Catalyst for Corruption
Lack of Proper Control Over Money Earmarked for the Development of the Country's Housing and Communal Services May Have Encouraged Wasteful Spending and Widespread Embezzlement

Hands Holding Open Envelope Filled With CashIn the Kremlin's latest effort to deal with Russia's never-ending saga of corruption and official deviance, President Dmitry Medvedev on Tuesday ordered the summary dismissal of any state official implicated in a suspected scheme to siphon off funds allocated to the regional communal and housing services. Konstantin Chuichenko, the head of the Kremlin's control department, told president Medvedev in a televised meeting on Tuesday that an investigation by his department has revealed that, over the past two years, canny municipal officials in the Central Federal District have siphoned off 25 billion rubles ($872 millions) meant for the region's communal and housing services.

The president, who has made the anti-corruption campaign a cornerstone of his presidency, directed federal agencies, including the presidential audit department, to investigate questionable financial transactions in all the country's communal and housing services. He said that the heads of the municipalities involved in the "gray" schemes must be dismissed. "If an investigation uncovers the existence of any fly-by-night company or firms transferring money abroad with false documents and without sufficient cause, regional governors are obliged to consider the dismissal of the municipal head," Itar-TASS quoted president Medvedev as saying. Chuichenko said the investigations should be conducted by the Prosecutor General's Office, the Interior Ministry's investigation committee, as well as the Federal Financial Monitoring Service, the country's anti-money laundering watchdog.

But such an investigation, if launched, could spell doom for the State Housing and Utilities Reform Fund ­ a state corporation created under then-President Vladimir Putin ­ and personally for Konstantin Tsitsin, the fund's general director, the RBC daily reported on Wednesday citing an unnamed source in the presidential administration. The housing fund currently spends about 230 billion rubles ($8 billion) per year on financing the housing sector, but regional elites have long complained that part of the money allocated for home repairs is misspent or sent back to Moscow in the form of kickbacks, the paper reported.

Prosecutors have, in the past, assailed the fund over the lavish salaries paid to its executives. In 2009, the prosecutor's office said 97 employees of the fund were paid more than 235 million rubles ($8.2 million) in 2008 and that the fund planned to raise wages by 100 million rubles ($3.5 million) that same year. The fund's general director, Konstantin Tsitsin, collected 16.5 million rubles ($575,586) in 2008, "which is several times more than the annual incomes of the top officials whose declarations were made public on the official Web sites of the government and of the president of the Russian Federation," the prosecutor's office said in a statement posted on its Web site. One of Tsitsin's deputies, who held the post for less than a month, was paid 1.1 million rubles ($38,372), it said.

Russia's municipal authorities are responsible for services like repairing roads and providing heat and electricity, but they lack the power to collect taxes, relying instead on transfers from the regional and federal budgets. But despite indicators continuously showing renewed economic strength in Russia, the local government at a regional or municipality level has failed to deliver the changes to social infrastructure projects such as water schemes, social housing, communal services, district heating schemes or even healthcare. But since the launch in 2006 of its highly-trumpeted four national projects ­ which sought to develop farming, healthcare, education and affordable housing ­ the government has pumped billions of dollars into social infrastructure projects in the regions. In 2006 and 2007, a total of 432.6 billion rubles ($15 billion) was spent on the four projects, with 51 percent, or 222.5 billion rubles, going to health, 20 percent to housing, 18 percent to education and 11 percent to farming.

In October of 2007, when as first deputy prime minister, president Medvedev was in charge of the national project on housing, Putin told a conference of mayors that he had ordered the federal government to transfer part of its oil-fueled budget surplus to a special communal services fund. He reminded the mayors, who had complained that they lack the money to provide basic services to citizens, that the total amount of budgetary transfers to local governments had increased by 60 percent over the previous year. And as recently as December 2009, Putin said during his annual televised call-in question and answer session that Russia used 240 billion rubles ($8.4 billion) of the proceeds from the bankruptcy auctions of Yukos' assets to create the housing and communal services fund. "I have never said it publicly before, but now I will say that the funds earned from the Yukos assets were transferred to the budget," Putin said. "If money was once stolen from the people, it should be returned directly back to the nation." Putin's move was in line with a 2007 bill passed by the State Duma that allowed the government to pump billions of dollars from funds collected in the forced sell-off of Yukos' assets into housing and high-tech research.

However, experts say most of the federally allocated funds have not been ring-fenced to deter their allocation elsewhere should the federal government's priorities change, for instance, in an election year. "Summary dismissal or even summary execution of regional officials will not solve the problems. If you disburse such huge funds to the regions without proper monitoring, you have the recipe for corruption," Vladimir Pribylovsky, the head of the Panorama think tank, said. "The size of the funds is bait too tempting for wheeling-dealing regional officials to resist." In the past, the Kremlin has acted decisively to discourage corrupt practices at the regional level by dismissing municipal officials, but experts say such a measure would not deter others who might scheme to get their hands on public funds. "There is just too much room for mischief ­ from charging exorbitant prices for utility connections to spending millions of dollars on fictitious home repair and home improvement projects," Pribylovsky said.

Apart from fictitious home-repair projects, the municipal authorities have used their control over land distribution to real estate developers as a means to make money. Prime Minister Vladimir Putin berated regional and local officials in August for some $13.5 billion in pointless spending in the previous year, singling out the Volgograd City Hall for handing out most land plots for construction to its officials or their partners and relatives. Aleksei Skopin, the deputy head of the regional economics department at the Moscow Higher School of Economics, said in the absence of a working land regulation, municipal authorities and their officials in charge of land allocation "are having a field day making tons of money, especially in Moscow, Krasnodar and Leningrad Regions."

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