Opinion

The Great Debate

How Russia puts business behind bars

By William E. Pomeranz
July 5, 2013

President Vladimir Putin at a news conference at the Kremlin in Moscow, July 1, 2013. REUTERS/Maxim Shemetov

The Russian Duma approved its much anticipated amnesty for entrepreneurs on July 2, seeking to halt the legal onslaught against the Russian business community. More than 100,000 Russian businesspeople are now either in prison or have been subject to criminal proceedings, according to Boris Titov, Russia’s official ombudsman for the defense of the rights of entrepreneurs. He maintains that the majority are innocent.  Releasing them — and improving Russia’s overall business climate — remains critical as the Russian economy continues stumbling along with low growth and falling revenues.

Russia has reached this disastrous state because of Moscow’s abuse of criminal law statutes — specifically provisions covering economic crime. Law enforcement authorities use these statutes, many still based on Soviet law, essentially to criminalize regular business activity, otherwise permitted under Russian civil law.

So Russian criminal investigators, tax inspectors, prosecutors and other oversight bodies — often at the behest of criminal groups — have used these broad laws to intimidate, and blatantly steal from Russia’s fledgling small business community. Titov regularly highlights these miscarriages of justice.  He recently traveled to Rostov-on-Don, for example, and singled out an entrepreneur who had been detained without trial for five years based on charges of fraud (Article 159) — the most abused provision within the Russian criminal code.

Titov broached the possibility of an amnesty about a year ago, to bring attention to the plight of Russia’s small business sector. He hoped that releasing thousands of Russian entrepreneurs might also spark economic growth.

President Vladimir Putin initially responded coolly to the proposal. But he then publicly urged the Duma to pass an amnesty, if narrower than Titov envisioned.

The Duma subsequently reduced the number of criminal code provisions subject to the amnesty from 53 to 27 — in part to ensure that Putin’s most prominent critics, including Mikhail Khodorkovsky and Alexei Navalny, would not fall under any official pardon.  Fraud, the most misused criminal statute, was only partially included in the list of crimes subject to the amnesty. The draft legislation also included the demand that before one could be released, the accused had to make the victim whole and pay any outstanding expenses or damages.

As a result, Titov’s blanket amnesty has been watered down to a conditional release — and it remains unclear who is, or is not, covered. What happens to those convicted on multiple counts, one commentator asked, when only some are covered by the amnesty?

In addition, the requirement to compensate victims for any alleged losses essentially means that all entrepreneurs must concede their guilt before they can be released.  Such an admission runs counter to the primary justification for the amnesty — that charges were fabricated in an overwhelming number of cases.

With the Duma’s revisions, the estimated numbers of entrepreneurs covered by the proposed amnesty dropped from 100,000 to 10,000 — to potentially as low as 5,000.  Instead of boosting Russia’s small- and medium-sized businesses, the sector will most likely continue to contract. A sharp increase in the social tax last year has already driven hundreds of thousands of small companies out of business or into the shadow economy.

Russians’ desire to participate in the private sector has also declined dramatically.  Only 3.8 percent of Russian entrepreneurs intended to open a business in the near future, according to a recent survey in Russia by Babson College and the London Business School. The corresponding collective average in Brazil, India, China and South Africa, the other BRIC nations, was 21 percent.  Russian university graduates also overwhelmingly favor working for state companies rather than in private enterprise, though interest in major international companies is on the rise.

Ironically, Moscow hired both J.P. Morgan and Goldman Sachs to help improve the overall image of the Russian economy and attract foreign investment. Yet all of Russia’s major economic problems are homegrown and require a domestic solution.

Russian legal experts have put serious proposals on the table to deal with the over-regulation — and criminalization — of Russian business. The amnesty as now discussed, however, does not address these fundamental deficiencies.

As a result, the legal harassment of Russian entrepreneurs looks likely to continue long after any amnesty has come and gone. The amnesty also does not ease concerns of foreign investors, whose negative perception of the Russian legal system is unlikely to change because a few entrepreneurs are released from jail early.

The debate over the amnesty raises a more basic question: Does Putin want to solve this problem?  Though he talks about the need to diversify the economy — with small business playing a critical role — he overwhelmingly continues to bet on state capitalism as the path forward. Moreover, as he learned during his re-election campaign, it is the emerging middle class that is most likely to come out and demonstrate against his policies.

The amnesty partially disarms the opposition, since on paper Putin has now provided some relief to Russia’s struggling entrepreneurs. Yet this reprieve comes with considerable strings attached and does not address any of the fundamental legal and institutional deficiencies that created the problem in the first place.

Amnesty provides the appearance of a solution without getting to the root causes. This may be exactly what Putin wants right now.

 

PHOTO (Insert A): Deputies stand for the national anthem at the opening session of the Russian State Duma, the lower house of the parliament, in Moscow, Dec.21, 2011. REUTERS/Sergei Karpukhin

PHOTO (Insert B): Participant holds up a placard with picture of an imprisoned tycoon, Mikhail Khodorkovsky, during a commemoration of victims of political repression in Moscow, Oct. 30, 2012. REUTERS/Maxim Shemetov

Comments
3 comments so far | RSS Comments RSS

Given that way back in ’90s it was considered OK for “good businessmen” to evade tax, fraud their clients and partners etc etc – traits which government under Putin tries to root out – can’t say that general populace likes amnesty. General consensus is that economical criminals of ’90s were not punished and “why bother with prisons, bullets are cheaper”.

Posted by chyron | Report as abusive
 

This article is biased in the most short-sighted way. Fraud is rampant and was not kept in check for a very long time. It makes sense to crack down on it hard. Also, centralisation and state control of all operations must be encouraged. It is a long, arduous process, but well worth the payoff if done correctly. It may be slow, but most certainly the system will benefit in the long term, and in theory so could all citizens.

Posted by AgnieszkaMaria | Report as abusive
 

I bet you the democrats would love to emulate the Russian approach to business.

Posted by jorge62 | Report as abusive
 

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