Customs Corruption and the China Trade

Bribery, kickbacks, the falsification of the value of goods and money laundering are regular events at Russian border crossings. The Russian Federal Customs Service collects between forty and sixty percent of all government revenues – billions of dollars worth of goods pass by Russian customs posts daily, and the temptation to skim cream off the top is too much for corrupt inspectors, the majority of whom earn less than $1500 per month.

The results? Imported goods cost the average Russian consumer more than in other countries. The Russian government loses billions of dollars annually. Transportation companies pay higher prices for services. And logical trade patterns deform to cope with the corruption.

Returning to the Novaya Gazeta article, The Great Post (Великий пост), the author describes how corruption influences trade patterns, affecting even Russian importers bringing goods from China.

“A curious fact: Almost all Chinese import goes by sea and clears Customs in Vyborg [on the border between Finland and Russia]. Although it would seem more logical to bring the goods through Far East Customs. But Vyborg is a huge border opening with seven dry-land Customs posts. The largest post, Torfyanovka, lets through up to 1000 trucks a day. Torfyanovka is known as the ‘Great Post’ and there many anecdotes about that in its corporate world.
“It is by no means necessary to go by yourself to Vyborg and bring a bunch of documents in order to import your cargo into Russia without troubles. Customs brokers there offer a full menu of services, including reducing the declared value of cargo and minimizing the paper chase, as well as transportation and storage (on the Finnish side of the border there are a huge number of distribution warehouses).
“Legalizing cargo [i.e., falsely declaring it to reduce the amount of duty paid, going through back channels, et cetera] by using brokers isn’t terribly onerous, but it is not cheap. But the legal way will cost you much more. Just the unofficial tax for allowing a truck through Customs amounts to 400 dollars at present. Truck companies automatically include those 400 dollars in the cost of their services.
“Multimillion sums pass through the hands of Vyborg’s brokers. Sources close to Customs rumor that the entire money stream flows around Igor Zavrazhnij, the Deputy Chief of the Federal Customs Service, and Federal Security Service Director Alexander Bortnikov. But these are undoubtedly shameful rumors since even Putin visited Torfyanovka recently, and he liked everything, and he even decided to expand the Customs post. Would the Premier really praise a criminal enterprise?
“Meanwhile nobody brings their cargo through Far East Customs – everything there is too slow. For example, Chinese consumer goods fall under the 111th Risk Profile, and are subject to 70 percent full Customs inspection. That takes a long time; Chinese clothes are brought into Russia in huge cellophane vacuum bags, to take up less space [in a shipping container]. And yet by law the Customs inspector is supposed to open and inspect all these bags.
“It is possible to avoid inspection by paying off the Customs inspector. But after that, again with the goal of speeding up Customs clearance, you will need to pay for sanitary inspection, transportation control (which registers the weight of your container with cargo), and many others as well. Nobody in the Far East offers a full menu of services to facilitate Customs clearance. And to pay separately for them costs too much.”

Right now, it is far cheaper and faster to bring Chinese goods to the Russian market by water via Europe – even though the trip is double the mileage of shipment by the Trans-Siberian Railway, and container rates are usually sold at a premium by shipping lines, since the cargo competes for space on ships with goods destined for Europe.

There are three reasons for this. The first is that, historically, Russian Railway tariffs are not competitive with the ocean rates. It costs shippers hundreds or even thousands of dollars more per container to send cargo overland than by boat. Second, the Russian Railway has a reputation for unreliability – in part, because cargo may be stopped at the Russian border by Customs for any number of reasons, foremost if there is missing or inconsistent documentation. Containerized cargo rarely gets lost or stolen but unless it is shipped in block trains, it does not arrive with the same consistency as an ocean to truck intermodal combination.

Now a third reason has appeared; the Vyborg gateway offers the best chance to bring in cargo without inspection. Even figuring in the expense of bribes, Chinese shippers and Russian consignees found a more cost-effective solution than rail. As the Novaya Gazeta article suggests, Russia’s trade patterns are set to a significant degree both by the clumsiness of its trade regulatory agencies and the corruption of its Customs officers.