Clearing Customs -- Fishing in Muddy Waters

Experts researching corruption in government identify two main elements necessary for it to take root and thrive; complexity and a lack of transparency. A complex process, with many moving parts spread out across a bureaucracy, is easily exploited by corrupt bureaucrats who game the system for personal gain. And the more opaque the system – the harder it is to get information about its inner workings, access its decision-makers, and figure out exactly how to get things done in it, the easier it is for dishonest players to exploit its clients. “It’s easier to catch a fish in muddy waters,” goes the Russian proverb, and the waters do not get much muddier – or shadier – than in the Russian Federation Federal Customs Service.

First, a bit of background. The Federal Customs Service in Russia differs dramatically from Customs in western countries. For example, the United States Customs Service focuses mostly on security, data collection and facilitating trade. It collects some duties but the United States government earns most of its money on trade by taxing the sale of goods once they reach market. Russia turns this equation on its head – although some taxes are collected at point of sale, the Russian government collects the lion’s share of its revenue from trade at the border, imposing 18% and higher duties on most imported goods. As a result, the Russian Federation Federal Customs Service collects over 40% of all government revenues.

Billions of dollars in goods – and duty payments – annually pass right under the noses of Customs. Many of these officers get paid only a few hundred dollars a month; even the most highly paid draw only a few thousand dollars monthly salary. The temptation to skim off some of this bounty draws crooked Customs officers irresistibly. The complexity and opacity of the processes necessary to import cargo into Russia provides plenty of opportunities.

The first place to begin is with a Russian Customs import declaration form – in Russian, a GTD, or Generalnaya Tamozhennaya Deklaratsiya – has 54 different ‘positions’ (or blanks) for an importer to complete regarding the origin, destination, end use and value of the cargo. Similar import documents for United States Customs have a total of four blanks to fill in – origin, destination, weight and value. Even China, a country not known for its transparency, requires importers to fill in only four blanks on a simplified import form.

In addition to a complex GTD, the Russian Federal Customs Service demands an entire series of other documents for customs clearance. These include Certificates of Conformity, Bills of Lading, buyer and seller contracts, importer registration documents, bank certificates and so forth – 13 documents in all. Woe to the importer whose documents are not 100% accurate. Any discrepancy between the documents can lead to a so-called ‘administrative arrest’ of the cargo. A Customs officer may arrest the cargo and hold it until the documentation of the cargo is in order, to his satisfaction. An administrative arrest can delay the delivery of cargo to its consignee by weeks or even months. Shipments are held regularly for the most trivial of documentation errors – a small weight discrepancy between documents, or an obvious clerical error.

Add to the complexity of documentation leads an opacity of process and importers are put in the middle of a bureaucatic minefield. Most Russian Customs posts lack automation; they do things the old-fashioned way, by passing piles of hard copy shipping documentation tied together by string, called papki, between departments. The papki slowly wend their way from department to department, from stack to stack, undergoing rigorous checks by officers vigilant for any error. Documents may pass the declarations department but then get hung up in the operations or hard currency departments. Initiative is frowned on among junior officers; only senior officers are allowed to make decisions about the disposition of cargo, which they write in hand on important papers.

The lack of access to Federal Customs contributes to the opacity. For example, the Baltic Customs building in St. Petersburg cannot be entered without setting a prior appointment with an officer, which may in turn take weeks to make over the phone. There is no email communication with Customs and even during a meeting, officers rarely commit to a course of action immediately. Difficult cases, even those with common sense resolutions, drag on interminably. The Russian Customs Code consists of over 10,000 pages of text, interpretation, resolutions, and instructions, and it is nearly impossible to master the entire mind-numbing document.

Hence experienced importers rarely even dare to venture into a Customs post. The cost and consequences of error are too significant. So in their place an entire industry of freight forwarders – expeditori, who specialize in the interface between the consignee and Customs – emerged over the past 20 years. In St. Petersburg, there are literally hundreds of companies whose sole task is to manage the paper flow for import shipments and ensure a good relationship with Customs. These freight forwarders cultivate ‘their own’ Customs officers, working more as junior partners for Customs rather than as freight advocates for cargo consignees. Saavy importers value the best-connected expeditori to handle their cargo and essentially pay them to maintain a cozy and profitable relationship with Customs. The expense of the bribes is hidden easily in the invoices expeditori present for payment to importers.

The cost to the shipping industry is enormous; in 2008, Transparency International estimated that each import shipment cost an additional $2050 US dollars above ocean freight and cargo handling fees to clear customs. Insiders estimate that it takes a bribe of about $1000 per container to expedite a shipment through Customs, although this can be more depending on the difficulty of the shipment. A shipment of expensive meat may cost many thousands of dollars in bribes before it can leave a port. These additional costs are reflected in higher costs to Russian consumers – imported meat and protein products, fruits and produce, and consumer goods, are significantly higher in Russia than they are in Western Europe (even high ocean freight costs cannot account alone for unit price differences for goods at point of sale).

The paper mill takes its toll on the shipping industry; the time a container takes to turn, or complete an export-import cycle, is a critical measurement for container carriers. Dry shipping containers in the First Container Terminal in St. Petersburg average 8 days on the dock before they leave the port, and refrigerated containers (with higher-value meat and fruit) average over 12 days. These compare to turn times of just hours in many western European ports. Container shipping lines build the additional expense into their cost models, and pass them along to exporters.

The only beneficiaries of this system are corrupt Customs officials. Exploiting a complex and opaque system for money gives them funding for a nice life – I know of many a Customs officer who drives a Mercedes or BMW, vacations a few times a year in Greece or Australia and wears a gold Rolex on a salary not much more than a thousand dollars a month.