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Moscow News
July 23-29, 2003
Corporate Disputes

By Rudolf Pikhoya, D.Sc. (Hist.)

Nearly all of Russia's history has been punctuated by "corporate disputes" as a means of using the state to regulate the makeup of political or economic elites and contain or eliminate certain aspirants for economic, information or political power (always political in the end). Let me make three preliminary observations here:

first, the so-called corporate disputes are almost invariably conflicts arising in a transition period, when the ruling elite has not yet been properly formed;

second, the transition period produces a legal vacuum, especially in new, hitherto unknown spheres of life;

third, new capital emerges in these new oases untouched by the previous regulatory system; but nature abhors a vacuum, and the nouveaux riches inevitably begin to be scrutinized to see how well they comply with the existing or future laws and regulations - precisely at a time when their activity becomes an impediment, if not a challenge, to the established power groups.

Alexander Menshikov

Alexander Menshikov, who rose from Peter the Greats batman to count, generalissimo, president of the Military Board, Duke of Izhora, and one of the richest men in Russia, was probably the first to come up against that. It seemed that he had achieved everything in life. He was the one who helped Catherine I to succeed to the throne after Peter the Great; under the young emperor Peter II, he was planning to marry his daughter Maria to the monarch. Yet as soon as Menshikov became seriously ill, the Privy Council - the supreme advisory body in the country dominated by the aristocracy (the Golitsyns and the Dolgorukys) - turned against him.

On September 9, 1727, Peter II issued an edict on Menshikovs arrest. The ensuing investigation was accompanied by wild rumors circulating both at home and abroad. They said that 30 million rubles in silver and eight million in gold had been confiscated from him, and that another five million to 20 million rubles had been taken from the count in exile. The figures were absolutely preposterous, even considering Menshikovs outstanding talent for self-enrichment (not at all rare at the time). In 1724, the entire Russian treasury was worth a mere 8.5 million rubles. Meanwhile, the records of investigation that were drawn up in the course of a search show that up to 400,000 rubles were confiscated from Menshikov in cash and valuables - also quite a tidy sum at the time.

In January 1728, Menshikov was banished to the town of Berezov, in Northern Siberia, where he built a house, buried his daughter, Maria, and died himself in November 1729.

Timofei and Savva Morozov

Other parties to corporate disputes, in the reform era, were more lucky. After serfdom was abolished, new players - muzhik-capitalists ? entered the economic arena. Former serfs or children of serfs, they became masters of new towns that emerged around industrial plants, such as, e.g., Ivanovo-Voznesensk and Orekhovo-Zuevo. Those new masters had money, clout, and influence on both factory workers and local authorities, who were dependent on them. They posed a potential threat not only to the workers but also to Russias autocratic/aristocratic system - a threat of future re-division of power.

In January 1885, one of the first, and perhaps the most famous, strikes in Russia took place at Savva Morozov, Son&Co. Nikolskaya textile mills (Pokrovsky district, the Vladimir region). The cause of the strike was the workers discontent with a slash in wages and the wide use of fines at the enterprises.

The company owner was Timofei Morozov, whose grandparents were serfs; he employed up to 8,000 workers. His enterprises used state-of-the-art equipment, while production was organized by British experts and Russian specialists - with a degree form the Imperial Technical College. Cotton came from the companys own plantations in Central Asia while the factory housing estate had a school, a hospital, and a poorhouse.

By the early 1880s, Russia had entered a period of economic crisis, production declined, workers were laid off, and wages were docked. Labor legislation was just emerging in Russia at the time. So there was plenty of cause for discontent among the workers. The strike, and the subsequent trial of its organizers, became a political event in the countrys life. The entrepreneur, and through him the entire class of industrialists, came under fierce attack from the government-controlled press, led by Mikhail Katkov, owner and chief editor of Moskovskiye Vedomosti. Timofei Morozov was declared guilty ? not legally, but morally. His statement in court was continuously interrupted with shouts of abuse and humiliation.

Capitalists like Morozov were guilty in that, according to Katkov, by raising the labor issue, they were objectively weakening the ruling establishment.

After the trial, Timofei Morozov fell sick, went out of business, and told his son to sell the factories. His son, Savva Morozov, had a degree in physics and mathematics from Moscow University, and studied chemistry at Cambridge. In 1887, at age 25, he expanded the family business. He built homes for factory workers, and funded the Art Theater, the writer Maxim Gorky, and Russian social democrats until committing suicide in 1905.

Meanwhile, in the late 1800s, access for non-aristocrats to the aristocratic class was further restricted. The old nobility more or less consistently protected itself from rich upstarts. The latter paid back in contempt for the ruling authority. Things came to a head in 1917.

Yeltsin vs. Gorbachev

The deeper the changes in the country, the more acute corporate disputes. The last decade of the 20th century produced a unique example of those disputes developing into a "war of laws", whose object was to provide a legal justification of reform in the early 1990s. The peculiarity of the situation consisted in a clash between Soviet and RSFSR lawmakers who were adopting often conflicting laws.

The conflict grew out of a confrontation between the Union and RSFSR authorities. By a quirk, it was the Union leadership, in a bid to subordinate the Russian leadership, that ignited the fuse of the conflict. Addressing the 1st Congress of RSFSR Peoples Deputies, Alexander Vlasov, alternate member of the CPSU Central Committee Politburo seeking the position of Chairman of the RSFSR Supreme Soviet, called on the Russian deputies to divide powers between the Soviet Union and Russia, saying that Russia had an exclusive right to own and manage her natural resources.

Vlasovs presentation was supposed to steal the radically minded deputies thunder ? the idea of Russias state sovereignty.

The point was taken up in a presentation by Vlasovs political opponent - Boris Yeltsin. "Russia's economic sovereignty," he said, addressing the Congress, "is only possible contingent on formation of the republics own property, its foundation being land, subsoil, the air basin, timber, water and other natural resources, industrial enterprises and their products, and the entire scientific, technological and intellectual capacity. It is necessary to pass legislation to ensure their utilization exclusively in Russias interests."

Those provisions were enshrined in the Declaration on State Sovereignty of the RSFSR that was adopted on June 12, 1990.

The attempt by the Union and Russian authorities to reach a compromise and pursue a unified economic policy based on the so-called 500 Days program went nowhere, as became obvious already in September 19990. Neither leadership wanted to share power.

On September 25, 1990, a session of the RSFSR Supreme Soviet Presidium heard a report by RSFSR Deputy Prime Minister Gennady Filshin, On the Economic Situation of the RSFSR.

The facts that he presented to members of the Presidium were far from reassuring. According to him, production of main export commodities - gas, oil, and timber - had fallen 10 percent. Filshins conclusion: Production was expected to drop another 15 percent to 20 percent in the very near future while it was critical to use world energy prices in relations with the Union constituent republics.

In response to Russias economic quests, on October 12, 1990, the USSR president issued a decree, On Measures To Ensure the Inviolability of the Right of Ownership in the USSR, which categorically rejected Russias claim to natural resources and to participation in managing Union assets on RSFSR territory ? in short, everything that was contained in the Declaration on State Sovereignty.

The dispute between the two levels of government over who was master in the country objectively led to August and then December 1991, which re-carved the map of the world.

This conflict - the "war of laws" - provided fertile soil for the first campaign to privatize Union assets.

The new owners in effect could not care less about the grounds on which they received their assets or the right to manage them - Union or Russian laws. What they were really concerned about was how to ensure their property rights. A new era of "corporate disputes" was dawning.

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