“In the 90’s, your enemy operated openly and you knew how to defend yourself,” Semyonov said. “I was shot by bandits who wanted our business, but we survived. Today I’m facing Oxford-educated lawyers.”

Today’s Washington Post highlights a new phenomenon in business that our partners in Russia have been alerting us to for the past several months.  Small and medium size businesses that have either achieved profitability or sit astride valuable real estate are increasingly susceptible to hostile and often illegal takeover sanctioned by corrupt courts and bureacrats.  While high profile cases such as the Yukos affair garner international headlines, the true crisis in Russia’s private sector is the assault on small and medium private enterprises carried out by individuals who abuse Russia’s incomplete corporate legal system to acquire controlling stakes in firms, or paralyze their ability to operate until a sale at “favorable rates” can be made.

Whether its Yukos or a small business, the heart of the crisis lies in Russia’s corrupt and ineffective legal system, and the willingness of government to encourage and/or turn a blind eye to its manipulation.  A common tactic highlighted by our partners involves the abuse of minority shareholder protections in which hostile elements gain a significant minority stake in a company, lodge a legal complaint against the firms handling of shareholder rights, and force an idefinite suspension in the trading of shares.  Majority shareholders are then faced with the unpleasant choice, have their shares tied up in a potentially lengthy and corrupt legal battle, or sell at a discount.  The Washington Post article chronicles how phony court complaints are used as a pretext to sieze property.  In either case the most basic tenet of private enterprise and growth, property rights, are violated by the legal system sworn to uphold them.  It’s difficult to see how either domestic or international investors would find such a market attractive, and indeed the non-oil sectors of the Russian economy are truly suffering in the shadows. 

It’s interesting to note that two CIPE partners in Russia from opposing ends of civil society, the INDEM anti-corruption crusaders, and the Russian Institute of Directors are both taking on new CIPE projects to try and address this critical issue.  Realizing the deck is stacked against successful enterprise these projects both seek to arm businesses with the legal and governance know-how to help Russian companies defend themselves in these hostile times, its a pity the Russian government can’t be relied upon to do this…..

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