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Businesses unite in search of protection from Siloviki

Interference in business by Siloviki is undermining steady economic growth. Things could improve if businesses are prepared to team up with organisations which represent the interests of other social groups. Andrei Yakovlev, Anton Sobolev and Anton Kazun at the HSE International Centre for the study of Institutions and Development have conducted research on the question “Can Russian business reduce political pressure from the state?”

Violence as a factor in how our economy and society are developing has been discussed a great deal by academics in recent years. Douglass North and William Baumol and other researchers showed that in their work that violence plays a major role in economic life. Societies which are unable to restrict the use of violence suffer from the absence of stable economic growth. So now our attention is turned towards political mechanisms and how to restrain and regulate them.

North, Wallis and Weingast’s book Violence and Social Orders, 2009, has been a key influence on how we research this problem. North and his co-authors explain that to make the transition from the ‘limited access orders’ typical of developing countries, to ‘open access orders’ with steady economic growth you need organisations which can effectively reduce the amount of violence in society to take shape.

However, exactly how these organisations are to emerge, and the conditions in which they can operate in a developing country remain unclear. What will drive the ‘victims of violence’ to collective action to defend themselves? How could collective action actually work to limit violence in an ‘imperfect’ institutional environment? These are the questions Andrei Yakovlev, Anton Sobolev and Anton Kazun have tried to answer in their research.

Bureaucrats instead of criminals

If in the 1990s business was under attack from criminals, in the 2000s the assault came from the state, or rather agents exploiting state means of coercion for their personal advantage, Andrei Yakovlev explained as he presented the results of research at the HSE seminar. This new tendency arose from an unwritten (and illegal) contract between the upper and lower ranks of the power vertical whereby top federal bureaucrats turned a blind eye to widespread abuses by law enforcement officers in exchange for political loyalty.

The crisis in 1998 led big business to see the advantage of collective cooperation with the government. As a result new tax laws were introduced in the early 2000s which both increased tax revenues for the state and made life easier for companies. As Andrei Yakovlev explained, “Business and the state made a deal: the government simplified the tax system and lowered taxes in exchange for making business more legal. This suited everybody as it brought more money into state coffers and reduced the burden on companies.”

Improving tax collection allowed the apparatus of state to grow stronger and law enforcement to be more effective and subsequently reduced criminal leverage on business. At the same time, a system of business associations formed to enable meaningful dialogue with the authorities. A whole range of associations (mainly in industry) were set up then, and four leading groups began to organise themselves - RUIE - the Russian Union of Industrialists and Entrepreneurs ( who represented big business) Delovaya Russia (medium-sized business)OPORA Russia(small business) and CCI RF - The Chamber for Commerce and Industry (Foreign Trade)

The partnership between the government and business collapsed over the YUKOS affair which became a precedent for arbitrary use of the law. This research presents the weakness of the mechanisms for dialogue and the reluctance of either side to compromise as reasons for the breakdown. There was no question that the associations provided a place for dialogue between business and government but they didn’t have real power to ensure agreements were honoured. This led to a change in the balance of power in the ‘ruling coalition’ (business became the junior partner to the government)  and at first glance, allowed the top bureaucratic elite to concentrate all the levers of control over the economy in its hands. But at the same time, the YUKOS affair was an unspoken signal to middle and lower ranking officials in the power vertical and provoked a wave of attacks on business by the siloviki the fruits of which we are harvesting today.

Publicity against pay-offs

The Euroset-Motorola affair in 2006, the chemicals affair in 2006-7, the Dmitry Malov case in 2006-8, the Magnitsky case in 2008-9 and the poppy affair in 2010-12 are all characteristic examples of siloviki type assaults on business. It would start with checks and threats to begin criminal proceedings accompanied by informal proposals to settle out of court. In these situations, Yakovlev points out, most businessmen agreed to make a pay-off.   

At the same time there were public displays of defending property rights - the Euroset and Motorola case and the chemicals affair, for example. On March 29th 2006, customs official arrested 167,500 Motorola mobile phones worth 17 million dollars which Euroset was importing on an official contract. The investigators changed their reasons for arresting the phones several times (one given was that ‘their use was harmful to the health of consumers’), but eventually on 24th August the case was closed as no crime had been committed and 117,500 telephones were handed over to Euroset. That case certainly made waves (George Bush even mentioned it informally to Vladimir Putin at the G8 in St Petersburg in July 2006). It also had political consequences - the Head of the Federal Customs Service Alexander Zherikhov and the Public Prosecutor Vladimir Ustinov were sacked.

In the second instance, the owners of a group of medium-sized chemical companies were coerced into cooperating with officers from the Federal Drug Control Service FSKN to supply the semi-processed materials to manufacture narcotic substances. The directors Sofex, Yana Yakovleva and Alexei Protsky rejected proposals for this ‘cooperation’. As a result in the summer of 2006 they were charged with criminal offences of (illegal manufacturing powerful and poisonous substances by a conspiratorial group) for trade in the industrial solvent ethyl ester. Yana Yakovleva was arrested in July 2006 and Alexei Protsky, a month later. The criminal case against Sofex was intended to frighten other chemical manufacturing businesses.

Yana Yakovleva was imprisoned illegally for 7 months by FSKN before they were forced to release her on 16th April 2007. It was pressure brought to bear by protesting business people that led to the decision to free Yakovleva. There demonstrations against the FSKN in Moscow and Samara on the 27th January 2007. Nine Duma deputies called for Protsky and Yakovleva to be released. They considered the repressive methods used in the ‘chemicals affair’ as a major incident of lawlessness which undermined citizen’s confidence in the state.    

A letter to Vladimir Putin signed by more than 100 heads of chemical companies from all over Russia, protesting against the FSKN’s repressive measures played a crucial role. As a result, in February 2008 a court supported all Yakovleva and Protsky’s accusations against FSKN. Following that, dozens of cases against directors of chemical companies were closed and the non-commercial partnership Business Solidarity was set up on the wave of success.

The researchers think that key factors for success in this case were the presence of a strong leader, strong links with the media, and using ways to put public pressure on the authorities a lot. But the effect of collective action proved to be limited because the membership base was narrow and resources to develop Business Solidarity were insufficient.

In the conditions of wild economic growth before the crisis in 2008, most entrepreneurs were not ready to join in collective action to defend the general interests of the business community. Andrei Yakovlev suggests that the federal bureaucratic elite had no interest in persecuting businesses but with high levels of economic growth and an influx of direct foreign investment, siloviki assaults on businesses didn’t seem to them to be a significant problem.

Protection after the crisis

The 2008 economic crisis made matters worse. The fall in public revenues and capital flight led to a tightening of control over businesses and further hounding of entrepreneurs. At the same time, businesses had less income and didn’t have enough money to pay off corrupt officials. The siloviki were increasingly pressuring successful medium-sized businesses most of all. This, in Yakovlev’s words, ‘is what lead to a change in the balance of outlays and gains of different strategies and provided a stimulus for collective action to change the circumstances’.

On the basis of the system of entrepreneurs associations that had been set up in the early 2000s to represent the interests of medium-sized businesses Delovaya Rossiya was reinforced. This association was forced to act to limit state violence on successful medium-sized businesses. In 2009 Delovaya Rossiya campaigned for a change in the law, making pre-trial arrests of those charged with economic crimes illegal and restricting other coercive practices used by siloviki on businessmen. The changes were supported by Dmitri Medvedev who was then president but it didn’t stop the siloviki, they just found other charges to use and abuse.  

Delovaya Rossiya changed its tactics, reacting to the needs of the Russian business community, placing a limit on siloviki pressure on business in the wider context of stimulating economic growth. Thanks to Delovaya Rossiya, a strategy for modernisation with the emphasis on non-primary manufacturing was formulated and approved by the authorities.

Potential investments of medium-sized business were presented as shares for exchange with the ‘ruling coalition’. After a series of meetings between the business associations and Putin and Medvedev at the end of 2010, in 2011 Delovaya Rossiya founded the Centre for Public Procedures ‘Business against Corruption’. According to the report presenting it to the Ministry of Economic Development, it was called upon to unite the efforts of the business community, public organisations and government to fight against raiding and corrupt pressure on business.

The system doesn’t allow us to beat corruption

‘Business against Corruption’ was the first organisation in Russia defending entrepreneurs which had been designed to work specifically on detailed demands to submit complaints about illegal persecution of businessmen and the formalisation of procedures for their examination. A complaint will only be examined if the victim of a conflict is an entrepreneur or company and has been subjected to raiding or corrupt practices. The examination is in seven stages, gathering evidence, a request in the regional department of Delovaya Rossiya,a lawyer’s opinion,a decision by the co-chairmen about bringing it to the public council, examination of the case by the public council and finally a prompt and practical response to the application.

Andrei Yakovlev points out that at first glance ‘Business against Corruption’ is a social organisation and the authorities do not have to be abide by its decisions. However it has two important characteristics. The public committee which conducts examinations of its cases include more than 20 authoritative lawyers, representatives of leading legal firms, Duma deputies, members of the Public Chamber and journalists. If as a result of a public discussion the members of the council come to a united opinion of a particular criminal case it isn’t going to be easy to argue with their opinion. Secondly, the government has given permission for ‘Business against Corruption’ to set up an observation committee, headed by vice-prime minister Igor  Shuvalov. The committee includes representatives of 65 departments responsible for business regulation and monitoring including the Investigative Committee, the Interior Ministry, FSKN, Russian Financial monitoring and others. This committee is intended to ensure that entrepreneurs whose cases are taken up by the ‘Business against Corruption’ Public Council are attended to quickly and effectively.

Between February 2011 and November 2013 ‘Business against Corruption’ has received more than 600 applications, most of which have been turned down in the first stage. Only 85 cases have reached the Public Council. The Co-chairmen found these to contain serious infringements of the rights of entrepreneurs and considered it possible to reach a re-examination of the case. Public investigation and sanctions in relation to ‘racketeers in pursuit’ are intended to signal to the racketeer (that their usual strategies are becoming risky) and to businessmen (that their rights are being defended). 68 cases were referred to the various organs for legal proceedings.

However, at the end of November 2013, there was only information on the ‘Business against Corruption’ website about 12 cases whose decisions were returned to court for re-examination. Andrei Yakovlev says that we can understand why the final outcome of the centre’s activity is so limited if we look at the case of Dmitri Malov from Agromol in Kostroma, which is probably Business against Corruption’s biggest success story.

Agromol is a medium-sized company that makes dairy products and employs 300 people. In 2006 when the government ran a national project to develop the farming industry, Malov’s company took out a loan of 17.8 million roubles. In 2008 two ex-FSB operatives approached Malov with an offer to buy his company at a reduced price. Malov refused and then the regional department of the FSB instigated criminal charges against him. They accused him of stealing 1.8 million roubles which had been officially returned to Agromol as part of the credit refinancing. Although Dmitri Malov gave evidence to the court about the extortion and the charges against him were absurd, he was charged and sentenced to five and a half years in prison.  

Malov’s case was brought to Business against Corruption in February 2011 and supported by the centre’s Public Council in March 2011. However when the court reviewed Malov’s case, all they did was reduce his sentence. And only in November 2012 a Supreme Court decision vindicated Malov completely. This only happened because the chairman of the Supreme Court Vecheslav Lebedev intervened personally when he ‘looked into Malov’s case and saw the injustice’. The final decision of the Supreme Court giving Malov the right to rehabilitation gives grounds to suppose that the case against Malov was entirely fabricated from the start. But all the other courts that dealt with him, were not able to ‘see the injustice’. Business against Corruption spent nearly two years trying to have this case re-examined.

The researchers conclude that on the one hand we can talk about the evolution of a strategy for businessmen who encounter pressure from siloviki. In the mid 2000s the dominant tactic was to make a deal informally, but more recently we have seen examples of individual (Euroset-Motorola) and collective resistance (chemical affair).

On those grounds organisations like Business Solidarity, defending businessmen against racketeering siloviki, have been able to appear. But it was only after the crisis of 2008-9 that the top bureaucratic elite became aware of the scale and consequences of siloviki pressure and these organisations started to get real support.

However, we have to point out a number of factors which hinder Business against Corruption from producing more results in defending entrepreneurs rights. Firstly the problem of ambiguous appeals - in many cases the businessmen asking for help have actually broken the law. Supporting these kind of appeals could damage Business against Corruption’s reputation. Secondly, there is clear opposition from the law enforcement agencies who are not inclined to ‘hand over their own’. It’s not possible to change the practice of applying the law without ridding the law enforcement system of dishonest officers. Andrei Yakovlev thinks that the situation could change if businessmen are ready and able to cooperate with other organisations representing the interests of other social groups.


December 11, 2013