RDRutherford

July 26, 2007

Revenue Transparency: Russia vs. Africa/Stratfor

Filed under: Africa — rdrutherford @ 10:28 pm

Revenue Transparency: Russia vs. Africa
By Bart Mongoven

Representatives of transparency advocates Global Witness and Freedom House appealed to the U.S. government this week to help them in their struggle to get former Soviet Union (FSU) countries, including Russia, to disclose the amount of money they receive from oil and natural gas operations — and to reveal how that money is spent. The concept, known as revenue transparency, is backed by a growing network of organizations and companies, including the World Bank and the International Monetary Fund, but has received little more than lip service from Washington.

In their July 23 testimony before the Helsinki Commission, the U.S. arm of the Organization on Security and Cooperation in Europe, the activists said programs such as the Extractive Industry Transparency Initiative (EITI) and the Publish What You Pay campaign are beginning to show positive results in some regions. They implied, however, that FSU countries conspicuously lack transparency.

The activists contended that the tight global oil supplies make transparency in oil-rich states more important than ever, because energy security in the short term requires knowledge — and knowledge requires transparency. They also argued that the U.S. drive toward energy security is complicated by its reliance on countries where corruption and disregard for the rule of law run rampant. Finally, both organizations concluded that campaigning by nongovernmental organizations is unlikely to be sufficient in the FSU and that improving transparency there will require the U.S. government to become actively involved — in terms of effort and funding — in supporting global transparency programs.

Also on July 23, Merrill Lynch issued a research report arguing that Africa has, in broad terms, turned a corner and deserves investor attention. The report contends that parts of Africa have seen improvements in governance just as oil and commodity prices have increased. As a result, according to Merrill Lynch, many places in Africa are witnessing economic growth and an improved investment climate.

Merrill Lynch’s research expressly compares governance in Africa to the FSU and backs the message implicit in the activists’ testimony: Transparency and governance are improving in Africa, while the FSU is lagging. For transparency campaigners this is a difficult mixed result. When Global Witness embarked on its work in Africa, its chances for meaningful progress were considered slim, but now key indicators suggest they are turning a corner. On the flip side, while they have focused their energy on Africa, they have looked up to find a far tougher situation developing in the FSU — and they appear to doubt their chances of success without significant support from Western governments.

If their testimony before the Helsinki Commission is any indication, the major players in the transparency movement are looking at the FSU as the next great battleground. This might be a bridge too far. Stratfor was not among those who considered transparency campaigning in Africa akin to tilting at windmills — far from it. In taking on transparency in the FSU, however, campaigners are taking on a different kind of corruption and revenue opacity. Transparency groups appear poised to direct as much effort at the FSU as they are at Africa, but in seriously taking on the FSU they will be running into Vladimir Putin’s strategy to project power and define Russia’s national interest. And they likely will fail.

Transparency Campaigning

With the general acceptance of globalization by human rights campaigners in the early part of the 2000s, activists began to turn their attention to ameliorating the most serious negative implications of globalization. For many human rights groups concerned about poverty, issues of governance leapt to the fore.

Among the dozens of issues that fall under the wide realm of “governance,” campaigners focused on an area in which major Western corporations were expected to increase their influence and exacerbate problems — revenue transparency and corruption. The death of activist Ken Saro-Wiwa at the hands of the corrupt regime of Nigerian Gen. Sani Abacha in 1995 was still fresh in activists’ minds when large oil discoveries were made off the West African coast. Campaigners were compelled to find ways to arrest the siphoning off of oil revenues by national leaders and to direct the money toward the public good.

The most important early effort to address this form of corruption was the Publish What You Pay campaign, which was developed by Global Witness and endorsed by a large coalition of human-rights and relief organizations. It started with the demand that oil and mining companies make public the amount of money they paid in royalties and other fees to governments in developing countries. The idea was that if the amount of revenue going into government coffers could be monitored, the amount of graft could be determined and campaigns could be developed that would dissuade dictators from siphoning off sizeable portions of their country’s income.

In the wake of Saro-Wiwa’s death, pressure built within the Commonwealth, particularly within the United Kingdom, for sanctions against Nigeria, and out of this, transparency emerged as a priority issue for then-Prime Minister Tony Blair. His government provided assistance to Global Witness and later developed an intergovernmental plan for building on the Publish What You Pay campaign. This plan, the EITI, essentially called for corporations to follow the basic idea of the Publish What You Pay campaign, and asked for governments to take actions that would advance these goals. More than 21 countries, including Nigeria, Angola, Azerbaijan, Kazakhstan and many other major oil exporters, signed on to the program and a few even have complied with many of the guidelines.

Further aiding this movement, the vast majority of private lenders and the World Bank’s lending arm, the International Finance Corp., have adopted codes of conduct that guide lending to projects in developing countries. For the private banks, the code is the Equator Principles. These codes, which address revenue transparency among other issues, have begun to affect how regimes in developing countries approach projects.

Unlike the Equator Principles, Publish What You Pay has not caught on as a driving code of conduct for resource countries, though the transparency ideas promoted by EITI have caught on to some extent. In his testimony to the Helsinki Commission, Global Witness Director Simon Taylor recognized Nigeria and Azerbaijan for their adherence to the EITI program.

The Final Investing Frontier?

Sub-Saharan Africa remains a corrupt market where graft, protection money and bribery are all part of doing business. Perhaps Taylor’s singling out of Nigeria — a notoriously corrupt and risky place to do business — most clearly indicates the small increments by which Global Witness and EITI measure progress. Global Witness and the Publish What You Pay coalition have spent millions of dollars and years of work trying to pressure leaders to improve revenue transparency.

Of course, any activists who have spent a decade on the project would be tempted to tell the world they are making progress — regardless of the evidence on the ground. However, when a major financial institution says things are improving — particularly when the brokerage’s point of view and objectives are so different from the campaigners — it is worth taking a look. According to Merrill Lynch, things are getting better in Africa. Corruption and adherence to the rule of law remain significant problems, but using their own research and data from the United Nations, World Bank and other sources, they also contend that Africa as a whole is now ahead of the FSU, and roughly on par with South Asia, in terms of rule of law and corruption, and ahead of South Asia in terms of political stability. Merrill Lynch acknowledges that Africa poses significant risks, but in addition to governance, it also argues that the continent is improving its infrastructure (thanks largely to Chinese investment) as well as banking and trade laws.

In terms of overall human rights, Merrill Lynch presents a mixed message. The improved stability that impresses the company is largely assured by the strengthened position of autocratic regimes that are bolstered by mineral wealth. Still, Merrill Lynch notes that economic growth in Africa is rising generally commensurate with oil revenue, a sign that high oil prices are improving the economy as a whole. Compare this to written testimony from Freedom House to the Helsinki Commission, which pointed out that Central Asian oil states such as Turkmenistan and Kazakhstan are growing at a paltry rate, despite high oil prices, because of the amount of revenue leaders are siphoning off.

Bearish

The difference between moves toward transparency in Africa and in the FSU is rooted in the nature of the corruption and the indigenous oil industry. Anti-corruption measures have worked in Africa because the focus has been on convincing single leaders or a leadership clique to make small changes. These leaders have learned that improving transparency and even increasing the amount of money going to the people need not necessarily result in a diminution of their lavish lifestyle. More important, they also have come to understand that they put all of their riches at risk if they ignore the campaigners, the International Monetary Fund, World Bank, Equator Principles banks and the rest of the growing network of organizations and companies that are demanding increased transparency.

The corruption in the FSU is different. First, African dictators depend on foreign oil companies to bring oil to market and foreign banks to fund projects. This dependence has opened avenues for transparency campaigners that do not exist in Russia. More important, the reason for the lack of transparency is different. African leaders simply want to steal the money. Russia’s lack of transparency is critical to its ability to control the oil industry, which it views as an offensive strategic weapon.

According to both Global Witness and Freedom House, Russia’s opaque oil and natural gas industry has caused a cascade of corruption throughout the FSU in which ownership of companies, fields and pipelines is not readily apparent — and where the revenue ends up is even less clear. Because the majority of Turkmen and Kazakh oil and natural gas pass through Russia, they are part of the intricate web of oligarchs, politicians and oil companies at the heart of Russia’s government. At the top of this chain is Putin, a leader who is not sending the country’s oil revenue to personal accounts in Swiss banks, but instead is enriching his political allies (or allowing them to enrich themselves). Meanwhile, he is holding a good portion of the proceeds in bank accounts in the country’s name.

This intricate web is designed to solidify Putin’s position (and presumably that of his successor) and also to ensure that the most powerful economic weapon Russia has — its oil and natural gas industry — remains a tool of the Russian state. With full Kremlin control of oil and natural gas, Russia has been able to flex newfound muscle, telling Europe that on important issues, including NATO expansion, it must deal with Russia on Moscow’s terms.

Controlling corruption in Russia, therefore, is not a matter of convincing a billionaire despot that his billions are secure only if he plays by new rules. Russia is using corruption to secure power that ensures the safety of the state. Unlike in Africa, getting half the pie will not work — there is no half control for Putin. It is a different ball game.

Global Witness and Freedom House implicitly acknowledged this in their testimony to the Helsinki Commission. They are calling on the federal government to become more involved in EITI and to turn transparency into a priority issue. Their testimony acknowledged that the new center of corruption in the global economy is a very different animal than Africa.

The question is whether the United States will act on this. On one hand, Washington might find that transparency issues strike at the heart of Russia’s strength. But as with Cold War human rights advocacy, Western calls for transparency in Putin’s oil and natural gas industry are likely to change nothing in Russia.

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