Reiderstvo (Russia)

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Reiderstvo
Location: Russia
Russia map.png
Author: Michal Mesquita
Affiliation: West Sands Advisory Limited

Original text: Michael Mesquita, West Sands Advisory Limited

The Russian word reiderstvo, derived from the English term ‘corporate raiding’, is an attempt by an investor or group of investors to purchase a majority or significant minority stake in a publicly-traded or privately held company. Once a raider acquires a controlling interest, they may replace the current management team or implement cost saving measures in an attempt to increase the company’s overall share value[1]. Unlike corporate raiding in the West, reiderstvo is designed for short-term gain rather than long-term investment, often for the purpose of stripping the business of its assets. The acquisition of the company may be technically in accordance with the law, but the methods by which the transfer is achieved are often semi-legal or outright illegal, including the use of physical force or corrupt collusion with state institutions.

Much of the research on reiderstvo focuses primarily on Russia and Ukraine; however, this tactic with its various forms can be found in other post-Soviet countries, including Uzbekistan, Kyrgyzstan, and Kazakhstan. While the practice may vary slightly by country, common characteristics of reiderstvo include fraud, blackmail, manipulation or distortion of the law, and actual or threatened physical violence. Reiderstvo is the result of uncertainty stemming from the privatisation of formerly state-owned industries, corrupt officials, poor corporate governance, and an insufficient criminal code[2]. The practice threatens both foreign investors and domestic business owners and undermines the development of market economies.

Reiderstvo dates back to the late Soviet era when organised crime groups exacted ‘protection money’ from bazaar (marketplace) traders (this process is referred to in Russian as krysha, which means roof). Not only did this provide safeguards against business rivals and competing criminal groups, but a krysha could also be used to attack a competitor’s business[3]. Following the collapse of the Soviet Union and subsequent privatisations, raider tactics shifted from small-scale protection and confiscation of minor assets to large-scale theft and seizure of state property. For instance, ‘black’ or ‘bandit’ raiding explicitly involved illegal activity and the use of force or intimidation whereby organised criminal groups would send armed men to the premises of a business to physically remove assets including cash, computers and machinery[3].

By the late 1990s, raiding had evolved from the use of force to more sophisticated methods of coercion, including the manipulation of legal and political institutions. Although the use of force could still be present, it was commonly applied in conjunction with a variety of legal and administrative tools and was often used to facilitate or expedite a judicial ruling. Additionally, criminal figures no longer held a monopoly on force; private entrepreneurs and government officials actively participated in reiderstvo with the assistance of a vast network of judges, law enforcement, lawyers, accountants, journalists and others[4]. One of the more profound changes that precipitated the evolution of reiderstvo was the active assistance of regional and federal agencies. Such connections (through informal networks of influence or bribery) grant access to the security services, customs, courts and regulatory agencies, which can be manipulated to acquire, for instance, corporate documents or favourable judgments. For example, raiders across the former Soviet Union commonly employ their connections to tax officials to open investigations into target companies, which can be used to initiate a state or private takeover. Indeed, the use of the state apparatus plays such a significant role in corporate raiding that the consensus among academics is that it is nearly impossible to conduct a raid without government assistance[5].

The tactic of corporate or minority shareholder attacks is an attempt to seize a business from within, typically through the manipulation of shareholder rights. In this case, a raider buys out a minority shareholder (possibly through bribery or intimidation) to acquire a small stake in a target company. As a shareholder, a raider gains access to company registers that can then be manipulated or used to investigate any weakness in the company’s legal status (questionable privatisation deals, licence discrepancies, etc.). If discovered, the raider files a criminal case, which may lead to bankruptcy proceedings or a business crisis as described above. Another tactic is the continual acquisition of minority shares to influence board decisions. Once a raider is in this position, they may convene a shareholders’ meeting but systematically exclude other shareholders. This can be achieved by holding the meeting in a remote location, or simply by arranging the meeting at short notice. Once a meeting is convened the raider can replace the Board with more favourable allies, or sell off the company’s assets to third parties (often affiliated with the raider). A shareholders’ meeting may also provide opportunities to issue more shares (sold to the raider or an affiliated party), effectively diluting the voting rights of other shareholders.

In the ‘extortion’ scenario, a raider or affiliated party disguised as an investor approaches a company, suggesting a new business partnership. If the company refuses, the raider leverages contacts in state agencies to apply pressure on the company by increasing the cost of doing businesses (such as fines, arbitrary investigations, environmental violations, etc.). The company is then compelled to sell a stake in the company for the attacks to stop. This process is repeated until it becomes too costly for the company to continue; thus it is forced to sell to the raider. Extortion may also be used to guarantee the target company receives the necessary state licences or government contracts to operate. Uzbek President Islam Karimov’s daughter, Gulnara, who allegedly received bribes from Russian and Finnish telecoms companies, reportedly used this practice to exact bribes and increase her stake in the local telecoms market[6].

Courts play an integral role in the raiding process and are commonly used to legitimise forged documents, freeze company assets and accounts, or sanction the use of private security forces (owned by the raider) to enforce court orders. Legal systems across the former Soviet Union tend to suffer from institutional weakness and are highly susceptible to corruption and elite interests. This provides opportunities for raiders to manipulate the courts and use litigation schemes to take control of companies. Judges may be bribed or directed to rule on false criminal charges against the management or owners of a target company (see also entry on telefonnoe pravo (‘telephone justice’) in this volume). The victim is then arrested, but can buy their freedom by selling the company at a reduced price. Alternatively, a raider may employ the ‘shareholder scheme’ to seize company assets while the victim is in custody. According to the Moscow-based NGO Liberal Mission Foundation (Open Democracy 2013), between 2000 and 2010 over 15 per cent of all Russian business entities were subject to groundless criminal proceedings, of which over 100,000 resulted in convictions.

While intimidation and violence has decreased in the past 10 to 15 years, corporate raiders may still hire private security firms to seize a company building or headquarters based on an injunction that has been granted by a bribed judicial figure. While any corporate raid is usually reliant on the support of a legal or political actor, intimidation is still used to facilitate or expedite the process. A recent public instance of hiring armed men to seize company property was the case of Ukrainian oligarch and former Mayor of Dnepropetrovsk, Ihor Kolomoysky, in March 2015. Following the passing of legislation that limited his influence over state oil company UkrTransNafta, Kolomoysky, who owned a minority stake in the company, hired a militia to raid the property. The raid, however, was unsuccessful; Kolomoysky was unable to exert greater influence over the company and lost his position in Dnepropetrovsk shortly after. Nonetheless, the event highlights how intimidation can still be a useful tool for corporate raiding.

Notes

  1. Salinger, L. 2013. Encyclopaedia of White-Collar and Corporate Crime, Second Edition (Los Angeles: Sage Publications).
  2. Firestone, T. 2008. ‘Criminal Corporate Raiding in Russia’, The International Lawyer, 42, 4.
  3. 3.0 3.1 Rojansky, M. 2014. ‘Corporate Raiding in Ukraine: Causes, Methods and Consequences’, Demokratizatsiya: The Journal of Post-Soviet Democratization, 22, 3.
  4. Viktorov, I. 2013. ‘Corporate Raiding in Post-Soviet Russia’, Baltic Worlds, 2: 4-8, http://balticworlds.com/in-post-soviet-russia/
  5. Rochlitz, M. 2014. ‘Corporate Raiding and the Role of the State in Russia’, Post-Soviet Affairs, 30, 2-3.
  6. Patrucic, M. 2015. ‘Uzbekistan: How The President’s Daughter Controlled The Telecom Industry’, Organized Crime and Corruption Reporting Project (OCCRP) 21 March, https://www.occrp.org/corruptistan/uzbekistan/gulnara_karimova/the-prodigal-daughter/how- the-presidents-daughter-controlled-the-telecom-industry.php

Further reading
Aslund, A. 2014. ‘Oligarchs, Corruption, and European Integration’, Journal of Democracy, 25, 3.
Balmforth, R. 2015. ‘Ukrainian oligarch under fire after night raid on state oil firm’, Reuters, 20 March, http://www.reuters.com/article/2015/03/20/us-ukraine-crisis-kolomoisky- idUSKBN0MG2A320150320
Demidova, E. 2007. ‘Hostile Takeovers and Defenses Against Them in Russia’, Problems of Economic Transition, 50, 5.
Gans-Morse, J. 2012. ‘Threats to Property Rights in Russia: From Private Coercion to State Aggression’, Post-Soviet Affairs, 28,3.
Hanson, Philip. 2014. ‘Reiderstvo: Asset-Grabbing in Russia’, Chatham House and University of Birmingham, https://www.chathamhouse.org/sites/files/chathamhouse/home/chatham/public_html/sites/def ault/files/20140300AssetGrabbingRussiaHanson1.pdf
Ledeneva, Alena. 2013. Can Russia Modernise? Sistema, Power Networks and Informal Governance (Cambridge: Cambridge University Press).
Moscow Times. 2010. ‘Yevroset Planning for IPO Next Year’, 12 November, http://www.themoscowtimes.com/business/article/tmt/422383.html
Osipian, A. 2011. ‘Corporate Raiding Russian Style: Hostile Takeovers via Corruption and Fraud’. Paper presented at the Annual Conference of the American Political Science Association (APSA), Washington, DC, in September 2010.
Zaostrovtsev, A. 2013 ‘Russia: An Oprechnik Economy,’ Open Democracy, 9 January 2013, https://www.opendemocracy.net/od-russia/andrei-zaostrovtsev/russia-oprichnik-economy