of the state program to intensify the fight with corruption for the period of 2002 – 2006 are formal in nature and do not eliminate real causes of corruption, graft and squandering of public resources.

To increase the authorized capital the company “Kommunkhoz” contributed its production worth 390 mln. BYB (book value). As the audit commission stated that these goods are not liquid. Hence “Gorsnab” fudged its financial status to look more appealing to banks and creditor.

The auditing company “AuditIncom” (director A. Nemerovich) wrote the mayor of Minsk M. Pavlov a letter in which it informed him about “serious violations of existing legislation of the Republic of Belarus. These violations had an impact on credibility of accounting (financial) reports of the company ‘Gorsnab Mingorispolkoma” during the period January 2002 – March 2003”. Hence the commercial flagship of Mingorispolkom has faulty reports which is a good evidence of the authorities’ inability to fight corruption in its backyard.

Gorsnab’s choice of partners was quite unfortunate. Most of its clients are the companies close to bankruptcy. For the short period of its activities the company accumulated bad debts in the amount of about 1 bln. BYB (about 500’000 USD). In March 2003 the account payable exceeded 6 bln. BYB. Including 1.3 bln. Debt to the budget. Besides the volume of low liquidity goods in warehouses was 4.3 bln. BYB (the book value). The company also issued bills and did not register them in the proper way. It did not pay taxes on financial operation either.             From January 10 to March 1, 2003 the State Control Committee audited Gorsnab. It found out a lot of violations of legislation. It started with a credit in the form of tractors (worth 15 bln. BYB in 2001) and in the middle of 2003 it had 7 bln. BYB account payable and the worthless goods in stock worth 4.3 bln. BYB. Many agreements conducted by Gorsnab were sanctioned by Mingorispolkom. For example the company sold tractors at such high prices that Minsk Tractor Plant could have delivered 65 tractors more if they had direct agreements. The difference between the producer’s price and Gorsnab price was 804.7 mln. BYB (about $585’000). The state commercial structure that was supposed to make government procurement system efficient increased costs for Minsk enterprises. Moreover Gorsnab made life of Minsk Tractor Plan (MTP) much more difficult as it sold tractors abroad at prices that were much lower than direct prices from MTP. The State Control Committee stated that, Gorsnab “sold tractors at prices that were considerably lower than the prices fixed for residents of the Republic of Belarus”. The company “Gorsnab got 1.16 bln. BYB revenues less for selling 545 tractors than if these tractors had been sold directly by MTP.

Gorsnab made many agreements with fake companies (odnodnyevki) that were used for tax evasion: «Interopt», «Strangest», «Gailtorg”, “Wizardtorg”). As a consequence of such activities of Gorsnab MTP “has lost its own markets and faced decrease of direct export”. Besides it ignored the existing rules for government procurement. Agreements were made with companies that lost tenders. For example Gorsnab held the tender for buying trolleybuses for the city of Minsk. Only one Russian company “Trolleybusnyi park” (Engels, Saratov oblast) took part in the tender (there are two Belarusian companies that manufacture trolleybuses) but Gorsnab bought trolleys from the Russian company “Gruppa Dedal” that did not take part in the tender. The company could have bought a trolley at much lower price from one the Belarusian company “Belkomunmash”. Hence Gorsnab violated the law “On budgetary system and off-budget funds of the Republic of Belarus (adopted on June 4, 1993) and had to pay 1.76 bln. BYB to the budget. Gorsnab bought some spare parts and goods for Minsk Underground at prices that were 30 times higher than market ones.  

When the new director of Gorsnab N. Rogozhnik took over the first deputy of Mingorispolkom N. Yerokhov suggested his debt cancellation. Thus one of the senior officials of the Minsk municipality covered up dozens of violations of the law. In spite of very harsh report of the State Control Committee and address of V. Parfenovich directly to A. Lukashenko on corruption in Minsk all major figures of Mingorispolkom kept their positions. Finally Gorsnab was liquidated and Minsk city authorities set up another commercial structure similar to Gorsnab. In the end of May president Lukashenko publicly criticized the mayor of Minsk M. Pavlov after another report of A. Tozik, Chairman of State Control Committee. The latter stated that “Overall overexpenditure of budgetary means in 2003 amounted to about 16% on the construction objects that were audited. Mr. Tozik said that “a powerful clan that divides the budgetary pie was formed in Minsk”. The president who declared at numerous occasions that he would fight corruption everywhere and any time has not fire the mayor. The prosecutor’s office did not start wide scale investigation of such blatant corruption schemes. M. Pavlov was just given three months to correct mistakes.

Hence the existing system of state procurement is the biggest source of corruption and budget money squandering. Executive committees of all levels, government structures and concerns can set up commercial companies. They become key executioners of state programs. As the same people do licensing, fund management and distribution of budget funds the propensity to discriminate against private competitors is too big to resist. Without parliamentary, media and public control the system turns into a mechanism for enrichment of a few individuals at the expense of tax payers. But the ultimate reason for such situation is obviously huge deficit of political competition and violation of the principle of division of powers.  

Chernobyl: a sensitive issue to squander budget funds

Government programs to eliminate or neutralize consequences of Chernobyl nuclear power are plenty. The noble cause and lack of objective knowledge made it possible for policy makers to squeeze many resources from budget and off-budget funds. Chernobyl programs grew but the government failed to do any cost-benefit analysis. Efficiency of spending money has not been determined. Poorly administered programs became the source of corruption. Public money was squandered in huge volumes.

In autumn 2003 the State Control Committee (SCC) revealed massive violations of legislation at carrying out Chernobyl programs. Out of 73 construction sites (objects) at 69 of them the SCC “found facts of using budget funds with violation of the legislation. Based on the results of the audit the budget reclaimed 80.6 mln. BYB back. The companies paid fines in the amount of 612.5 mln. BYB”. These are very eloquent numbers. 94.5% of all organizations that were involved in construction under Chernobyl programs violated law. Heavy fines do not scare people who manage state funds. These fines are paid by companies that get financing from various budget sources. At the same time punishment of managers of the companies and government employees is quite mild. For all these violations 35 persons were fined by 1.9 mln. BYB and only two persons were fired.

In 2003 the government spent about 320 bln. BYB to finance Chernobyl programs. In 2004 the budgetary target is 431.5 bln. BYB. Spending so much money without proper control and lack of adequate disciplinary measures against government officials makes the Chernobyl theme a major corruption generator. As the SCC stated, the Committee for Problems of Consequences of Chernobyl Nuclear Power Catastrophe at the Council of Ministers “has failed to ensure effective use of budgetary funds that were spent on Chernobyl programs”. Most of real estate objects in Chernobyl area are being build since 1992 – 1994 and have not been completed yet. At the same time many more objects are added to the construction programs each year (about 20% each year). Normative construction time in many cases is exceeded by 8 times. Only in Gomel and Mogilyov regions  there were 199 and 192 unfinished construction objects. None of this site was protected from erosion and theft. Leisure house for disabled people in the small town Surmino, Gorodokski district, Vitebsk region is a typical example. The construction began in 1994. Construction works were suspended in 1997. When the building was inspected in 2003 brick walls were falling apart and the building was pilfered. “A responsible person for destruction of construction objects and ineffective use of budget funds were not found”, - stated the SCC. At the same time “numerous facts of overevaluation of construction works, bloating costs by including works that were never done were revealed”. Obviously the budget money was “channeled” for private use of the companies that were authorized to manage them. Corruption flourish when the functions of the policy maker, owner, auditor and executioner are combined as is the case with Belarus.

The scale of corruption and money mismanagement in construction is appalling. As economic advisor to the president of Belarus Sergei Tkachyov wrote that as of August 2003 about 13% of GDP ($2.3 bln.) were frozen in more than 17000 unfinished construction objects. It is the outcome of the government’s decision to crowd out private investment from construction sector. This scheme is good to generate both steady GDP growth and investment mistakes. People who are involved in construction business in Belarus state that at least 20% of cost sheet of each object is kickbacks or bribes or just stolen goods. Hence Belarus is trapped in a typical bureaucratic net woven by policymakers and the companies used to channel budget funds. Neither of them is interested in changing the political situation in the country. The existing authoritarian state ensures their reaping monopolistic rent, privatizing profits and nationalizing losses.  

Energy saving as a cover to squander public funds

Another top priority project of Belarusian government is energy saving. A. Lukashenko stated on numerous occasions that the biggest challenge for Belarus is reduction of energy dependence from Russia. The report of the State Control Committee on activities of Committee for Energy Effectiveness (CEE) helps us see how efficient the government is in meeting its objective. The conclusion of SCC is a devastating blow to the energy saving policy of the government, “Committee for Energy Effectiveness has failed to fulfill all its tasks. It did not control properly the use of funds allocated for energy saving programs by territorial bodies of the Committee, regional executive committees and enterprises. The Committee did not analyze the programs aimed at energy saving and broke the procedure of issuing licenses for making analysis of energy efficiency”. It means that both government officials and businesses used the public money at their own discretion. From 1996 to 2002 $545.61 mln. was spent on energy saving measures. “The committee has failed to fulfill its functions properly. Its violations led to misuse of considerable amount of funds from the Republican budget, the innovation fund of Ministry of energy and the Fund for Energy and Resource Saving”. It is a clear recognition of wide scale corruption that exists within the government system of public money distribution. The budget law is the ultimate source of such state of affairs. Setting up of innovation funds was legalized in this document. Each ministry or a concern can set up such a fund and use the resources at its own discretion. Innovations funds amount to about 5% of GDP. This money is spent under a very attractive cover of “modernization of the economy” but in fact threes are just funds to enrich few and discriminate against others.

The effectiveness of Committee for Energy Effectiveness’s investment is illustrated by the following facts. The scientific technical program “Energy Saving” for 1996 – 2000 included more than 100 projects. Only 56 of them were completed and only 21 of them were approved for further investment. In fact only each fifth dollar spent in this way can be estimated as spent efficiently. The remaining $435 mln. was practically wasted as a result of joint efforts of bureaucrats, pseudo-scientists and political entrepreneurs (the companies that were used to “channel” innovation and energy saving funds). Here is a good example to illustrate it. To create the original wind electric energy equipment 307’000 was spent but even the sample of this appliance has not been manufactured. At the same time the CEE continues to finance creation of wind electric energy generators.

The government keeps talking about using local fuels but the effectiveness of its work in this direction is close to nothing. In 1996 – 2000 “Belenergo” invested $10,5 mln. from its innovation fund to finance different projects aimed at increase of local fuels use. As a result :instead of increase we observe the decrease of consumption of local fuels, for example peat. From 1996 to 2002 its consumption dropped twice”, -stated SCC.

Local executive committees and CEE gave grants to various commercial structures clearly violating the legislation that forbids such practices. For example the profitable company “Grodnoenergo” received 1.6 bln. BYB grant from the CEE. The innovation fund of “Belenergo” used its money top buy “Renaut” 5 mini buses (200 mln. BYB) allegedly for the laboratory. In fact these buses were used by heads of regional departments to monitor rational use of fuel and energy resource. Only in the period of 2001 – 2002 5.5 bln. BYB was spent on the projects that were not adopted by the government. The SCC stated that “in 2002 the Committee did not fulfill a single project in the sphere of energy saving”. The funds were used to benefit managers of the fund. For example top managers of the Fund for Energy and Resource Saving of “Gomelenergo” paid themselves the bonus of 1.2 mln. BYB (about $1000). Note that an average salary in Belarus that time was about $110. The SCC audited 209 enterprises on how they implement energy saving measures. 98 of them violated the existing legislation. They were fiend by 16.5 bln. BYB. 66 persons were fiend administratively for 7.2 mln. BYB. Compare this sum to the amount of money spent on energy saving measures - $545.61 mln. It means that the administrative fines amounted just to 0.0007% of the money spent on energy saving projects. With this kind treatment squandering public money is quite a profitable almost risk free scheme. No wonder so many government employees and the companies that work closely with the government energy monopoly favor the existing policies.  

How money is spent on the district level: Nesvizh district, Minsk region

It is clear that the government failed to exercise control over the funds spent by off-budget and budget funds created by numerous structures. Government procurement schemes are another source of wide scale money squandering. The district executive committees manage less resource but the quality of their work remained critically low. District authorities are given free hand in managing financial resources. As the SCC states, the authorities of Nesvizh district “did not take law seriously and in some cases they had serious drawbacks”. It means that the authorities arbitrarily interpreted law and ignored budget guidelines.

Behavior of Nesvizh district officials is typical of other Belarusian districts. By analyzing their work we can clearly see defects of the government administration on the local level and how it begets corruption. Chairman of Nesvizh district committee (raiispolkom) F. Privalov signed the agreement with “Belarusbank” on providing guarantees for the loan to “Nesvizh dairy plant” in the amount of 350 mln. BYB. He mortgaged the building of the hospital worth 633 mln. BYB. The chairman ignored that fact that it is exclusively up to the District Council to make decisions on real estate. Violating the law “ON local self-government in the Republic of Belarus” the Department of food and agriculture of the District Committee set up its own fund. It was formed allegedly by voluntary contributions but neither the District Council of Deputies nor the District Committee made the decision to set up such structure. Both profitable and loss making enterprises were forced to make contributions to this fund which accumulated (when the district was audited by the SCC) 73.8 mln. BYB.

The same procedure was used to set up the “Fund of the director”. Its money was used by heads of the district at their own discretion. The fund accumulated dozens of millions of BYB. The sum is not that big in the scale of the country but the authorities of each district (118 of them in Belarus) can arbitrarily set up such a fund and have their own “pocket money”. Such state of affairs is possible only if local auditors whose job is to control the executive branch of power keep a blind eye on the corruption in the district. As the State Committee stated, the financial department of Nesvizh district committee “did not audit legality, effectiveness and correspondence to budget guidelines of the district authorities’ spending the funds from republican and regional budgets and target budget funds. It failed to check legality of getting loans and their proper documentation by Department of agriculture and food. Financial liabilities were not documented. Most of budget loans were given without filling out necessary documents”. This is quite a revelation. Money from the Republican and regional budgets is given to local authorities without any basic financial documents. It creates very favorable environment for corruption and nepotism. Heads of the district executive committees can distribute financial means at their own discretion.

Chairman of Nesvizh district F. Privalov agreed with Minsk oblast to pass it a building free of charge. He building was quite new but the chairman ordered to destroy it as he wanted to build a house for himself on the same place. No compensation was paid to the budget. It is a good example showing how local authorities manipulate prices to satisfy their needs. Leaders of the district set an example for directors of state enterprises and farms. A combine harvester SK-5 disappeared in broad daylight in the collective farm ‘Rassvet”. Bureaucrats of the Department of agriculture and food sold the SUV UAZ-31514 and never got the money for it. Local officials even sold tours to children camps at higher prices.

In 2004 utility bills reached new height in Belarus. Few people realize that local authorities contribute much to considerable cost increase. “Energonadzor” of Nesvizh district charged educational institutions much more for electric energy. The company “Nesvizh housing and utilities” also charged the educational institutions 14.4 mln. BYB more than proper tariff calculation. “Nesvizh raiagroservice” also charged household too much for heating. The audit inspection of the SCC confirmed that local enterprises fudged output statistics to ensure the target GDP growth, “volume of fodder was set too high, number of cattle, volume of milk and meat were overvalued”. The collective farm “Lan” reported 18.5% higher milk output than it was in reality. At the same time the collective farm management wrote off 147.7 mln. BYB that allegedly was used to produce this amount of milk. Thus district authorities as well as managers of local enterprises and farms create opportunities for channeling budget funds into private projects. The audit of the SCC resulted in 35 administrative fines. Enterprises were given fined in the amount of 47.3 mln. BYB. The system has not changed. Such extremely minimal fines (the cost of the “license” for corrupt activities) are eagerly accepted by the government officials on the district level. They are interested in keeping the system that ensures steady generation of their personal wealth at the expense of taxpayers on the one hand (budget grants, subsidies and loans) and consumers on the other hand (high prices and illegal fees).  

When the law makes people criminals 

The more powers have the authorities the less powers citizens retain. If the government is granted the right to take care of the citizen from cradle to grave it is bound to stomp on individual rights and to beget corruption. People are afraid of high prices – the bureaucrats willingly propose keeping them on the socially responsible level. They still hold the exclusive right to determine what it means. As a result thousands of entrepreneurs and businesses pay fines for failing to adjust to the government’s price policies. Of course prices keep growing ignoring intensive price regulatory work. People value justice and equality – the authorities are quick to impose their understanding of these values and interpret them through legislation. As a result progressive taxation, cumbersome customs norms, numerous benefits, subsidies and financial grants are arbitrarily distributed. People like the notion ‘sustainable development” – and the government are eager to appoint “engines of industrial growth” which they believe will provide high GDP growth at least in the coming decade. Ordinary entrepreneurs try to adjust to the existing economic discrimination and to reduce compliance costs. The contradictory legislation makes their punishment inevitable if audited by a control body. Businesses make decisions without being sure that they are perfectly legal and that they will enjoy free distribution of the fruits of their choice. The voters are afraid of poverty – here is the government with the promise to eliminate market failures `and to ensure social protection. As a result pensioners are sentenced to poverty. Youth can hardly afford higher education and numerous social programs benefit the rich more than the poor. Wide scale regulatory work perverts the healthy incentive structure of the individual and makes him violate law in order to survive. Hence activities of the government generate many more dangerous costly failures than free market. Corruption is one of the worst unintended consequences of government regulation.

The proposition that law is the ultimate source of corruption in Belarus can be proved by analyzing the legislative base of the Belarus and results of numerous audits held by State Control Committee. For example in 2002 the SCC conducted 14206 auditing inspections. “In 97.1% of these inspections different violations of legislation were revealed”. It means that once you do any kind of economic activity you should be ready to either pay fines or to establish informal relations with state controllers to minimize the negative effect of the legislation on your business. The auditing inspections of the SCC resulted in administrative punishment of 11553 persons. 571 persons were laid off. The prosecutor’s office initiated 312 criminal cases. To add to that the Department of financial investigation considered 3105 cases and initiated 1498 criminal investigations.

These are activities of just one of about 20 control bodies in Belarus that monitor business. Obviously it creates nervous atmosphere and insecurity. Crooks and criminals make the best use of it. Their threshold of crime toleration is much lower than that of an ordinary entrepreneur.

The government urges citizens to report on businesses. In 2003 25000 citizens addressed the SCC with different claims. Businesses are targeted but bureaucrats habitually go on unpunished. For example the SCC revealed in Mogilyov region that “resources of local budget and off-budget funds were spent with violation of the legislation, not in the way indicated in the budget law. The total amount of such resources is 9282.7 mln. BYB. In Minsk city executive committee and administrations of districts of Minsk 3155.9 mln. BYB was misused”. At construction of the circle road around Minsk “5.6 bln. BYB was ineffectively spent”. The guilty parties were fined 4.2 bln. BYB.

A vivid example of the government’s failure is the situation on the tock and exchange market. The government nationalized the company “Belarusian currency and stock exchange” (BCSE) expecting to increase effectiveness of these two important sectors of the economy. The nationalized BCSE turned into another corrupt structure. It traded securities that were banned for commercial circulation by presidential decree ¹ 3 as of March 20, 1998 “On privatization and commercialization”. The SCC indicated that high taxes on capital operations “contributed to hiding real value of stocks at trading them. They lower the interest of portfolio investors”. It is the recognition of the fact that the BCSE became a major institutional barrier for modernization of the economy.

The expectation of more transparency and accountability in the activities of the BCSE turned to be betrayed. As The SCC states, the top management of the BCSE “in fact commanded considerable state material and financial resources without any control. The stock paid for tennis lessons of the general director, his deputies and a few more managers. The company paid for medical services provide for them and members of their families. Tours to leisure tour were also bought for them. Sports clothes, household goods and gifts were bought at the expense of the state company BCSE. The SCC imposed 2.7 bln. BYB sanctions and returned to the budget 450 mln. BYB. The general director and his two deputies and the accountant were fired. The state begot the corrupt practices and faced severe consequences. Instead of eliminating the source of corruption and inefficiency (privatization, deregulation and imposing strict transparency practices) the government habitually changes managers.

The quality of Belarusian legislation and its propensity to generate corruption is illustrated by the following example. In 2003 the SCC audited 478 trade outlets. In 98.6% of them the committee “discovered various violations of trade rules: selling goods without documents that certify their quality and safety, selling goods without technical documentation, violation of sanitary norms and rules, tax legislation, price formation, metrological norms and rules etc.” The overwhelming majority of these violations would not have been made had the law in Belarus been market oriented. Production and trade of video and audio goods is also the source of illegal practices. “97.4% of all audited enterprises violated existing legislation. Experts estimate that due to law violations the budget does not receive up to 10 bln. BYB a year”.  

Cobweb of normative acts 

It is getting more and more difficult to abide by the law in Belarus. People hardly become anarchists. There are so many different legislative acts that it beyond anybody’s power event to read them. Tax and license legislation keeps changing. Price formation, depreciation and cost norms and indices are revised permanently. It takes a company three accountants to abide by all tax legislation[15]. Article 13 of the Constitution states that “the state shall ensure everybody equal rights fro economic and other activities except for those that are banned by the legislation. The shall guarantee equal legal protection and equal conditions for all forms of property… The state guarantees everybody equal possibilities for application of their abilities and property for entrepreneurial and other economic activities that are not prohibited by law”. The meaning of “equal economic conditions” is quite clear: tariffs and prices of state monopolies, rent terms, credit interests and punishment for violation of legislation should be equal both to state and private enterprises. Belarusian authorities universally violate this constitutional norm. Presidential decrees, resolutions of the government, normative acts of other structures of the government habitually discriminate against private entities. There is another important norm in the Belarusian constitution. Article 44 states that “the state guarantees for everybody the property right and assists in acquiring it. The owner has the right to possess, to use and to dispose his property single-handedly or jointly with other persons. Property immunity, the right of its inheriting are protected by law”. In Belarus the property right is greatly restricted. The government turned it into a static institution. The most common tools to do it are price regulation, licensing, enforcing the means and terms of payment, restriction or ban on sales of assets etc. The most blatant institutions of property rights violation is the “golden share” and the loose interpretation of nationalization. All these tools were actively used in 2003 and in the first half of 2004. As a result the share of foreign capital in fixed capital investment in Belarus does not exceed 1% of the total amount of this investment for the last 4 years.            

In 2003 the normative bases of Belarus expanded much. 87 laws, 24 decrees of the president, 541 resolutions of the president and 1698 of resolutions of the Council of Ministers were passed. If we take into account resolutions of ministries and normative acts of local bodies the overall legislative base in 2003 increased by 5500 – 6000 documents[16]. Growing number of normative acts does not bring more order and respect to law as such. In 2003 Belarusian authorities failed to pass critically important laws to launch market reforms. Tax reforms were suspended. The budget is a loose document that enables state officials to establish individual tax burden and to hide a big chunk of government expenditures. Privatization and the procedure of bankruptcy have been blocked. Utility and housing monopoly keeps increasing prices. It does not feat any competition as no reform of natural monopolies is envisaged. Domestic trade is squeezed into tight framework of semi-state trade centers. Neither administrative nor pension reform is in sight. The healthcare and education systems are strictly regulated and preserved as state monopolies. The institute of insurance has been remonopolized. It means that the state insurance company discriminates against small private entities that have severely restricted access to the insurance market. The threat of unemployment is growing. The team of experts that wrote UN Human Development report on Belarus stated that up to 30% of existing jobs can be lost if the government did not start restructuring and reforms.

The authorities keep talking about inventory reduction but they keep growing. As of January 1, 2004 their value was 1.01 trln. BYB and as of May 1, 2004 they rose to 1.7 trln. BYB. In spite of numerous normative acts agriculture keeps generating debts. In 2003 this sector received direct and indirect financial and resource assistance in the amount of $1 bln. For the same period of time agriculture generated $10.2 mln. debts and still works with negative profitability. About 60% of all agricultural enterprises are chronically loss making. Still the president passed the decree ¹ 138 as of March 19, 2004 “On some measures to financial restructuring of agricultural enterprises and attractive investment into agricultural production” to give more benefits to this sector

The government tightens price regulation but in 2003 flour prices went up by 42.1% (inflation in 2003 was 25.4%), groats – by 35.7%, sugar – by 38%, alcohol – by 41.4%, gasoline – by 43.8%. Utility and housing prices went up by 51.9%. Hence the economy that is under strict administrative regulation does not follow orders and ignores laws. Conflicting tasks of the economic centrally planned economy explains low financial and payment discipline, inactivity and apathy of managers of state enterprises. They are reluctant to risk restructuring as their decisions can be abolished by central planners. The abolition of privatization deal signed in 1994 between stockholders of the company “Belmedpreparaty” and the state in June 2004 is another vivid example of shaky grounds of Belarusian property legislation.

The most typical pieces of legislation passed in 2003 were the following. The presidential decree ¹17 «On licensing of separate kinds of economic activities: as of July 14, 2003. Instead of liberalizing the procedure of licensing the decree made economic entities get licenses anew. On average 1.5 resolutions of the presents a day were passed in 2003. The resolution ¹ 602 «On some issues of financing agricultural organizations” as of December 30, 2003 is a typical piece of legislation that granted another batch of financial aid to the loss making sector. Enterprises were given tax breaks. Debts were written off and the government did nothing to prevent debts from piling up. As of April 2004 accounts payable were 15.6 trln. BYB while as of April 1, 2003 this indicator was 11.8 trln. BYB. The accounts receivable were 11 trln. BYB (a year ago they were 8.7 trln. BYB). Here are a few examples that led to piling up debts and loose fiscal discipline. Decree of the president ¹ 522 as of November 18, 2003 “On setting customs duty on imported beet-root harvesters SF-10”, decree ¹ 431 as of October 2, 2003 “On some measure to reconstruct sugar processing organizations”. The following resolutions of the government illustrate the financial discipline. Resolution of the Council of Ministers ¹ 288 as of March 16, 2004 “On freeing the republican unitary enterprise “366 repairs plant that deal with machines and equipment of food service” from paying fines” or Resolution of the Council of Ministers ¹ 144 as of February  9, 2004 “On freeing Grodno republican unitary production enterprise “Gronitex” from transferring to the republican budget the financial resources it received from renting real estate”.

In 2003 – 2004 the Council of Ministers keeps supporting different lobby groups. Here are a few examples: the resolution ¹ 1652 as of December 18, 2003 “On some measures to order export of flax fiber”; the resolution ¹ 1594 as of December 6, 2003 “On import quotas of raw cane sugar to the Republic of Belarus”; resolution ¹ 1405 as of October 10, 2003 “On granting the stock holding company “Borisovski meat processing plant a tax credit from the republican budget”; resolution ¹ 1283 as of October 10, 2003 “On freeing the republican enterprises “Belagroservice” from paying to the republican budget the money for the government guarantee that was provided for it on a foreign loan” or the resolution ¹ 697 as of May 27, 2003 “On freeing the Production amalgamation “Minsk tractor plant from obligatory selling of hard currency revenues”.

In the first half of 2004 the government continued creating favorable conditions for some enterprises and sectors at the expense of others. For example resolution of the government ¹ 318 as of March 19, 2004 “On adoption og measures to expand export of agricultural machines and equipment and the priority order of restructuring of the exporters of such machinery for 2004 – 2005”. The resolution ¹ 295 as of March  16, 2004 “On giving budget loan to the unitary republican enterprises “Mogilyovski automobile plant named after Kirov” is an example of direct support of an enterprise which violates WTO legislation. The problems with carrying out generous assistance programs is that nobody monitors and controls how effective these finds are used. The audit inspections of the SCC prove that a big chunk of these funds are squandered. Hence such government policies increase the enterprises’ propensity to corrupt. Wide scale support of light industry continued by passing the decree of the president ¹ 151 as of March 24, 2004 “On freeing cotton fiber from VAT payment”.

Ideally law should protect life, property and human rights of the individual. In spite of growing number of legislative acts the quality of life of ordinary citizens deteriorated. The Belarusian economy is caught by a network of dense net of regulations and restrictions that stifle competition and generates corruption. If pensions and wages of the people grew as fast as the legislative base there would be 30 – 50% les people living below poverty line. Unfortunately the logic of the bureaucratic state prevails in Belarus. Tat is why each State Control Committee auditing inspection states that 85 – 90% of all companies violate law. Here is nothing in Belarusian culture and folklore that makes Belarusian the nation of corrupt individuals. Obviously it is the Belarusian law that is the root of wide scale corruption in Belarus.

The population and businesses perceive corruption as a burning and growing problem. The Independent Institute of Social Economic and Political Research (ISER) conduct opinion polls on issues connected with corruption on a regular basis. The evasive law enhanced by state monopolies in major spheres of the economy and lack of transparency create favorable environment for corruption. Here is some data from the ISER’s polls. When asked whether you or people you know had to give a bribe in order to solve a problem the interviewees responded in the following way: 17.7% of respondents bribed government officials, 30.5% - healthcare system representatives, 15.3% - to police. 34.6% of respondents agreed that now it is necessary to pay more to solve the problem through bribing. The young the people the oftener they are inclined to give bribes. People who are employed in private sector, who live in the capital and big cities who prefer to use hard currency are more likely to give bribes.

After arrests of the two representatives of A. Lukashenko’s tram Ms. Galina Zhuravkova (former head of the Directorate of the presidential administration) and Yegor Rybakov (ex-head of State Belarusian television and radio company) 42.4% thought that people that A. Lukashenko appoint betray him and 35.3% believed that he appoints dishonest people.

Many people would seek personal benefits if given a job in a state structure. 33.3% of respondents stated that they would do. Still the number of those who would not give bribes is higher – 49%. People who believe that the president is the source of corruption estimate the situation with corruption in the country much harsher. Many respondents see more control as the effective solution but thorough analysis of legislative and control activities of the authorities demonstrate that you can hardly control corruption-generating law in the poor country with weak formal and informal institutions. Economically active people who face the reality of Belarusian bureaucracy quickly understand that the Belarusian state is not much different than any typical country with the dominant position of the state, no division of powers and independent judiciary.