Streetwise Professor

July 9, 2010

Business in Russia: Animal Planet

Filed under: Economics,Politics,Russia — The Professor @ 9:32 pm

If you believe Russian police and prosecutors, Russian businessmen are among the most criminal and corrupt in the world: well over 100,000 are in jail. But, if you believe many of the entrepreneurs, the police, prosecutors, and security forces are the true criminals.  Businesspeople are allegedly routinely charged with crimes as part of extortion or robbery schemes.  As in this story:

Legislation isn’t enough to change the “predatory” culture of police, prosecutors and judges, according to Yana Yakovleva. The co-owner of Moscow chemical distributor Sofex Co. spent seven months in jail awaiting trial in 2006-07 before she was acquitted of trafficking in dangerous substances.

“The current environment is like swimming with crocodiles in a pool of sulfuric acid,” said Yakovleva, 38. “There’s a war on business people in Russia, and it’s purely business for officials. They can charge you with any crime and incarcerate you to extort money.”

Swimming with crocodiles in a pool of sulfuric acid.  Sounds like loads of fun.

Yalovleva elaborates:

“It has become so severe in Russia that entrepreneurs live with the fear of being arrested,” she tells RFE/RL. “It has become a way of making money [for law enforcement officials], a kind of conveyor belt.”

She’s not alone:

Many in Russia share her view. “That’s the way our law enforcement system functions, with the protection of the FSB security services,” says Yelena Lukyanova, a law professor at the Moscow State University.

“A trend has swept the country, and it already has a name: criminal-legal repression,” she continues. “It is a state within the state. This system has long cut loose and turned against the population, but now it has cut loose even from the federal authorities.”

And it’s not just the small guys either.  According to billionaire Alexander Lebedev, even the oligarchs quake in fear:

For Alexander Lebedev, hardly a week goes by without a call from a crooked security-services agent or cop angling for a chunk of his $3.4 billion fortune. It’s not a lifestyle he wishes for his son, Evgeny.

“Business in our country is like wrestling with bears,” Lebedev said in an interview with Bloomberg Businessweek for its July 12 issue. “I’m not sure you’d want to pass that on to your son — would you?”

Wrestling with bears.  Swimming with crocs.  Too bad Steve Irwin is dead.  Sounds like he missed his calling to do business in Russia.

This gets the nub of it:

“There is almost no such thing as private property in Russia,” said Stanislav Belkovsky, a former Kremlin adviser who now heads the National Strategy Institute, a Moscow-based think tank. “It’s no harder for the authorities to fire an owner than it is an employee.”

By comparison with virtually every other major post-War growth success story, Russia is notable for its low rate of capital investment.  Foreign direct investment is low, and successful Russians are notorious for trying to get their money (and their children) out of the country.

Given the risks, this should not be surprising.  Even a small probability of suffering through the kind of things described in the linked articles is a severe deterrent to entry into business.  (Is it any wonder that the rate of business formation is far lower in Russia than in, say, Poland?)  Even those who do go into business inevitably limit accumulation of capital that could be stolen or expropriated.  They will also spend inordinate amounts of time and effort to conceal assets.  And even those who avoid jail no doubt end up paying obscene sums in bribes.

As is his wont, Medvedev has spoken against the piratical environment in which businesses operate in Russia–and done precious little about it.  The Duma is considering a law that would reduce use of pretrial detention for business crimes.  But Russia’s problem is not too few laws.  It is the utter mendacity of those charged with enforcing them.  Until that changes–and I’m not holding my breath–Russia will remain an economic backwater.

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  1. Current incarceration rates in Russia are higher than they were in the 30s. The acquital rate is lower. Stalin was such a monster.

    Comment by So? — July 9, 2010 @ 11:53 pm

  2. Then what does that make Putin, you Russophile cockroach scurrying about in the comments?

    (And what does that make America?) 😉

    Comment by Sublime Oblivion — July 10, 2010 @ 1:20 am

  3. Well, at least America has the negro excuse, and yet its homicide rate is 3 times less than Russia’s.

    Comment by So? — July 10, 2010 @ 1:32 am

  4. Russia has the alcoholics excuse!

    (About 75% of its homicides are linked to vodka binges).

    Comment by Sublime Oblivion — July 10, 2010 @ 1:47 am

  5. By the way that’s very racist and naughty of you So?. In the US it’s customary to keep said observations in mind but unsaid. 😉

    Comment by Sublime Oblivion — July 10, 2010 @ 1:49 am

  6. It’s bleeding obvious though.

    Comment by So? — July 10, 2010 @ 2:20 am

  7. It’s quite ironic that Lebedev is complaining about the system he has created together with his KGB buddies. Very much like a professional robber complaining about how easy it is to get robbed these days.

    Comment by Ivan — July 10, 2010 @ 2:44 am

  8. For once I agree with you Ivan.

    To extend SWP’s animal theme, the Russian economy is an ecosystem. The businessmen are the hyenas feeding off the Soviet carcass, the power people are the wolves who want their meat too. Spilling crocodile tears for any of them is a waste of time.

    Comment by Sublime Oblivion — July 10, 2010 @ 2:57 am

  9. S.O. – no, not really. There are real businessmen in Russia (mostly operating on modest scale, for obvious reasons) and there are KGB/Nomenklatura. Part of the latter are posing as “businessmen”, another part as “statesmen”, but they are just a single gang looting the territory together. It’s understandable when complaints are coming from real businessmen, but in Lebedev’s case it’s chutzpah in the purest, “that quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”

    Comment by Ivan — July 10, 2010 @ 3:23 am

  10. And I agree with Sublime Oblivion! Russian Big Bizznes is selling/stealing Norilsk shares back and forth.

    Comment by So? — July 10, 2010 @ 3:41 am

  11. Russia. Land of seemingly infinite natural resources and limitless exploitative opportunity for the insiders. At the end of the Cold War I had high hopes for the kind of business connections between the remaining two superpowers that the U.S. enjoyed with Japan within twenty years following WWII. As I waited, the only noteworthy event seems to have been where billions of dollars of American “aid” disappeared down the rabbit hole. (“Rabbit”: Oligarchus Russicus) Oddly enough, the media did not fully capitalize on this outrage. Furthermore, there was little following report on cooperation between the U.S. and Russia. The Americans seem to think that since the beggar on the street has spent his money on drink, he needs to be cut off. I hope not. Russia sits on a vast wealth which, especially considering the impact of global warming on Siberia, will soon push Russian to the top of the “Wealthiest Nation” list. The world is behind the eight-ball in making connections with these emerging magnates. If left in relative isolation, the world’s most reclusive ultra-rich may emerge as self styled “big shots” who muscle up to the world markets like some lower class lottery winner at the roulette table in Vegas.

    I had an ESL student from Odessa. When I expressed both desire and fear about visiting Moscow and St. Petersberg, he said “Don’t worry, the mafia has everything under control. They own the restaurants, travel agencies, casinos, taxi companies, and more. They have ‘eliminated’ small crime to ensure the safety of foreign tourists who will have a good time, and return with their friends to the new party central in Europe.” I have an image in mind, a sign facing those leaving major cities in Russia: “The Mafia thanks you for your patronage. Come again.”

    Comment by Brian Rabourn — July 10, 2010 @ 10:32 am

  12. Hi, Brian–good to hear from you. Thanks for reading. Interesting story re your student from Odessa. Another commentor here, who goes by the name Howard Roarke, spent a lot of time in Odessa. He has some interesting stories too.

    The economist Mancur Olson distinguished between two types of exploiters: roving bandits and stationary bandits. Roving bandits are like locusts–they come and consume everything, lay it to waste, and leave. Stationary bandits are like the mafia you describe. Since they perceive that they will be around to exploit for some time, they have an incentive to provide some minimal level of “public goods” and property rights, so as to enhance the productivity of those whom they exploit.

    Russia went through a period of intense roving banditry immediately post-USSR. After a while, the various gang wars resulted in the creation of a relatively stable group that began to act as stationary bandits.

    I think as a traveler that you have to be most concerned about the cops, rather than the people the cops are supposed to catch.

    @Ivan–I was ambivalent about Lebedev and his statement. Yes, indeed, he and his ilk are as culpable for the current state of Russia as Putin et al. Indeed, there is a symbiotic relation between the gangsters in the state and those outside it. Hence I am not at all sympathetic to Lebedev’s plaint, nor to him and his peers. That said, the phenomenon he describes is the very thing that will continue to hamstring Russia for the foreseeable future.

    @So? Cool it on the racial stuff, OK?

    The ProfessorComment by The Professor — July 10, 2010 @ 12:34 pm

  13. […] This post was mentioned on Twitter by Todd Ferrara. Todd Ferrara said: RT @LibertyLynx: Want to see where we're headed? Prof Craig Pirrong discusses the war on business in Russia: #tcot […]

    Pingback by Tweets that mention Streetwise Professor » Business in Russia: Animal Planet -- — July 10, 2010 @ 2:10 pm

  14. Russia sits on a vast wealth which, especially considering the impact of global warming on Siberia, will soon push Russian to the top of the “Wealthiest Nation” list.

    Incidentally, I wrote about the vast boons Russia will receive thanks to AGW back in one of my first posts 2.5 years back.

    Comment by Sublime Oblivion — July 10, 2010 @ 5:35 pm

  15. WRT roving vs stationary, I am not so sure. The oligarchat has property, bank accounts, children abroad. That’s why I find this “rogue Russia” stuff amusing. You wanna rein in “recalcitrant” Russia and help the ordinary Russian? Freeze some bank accounts, confiscate property, declare some individuals persona non grata. That way they may actually stay home and take a more long-term view of their fief.

    Comment by So? — July 10, 2010 @ 7:41 pm

  16. So? I don’t think you understand my use of the terms “roving bandit” and “stationary bandit.” The stationary bandit does not mean unable to travel, flee, etc. It means that they assign a sufficiently high probability to being able to continue to prey on a particular population for some time into the future, that they have an interest in encouraging some wealth creation through the enforcement of property rights, laws, etc. In particular, they have an incentive to try (as Brian suggests in his comment) to prevent others from preying on “their” flock. There’s an entire literature on mafias (Sicilian and Russian, particularly) serving as de facto enforcers of some laws and rights, all the better to increase the take they realize from those who are in their power.

    In contrast, a mere raider, who hasn’t the ability, or perhaps even the inclination, to remain in control of a particular territory, has every incentive just to despoil it, and do nothing to encourage wealth creation. The raider has no incentive to spend resources today to enhance the future productivity of a particular group or territory, because he won’t be around to take it.

    It’s like the difference between robber barons (of the feudal sort) and Mongol or Hunnish hosts.

    The ProfessorComment by The Professor — July 10, 2010 @ 9:49 pm

  17. They may not be roving, but they are definitely short-termist. Suitcases always packed, so to say. If they were made to understand that retirement to a “normal country” is out of the question, even for their spawn, then maybe they’d start to take a long term view of things and try to make their place of incarceration more pleasant. You know, build some roads for a change.

    Comment by So? — July 10, 2010 @ 10:58 pm

  18. That would basically be closed-borders Sovietism, though. Not fun.

    Plus, Russia doesn’t need roads (except within urban areas and environs). Given the imminence of peak oil linking Russia up with an interstates equivalent would now be a waste of resources.

    Comment by Sublime Oblivion — July 11, 2010 @ 1:11 am

  19. @So
    I totally agree with your point. Unfortunately, not gonna happen. It’s in nobody’s short-term interest except that of the bandits’ captive population, while the Western politicians are short-termists as well. They can’t disrupt gas supplies – just ask Schroeder. They can’t cause Porsche Cayenne sales to drop. They can’t sacrifice concrete Afghanistan logistics to abstract principles. So, the answer to your <> is <>.

    The roving/stationary bandit model is oversimplified. To model Russia, one should consider the whole “power vertical” of bandits. While at the top the power is sufficiently consolidated to allow a stationary prospective, the situation of every individual bandit at the bottom is much more precarious, and thus stimulating the roving behavior whenever nobody’s watching. Comrade Putin is nowhere near comrade Stalin in ensuring somebody’s watching (meaning executing everyone who puts his roving instinct before orders from above, and then some more for good measure). That’s why Bulava does not fly.

    Comment by Ivan — July 11, 2010 @ 1:58 am

  20. So, the answer to your =You wanna rein in “recalcitrant” Russia and help the ordinary Russian?= is =No, not really – no short-term pay-off in it=.

    Comment by Ivan — July 11, 2010 @ 2:01 am

  21. […] professor discusses the difficulties of Russian business, corruption and actions by the law enforcement […]

    Pingback by Global Voices in English » Russia: Business, law and corruption — July 11, 2010 @ 2:19 am

  22. […] professor discusses the difficulties of Russian business, corruption and actions by the law enforcement […]

    Pingback by Official Russia | Russia: Business, law and corruption — July 11, 2010 @ 2:04 pm

  23. Sublime, you’re smarter than the tired “America is just as bad” argument with which you kicked off the comments. It’s a sign of intellectual lassitude that ill becomes anyone who aspires to reasoned debate.

    Still, if you must draw the parallels, draw the correct ones. Don’t look at incarceration rates…look at overall application of the rule of law.

    I’ve used the image before but I think it bears repeating:

    In America, if you invent a better mousetrap you can expect to be well compensated, feted for your genius, and protected by a legal system with decades of business savvy.

    In Russia your mousetrap has a chance of attracting the wrong attention. A competitor (or just someone who’s well connected) can decide that they want what is yours and pay off the authorities and courts to ensure that it becomes theirs. If you’re lucky you can parlay your genius into some money that you can get out of the country into Cyprus or the Channel Islands. Or perhaps you’ll be lucky enough to find a krysha you can pay enough to keep the wolves away. Though that has risks of its own; look up the term “Danegeld”.

    Comment by Swaggler — July 11, 2010 @ 3:55 pm

  24. @Ivan. I never claimed, and never would claim, that the bandit models are a complete characterization of current Russian politics. I agree that none of the Russian bandits are completely secure in their tenure, and hence have relatively short time horizons. I’d also agree that the lower you are on the totem pole, the less secure your tenure, and hence the more likely you are to engage in predation, and the less likely you are to cultivate any security among those you rule day to day. My statement is a relative one: the bandits are more secure (“stationary”) now, than they were in say 1992.

    I’ve written a lot in the past about the short termism of Russian decision making, due to the precariousness of the political situation. My writing based on the natural state model (mostly from ’08 and ’09, if memory serves) discusses these issues in more detail.

    The ProfessorComment by The Professor — July 11, 2010 @ 5:21 pm

  25. @Sublime Oblivion – I’ve seen you make the point several times that investing in roads now makes little sense with peak oil looming. What you fail to grasp though, is that automobile transportation and trucking might very well switch over to alternative energy sources from the hydrocarbon internal combustion engine. If peak oil is a slow enough process (say, several decades of slowly increasing gas prices), then I have no doubt this will in fact take place, and good highway infrastructure will remain an important asset of any nation.

    Comment by Robert MacGregor — July 12, 2010 @ 6:04 am

  26. @Robert MacGregor,

    Just for you! 😉


    Yeah, I know – comparing Russia to the US isn’t always (or even usually) called for, but I’m also lazy a lot of the time.

    I don’t have as high an opinion of the American system as you do (though it’s better than almost anywhere else). A lot of the time you can expect a company with five figure salaried lawyers to sue you for some obscure patent infringement and exploit your investment. In the better cases, granted, they’ll just buy your start-up out for a generous sum – that’s basically how Google “innovates” nowadays.

    Comment by Sublime Oblivion — July 13, 2010 @ 12:02 am

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