Reiderstvo: Russia Puts the “Raid” in Corporate Raiding. By Jacqueline Klapak and Andrew Bowen

This past March, Chatham House published a paper on a topic that illustrates the difficulties that foreign investors have when doing business in Russia (beyond the threat of sanctions) and representative of the cannibalistic nature of the business world. The topic? Reiderstvo, or corporate raiding, in Russia.

“Corporate raiding” in the Western or American conception is when an investor spots a company with undervalued assets or on the verge of bankruptcy buys up enough of its assets to become a significant stakeholder, and then seeks to re-organize or takeover the management of the company and institute preferable business practices. Often this results in the complete liquidation of the company. Though it’s often done much to the dismay of the company’s current management, it is completely legal and remains a less than preferable version of mergers and acquisitions.

“Corporate raiding” in Russia couldn’t be more opposite. Essentially, Russian law enforcement accuses a business owner or company executive of a major white-collar crime (either with fabricated or absent evidence), the courts sentence the businessperson to jail, and the assets are given to the raider during detention or a prison term. The key components for a successful reiderstvo are (1) corrupt officials (judges, police officers), (2) fake charges (money laundering, tax evasion, embezzlement), and (3) some door-kicking and search warrants (if it’s been a boring day). It goes without saying that the only businesses free from the threat of reiderstvo are ones that are government-owned, or have a strong enough krysha (“roof”) to protect them from the interests of carnivorous businessmen and the various law enforcement agencies. The status of one’s krysha has become of even more importance with the mounting evidence that Russia’s security services, especially the economic crimes sections, are locked in a struggle for this profitable sector. It also logically follows that many businesses most prone to reiderstvo are companies with fixed capital and tangible assets—essentially, ones with buildings that can literally be raided on foot, though this is just often and not necessarily – the case. For example, if one looks at the Magnitsky case, there were actually no tangible assets. Instead, top police officials raided the office of Sergei Magnitsky, absconded with documents and company seals, set up fraudulent companies using the stolen documents, and then applied for tax rebates totaling $230 million.

The Duma’s amnesty bill in July of 2013 that was enacted to pardon white-collar criminals seemed to surprise those of us around the globe merely on the Russian sidelines. An estimated 100,000 people were thought to fall under the umbrella of requirements, the main one being that this was indeed their first white-collar crime conviction. However, according to the Chatham House paper, less than 1,300 people have been released.

In 2012, the media estimated that there were over 70,000 cases of corporate raids. As the reiderstvo is based upon fraudulent charges, one would imagine that most, if not all, of those 70,000 people made up the majority of the 100,000 people deemed to be eligible for the Duma’s new bill. Why have they not all been freed yet? Further, it takes away the merits of the new bill: the Russian government will wrongfully charge you, abscond with your assets, and then “let you go” as a favor (or to negate any unfavorable criticism in the run up to the Sochi Olympics over its human rights record as was done with imprisoned business magnate Mikhail Khodorkovsky). It calls into question the sincerity of the bill, which seems to be rife with other red flags not even a year in and lends to the credence of analysts calling it a move by Putin to improve the image of the business environment in the country without making any substantive changes.

Evidence of the level of government involvement in reiderstvo is exemplified with the expulsion of former U.S. Embassy legal advisor Thomas Firestone from the country, who is widely recognized as one of the foremost authorities on the subject of reiderstvo.

It is still too early to tell how the bill is going to play out or whom it will affect. For now, reiderstvo has to be taken as a normal risk to calculate when doing business in Russia. Until then, business owners can only hope that if it happens to them, they might luck out and be one of the 2% of the eligible who actually do get pardoned as a result of the bill. After all, not everyone can move to Switzerland.

 

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