RAIDING AS MIRROR OF RUSSIAN ECONOMY


07.12.06
MOSCOW. (RIA Novosti economic commentator Nina Kulikova)

Raiding, just like many other notions borrowed from the English language and brought to Russia as the market economy emerged, has acquired a different, mainly illegal meaning here. This phenomenon mirrors all the major problems in the Russian economy. So far market players have been more efficient than the local authorities in fighting it.
Raiding in international practice is a normal situation when a stronger and more efficient company legally takes over a weaker one. Usually both parties benefit from the transaction and the merged company continues developing successfully. In Russia, however, businesses are often taken over by illegal means.
A typical example is when bribes and loopholes in legislation help someone to secretly re-register a company's asset in another owner's name. Then the pseudo-owner arrives at the company and starts making decisions. While the legal owner tries to prove his/her rights in court, assets are sold and production shut down. In other words, raiding in Russia means illegally depriving owners of their lawful rights.
This phenomenon has already become a widespread and extremely profitable business. Experts estimate that about 5%-8% of all mergers and acquisitions in the country are criminal, with one successful illegal takeover brining raiders up to 1,000% in profit. Remarkably, such criminal takeovers never seek to develop the target company. Raiders' main goal is to profit from reselling some of its assets, mainly land plots and real estate. The Russian Chamber of Commerce and Industry estimates damage from raiding in Moscow Region alone at some $200 million.
Why are these destructive activities possible in Russia? At first sight, the reason seems obvious. As a new phenomenon for the economy, raiding is yet to be reflected in the legislation and is so far not a criminal offense. Most schemes of hostile takeovers are based on some violations of the Russian Criminal Code, from document forgery to groundless court rulings. Yet the Code does not have an article that unites all moves to take over property using criminal force. So raiders can be charged only with individual, usually not grave offenses. The masterminds most often remain safe.
The parliament is now working to eliminate loopholes in Russian laws. Last May, the government endorsed the concept of developing corporate legislation till 2008, drafted by the Economic Development Ministry. The concept seeks to put an end to raiders' takeovers and envisages a set of amendments to legislation that should eliminate the loopholes actively used by raiders within the next three years. Yet it is obvious that the problem lies not only in the absence of necessary laws, but also in insufficient enforcement of those that do exist. It is well known that no illegal takeover can take place without a case of corruption, bribing of court, administrative or law-enforcement officials. So raiding only testifies to the spread of corruption in the country. Fight against this phenomenon has been little effective so far, despite President Putin declaring it a priority.
As a result, Russian businesses have come to understand that they have to do something and that the only way to protect themselves against a criminal takeover is to unite and work out a common counteraction system. The Russian Chamber of Commerce and Industry is now actively involved in fighting raiding. A United Anti-Raider League is being set up, which will focus its efforts on protecting the rights of companies' legal owners.
It is obvious that mechanisms used by raiders reflect general problems of doing business in Russia. Shareholders are often negligent or unfamiliar with the legislation, and their mistakes allow raiders to strike a blow. If a company's assets are properly structured, the system of contract relations with suppliers and buyers is built adequately, corporate and statutory documents are meticulously executed and an appropriate corporate culture is implemented, attackers have far fewer chances of succeeding. If a business is absolutely transparent and does not make mistakes that can become bait for raiders, its takeover becomes significantly more expensive. Any takeover is designed for further sale and raiders are believed to be interested if the self-cost of the process does not exceed 10%-30%.
An obvious question is whether it is necessary to combat raiding if it actually makes businesses improve their corporate culture? Perhaps, gaining control over a company is just a tool of concentrating capital by strong companies and is a market development? Until recently, this has been the government's position, and it has not interfered with economic activities and disputes between economic agents.
However, apart from the obvious negative criminal aspect of raiding, its existence in Russia means another, minor wave of property redistribution. The very notion of private property appeared in Russia not so long ago. Privatization of the 1990s did not shape a broad group of private owners, because all large property ended up in the hands of 1% of the population. Not everyone in Russia considered it fair. So perception of private property as a legitimate notion has not fully taken shape in society and people do not see conflicts between economic agents as something extraordinary.
Respect for private property will take longer to get rooted. As raiding questions the legitimacy of private property in the country, it affects the investment attractiveness of the Russian economy both for foreigners and for domestic investors, posing a serious threat for economic development in general.
Most importantly, raiders' activities in today's Russia do not have any sense from the point of view of industrial or economic efficiency. It turns out that the biggest profit is reaped by those who can rob and sell, rather than those who produce something. This is a destructive system, which reduces economic efficiency.
Perhaps, such phenomena are inevitable on any emerging market. Experts estimate that this trend will fade away in Russia within the next five to seven years. Hopefully, joint efforts of the authorities and market players will be able to speed up the process. 0