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on geopolitics

Mar 8, 2018 | 22:20 GMT

17 mins read

In a Time of Anti-Corruption Campaigns, Context Matters

VP of Global Analysis, Stratfor
Reva Goujon
VP of Global Analysis, Stratfor
A Brazilian anti-corruption protest in Sao Paulo on Dec. 4, 2016.
(MIGUEL SCHINCARIOL/AFP/Getty Images)
Highlights
  • While global corruption rankings heavily influence credit and investment risk ratings, the geopolitical context around the motives of anti-graft efforts is critical to understand.
  • Technological advancements in big data will enable interested parties to track down corruption allegations, sustaining anti-corruption momentum globally.
  • Anti-corruption probes can take on many forms: Some are pure window-dressing or power plays, but there are strong examples of top-down and ground-up corruption probes that can either align neatly — or directly collide — with the imperatives of the state.
  • Western powers will use anti-corruption campaigns as a foreign policy tool, but they run the risk of inflaming sensitivities over sovereignty in the process.

While Saudi Crown Prince Mohammed bin Salman has been shaking down princes at the Ritz Carlton in Riyadh, Russian opposition leader Alexei Navalny has been riling up protesters with YouTube videos of luxury dachas, and probes into Brazilian construction giant Odebrecht have been knocking down Latin American politicians like bowling pins. Whether driven by appearances, power consolidation or state survival, anti-corruption campaigns are pervading the global discourse.

I discussed in a previous column how a confluence of factors can broadly explain the rising interest in anti-graft issues in recent years. A rising tide lifted all boats in an age of globalization where developing countries were able to ride China's economic wave, insert themselves into global supply chains and raise their gross domestic products. With capital coursing throughout the globe and investors eyeing emerging markets, political leaders and state-backed firms in institutionally weak states were able to enrich themselves off massive infrastructure and development projects by padding budgets and wrapping contracts in red tape to create more opportunities for payoffs. Those payoffs translated into powerful political patronage in boom times. But when the big bust came in 2008, political scrutiny rose with economic pain, and a newly arisen, socially conscious middle class with the ability to inform and organize over social media began demanding more from their political leaders.

In some countries, that trend manifested itself in legitimate corruption probes that have taken down heads of state and corporate kingpins. At times, those probes have been encouraged by outside powers trying to shape the political evolution of another nation. In other cases, the political leadership has seized the anti-corruption mantle to drive reform and simultaneously consolidate power from the top down. And then there are the countless anti-corruption bills and investigative bodies that pop up around the world and get celebrated in state-run media as examples of "real progress in fighting corruption," but they are little more than instruments used by the corrupt to weed out their enemies, or are empty attempts to placate investors and curry favor with the West.

Examining the factors driving anti-corruption campaigns can help separate the more credible graft-fighting efforts from the window dressing and the pure power grabs.

Though there are a number of respectable corruption databases out there, including Transparency International's Corruption Perceptions Index and the World Bank's Control of Corruption indicators, these data sets tend to be more useful for evaluating a country's ranking relative to its regional or economic peers. Their value is more limited in capturing the efficacy of corruption probes within shorter time-frames. A country that is in the throes of a serious anti-corruption campaign, for example, could see its corruption ranking worsen because the perception of corruption can increase as citizens become more aware of abuses exposed in anti-graft investigations. Nonetheless, these country rankings can profoundly affect credit ratings and risk assessments for foreign investment. A deeper examination of the source and the drivers behind anti-corruption campaigns must be laid against the imperatives of the state in question to separate the more credible graft-fighting campaigns from the window dressing and the pure power grabs.

Graft Removal From the Ground Up: The Brazilian Example

What began in 2014 as a Brazilian federal police task force to investigate a routine money-laundering case at a gas station, Brazil's Lava Jato (Car Wash) investigation has become one of the biggest and perhaps most impactful corruption scandals ever recorded. The probe's center of gravity is the construction giant Odebrecht, which had a penchant for greasing the palms of politicians and corporate magnates across Latin America and parts of Africa to secure lucrative contracts to build everything from Olympic stadiums to airports and dams. Governments from across the political spectrum in Brazil would then use Odebrecht as a tool to influence the politics of its neighborhood.

In a span of four years, a remarkably autonomous task force has exposed billions of dollars in bribes and taken down or is threatening to take down nearly every viable Brazilian presidential candidate. (Former President Dilma Rousseff was impeached, former President Luiz Inacio Lula da Silva has been convicted, current President Michel Temer is fending off charges for a second time and scores of government ministers are under investigation.) The inquiry's tentacles have extended far beyond Brazil: Peru's President Pedro Pablo Kuczynski is facing an impeachment threat, and two former presidents are under investigation; Ecuador's vice president was thrown in jail; Colombia's president is fending off allegations; and investigations are being pursued in Mexico, Argentina, Chile, Guatemala and Panama, while Venezuela's president has simply driven his chief prosecutor out of the country.

The Brazilian case exemplifies a legitimate, ground-up corruption probe that was able to operate with relative autonomy and compel cooperation beyond its borders. It also shows how the damage of such a probe can collide with the political and economic imperatives of a state. The political crisis threw Brazil's national champions into heavy debt and froze investment, exacerbating the country's worst recession in more than a century. Meanwhile, emerging markets like Peru became collateral damage as the country's entanglements with Odebrecht paralyzed infrastructure projects. As described in leaked audio recordings, Brazil's political and economic elite looked to Temer to "stop the bleeding" and a new justice minister was allegedly brought in to dismantle the probe.

The question moving forward is whether Brazil can maintain its anti-corruption momentum despite a concerted campaign by the probe's political targets to close this chapter in Brazilian history. Judging by the country's socially engaged middle class, active and independent news media, and the strong public support for the probe and convictions against even the most charismatic of Brazil's politicians like da Silva, the legs that have underpinned these anti-corruption efforts still appear quite sturdy. While some regression on the anti-corruption front can be expected as Brazil economically recovers, the shock from the probe is still likely strong enough to give executives and politicians pause before conducting business under the table.

Brazil's example is also weighing heavily on the minds of other big state-run giants in the region, such as Mexico's Pemex as it tries to put on a cleaner image for foreign investors. Whether Mexico's ruling cadre will allow enough space for autonomous investigative bodies to credibly pursue corruption cases remains a giant question. Mexico is currently in the midst of an election race in which anti-corruption is a central theme. The long-standing Institutional Revolutionary Party bet on a cleaner technocratic candidate, Jose Antonio Meade, to battle the anti-establishment wave, but is nonetheless failing to shake off its reputation for corruption. Disillusionment will continue to run deep in Mexico, but a highly frustrated electorate, including a much more active youth constituency and probing media, is showing growing determination to call out politicians and expose superficial crackdowns.

A High Stakes Anti-Corruption Crusade: The Chinese Example

While Brazil's sweeping investigation worked from the ground up to take down powerful elites, China's massive anti-corruption campaign under President Xi Jinping represents a heavy top-down approach to tackling graft in the name of state survival. After decades of rapid economic growth off low-cost exports and state-led investment in construction, China was at an inflection point. It had to fundamentally restructure itself to shift to a more sustainable economic model that could depend on high value-added industries, services and domestic consumption for growth. Xi would only have a chance at forcing such a dramatic shift on a severely tight timeline if he could move China away from a politically decentralized model, reconsolidate power and drive a no-nonsense reform agenda from the top. To save the Communist Party, Xi had to first break the Party. He also had the ability to throw a colossal amount of resources behind his campaign to roll up high-value "tigers" and low-level "flies." According to the Central Commission for Discipline Inspection of the Communist Party of China, more than 1 million people have been targeted since the launch of the campaign in 2012.

And the plan is largely working. Economic restructuring efforts are slow and uneven, but China is cutting dead weight, breaking down and consolidating state-owned enterprises, streamlining financial regulations and holding local officials accountable for accurate reporting on economic activity. From banning golf courses (a "millionaire sport") to regulatory crackdowns on infant formula to hunting down corrupt billionaires overseas, Xi has been able to channel mass support from the anti-corruption campaign into a message of Party unity. At the same time, Xi has used the probe to take down once-powerful political rivals and their patronage networks, including Chongqing Party Secretary Bo Xilai and retired Politburo Standing Committee member Zhou Yongkang and their Sichuan power base, as well as allies of former President Jiang Zemin centered on the financial capital of Shanghai. As evidenced by the Party's willingness to change the constitution and abolish term limits, Xi has proved effective at muting resistance to his ambitious agenda.

While taming corruption at home, China could be feeding the beast abroad.

The Xi model still carries ample risk. China has had to grapple with a big unintended consequence of its anti-corruption drive: reform paralysis. Local officials who became overly fearful of getting ensnared in Xi's net often opted for inaction rather than action that would risk getting them on the discipline commission's radar. And Xi has drained the swamp of hundreds of thousands of corrupt officials, but that drain can just as easily get clogged again. The widespread arrest of lawyers, activists and journalists, while muting dissent against the Party, removes a critical signal from the masses to the Party elite on their core concerns, which could undermine the credibility of the anti-corruption drive over time.

While taming corruption at home, China could also be feeding the beast abroad. Under the mantle of the Belt and Road Initiative, the China Development Bank and Silk Road Fund are issuing about $1 trillion worth of loans to some 60 developing countries, such as Pakistan, Laos and Kenya, for hundreds of infrastructure projects. The weak rule of law in these countries plus minimal oversight by Beijing on graft-prone, resource-intensive infrastructure projects will likely be a recipe for deepened corruption and political entrenchment in much of the developing world.

Xi's Pupils in the Gulf

Xi's sweep of tigers and flies shows the dual imperative of a top-down anti-corruption drive: power consolidation and economic reform. This is a model that has resonated with Saudi Arabia's Crown Prince Mohammed bin Salman. Like Xi, the young crown prince knows that he will be presiding over the kingdom at a major inflection point. A rise in U.S. shale supply and associated plunge in oil prices in 2014 was the wake-up call to Riyadh that the time for complacency is over. If Saudi Arabia is to remain relevant, it will have to diversify away from hydrocarbons, create a dynamic private sector and overhaul its labor pool — and it has to do so fast.

Salman needed to first create space to take on risky reforms by clearing away potential dissenters and rivals among Saudi Arabia's far more unwieldy third generation of princes. With his dad shielding him from the throne, the crown prince worked at a dizzying pace to sideline his relatives and amass powerful portfolios to author the kingdom's political, economic and defense strategies. To demonstrate the seriousness of his reforms and get some seed money for investments on the side, Salman launched a Saudi-style anti-corruption campaign. Hundreds of fellow royals and business tycoons, including the Warren Buffet of Saudi Arabia, Prince Alwaleed bin Talal, were placed under luxury arrest at the Ritz-Carlton until they could work out a settlement with the crown prince. The Saudi government claims it netted more than $100 billion in assets from the crackdown, but it came at the cost of spooking the foreign investors that Saudi Arabia is relying on to invest in its future. The Saudi government was quick to put out Twitter updates to reassure investors that the corruption probe is wrapped up and all is well in the kingdom.

Still, we can expect more, perhaps less splashy, anti-corruption probing by Salman in the future. Investors will be looking to see whether Saudi Arabia will actually develop a transparent and legal framework on corruption violations and whether corruption charges go beyond the aim of political consolidation. After all, Salman is trying to rebuild a new patronage network under his family line, and nepotism will necessarily be part of that process. Whether Saudi Arabia can successfully emulate the Xi model will depend on its ability to target institutionalized corruption at the local and mid-tier levels to drive systemic economic reform.

Western observers may look at Salman's anti-corruption campaign in disbelief: How can the anti-corruption drive of a prince buying up a $300 million chateau, a $500 million yacht and a $450 million Leonardo da Vinci painting be taken seriously by Saudi citizens? Surely revolt is around the corner. But there is a cultural bias that Western observers must bear in mind when analyzing Saudi moves. In Saudi Arabia and much of the Gulf region, citizens tend to view their leader as a benevolent dictator, whose wealth is fitting for his royal stature. And judging by the social media response to Salman's reforms thus far, the young crown prince is carrying popular support for now.

Considering Iran and India

Authoritarianism in China and Saudi Arabia may lend itself well to top-down anti-corruption and power consolidation drives in stressful economic times. But will such a top-down approach work in a more diffuse political model? Iran, for example, is a unique hybrid of democracy and theocracy. As evidenced by a recent spate of protests, economic discontent and social frustration is running high in Iran, and criticism is growing toward what is perceived as a corrupt clerical order. With more than 70 percent of the population born after the Islamic republic was created nearly four decades ago, Iran's revolution will need some updating if it is to survive. This notion has been driving a debate among Iran's leaders from across the spectrum on ways to reform the country's political architecture. This debate is still in its early stages, but it will bear close watching to test whether Tehran will have the political space and coherence to legitimately target corruption and upgrade its revolution, as Xi has done in China, or whether another power struggle plays out among the elite under the guise of anti-corruption.

Does Iran have the political space and coherence to legitimately target corruption and upgrade its revolution?

India, too, faces an overwhelming economic imperative to reform, but it has a far more chaotic democratic system to contend with in attempting a serious anti-corruption drive. The stakes are high for New Delhi: Nearly 1 million Indians are joining the workforce every month, yet the Indian economy, heavily weighted toward services while more labor-intensive manufacturing has lagged far behind, is wholly unprepared to absorb those workers in the coming decades. Any serious attempt at economic restructuring will need to address the corruptive rot that has long hampered India's economic potential. While Indian Prime Minister Narendra Modi proclaimed himself India's chowkidar, or watchman, on corruption, corruption scandals continue to dog his administration and undermine his credibility. Even if New Delhi developed the political will to credibly tackle corruption, a top-down approach a la Xi or Salman simply would not work in India's decentralized political system. India, however, has the benefit of an independent judiciary and hyperactive media to hold its officials accountable if it were to follow the Brazilian model to try to expose and target corruption from the ground up.

Politics and Appearances

Anti-corruption window dressing can be much easier to spot around the world. These are cases where the existence of anti-graft legislation can mean little when the investigative and prosecuting bodies cannot operate independently, lack enforcement and are subject to heavy politicization and even bribery themselves. In the Philippines, President Rodrigo Duterte has vowed to hunt down tax evaders and made a big show recently when he ordered customs officials to reduce $1.2 million worth of luxury vehicles into scrap metal. But even as some of Duterte's own allies have been taken down, targeting in the corruption probe has been selective and anti-graft prosecutors are highly vulnerable to dismissal when they cross certain political lines. Likewise, Nigerian President Muhammadu Buhari has made fighting corruption a central mandate of his presidency and constantly declares that his country is winning the fight against graft. But for all of Nigeria's anti-corruption bills and commissions, the country's opaque procurement process provides ample opportunities for bribery and even anti-graft judges in Nigeria have been implicated on corruption charges for accepting payoffs in exchange for leniency.

Superficial anti-corruption commissions can also serve as useful tools for waging power struggles. Russia is a case in point. An escalating feud between Russia's Federal Security Service, the Foreign Intelligence Service and the relatively new National Guard is centered on a struggle for control over the country's Investigative Committee — an ostensibly neutral body that theoretically can be used by a prevailing Kremlin faction to oust rivals with legal ease. Meanwhile, on the streets, opposition leader Alexei Navalny is on a mission to expose Kremlin corruption at all costs and has had success in galvanizing protesters across the country, many of whom were born after the fall of the Soviet Union. But even as that generational challenge is rising against the Kremlin, President Vladimir Putin is more likely to use the anti-corruption complaints as a tool to restructure the security services with an eye toward weakening the Federal Security Service's political clout.

Anti-Corruption as a Foreign Policy Tool

Western powers seeking to contain countries like Russia can try to seize on public outrage over graft by targeting high net-worth officials to create complications for their political adversaries at the top of the chain. This logic is what in part informs the U.S. sanctions strategy against powerful Russian oligarchs tied to Putin's base of support.

In some cases, Western powers have tried to play a more direct role in shaping the politics of target countries in the name of fighting corruption. The intent behind such strategies is to prop up friendlier — and more stable — governments in the long run, rather than getting caught flat-footed when an Arab Spring-like episode erupts and a long-standing ally is abruptly removed from the scene.

Yet the more interventionist Western powers get, the more they risk inflaming sensitivities over sovereignty. In its own backyard, the United States has heavily backed Guatemala's International Commission Against Impunity (CICIG), spending $44.5 million on the commission since it was established in 2007. CICIG took down former Guatemalan President Otto Perez Molina and has raised impeachment threats against current President Jimmy Morales (Morales is trying, so far without success, to neutralize the probe and oust the head of CICIG). While trying to keep commission alive, the United States would like to apply the Guatemalan model to other parts of Latin America where corruption, drugs and politics form a volatile mix. Not surprisingly, Guatemala's neighbors, including Mexico, have resisted such probes after watching the CICIG take down presidents.

The European Union employs a similar strategy on its periphery and faces the same challenges over sovereignty. Western European powers backed Ukrainian protesters, incensed by rampant corruption, to oust Russia's ally, former Prime Minister Viktor Yanukovich, in the 2014 Maidan protests. Four years later, the EU-backed president, Petro Poroshenko, is resisting International Monetary Fund and EU demands to appoint independent members to a new anti-corruption court, arguing that they are infringing on Ukrainian sovereignty. In Romania, where hundreds of thousands of protesters have waged anti-corruption demonstrations, Brussels has tried to prevent a government overhaul of the judicial system that threatens to oust the country's anti-corruption chief and stifle anti-graft efforts overall. But the more the European Commission tries to lean in on the issue, the more it invites backlash from Romanian politicians arguing that Brussels is overstepping its bounds. This is an argument that other countries in Eastern Europe, such as Hungary and Poland, will be quick to use to try to keep Brussels out of their domestic politics.

Sustaining Momentum

As technologies advance and accessibility to big data grows, interested parties will be able to track corruption allegations more comprehensively to expose the rot within states and companies, sustaining anti-corruption momentum globally. Whether a government pre-emptively launches an anti-corruption crusade or becomes the victim of one, the geopolitical context surrounding the motives of anti-graft campaigns may reveal more in the end about the ultimate impact of these probes than what can be gleaned from global rankings.

Reva Goujon is a leading global strategic analyst who keeps her finger on the pulse of emerging trends across the world. Ms. Goujon leads Stratfor's team of analysts and plays an integral role in applying a forward-looking, strategic lens to Stratfor's coverage of global events. She is also a prominent speaker, regularly addressing executives and investors at events across the world in a variety of industries, including energy, finance, commercial real estate and agriculture.

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