Budgetary feeder: in six years Russian citizens paid 30 bln rubles to the political parties

Over the course of six years, Russian citizens have paid more than 30 bln rubles to the country’s political parties. This was discovered by experts of the Golos Movement, who analyzed the political parties’ financing from 2012-2017.

It transpires that in 2017 the United Russia party had an income of over 5 bln rubles, of which 80% came from the federal budget. The rest of the parties put together received half of this amount.

Government support of the parties is not limited to financing from the budget, as their corporate donors also regularly receive government contracts. However, more than 90% of state contractor companies only donate money to one of the parties, the United Russia. The arrangement where the parties are financed through non-profit organizations and funds associated with them is becoming widespread, making the parties’ incomes non-transparent. The parties have practically ceased receiving private donations, whose share is negligibly small.

This is why the system of party financing has to be reformed in order to force the parties to work with the electorate at grassroots level, says one of the report’s authors, member of the Golos Movement’s Council Stanislav Andreichuk:

“Our deputies regularly increase the budget payouts to the parties, to which they themselves belong. In essence, they take money out of the citizens’ pockets and put it into their party’s pockets. We should help them avoid this conflict of interests and give the citizens an opportunity to decide whether they want to finance them.”

Analytical report

Comparative analysis of Russian parliamentary parties’ financing in 2012-2017

Introduction

Conclusions

General description of political parties’ incomes

Government financing of political parties established by law

Government support of party-affiliated NPOs and funds

Allowance for the assistants to the State Duma deputies

Government contracts for political parties’ donors

Corporate and private donations and party dues

Hidden foreign financing

Recommendations

Introduction

Money is one of the key resources of the daily political activities, and non-transparent arrangements of the politicians’ financial support further aggravate the problems of corruption and shady lobbyism. This has a negative effect on the voters’ understanding of the real political situation, and reduces their mindfulness of the choices that they make during voting.

In previous years, the Golos Movement has published a series of reports and articles dedicated to the financial component of Russia’s political market. These texts provided a detailed description of the legal and methodological foundation of the research, which is why in this report we will provide only a brief outline.

The financing of political parties is regulated by the Federal Law “On Political Parties,” which lists the restrictions on donations. In particular, party financing is forbidden for organizations where 30% of the equity capital is owned by foreigners or Russian government bodies. Exception is made for the official government financing of political parties that cleared the 3% hurdle at the State Duma deputies’ elections. As of today, there are four such parties in Russia – and each year they receive from the federal budget 152 rubles for each vote that was cast for them at the last federal elections.

This research is based solely on open source data, most of which is official. Its basis was provided by the financial reports of the political parties, published by the Central Election Commission of Russia, as well as information from the official government procurements portal, Presidential grants foundation, laws on the federal budgets of Russia for 2012-2018, and publications in the media.

We have to caveat, however, that a considerable part of all cash inflows come to the parties’ and candidates’ funds indirectly, and this money is not reflected in the official reports available to ordinary citizens.

Conclusions

The gap in financial endowment of United Russia and the rest of the parliamentary parties put together is almost double and leaves no chance for the near future establishment of a competitive political environment in Russia. In no small part this gap is achieved through government financing of the parties. By decision of the deputies of the State Duma, the taxpayers’ funds, received by the parliamentary parties from the federal budget, serve as the dominant source of income. From 2012-2017, the share of federal budget funds in the income of all four parliamentary parties amounted to 63.6% on average, but in 2017 it increased to 81.5%. Altogether, over the last six years, the parliamentary parties received direct transfers of more than 31.5 bln rubles from the federal budget. At the same time, the existing model of government financing did not make the political parties stronger and did not stimulate their activities at local level. On the contrary, we are seeing a greater bureaucratization of the party apparatus and reduced reliance on voters on the part of the party functionaries. The parties’ membership is stagnant, and there is no engagement of sympathizers in their activities.
Official government financing is not the only way that the government supports specific political parties. The parties and affiliated organizations are provided with free of charge offices, along with grants, subsidies and government contracts. More than 90% of government contractors donate to a single political party, United Russia. This unqualified correlation between political domination and the presence of financial support from the businesses that secure government contracts make it possible to assume the existence of a political component in the appointment of government contractors and close ties between the companies that donate funds to United Russia and governmental customers. A specific role in the parties’ support is played by the wages allocated for the State Duma deputies’ assistants, who had cost the Russian taxpayers approximately 1.2 bln rubles in 2017 alone.
The reduction in government financing leads to increases in private donations both in relative and absolute terms, forcing the parties to actively work with potential donors. For example, the size of private donations raised by the Just Russia and KPRF has grown by 1.5-twice as much as compared with 2015.
Having said that, the Russian political parties face no threat of their “privatization” by large businesses. The share of private donations is very small, and individual donations and party dues on the part of the voters are nearly invisible against the general backdrop of government financing. The parties have virtually ceased all work on raising private donations, including voter outreach.
The system of parties’ support via affiliated NPOs and funds is preserved and continues to expand. However, such organizations do not publicly disclose the sources of their income, significantly reducing the transparency of political activities’ financing for voters.
In recent years, there has been a noticeable improvement in terms of political parties’ financing by companies whose ultimate owners reside abroad or are a part of the government. Nonetheless, the legislative loopholes that make it possible to sidestep the ban on foreign and state financing remain in place.

General description of political parties’ incomes

In 2017, the aggregate incomes of the four parliamentary parties fell in comparison with 2016. This, however, can be explained by the “anomaly” of 2016, when the State Duma elections were held, and the parties mobilized all of their resources, engaging the maximum number of donors. Compared to 2015, the income of the United Russia party grew by 4.6%, while the rest of the parliamentary parties saw a drop in incomes: 14% for KPRF and 3.8% for LDPR. The Just Russia party, which had lost a significant part of its voters since 2011, saw its income radically reduced by 39.7%.

One of the principal problems is the giant disparity in incomes between the United Russia and the rest of the parliamentary parties. In 2017, United Russia’s budget was 1.8 times greater than the aggregate budget of the remaining three parties. This disparity has remained constant since 2012.

The increase in government financing in this situation, when even the winning party had 2 mln less votes than in 2011, was made possible by the fact that the “cost” of one vote cast for the party during elections was increased. Right after the elections, the four parliamentary parties approved amendments to the legislation, increasing the “cost” of one vote from 110 to 152 rubles (altogether, since 2015, this sum has almost tripled thanks to the efforts of the parties themselves).

As a result, the increase in government financing reduces the political parties’ motivation to raise money through their donors, and in the long run this may lead to an even greater disengagement between the party functionaries and voters.

Government financing of political parties established by law

Although government financing of political parties is common around the world, it is in no way a dogma. As of 2014, regular government financing of political parties was available in just 1/3 of all countries. In another third there was no government support of political associations whatsoever.

Two reasons are usually given for the introduction of government financing: it allows the parties to remain independent from large corporate and private donors, and such incomes are easier to control. Having said that, the goal of government financing is to permit political parties to systematically work with voters, promote their ideas and regularly take part in elections, including even the smallest ones.

Opponents of government financing point out that it leads to bureaucratization of parties and their disengagement from voters. Moreover, one of the strongest arguments against government financing is that in essence the parties are associations of citizens, similar to public organizations and various shared activity clubs, and the state cannot interfere in the activities of such associations or support some of them to the detriment of others.

It should be noted that such concerns are quite justified in Russia. It’s not just that the share of private donations is negligible and continues to fall, testifying that systemic parties have no interest in receiving financial support from their voters. Even more important is the analysis of the political parties’ spending patterns.

In the United Russia and KPRF parties approximately half of all spending is used for the upkeep of the central party apparatus and the regional branches, i.e. the party bureaucracy.

Having said that, the share of the maintenance costs for the party apparatchiks demonstrates a growing trend. In particular, in July of 2018, United Russia announced that it plans to hire 100,000 new party functionaries who will work in every district of the country.

LDPR’s expenses look to be even more oriented towards engagement with voters. The party had spent only 6.6% on the party functionaries, but 75.4% of all funds on elections and propaganda.

But even in such cases the results of this work raise questions. At the upcoming gubernatorial elections that will be held on 9 September 2018 in 22 regions, KPRF was the only party other than United Russia that was capable of passing the so-called “municipal filter” without assistance (and that was possible in just three (!) of the 22 regions). This means that for the previous six years the parliamentary parties, as a rule, organized no outreach programs in the regions (or if they did, the work was ineffective), and did not contest the local elections for victory despite the considerable sums of government financing that they received. It seems that participation at the local self-governance elections was predominantly ceremonial.

Government support of party-affiliated NPOs and funds

As early as the 1990s, the political parties (or, rather, persons affiliated with them) began to establish non-profit organizations and funds, which, among other things, accumulated the funds for their political activities. The current political parties also have such organizations affiliated with them. The United Russia, for example, in addition to the Youth Guard (Molodaya Gvardia), has a whole network of funds for support of regional cooperation and development, and a number of other affiliated organizations. The other large political parties also have external entities associated with them.

Such organizations can also receive various kinds of government support in the form of grants, subsidies, or even office space in the central part of Moscow. From 2012-2017, the Youth Guard, for example, along with its regional branches received Presidential grants for a total sum of no less than 37 mln rubles. Another 10 mln rubles were given to other organizations affiliated with the party (the size of received regional grants is unknown). Over the same years, Leadership Projects organization and KPRF Sports Club, affiliated with KPRF, received almost 46 mln rubles worth of Presidential grants.

Additionally, such organizations may receive multimillion ruble subsidies from the federal budget. In 2017, for example, the Center for Protection of Citizens Rights, affiliated with the Just Russia party, received a subsidy of 120 mln rubles from the federal budget. In 2018, this practice was expanded to the other parliamentary opposition parties. The same fund will receive another 120 mln rubles, while the Leadership Projects and the Institute of Global Civilizations, affiliated with KPRF and LDPR respectively, will receive 50 mln rubles each.

Allowance for the assistants to the State Duma deputies

The presence of their deputies in the State Duma of Russia allows the parties to partially pay the costs of maintaining their party apparatus with the help of the wages of the deputies’ assistants, which are paid from the federal budget. According to item 1 of article 37 of the law “On the status of the member of the Federation Council and the deputy of the State Duma of the Federal Assembly of the Russian Federation,” a State Duma deputy may have up to seven assistants hired through fixed-term service contracts or fixed-term employment agreements. In 2017, each deputy received an allowance of 231,000 rubles a month to pay their assistants’ wages.

In this way, in 2017, United Russia deputies were able to spend 945.5 mln rubles on their assistants, KPRF deputies were given 116.4 mln rubles, LDPR deputies – 110.9 mln rubles, and Just Russia deputies – 63.8 mln rubles. The assistants are also reimbursed for their business travel expenses (travel and lodging, along with per diem expenses).

Government contracts for political parties’ donors

The analysis of the parties’ corporate donors who are regularly given state procurement contracts also raises suspicions of indirect government financing of political parties. As previous research has already shown, such contracts often raise suspicions of corruption.

We have analyzed the government contracts won by all of the legal entities that donated over 500,000 rubles to the political parties (later, a part of this sum could be reimbursed to the donor).

It should also be kept in mind that we only examined the contracts given directly to the corporate donors and did not consider their affiliated entities, because otherwise the sums would be much greater.

Altogether we discovered 50 corporate donors that were given state procurement contracts that fit the specified criteria. Of them, 47 companies (over 90%) only donate to one party, the United Russia. Such unqualified correlation between political domination and the existence of strong financial support from the businesses given state procurement contracts suggests the presence of a political component in determining the government contractors and close ties between United Russia’s corporate donors and their governmental customers.

A prime example of this is JSC Karelstroymekhanizatsiya, which donated 11.5 mln rubles to the “ruling party.” In 2017 alone, JSC Karelstroymekhanizatsiya received 86 government contracts worth over 615 mln rubles. The majority of contracts were allocated by the entities of the Administration of the Republic of Karelia, including the republical Ministry of Education (the largest contract for a sum of more than 414 mln rubles). The company’s CEO and owner of a 71% stake is Nikolai Makarov, who served several terms as the deputy of the Legislative Assembly of the Republic of Karelia, and was also a member of United Russia’s regional political council.

In the Perm Region, JSC PZSP, whose CEO and 50% owner is Alexei Demkin, the chairman of the Perm City Duma committee for urban planning and development, donated 4.7 mln to United Russia in 2017. In 2018, the company was given 13 government contracts for a sum of 88.1 mln rubles, and in 2017 – 20 government contracts for a sum of 20.7 mln rubles.

LLC Novosibirskagropromdorstroy donated 3,815,000 rubles to the party. In 2017, the company won the tenders for 53 government contracts worth 614 mln rubles.

LLC Investment Construction Company Yamal Alliance donated 2 mln rubles to the United Russia party. In 2018, it was given a contract worth 26.5 mlb rubles, and in 2017 – two contracts for a total of 60.5 mln rubles.

The party received another 1.9 mln rubles from LLC AVK-Alliance in the Sverdlovsk Region. In 2017, the company won tenders for 290 government contracts worth 754 mln rubles. The majority of the contracts were allocated by the administration of the Sverdlovsk Region.

The analysis of government contracts received by corporate donors has allowed us to determine the principal governmental customers who provide the parties with indirect support using this arrangement. Among the federal entities, road builders are the most prominent, the most important of them Rosavtodor and its affiliated organizations. Another three federal entities – Ministry of Defense, Russian Guard, and Russian Railways – also play an important role in supporting the United Russia party via a system of government contracts.

Among the regional authorities, who serve as governmental customers of United Russia’s corporate donors, the governments of Moscow, Novosibirsk and Chelyabinsk regions, as well as Yamalo-Nenets Autonomous Region should be especially noted. Although this list includes other constituents of the Federation, the said regions are most often mentioned as governmental customers of the United Russia’s corporate donors, suggesting that in these regions such arrangements for pumping up party budgets has become a “cottage industry” — approximately every third company (35 out of 116), that has donated more than 1 mln rubles to the party, has received large government contracts.

Corporate and private donations and party dues

As was mentioned earlier, donations and party dues represent a relatively insignificant part of political parties’ incomes. In 2017, for example, the share of pledge and membership dues in the parties’ incomes amounted to 4.2% for United Russia, 7.3% for KPRF, less than 0.1% for LDPR, and 0% for Just Russia. The share of donations is also incomparable with government financing in the parties’ budgets.

In this way, the parties themselves have lost any interest in engaging with potential sponsors. This is especially true for individual donors, i.e. the citizens themselves. The share of their donations in the parties’ incomes is completely negligible.

Having said that, the analysis of previous financial reports shows that ostensibly individual donors may actually hide the owners of companies that donated to the parties’ funds, as this allows to circumvent the restrictions on the maximum size of donations. Moreover, in different years, the donors included the political operatives who worked for the said parties, as well as university students and regular citizens who had no ability to donate such large sums inconsistent with their own incomes.

The parties’ use of non-profits and various funds to replenish the party budgets remains a problem. Such organizations collect funds for their own accounts, and then transfer them to the political parties. As a result, voters are unable to ascertain who the actual owner of the funds directed to finance the political activities in their country initially was.

The largest donor among all the parties was the Initiative Fund for Promotion of Civil Society and Political System, which donated almost 43 mln rubles to the Just Russia party. Altogether, parliamentary parties received over 183 mln rubles from such organizations. The source of these funds is unknown.

The Golos Movement has regularly pushed for the disclosure of information about the sources of financing of organizations that donate money to the political parties and to the electoral funds of the candidates, to be under the same conditions as it is done by the parties and candidates themselves.

As of today, these suggestions have been supported by the experts of the OSCE Office for Democratic Institutions and Human Rights, and have been included among recommendations of the Group of States Against Corruptions (GRECO) that were sent as part of the evaluation of the actions taken by the Russian authorities in their fight against corruption.

In particular, the final report of the 2018 Presidential Election Observation Mission of OSCE ODIHR says, among other things that: “Additional consideration could be given to include requirements for disclosure of the owners and sources of funding of legal entities and not-for-profit organisations that donate funds to candidates and parties.”

The same problem is pointed out by GRECO in its Third round of evaluation: “GRECO remained concerned that, in times of elections, non-profit entities set up to support parties and campaigns were not subject to the same monitoring regime and disclosure rules as the political parties themselves.”

The greater disclosure of information issue concerns corporate donors as well. In their case, it would be necessary to specify the beneficiary donors and the existence of received government contracts, subsidies and other measures of support.

Hidden foreign financing

In its previous reports devoted to the financing of political parties, the Golos Movement has regularly pointed out that the parties are financed by persons that reside abroad. To this day, this problem hasn’t been fully resolved. In previous years we have discovered the companies that directly violated legislative restrictions on foreign financing, but in 2017 no such companies were discovered. Nonetheless, a number of donors, whose beneficiary owners reside abroad, had used the shortcomings of Russian legislation to circumvent the ban on foreign financing.

As a rule, the donations are made by Russian legal entities whose ultimate owners are registered in Cyprus or other offshore zones. And although the scale of such financing has been considerably reduced as compared with 2015 and 2016, we were able to discover the businesses that are ultimately owned by foreign firms among the sponsors of the United Russia party.

JSC Severstal Management, part of OJSC Severstal, has donated 8 mln rubles to United Russia. At the same time, as of June 30, 2017, approximately 80% of the parent company were owned by several Cypriot offshore companies.

Another of United Russia’s sponsors with a significant share of foreign ownership is based in the Republic of Mordovia. LLC Rm Rail Trading House has donated 1 mln rubles to the “ruling party.” 34% of the company shares are owned by JSC Rm Rail Holding, while 66% – by LLC Vkm-Service, which is 100% owned by JSC Rm Rail Holding. The said joint-stock company is 67.7% owned by LLC RKTM-group, and 32.3% – by JSC Razuvaevsky Plant of Chemical Machinery. One of the principal owners of RKTM-group is a Cyprus-based company Consultrend Enterprises Limited. This means that the company is fully controlled from a Cypriot offshore, even though it doesn’t violate the existing legislation regarding financing of political parties.

Recommendations

The system of government financing of political parties has to be substantially revised in order to stimulate grassroots engagement and intensification of voter outreach. In order to do this, a possible solution may be to replace direct government financing of political parties and civil society institutions with an introduction of a selective tax that would allow citizens to independently direct a share of their taxes to support a specific party, NPO, or religious organization. In particular, the government may allow citizens to independently manage 0.5% of their personal income tax (this is approximately equal to the amounts that the state currently spends to support parties and NPOs), on the condition that it works out the mechanism for compensation of the lost tax incomes to the local and regional budgets, as well as the taxpayer’s ability to transfer the money to the specific regional branch of the organization. This will create competition not just for votes, but for the voters’ money.
Organizations that donate money to the funds of political parties and candidates should be obligated to disclose the information about the sources of their financing under the same conditions applicable to the parties and candidates themselves.
It would be expedient to introduce to the Russian legislation the notion of the beneficiary (ultimate) owner, and to reconsider in connection with this the wording of the laws on the ban on foreign and government (other than established by law) financing of parties and candidates.
The government should introduce restrictions on provision of financial support to the parties and candidates by the legal entities that receive government procurement contracts and various forms of government support (grants, subsidies, etc.).
The Golos Movement agrees with the opinion of OSCE ODIHR, which believes that “although the CEC cooperates with other state authorities in its effort to control the legality of the transactions made through electoral funds, it does not have the investigative capacity to check transactions potentially made outside the electoral funds. This effectively limits the accountability and transparency of the campaign finance.” We see the possible solution to the problem in the separation of functions of election organization and financial control, which could be done either through the establishment of a new body or through the transfer of financial monitoring functions to the existing entities, such as Russia’s Audit Chamber.
There should be a single generally accessible database of sponsors of candidates and political parties of all levels. All of the financial reports of the regional party branches and single mandate candidates should be published in machine-readable form in accordance with a common standard, and this should include the obligatory publication of the corporate donors’ TINs.
It is necessary to review the incomes of private persons who have donated more than 100,000 rubles to the party funds within a single year.