The Political Economy of Corporate Raiding in Russia

Ararat Osipian

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138477933
• eBook ISBN: 9781351103794
• Edition: 1
• Topic: Scienze sociali
• Subtopic: Studi regionali

Corporate raiding – the shocking phenomenon whereby criminals, business rivals and even state bureaucrats visit business headquarters and force owners or staff to transfer business assets, land or property – is an increasing problem in Russia. This book, based on extensive original research, provides a comprehensive overview of this activity. It describes the nature of corporate raiding, provides numerous case studies and discusses the role of the state and government officials. Overall the book argues that the prevailing climate of business and government in Russia leads to a situation where control is closely linked to corruption and coercion.

1
Corruption, coercion, and control

1.1 Theoretical explanation of raiding in a transition economy

Regime sustainability and raiding

A substantial block of scholarly literature considers excessive corruption as an indication of the weakness of government. Policy makers and general public are of similar opinion in regards to this conventional wisdom. However, this does not imply that this notion may not be challenged and that such a challenge will not be productive. When it comes to the link between the state, corruption, and corporate raiding, a thorough scholarly investigation might bear fruit. Sceptics challenge the relevance of good governance and political science approach in general to human well-being. Holmberg and Rothstein (2012) give an excellent response, pointing out that societal ills “are not caused by a lack of technical equipment, effective medicines or other types of knowledge … but by the fact that a majority of the world’s population have to live in societies that are dominated by dysfunctional government institutions” (p. 3). North (1990, 1992, 2006, 2007) and Olson (1982, 1996, 2000) point out the significance of organizational changes for societal development and economic growth. Olson, Sarna, and Swamy (2000) argue that the difference in the rate of economic growth among developing nations is due to differences in the quality of governance. The authors show that productivity growth is higher in better-governed countries. De Haan, Lundstrom, and Sturm (2006) summarize that

Since the time of Adam Smith, if not before, economists and economic historians have argued that the freedom to choose and supply resources, competition in business, free trade with others and secure property rights are central ingredients for economic progress.

(p. 182)

Thus, more theorizing based on political science research frames is needed in order to explain and improve developing nations.

When it comes to the imaginary or perceived weakness of the state and presence of widespread corruption, the opposite may well be true. In nondemocratic societies, corruption, informally approved, imposed, or regulated by public authorities, is an indicator of the power of the state, rather than its weakness. To be more specific, this kind of power is not the type of power generally associated with the state and perceived as a tool for betterment of society. On the contrary, this is a specifically designed coercive power, exercised informally by formal state institutions. Corruption may be used on a systematic basis as a mechanism of direct and indirect administrative control and redistribution of wealth on the state level and down to local authorities and administrations of public and private institutions. Control and redistribution of wealth in this case is based not only on formally approved and justified coercion, but on blackmail and selective justice.

Authoritarian countries often informally approve of corrupt activities in exchange for loyalty and compliance with the ruling political regime. Legal traps are often created by the ruling political regime in order to encourage bureaucrats and entrepreneurs to violate the law and then force them to comply and share revenues with the regime. Vertical and horizontal structures of corrupt control allow ruling regimes to sustain themselves and exercise coercive power over their constituents. Administrations of enterprises and institutions are targeted by central and local governments in pursuit of higher degrees of informal control. Administrators, managers, entire institutions, and regular individuals are much easier to be ruled if corrupt. The same is true for businessmen who operate in authoritarian regimes. In such cases, the ruling political regime extracts its rent not only in the form of direct monetary payments, but in loyalty as well. The alleged tax schemes in the Yukos case is a good example in this regard.

The ruling regime derives its rent through the use of the authoritative powers, regulation, and oversight functions of the state. While state bureaucrats extort their rent from the clientele, including businessmen, in form of bribes and numerous other favors, the ruling political regime extorts its rent from the business community in the form of loyalty and compliance, in addition to payoffs, kickbacks, and shares. This is quite characteristic of the concept of corruption, subversion, and coercion developed over the decades and put into action (Almond and Coleman, 1960; Andreski, 1966, 1968; Anechiarico and Jacobs, 1995; Banfield, 1975; Darden, 2001, 2002, 2008). The rent is derived not only in cash, but also in loyalty and obedience (Osipian, 2012). The ruling political regime needs this obedience not only from civil servants and other public employees, but from businessmen as well.

As far as Russia is concerned, the ruling authoritarian regime focuses on suppressing both entrepreneurial and civil initiatives while forcing businessmen to contribute to selected socially significant projects. The corruption and blackmail scheme used to control businessmen has been put in action more than three decades ago, with the start of Perestroika. Thus far, the ruler of Russia has been doing this quite successfully. There are supporters to this explanatory approach. For instance, Mesquita and Smith (2012) suggest that,

[A]n ineffective economic system, from the viewpoint of a cynical dictator, turns out very effective politically … you constantly underpay the law enforcers which creates corrupt incentives. Although they cannot be jailed for being disloyal, they can be jailed for corruption. Then you tell them: I can forgive you corruption if you remain loyal…. Politically, this is very effective. Besides, he does not need to spend much money on the repressive apparatus: they can collect all necessary resources through bribes.

(as cited in Markus, 2015, p. 8)

Inability of the government to cope with endemic corruption – be it Africa or post-Soviet Eurasia – is attributed to a weak state. This weak state is unable to offer due protection to holders of property rights. Markus (2015) departs from the “absence-dominance” approach to the state’s role in weakening the security of property rights. He suggests that it is the state weakness, “conceived as the inadequate control of the sovereign over his bureaucratic apparatus, that constitutes the main threat to property rights” in Russia (Markus, 2015, p. 2). The meaning of the state and the ruling political regime becomes split into two: the ruler, king, or czar, and his agents, bureaucrats, or servants. The blame for predation of property is placed conveniently on the latter. Supposedly they rob the people and thus betray their principal. This approach reminds one of the Russians’ belief in the good czar, which creates an impression that the king is good, but his servants are evil. This belief was as naive as it was misleading, but consistently high approval ratings of President Putin indicate that this belief is alive and well in today’s Russia.

Vertical and horizontal structures of control distribution may be based on corruption and coercion. These structures allow the ruling regime to survive and execute its authority through mechanisms of coercion of its constituents and electorate. Voters, coerced in casting their vote, and moreover, casting it for a certain candidate or political party, create an illusion of democracy. This illusion adds to the proclaimed legitimacy of the state and is attributed to legitimacy of the ruling regime. These two terms, the state and the ruling regime, are frequently confused in Russia. Similarly, the terms of power and authority are confused or not delineated at all. Local officials, bureaucrats, and businessmen may be targeted by the ruling regime in the process of strengthening both formal and informal control. Corrupt local officials and businessmen coerce their constituents and employees into supporting the regime. In this way, large-scale and widespread corruption helps the regime to skillfully manipulate the masses.

Suppression of corporate autonomy, the induction of state bureaucrats into corporate governing boards, the imposition of pseudo-accountability under the nontransparent financial regulations, and direct informal control are used by the authorities and administrations in order to control businessmen and the business activities of the companies. Under the conditions of market transition, when laws are changing and the rules are unclear or subject to interpretation, state bureaucrats are placed in conditions of financial survival while businessmen find it hard to comply with laws and regulations even if they try their best and in good faith to do so. Numerous violations follow; they are registered and those bureaucrats and businessmen become subjects of blackmail. This type of blackmail comes not from the side of criminals and racketeers, but from the side of the ruling regime. The Russian political establishment may either use this mechanism of corruption and subversion, or at least be aware of its use. Nevertheless, this mechanism of informal and potential control spreads nationwide and extends to different levels of social organizations.

A monopolistic position is a basis for rent. In this sense, rent and corruption have similar grounds. A monopolistic position explains the noneconomic nature of rent. A monopolistic position of economic agents is based on limited resources, utilized in societal production. Regulating access to limited resources creates opportunities for corruption. In post-Soviet Russia, corrupt transition and rent-seeking behavior merge to form a specific modus operandi for the system, made distinct by high transaction costs. This merger of corrupt transition and rent-seeking behavior occurs in different sectors of the economy, but because market transition is relatively slow, this merger is sometimes hidden due to unclear new rules and regulations, and sometimes very visible due to a long-lasting exposure without changes. This study will now turn to a more specific analysis of corruption and state control in Russia.

It would be beneficial to start constructing the concept of corruption as the instrument of coercion and the mechanism of administrative control from considering the role of the state in society and its relation to corruption. Specifically, the question is: How does the state relate to corruption? Zhdanov (2002) presents the following view on the relation of state to corruption: “Corruption and government are eternal antagonists. Corruption, as a form of social corrosion, ‘eats away’ at governmental structures, while governmental authority in turn strives to destroy corruption.” This study argues the opposite, based on Darden’s (2002, p. 2) definition of the state “as a compulsory rule-making organization that is sustained through the extraction of wealth from within its territorial domain.” This definition is particularly convenient in investigating power-wealth relations in nondemocratic regimes.

Darden (2008, p. 37) describes the vulnerability of the assets acquired by illegal ways and the mechanism by which the government officials subordinate their lower-level counterparts:

Hence, the threat of exposing and enforcing his wrongdoing constitutes an enormously powerful sanction and places lower-level officials in an especially vulnerable position. The severity of this sanction allows the state leadership to practice a systematic form of blackmail, with payment exacted not in cash but in obedience.

Leadership of the state apparatus executes a systematic blackmail of its subordinates or even formally independent entrepreneurs not only with the goal of gaining their loyalty and support, but also redistributing already earned benefits or economic assets and illicit income.

The practice of making people guilty and blackmailing them is not new. The scheme is very simple and may be formulated as follows: “Make people feel guilty and propose them salvage in exchange for obedience.” In the era of the dominating Roman Catholic Church, this formula was reinforced with the Inquisition and realized through Papal indulgences. In modern autocratic regimes, this formula is reinforced with selective justice and realized through corrupt state institutions. Wrapped in the multilayered coats of legality and justice, the corruption, coercion, and control scheme sustains the undemocratic regime, but at the same time proliferates and reinforces the destructive processes in the country. This approach to the governance is perhaps as old as the Roman “divide and conquer.” A similar approach may be applied to businessmen coping with peculiarities of tax laws and changes in the legal system of property rights. They suddenly discover that in past years they did not pay taxes or did not do it correctly and in full. And now they may face charges of grand scale tax evasion and imprisonment. On this legal ground, businessmen may be blackmailed by the state organs.

Political stability in a country does not necessarily mean there are low levels of corruption but rather well-adjusted mechanisms of functioning at all levels of authority, even if these authorities are corrupt. Shlapentokh (2003) asserts that,

When life in a country is relatively stable, corruption, like some cancers, destroys a society from the inside without producing symptoms or even pain. This is the case for Putin’s Russia, where the political arena is calm in comparison to Yeltsin’s turbulent years in office.

(p. 158)

He says that widespread corruption creates a parallel, semi-feudal chain of command that competes with the official hierarchy. In fact, this semi-feudal structure is not parallel, but is of the essence of the system. It is informal, but it does not compete with the official hierarchy. This structure is developed and maintained by the frame of formal state institutions. Waite and Allen (2003, p. 294) support this view of self-sustainability of corrupt regimes:

Corrupt systems are difficult, if not impossible, to challenge and change from within, especially since the power operant in such systems is self-protective and self-perpetuating. Also, corruption may work in tandem with other forms of repression, such as racism, sexism, and classism.

Payne (1975, p. 53) describes similar mechanisms of subversion and corruption in national systems as well as in international politics in an historical perspective, based on practices of dictatorial regimes.

The same mechanism of state-based corruption and coercion is described by Zhdanov (2002, p. 5), who writes about the selective application of criminal law and other repressive legal measures to governmental officials and politicians: “The use of juridical reprisals against political opponents by means of charging them with corruption (or other illegal acts) when there are no legal grounds to do so.” Often the laws or the normative acts are composed post-ante in order to prosecute an activity that took place when it was not illegal. Legal craftsmanship is one of the essential features of the government’s use of its authority for the purpose of selective justice. Political rhetoric is impressive: corrupt opposition-ists claim that they are prosecuted because they are in opposition to the corrupt regime, while the regime states that it opposes corrupt politicians.

Selective justice as one of the primary instruments of coercion implies the existence externally managed courts. Popova (2012) notes that judicial independence is being commonly attributed to “two main casual variables: structural insulation of the judiciary from the other branches of government and political competition” (p. 6). It turns out that competing political powers are not necessarily comfortable with a high level of political independence of their judiciary. As far as Russia is concerned, it is hard to call the country’s legislative, executive, and judiciary branches competing political powers. While the role of courts in provision of free and fair elections is significant and growing in Russia, the pressure on courts and judges may also be growing. Nevertheless, as Popova (2012) suggests, judges act in their self-interest and decide whethe...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• Preface
• Acronyms and abbreviations
• Note on translation and transliteration
• Introduction
• 1 Corruption, coercion, and control
• 2 State and raider and state-raider
• 3 Raiding in transition
• 4 Corruption and raiding
• Conclusion
• Index