Russia » Economics

Price the state pays for arresting Khodorkovsky

Russian oligarchs are about to take over the power functions of the state officials, and the state does not seem to oppose it.

  It is the wrong impression that the state was able to undertake the police action to Yukos company easily. Russian mass media expressed either condemnation or delight by writing that the business community “got scared” and did not support arrested Michail Khodorkovsky. Meanwhile, it is hardly possible that the sensible businessmen will make up their mind to invest their “honestly earned” capitals to transform the existing regime, the idea expressed by many well-known political scientists. There is no need of it. Russian business knows how to deal with its state authorities.  Moreover, the authorities seem to be ready to make more compromises with business than it expected to have because the authorities are afraid of the clear signs of people’s supporting politicians who express the “idea of revenge.”

Recently Prime Minister Michail Kasyanov was speaking about the future of Russian government after the Parliamentary elections. He said the primary purpose of the administrative reform is to deprive the state of  its extra functions and passing these functions to the self-regulated organizations and business community. RIA Novosti information agency reports that according to Michail Kasyanov, currently business is more active in its attempts to take over the functions of the state. The Prime Minister approves this. Ноwever, Michail Khodorkovsky was badly criticized and finally imprisoned because of the same ideas of allocating the power resources in favor of big business. After analyzing this idea one can understand that the scheme is similar to the mortgage auctions of 1996 which bear a bad reputation. This time not the property of the former USSR is supposed to be privatized, but the real power in the state.

What is the idea of the bill “On self-regulated organizations” whose first edition was adopted by the deputies of the last Russian Duma (whose term expired in December 2003)? Pravda.ru offers the paper of the President of the Union of Producers Equipment for Oil and Gas Industry, the member of the Board of Russian Union of  Product Producers Alexander Romanikhin.

The bill “On self-regulated organizations” was submitted to the Duma in summer 2003 and passed in October 2003. A big group of deputies headed by former Chairman of the Duma Committee on Property Viktor Pleskachevsky. Russian liberals estimated passing this bill as their significant victory. They had reasons for this.

The bill “On self-regulated organizations” is described to Russian people as very progressive, democratic and necessary for the administrative reform. They say the bill has been elaborated in accordance with the prioritized directions of the administrative reform in 2003-2004 which include the development of SRO in accordance with the President Decree “On measures of conducting administrative reform in 2003-2004”. They say the law on SRO is necessary to protect the interests of the subjects of entrepreneurship and professional activity and to increase their responsibility to customers. All the reasons of the SRO law proponents sound well, but in fact they can produce bad results.

First of all, no country in the world has the law similar to the Russian bill on SRO. The Russian language even has no similar ridiculous term. Any company is self-regulated, and the current Federal law “On NGO” provides legal basis for uniting juridical persons in unions, associations, partnerships and so on.
 

All states had natural process of establishing different unions and associations, there was no need of special laws for this. Russian liberals do everything to destroy the existing system of the state control and pass these functions to the newly established institutions being ambiguous and far  from democratic. In this sense the bill resembles law “On co-operative enterprises” which gave strong stimuli for the development of hierarchic system of corruption in the Soviet Union. At that time the authorities had best intentions, they spoke about the development of producing goods, encouraging people’s initiative, but in fact all this resulted in allocating the state resources in favor of separate initiative people. The majority of co-operative enterprises charged as much as they liked for their services and then laundered  and shared the state money with the directors of the state enterprises. By the way, the main author of the bill on SRO is well aware of the law “On co-operative enterprises”. In August of 1988, one month after the law had been passed Viktor Pleskachevsky established Altus company - one of the first co-operative enterprises in Leningrad.

The bill on self-regulated organizations under the excuse of conducting administrative reform grants such organizations the right to establish standards, control maintaining these standards, discover the facts of the standards violation and impose fine on the companies responsible for this.  Certainly, such a combination of functions within one organization contradicts the principles of administrative reform. Moreover, SRO has the right to charge for the services they provide. In fact, SRO will replace the current federal institutions of executive power, and bribes to officials will be replaced by legal entrance and installment fees to SRO and also by payment “for services”. All companies will find themselves under the conditions of accepting the practice of paying tribute to SRO and playing according their rules.

The bill on SRO assigns compulsory membership: “Federal laws can stipulate  compulsory participation (membership) in SRO for executing some kind of business or professional activity”.
 

The participants of the securities market are well aware of the results of the compulsory SRO membership established in 1996. This regulation contradicted the law “On securities market”, but it was strongly supported by former Head of Federal Commission on Securities Dmitry Vasilev. SRO had a chance to be granted the right to issue licenses for professional participants of the market, but new Federal Commission Chairman Igor Kostikov managed to change the situation, and President Vladimir Putin signed the decree canceling the compulsory membership in SRO.
 

The new directorate of Federal Commission on Securities keeps the position of minimizing the bureaucratic procedures of issuing licenses instead of replacing one bureaucrats in charge of this procedure by others. If the number of the businesses subject to having license is reduced, this issue will cease to exist. This is the only option of reducing the administrative pressure to business.
 

At the end of last year new Federal law  "Оn insolvency (bankruptcy)" was passed. New problems aroused because of establishing the new institution of bankruptcy – self-regulated organizations of arbitration managers.

According to the new law, the rights of appointing and controlling arbitration managers were granted to SRO. Earlier arbitration managers were independent subjects of law, according to the law passed in 1998. The new law makes membership in one of the SRO mandatory for arbitration managers. However, the effectiveness of such “public control” is doubtful.
 

At the beginning of July 2003 the government established the number of the new rules on regulating the work of arbitration managers and SRO in accordance with the law “On insolvency (bankruptcy)”. The regulations establish the procedure of conducting financial analysis by arbitration managers and SRO controlling the activity of its members. Analysts say that such a control will result in disclosure of commercial information on the borrower’s lenders and counteragents. It is not clear who will bear responsibility for disclosure of commercial and sometimes even state secrets.
 

It is not clear in what way the regulating institution will control the work of SRO. There are all conditions for transforming current SRO of arbitration managers into the system of organizations pursuing their own interests by establishing certain businesses in the market of bankruptcy. Deputy Chairman of Supreme Arbitration Court Vasily Vetryansky gave the following characteristic to the role of the SRO for arbitration managers: “This is some weird business developing on the procedure of bankruptcy. However, I know the source of it – many deputies in the State Duma are involved in professional organizations, therefore they decided to gain more power”.

Vasily Vetryansky added that the decision of establishing the new institution of SRO did not prove to be expedient because these organizations are not self-sufficient in terms of finance: “This is a business which needs money. Do you know that such organizations request 2-3 thousand dollar reward from debtors? SRO need sponsors for their funding”. 

Those SRO having sponsors outside it or the support from the authorities have competitive advantages. In the first case SRO is funded by big business, in the second case by appointing the SRO members arbitration managers for bigger companies. As a result, the SRO controlled by oligarchs will be the main players in the market.

Big business is getting ready to fill the positions in the market of arbitration management. Earlier, on September 25, 2002 the Council of Russian Union of Producers and Entrepreneurs decided to support the idea of establishing under its patronage the professional self-regulated organization of arbitration managers. This is non-commercial partnership “Interregional self-regulated organization of professional arbitration managers”. Vasily Shakhnovsky (ex-CEO of Yukos-Moscow), Alexander Mamut (Troika-Dialog), Alexei Mordashov (Severstal Group), Vladimir Potanin (Interros), Anatoly Chubais (RAO United Power Network), Arkady Volsky (Russian Union of Producers and Entrepreneurs), Kakha Bendukidze (United Machinebuilding Plants), Michail Fridman (Alfa Group) and the number of other representatives of big business are among the founders of this organization.

 

The businessmen from Russian Union of Producers and Entrepreneurs headed by Georgy Tal, the former Head of Federal Service on Financial Recovery and Bankruptcy, established their own organization of arbitration managers.
 

Arbitration manager Alexander Tarantov wrote in his paper “On the threshold of new property distribution” in Economics and Time weekly on December 1, 2003: “Law will hardly be observed when the arbitration manager will be appointed, paid insurance money and controlled not by the court or federal service on financial recovery and bankruptcy, but by some NGO! After paying the requested sum of money to NGO one can obtain the plant for his/her own use. No objections can be accepted – everything is in accordance with the law”.

On December 3, 2003  a new regulation from the law on bankruptcy came into force. This regulation obliges arbitration managers to undergo registration anew and become the members of SRO. In addition, they have to insure in these organizations their financial liability.  Federal Service on Financial Recovery and Bankruptcy addressed his query on the new situation to the Supreme Arbitration Court of the Russian Federation. According to the law on bankruptcy, arbitration courts will have to fire all arbitration managers who did not become members of SRO. However, arbitration court itself appointed these people arbitration managers. Badly elaborated laws lead to such contradictions.

On April 16, 2003 the Council of  Russian Union of Producers and Entrepreneurs decided to establish National Organization on Financial Inventory and Accounting able to take over the functions of the Ministry of Finance on “methodological support of financial accounting”.
 

As it was mentioned earlier, the government is studying the opportunity of passing the functions of regulating in the sphere of audit and financial accounting to SRO. Earlier this was the responsibility of the Ministry of Finance. Currently the monitoring functions of this Ministry are planned to be passed to self-regulating organizations of auditors. SRO are also going to obtain the functions of issuing licenses to auditors.


The Ministry of Finance has some faults in its work, but it is the federal institution of executive power independent from auditors and having much more conditions for elaborating objective decisions than the SRO which will be controlled by big auditing companies.  Certainly, the biggest auditing companies who established SRO promote the idea of the mandatory membership in such organizations.

The process of passing the “surplus” functions of the state to the newly established institutions is becoming a trend. In December 2003 the government Commission on Administrative Reform received the proposal to pass SRO the functions of the Ministry of Labor which is the authorized federal institution on monitoring the activity of the non-state Pension Funds.  Different structures, such as National League of Managers and others are certainly interested in obtaining such functions of the federal executive power institution.

The proponents of the law on SRO often refer to the need of passing it because it is necessary to prepare technical regulations, therefore we should dwell on this sphere of self-regulation.

The federal law “On technical regulation” came into force about six months ago. It was introduced to the deputies as the necessary measure under the conditions of Russia’s joining WTO, and also as the tool of reducing bureaucracy in the sphere of standardization and issuing certificates. However, the real situation is different.

The main idea of the law on technical regulation is passing the controlling functions over the quality of the produced goods and services to SRO, and also canceling the mandatory state standards of production. The state will control only the observance of the key rules of production described in the technical regulations and adopted in the form of federal laws and decrees of the President and the government.

Here is the scheme of the technical regulations preparation. For example, it is necessary to prepare the technical regulations “On the safety of ball-point pens”. The biggest producers of such pens

are very interested what kind of norms these regulations will have. For instance, the number of the mandatory product tests can significantly influence the cost of the final product and its competitiveness. Therefore they either establish “Union of Ball-Point Pens Producers” or put under their control the Union or SRO which already exists. Then the new technical regulations of the

very kind these businessmen need is being prepared under the name of this “self-regulated” organization.


The majority of the existing Unions for different branches of industry are poor and are ready to be sold out to any oligarch. One former Soviet Minister said “branch Unions are very independent”. And he added with a smile: “Nothing depends on them”. Indeed, the influence and capacities of the Russian branch Unions can hardly be compared even with the biggest Russian companies. For example, the Russian Machine Building Union is absolutely different from the Machine Building Union in Germany which has long-standing traditions of business self-regulation.

The capacities of this Russian Union cannot be compared with those of United Machine Building Plants Company. The Union of Juice Producers is nothing in comparison with Vimm-Bill-Dann company.

Such Unions are going to become the institutions dependent on the opinion of sponsors – big business, not on the opinion of the majority of their members. Certainly, the management of such institutions will have more money, and the industry will have the new technical regulations suitable to oligarchs, instead of the state standards which often were more demanding than the Western countries standards.

Many Russian politicians understand the danger of this trend. First deputy of Federation Council Valery Goreglyad gave the following estimation to the SRO: “What is the SRO for big business? It means the state functions in the aluminum industry will be executed by aluminum tycoon Deripaska. There will be two or three branches of his company and they all will start self-regulating in favor of the oligarch. This opinion is shared by Head of the Ministry on Anti-Monopoly Policy Ilia Yuzhanov who says that “there is a danger to have some SRO as the worst samples of cooperation when a group of people will take over some market, sphere or branch of industry and will start regulating it in the way it wants”.

Russia has no traditions of business self-regulating. For years, all the attempts of self-regulation resulted in establishing the control of several people over business. Russia has no pre-requisites for establishing democratic and independent SRO expressing the interests of the majority of their members. Therefore today the functions of the state may not be passed to SRO under no conditions. The bill “On SRO” is the especially bad option which grants such organizations the right of setting standards, controlling their observance and punishing the companies for violating them. This is absurd and harmful under the current conditions in Russia.

 

Alexander Romanikhin,
President of the Union of Producers Equipment for Oil and Gas Industry, the member of the Board of Russian Union of  Product Producers