Voice of America
27 June 2008
Russian Entrepreneurs Face Choice of Bribes or Prison
By Peter Fedynsky
Moscow
Entrepreneurs flourish when they can depend on the viability of a country's courts, which are often asked to enforce contracts or settle business disputes. But in Russia, business is suffering from what President Dmitri Medvedev has called "legal nihilism," or widespread disrespect for the law. VOA Moscow Correspondent Peter Fedynsky examines how official abuse of the law created a risk that two local entrepreneurs in the chemical industry never imagined.
There is heavy worldwide demand for silicone, a product with a broad range of applications from plumbing to medicine and airplanes to cookware.
Sofex, a medium-sized company in Moscow, has been producing silicone for the Russian market since 1991. Sofex distributes various other chemicals and earns about $30 million a year with nearly 25 percent in profit. Company director Alexey Protsky says business would be even better, if not for the government's bureaucratic reporting requirements. "For a manager, excessive paperwork means a loss of time and reduction of labor productivity," Protsky said.
The government bureaucrat, or "chynovnyk," has long been an object of dread among Russians. Inspector General is a classic 19th century comedy that still resonates in Russia. The author, Nikolai Gogol, satirized the chynovnyk's power by depicting a Russian town intimidated by a minor clerk who is mistaken for a high level bureaucrat.
But today's bureaucrats are no joke.
The Interfax News agency recently reported that entrepreneurs pay government officials an estimated $33 billion in bribes each year. Confirming the figure is impossible, but Sofex managers say bureaucrats routinely demand bribes for licenses and have the power to imprison those who refuse.
Two years ago, the company's financial director, Yana Yakovleva, spent seven months in jail for rejecting a bureaucratic attempt to blackmail the company. Yakovleva says the Russian system encourages shakedowns.
She says, "There is a system of check-marks and points. A bureaucrat scores a point for each court case he initiates or for every company he closes, and this improves his job performance evaluation."
Yakovleva says inspectors constantly harass entrepreneurs with threats to close a company or with demands for bribes to keep it open.
Sofix was also victimized by corrupt narcotics agents who retaliated against Yakovleva and Protsky by throwing them in jail on false charges after they refused to cooperate in a criminal scheme to manufacture a solvent needed for illicit drug production.
Yakovleva says prosecutors have no incentive to question a false charge. "It's not the prosecutor's function to investigate,” she said. "His function is to demonstrate effectiveness. And effectiveness happens to be the number cases brought to trial and how many guilty verdicts are obtained."
Sofix's 80 employees held the company together as Yakovleva and Protsky went through five teams of defense attorneys, before finding a lawyer willing to defend their innocence rather than seeking the typical plea bargain with prosecutors.
The arrest of innocent businesspeople has become so widespread in Russia that it has caught the attention of the human rights community. Ludmilla Alexeyeva has been a member of the Moscow Helsinki Human Rights Group since its founding in 1976.
"Russian business, as before, is victimized by rackets, though no longer by bandits, but rather by bureaucrats and law enforcement officials," Alexeyeva said. "That is much more dangerous for business and poses greater risk for arrest than was the case in the 1990's when it was possible to deal with bandits by going to the police."
Yakovleva and Protsky were exonerated following a campaign by Russian chemists that forced the government investigator to admit the case had no merit. The chemists understood the implications for Russian industry of criminalizing chemicals found in paint, glue and even fingernail polish.
Alexey Protsky says abuse of the legal system can be traced to Soviet times, when powerful individuals used telephones to tell judges how to dispense justice.
"People don't believe in justice and do not believe they can organize in self-defense," Protsky said. "In a normal situation, none of this would happen. It would be sufficient for entrepreneurs to organize their efforts to punish any such bureaucrats. The potential is there. But right now, entrepreneurs are not united, though as far as I understand, the process is slowly moving ahead."
Protsky says the absence of an independent judiciary is not only bad for business, but also for senior Russian leadership, because lower and middle level bureaucrats make it impossible to manage the country effectively.
The entrepreneur says Russian President Dmitri Medvedev has defined the need for legal reforms and must now take practical steps to enact them. Yana Yakovleva adds that Russia also needs free media to expose bureaucratic criminality to the light of day.