The Russian Law of Contract
All those who have tried to do business in Russia know that the usual norms of business practice do not apply. Although it is possible to make contracts, there are no properly established legal procedures to enforce those contracts. Western companies can draw up contracts and make payments outside the country, where they can rely on Western banks and judicial procedures, but how do the new Russian capitalists manage to do business in such conditions?
Before perestroika capitalist activity could only be conducted outside the law, and it is not surprising to find that the practices developed in that period persist in the new conditions of the market economy. Despite the enormous economic changes, there have been very few changes to the criminal code - the article banning enterpreneurial activity was only repealed in December 1991. Despite the fact that price instability has led to the rapid growth in dollar transactions, such transactions are still punishable as criminal offences. High rates of taxation similarly make it impossible to conduct business within the limits of the law. On the other hand, the law of contract is very undeveloped, and effective judicial procedures for the enforcement of contracts are non-existent. This is why people who were already used to working outside the law became the pioneers of Russian business.
After the adoption of the law on co-operatives in 1988 the existing balance between the legal and illegal economies was upset. A lot of new enterpreneurs entered the market economy for the first time. However even the most honest very soon found themselves faced with demands from racketeers, particularly if they were involved in cash business. At first the rackets were disorganised, but by 1990 gangs had become established which could claim control over particular districts in every large city. With the stabilisation of the situation these gangs formed themselves into legitimate businesses under the cover of the Law on Cooperatives, some of which offered `protection' to small businesses and even joint ventures operating in their sphere of influence.
At the same time legitimate enterprises which had reached a sufficient large scale of activity began to form their own internal security services. These began with the employment of bodyguards for the Directors of the enterprise, often under the guise of `drivers', to provide protection from criminal attack. However they soon developed a wider role, providing protection for the premises and property of the enterprise. During 1991 the existence of such an internal security service, although rarely acknowledged, had become the rule for the richer enterprises.
During 1991 private business continued to boom, but with the freeing of prices, higher interest rates, tighter credit and increased competition in 1992 many businesses found themselves in financial difficulty. In these circumstances it became increasingly difficult to secure the repayment of loans and the enforcement of contracts. Unable to turn to judicial procedures, many companies looked to their internal security service to fulfill the role.
ASKO is the principal competitor to the state insurance company, Gosstrakh, throughout Russia. It comprises a chain of autonomous holding companies in the various regions of Russia. Samara-ASKO is the company covering the Volga region, with its base in Samara. The company was formed as a small insurance company three years ago, and rapidly developed into one of the richest companies in the region, growing from seven to about three hundred staff, with links with foreign insurance companies to provide cover for foreign travel.
Nikolai Starkhov, Niaz Galeev, Mark Feld'man formed a small commercial company, OPAL, in Samara in 1991 to engage in general trading activity, joining the boom in commodity broking. They borrowed 1.5 million roubles from the local branch of the state bank to buy seats on some of the Samara exchanges. The bank insisted that the partners insure the credit, and following the bank's recommendation they insured it with the Samara-ASCO insurance company, with which the bank has an unwritten co-operation agreement. After a series of difficulties in the broker company, following the collapse of the boom on the exchanges, the company was unable to repay its bank loan. Samara-ASCO paid the bank under the terms of its insurance, and took over the loan. Samara-ASCO pressed the OPAL directors for repayment at the end of the summer, although their methods were somewhat unusual.
A group of strong-arm men, claiming to be representatives of Samara-ASCO, appeared in the offices of OPAL, where they threatened Starkhov and took away the company's documents, including its account books, and invited Starkhov to come to the central office of the insurance company two days later to explain how he proposed to repay his loan. Starkhov was absolutely terrified, and visited Galeev, who by this time had left the company, to warn him.
A few days later the same group, together with the chief of their `preventive department', visited Galeev's flat. They explained that they were not interested that he had left the company, and insisted that he visit the Samara- ASCO office to have a conversation with the General Director, Dmitri Shakhmatov. Galeev visited Shakhmatov several times, but each time was told to come back later, which only increased his anxiety. `I felt, and I still feel, like a person standing on the edge of a cliff', he said, `the victims of Stalin's repression probably felt the same before they were arrested, jumping with fear every time they hear the bell ring or a car stop outside, without knowing where the danger lay'.
Eventually, when Galeev met Shakhmatov the latter told him that he could not guarantee the safety of their young lives. Shakhmatov then told him that he would have to stay in the office until he had written a full account of the activities of his partners. `Are you a judicial body', asked Galeev, `to give you the power to hold me here?' `We are more than a judicial body', replied Shakhmatov. Galeev, who was secretly recording the conversation, decided to leave, but in the corridor of the company he was caught and beaten up by the security guards, who pushed him into a special room within the office of the preventive service. `I was amazed', said Galeev,`not that the security guards hit me, but that the General Director Shakhmatov took part in the beating and hit him several times. After this experience, I wrote everything that they demanded. They only allowed me to leave the offices several hours later after I had promised to visit them weekly. A lawyer accompanied me to the next meeting, but Shakhmatov threw him out. After the lawyer left the office, the Director started to make his position clear. He told me that the debt is quite a large amount, and for one tenth of it he could employ a thug from outside to take money from us by any means, because he is not going to use his own guards for this dirty work. I understood that in principle I have to take responsibility for the debt, but according to the law. I am ready to be responsible to the court for my activity, but they are not going to refer this matter to the court or to arbitration, both of which are very soft from their point of view, and they prefer to take me like a fish. I am afraid for my life and for the life of my relatives, and I don't know what to do.' The matter is still unresolved.
This is not by any means an isolated example, but has become the usual practice among Russian private commercial and financial enterprises, most of which use internal security departments in the course of their normal business. The members of these departments were originally recruited from among sportsmen and body- builders who had earlier worked for racketeers. Since the beginning of 1991 they have increasingly been recruited from former policemen and KGB officers. This provides the employing company with an extensive network of contacts in the criminal world and in the police and internal security services, which provide it with information, resources and protection from the law.
The security service is not only used for business pruposes, but can also replace the legal authorities in criminal investigations. Tekhnopolis is a large and profitable computer electronics company in the Urals city of Chelyabinsk. Somebody stole the General Director's briefcase while he was in the sauna. The briefcase contained some company documents, and 30,000 roubles, which was nothing for him. Nevertheless it was not the kind of thing that he could allow to happen, because it could set a precedent for further attempts. He asked his internal security service to resolve this problem as soon as possible. Ten days later the thief was brought to the Director's office with the stolen case, the documents and the money, by two guards from the security service.
The moral of this tale, as of all others, is simple: workers of all countries unite.