Building on my last post and the theme of uncomfortable situations as an indicator of things to pay attention to while trying to gauge a country’s trajectory, one major concern for many investors in Russia is the company capture or “raiding” phenomenon. This phenomenon only made international headlines a few years ago in the high profile Yukos affair. It seemed the Russian government decided that raiding a major, privately owned oil company was worth the bad international press. Today raids and captures like these are daily events, but they rarely make the news unless the company is large enough to peak an interest. CIPE is actively looking for ways that entrepreneurs can defend themselves against these kinds of take-overs, so imagine my discomfort when I was having a drink with a businessman I just met, and suddenly he proudly confesses to raiding local companies during his time at a regional prosecutor’s office.
This was yet another example of an uncomfortable situation I didn’t really want to be in, until I decided it could at least satisfy a morbid curiosity. My new acquaintance went into detail about how raiding works. He would buy shares of a company and take advantage of a weak corporate governance structure by calling a meeting of shareholders and taking over the board of directors. Then he would replace the company’s management with his own people and strip the company of all its assets. Meanwhile, judges were paid and all transactions were dressed up with a veneer of legality. Employees of the company were paid off to avoid public protest, and many of those were given higher paid jobs at another company owned by the raiders. Since the raided company was chosen largely for the land it occupied, the raiders proceeded to use the land for something they believed would bring higher profits, and many more of the displaced employees were offered jobs at the new company.
I’ve heard numerous examples of how to raid a company, but this was the first time I’d knowingly sat at the same table with a real raider, a former government prosecutor. The good news, however, is that many of the people that first thought of these hostile get- rich- quick schemes are giving up illegal take overs in favor of legitmate investment and rule of law. About 4 years ago, all of the local mafias in this region had fattened up. A war between the 3 gangs had broken out and they were all eager to take their piece of the pie and make peace. They divied up the local industries and left the scraps to others. They took their money, built honest businesses and sought to join the world market and follow its rules by issuing IPOs and other stabilizing measures. Of course there are others who would continue to raid companies, usually afilliated with the prosecutor’s office, tax inspection, and other law enforcement agencies. Ironically, those involved in raiding now are seen as a lower level of human being by those that left the game to seek legitimacy. All of these so called “white” mafias involved in company capture, extortion, and counterfit still look down on the drug and prostitution mafias. According to my source, those “black” mafias still exist, but law enforcement agencies have killed or jailed most of them by now.
The question remains, how long will it take for this cycle to play itself out? How long until all the would be mafias have satisfied their appetites, stolen enough, so that anyone who attempts to do what they once did are looked upon as lower life forms, forcing people to seek more honorable careers? Unfortunately, it may be a long time coming. People here are fascinated with crime and figuring out ways to get around obstacles and systems.
I saw some graffitti this morning that dampened my hope that honor and love of one’s neighbor would prevail over greed in Russia’s near future. The graffitti was obviously written by impressionable teenagers, probably not so different from the ones buying Nazi flags at the local bazaar (see my last post). The graffitti was an unabashed celebration of the criminal mind for whatever heroism it represents. It said “MAFIA FOREVER”.
Published Date: October 17, 2007