Date: Sat, 18 Apr 2009
Subject: part 4, 2009
From: Paul Backer <pauljbacker@gmail.com>
The 2009 Financial Crisis, Russia and CIS
Part 4. The Management of Administrative Resource.
By Paul Backer (pauljbacker@gmail.com)
Nothing so addles the mind or taxes the imagination of entrepreneurs in Russia and CIS as the magic words: administrative resource. The sight of a well turned out bureaucrat wielding a stamp turned many a strong entrepreneur to jelly. Which entrepreneurs heart does not secretly yearn to be swept off his feet by a prince’s magic chariot (typically, a Kaliningrad assembled BMW sedan) sailing off for happily ever after under the gently pulsing blue roof strobe light.
Soft music, candlelight, gentle rolling surf somewhere… with Moscow, Kyiv and Almaty infelicitously short of romantic beach, and an assistant deputy to the assistant minister of a provincial government emerging gleaming in the moonlight. Words fail, the pen, or rather the keyboard falls from lifeless fingers… Let’s pause for breath. Anyway, it could very well be “glistening” not “gleaming”.
There is no denying that administrative resource permeates the environment. It has to. Nature abhors a vacuum and to a great extent Russia and CIS are a property rights vacuum. Russia and CIS can be described as “permission based” property rights systems. The exercise of ownership rights as to most every piece of movable and real property requires obtaining and protecting stamps, signatures and other signs of administrative largesse.
It’s a bit like animism, one can own the farm or the forest, but the spirit of the farm or the forest must be propitiated or one will be cast out or poxed. “Poxed” is no fun. Administrative resource is like oxygen, you can’t see it or taste it, but it certainly exists and gives life. What happens if there is no oxygen? Companies and projects die.
Best way to fail in the sphere of administrative resource is to misidentify required resource. Life is much more straightforward. What is the value of natural resource rights not registered in the appropriate registry? Not too much. Bought an oilfield only locally registered? Don’t you feel silly? The second best? Giving in to delusion and believing that you are an acting character in either James Bond or Sopranos.
But, if you can’t see or taste administrative resource, how do you describe it and more importantly, how do you acquire, manage or lose it? How do you define it? As a thumbnail, administrative resource is the ability to successfully identify, engage and maintain a viable relationship with administrative entities impacting your business. There are three basic kinds of administrative resource challenges: strategic (national interest and policy), tactical (procedural and compliance) and anecdotal (dreaded gadfly).
Anecdotal and strategic administrative resource problems are very similar. They don’t readily yield themselves to effective solution by your proxy (the lawyer). Try as he might, there is very little that your lawyer can do about a tectonic shift or some guy who takes life guidance from his neighbor’s talking dog. Imagine one day the powers that be decide that TNK BP can’t continue in its present form? Your lawyer isn’t going to be able to change their minds. Maybe, it’s possible to do so, principal to principal. Wouldn’t know, I am a lawyer, not a principal.
During a strategic administrative resource crisis an effective lawyer can actually achieve a great deal around the margins. He can help you get the best deal possible and minimize tax impact when you cash out. He can expedite implementation of needed securities and finance vehicles. He can slow down the process to help you make your moves and implement your plans. Utilize SPVs to reconfigure and redistribute assets. He can mitigate, but he can never stop the tectonic plates from moving. Either you as the principal can propitiate the gods or you can’t. If your lawyer had THAT kind of impact, he would be an oligarch, not working on a billable hour or project basis.
A lawyer claiming that a series of legal maneuvers can change national policy is either kidding himself or you and really, really wants the billable hours. Historically, anyone who has gone that route and spent hundreds of thousands or in some cases millions of dollars wound up poorer, ultimately lost, but gained the limited compensation of reading supportive op/ed pieces in the press or making damning remarks on BBC on chilling the investment climate for foreign investors. Hermitage Fund, Yukos, etc. Potentially, good therapy, but bad for business.
Incidentally, if you do want the world to hear you, you need a good international PR man, Mark D is the best one I know. As an aside, having the right person implement very frequently makes the difference between success and failure. A large part of being in the region for 15 years is knowing the best IP enforcement guy in the region, the best tax guy in Moscow, the best regulatory and criminal defense guy in Kyiv. Best plans in the world won’t solve your challenges if the implementation lags. If you ask for help and get back a book report on the Civil Code, you may be talking to the wrong guys, unless you see them as a kind of a therapist.
Anecdotal administrative resource problems are a phenomenon by no means unique to Russia and CIS, but they seem far more frequent in the region. A large part of it is the painful Soviet legacy of creative complaining and denunciation. There is a perverse magic to the disproportionate administrative impacts inflicted by the… umm… let’s say “emotionally non-standard” individuals. There is a fairly well known story in Moscow, a bar opened in Moscow near the Galleriya Restaurant, an elderly woman lived above the bar. She didn’t care for the noise. She complained, complained, complained, complained…
As a civil code nation, Russia has fairly strict regulations as to how administrative agencies must address citizen complaints. The elderly lady had nothing, no lawyer, no administrative resource, no money, really just about nothing. Long story short, after offers to buy her apartment, pay her for the nuisance, just pay her, relocate her, etc., she saw the bar closed after the umpteenth administrative inspection. The millionaire company threw up its (ugly metaphor) collective hands and walked away. This case is by no means unique. Due to a number of factors, the angry “little guy” does exceptionally well when he takes on a business through administrative resource.
It is exceptionally hard to stop the “little guy” seeking administrative impact. The Russian administrative system derives from both from Soviet and democratization influences. It is significantly geared toward social justice for the little guy. There are pre-determined periods to respond, formal appeal methodologies, adjudication and hearing rights, etc. There is of course, the natural tendency of any bureaucracy to ignore the gadfly, but the persistent gadfly is frequently able to make the system address his concerns. Sometimes, they can even make the system dance to their tune.
It should be noted that whatever distortive impacts are attributed to Russia and CIS administrative resource systems, they are intended to and therefore do favor the little guy. Obsession and free time very often provides the crucial edge. An official failing to respond to a noise, garbage, public or fire safety, sanitary or other complaints puts his job at risk and fails in his main function, not embarrassing his superiors. Failure to inspect upon a fire safety complaint leads to a letter to the newspapers and a letter to the prefect and letters to the mayor, governor, President, etc.
It is nigh impossible to stop this process through formal legal action. SLAPP law suits don’t work against pensioners. No one can be prevented from filing a complaint. Whatever “Wild East” fantasy may occur to a business owner, the world simply doesn’t work that way. Whatever revenge fantasy you may nurture, it’s just that, a fantasy. What can one do about the activist neighbor? Be nice. Avoid engaging and enraging. Don’t involve your lawyer who may very well make that person feel cornered, angry and desperate.
A newspaper which would never publish a disgruntled neighbor letter will cheerfully publish a threatening lawyer letter. For sheer comedy very little beats a major law firm threatening letter to an activist pensioner published by a newspaper. “Whereas the Parties heretowith have aggregated to require that you, Piotr Arkad’evich, hereinafter “Disgruntled Elderly Pensioner” in perpetuity cease and desist…” you get the idea. It’s ugly. It’s a rare opportunity to both look bad and spend a good deal of money.
What works? Have your lawyer deal with the administrative entities as they issue inquiries to your business, don’t enrage, don’t engage. Don’t feed the vicious cycle of negative PR leading to greater administrative attention. Document each inspection. Discuss all previous inspections with subsequent inspectors. You are not trying to embarrass someone out of doing their job. You are making it possible for subsequent inspectors to identify the obsessive and perhaps, delusional aspects of the person whose idée fixe your business has become. Incidentally combat handholds effective against delusional neighbors are effective against delusional regulators and competitors.
What can your lawyer do in terms of administrative resource? One of the crucial tasks is help identify what administrative resource must be engaged for your project to be viable. Federal or municipal? How many municipal entities are involved? Executive level or implementation level? What documents do you actually need? Where must these documents be registered? What do the appropriate documents look like? You do not need a private security firm led by a retired FSB general to open a clothing store, but you certainly need local prefecture approvals.
It is not intended to make fun of others’ pain. For sheer, egregious disengagement from reality there is a story of a foreign owned enterprise that was inspected and paid a cash (!!!) fine to an inspecting entity which didn’t actually exist.
As a common example, pretend that you are taking over a manufacturing plant in Novosibirsk. Administrative resource is a very big part of the due diligence process. How will you transport your product, by road or railroad? Whose approvals do you need? Whose approvals do you need to manage the plant’s exhaust and waste? Is the local government a shareholder? How do they vote their shares? Can you enter into a binding long term voting agreement with a government entity? How can it be documented? What is the object’s situation vis a vis the Pension Fund, the Tax Service, the Customs Service?
Pop quiz. When acquiring a privatizing property in Moscow, who must sign off? Mayor? Committee head? Can a deputy Mayor sign? The Prefect? Head of the City Property Committee? His deputy? When and how? It’s not your job to know, it’s your lawyer’s.
You probably noticed that none of the above is about taking a shvitz with the governor’s middle school classmate or helicopter trips to hunt polar bears or other flights of fancy associated with administrative resource as “seen in a movie theater near you!” The above may be a foolish waste of time and money or it may be a great way for principals to bond, but it has nothing to do with administrative resource tasks sensibly assigned to your lawyer. First, last and foremost legal tasks done right are professional tasks. They can be identified. They are not magic.
An attorney not able to break down administrative resource related project into modular, explicable, replicable tasks is at best not quite able to help, b/c he can’t identify the milestones to meet, at worst he is about to jeopardize the viability of your project by covering bases that don’t need to be covered and ignoring those that do. As a rule of thumb gained after 15 years of professional experience, if a consultant can’t explain what and why he plans to do, he either can’t do or doesn’t have a clue.
How do you keep administrative resource? Good corporate governance. File environmental impact reports on time, pay licensing fees when due, provide full and adequate financial reporting, etc. Doing so makes it very hard to take away your telephone, gaming, bank or natural resource license. If you never miss a rent payment, you protect your subsidized lease. Ensuring that small required payments and reports are timely preserves project viability. It’s what good corporate lawyers excel at. They don’t golf with the provincial head, they just get up in the morning and do their best every day for you and your project. Principals golf. Someone has to.
A tag line: in the land of administrative resource, organized, repeatable and modular wins every time.
PS. May merit a quick read: http://graphics8.nytimes.com/packages/pdf/business/18money.pdf, it’s about how to work with your fiduciary without getting robbed. Most of the stuff written before by me and others, but now in a bigger font. Mysteriously, the bit about never signing blank or incomplete documents doesn’t get absorbed well. Go figure.