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Russia's Really Hostile Takeovers


International Business: RUSSIA

RUSSIA'S REALLY HOSTILE TAKEOVERS

Oleg Kantor, president of Moscow's Yugorsky Bank, liked to spend his free time at his luxurious dacha outside Moscow. Until July 20. That morning, police discovered the 40-year-old banker's body with his throat slit and a big hunting knife sticking out of his chest. Moscow executives believe that the murder was a contract killing connected to his bank's business with a profitable aluminum company.

It's a growing trend in Russia: Organized crime is going after Big Business. Murders of executives have soared in the last year, suggesting that criminal groups are no longer content with running protection rackets. To infiltrate big enterprises, Russia's crime lords have tried several methods. In some cases they extend loans on favorable terms to enterprises--and later demand management control. In other cases, they try to gain influence indirectly, by taking control of the company's bank. Or they simply threaten top executives. Says Vladislav V. Selivanov, first deputy chief of the Moscow City Police Dept.'s organized-crime division: "Mafia groups are trying to gain inroads into financial services and raw materials like oil and gas, diamonds, gold, metals, and lumber."

Russia's lawmakers finally seem to be taking the threat seriously. On July 12, just eight days before Kantor's death, the Russian Duma passed a measure that would make organized criminal activity illegal for the first time in Russian history. The bill targets crimes not covered by existing Russian law, such as money laundering, financial scams, and racketeering (table).

It is an important step forward in combating the criminal gangs that have spread their tentacles throughout Russia's economy. Interior Ministry officials estimate that over 40,000 enterprises are connected in some way to organized criminals. As many as 10 of Russia's 25 big banks also may have Mafia connections, observers say.

Lawmakers particularly hope to stop criminals from tightening their grip on profitable export industries such as aluminum and oil. Several murders have occurred in the Tyumen region in Western Siberia as rival groups fight over Russia's oil riches. Since the beginning of April, at least four aluminum executives have been murdered or injured. The most recent incident was on July 31, when the 32-year-old Moscow representative of the Volgograd Aluminum plant was shot in the head in his apartment building's hallway.

Moscow observers see the murder as one more sign of crime bosses trying to gain control of the activities and finances of the aluminum business. The earlier stabbing of Kantor closely followed the murder of Yugorsky Bank's vice-president, Vadim Yafyasov, who was responsible for its business with aluminum companies. Yafyasov had previously been commercial director of the giant Krasnoyarsk Aluminum plant.

Russian police also worry that professional criminals are sinking their hooks into the defense industry. In a single raid in early July, Moscow police seized 154 automatic weapons from a group that had embezzled them from a weapons plant in the Urals city of Izhevsk. Criminal groups are also stealing and exporting strategic materials from Russian defense plants. According to Selivanov, criminals may be colluding with defense plant managers to earn money by storing foreign radioactive waste on Russian soil.

FOREIGN VICTIMS. As attacks increase, foreign ventures have not been spared. On July 20 in Moscow, a John Bull pub franchised by the British company Allied-Domecq was bombed with an antitank mine--for no apparent reason, the owners say. But small businesses such as retailers, restaurateurs, and consumer-goods importers are increasingly vulnerable to extortion. Big multinationals with investments in Russia haven't been touched by violence yet.

To many Russians, the explosion in violence is a disastrous consequence of the shift to a market economy. While violent street crime was rare when Communist commissars ruled Russia, corruption and criminality are deeply rooted in Russia's history. Russians have paid bribes to government officials for centuries. Official corruption grew even worse in the Soviet system, when state officials controlled all economic activity. Post-Soviet officials are no different. "Organized crime exists where it finds government support," says Alexander Gurov, former head of the Interior Ministry's Organized Crime Dept.

In fact, Russian lawmakers have voted down attempts to push through anticorruption laws since 1992. When the Federation Council, Russia's upper house of parliament, returns from vacation in October, it will take up a new anticorruption bill passed by the Duma. The Federation Council also will vote on the Duma's new organized-crime law and measures to strengthen Russia's criminal code. Taken together, the package would provide a much-needed legal base to prosecute leaders of criminal gangs, the banks that launder dirty money, and officials who take bribes.

Still, Russia's lawmakers and leaders will have to go much further. With the judicial system in shambles, many businesspeople feel they have no choice but to use Mafia groups as "contract enforcers." Guns, bombs, and grenades take the place of arbitration courts. And in a country where taxes can approach 100% of revenue--let alone profits--businesses find it almost necessary to evade taxes, making them easy targets for blackmail by the Mafia. Says Yuri Schekochikhin, a reporter for the newspaper Literaturnaya Gazeta: "If we want to stop crime, it's very important to change the tax law and take other measures to create economic stability."

As a result of the country's rapid economic transformation, the boundary between legality and illegality in Russia has probably never been as blurry. In the early years of reform, managers and bureaucrats illegally used Communist Party money or state assets to set up banks or launch businesses. Now, it's difficult to distinguish these Soviet survivors from true entrepreneurs who pulled themselves up by their bootstraps. Nearly everyone broke the law in some way.

But some want to go legitimate. They've amassed big enough fortunes that they now want to be seen as respected businesspeople. Some may even run for parliament in December. Says Schekochikhin: "They want to get clean, like America's early robber barons."

Others draw a much darker scenario. Retired Russian crime fighter Gurov worries that Russia may have already lost its war against organized criminals because they already control many big enterprises and banks. The violence itself is likely to drop once the spoils of privatization of Russia's most lucrative industries are divvied up. But the big question is: Who will end up running Russia's industry? It could turn out to be honest businesspeople--or organized criminals.

Russia's New Plan To Fight Crime

OUTLAW money laundering, financial scams, and bribing private individuals

PENALIZE leaders of organized crime groups with 10-15 years imprisonment and confiscation of property

PROHIBIT arms trafficking and illegal possession of weapons

DATA: BUSINESS WEEKBy Patricia Kranz in Moscow


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