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Russian Capitalism Still Has Muscle Behind It

Contract laws are in place and courts mandate conflicts, but sometimes disputes are settled by hired force.

June 26, 2005|Kim Murphy | Times Staff Writer

MOSCOW — In a city mad for the automobile, even a tiny downtown showroom was a license to print money. Selling Chevrolets, Cadillacs and Opels, Trinity Motors was raking in $1 million a month.

A group of Canadian and British investors operated the dealership on tony Tverskaya Street for 13 years. Until one morning late in May, when Trinity Motors ceased to exist.

Shortly before noon, about 30 men, some dressed as security guards, some in jeans and shorts, swarmed into the showroom, forced Trinity's managers and employees out of the building and proceeded to paint over the windows. The dealership's lease, Trinity was told, had not been renewed by the Kremlin property administration.

The truth was more complicated -- and ultimately much more worrying for anyone who has money invested in Russia, said Trinity spokesman Rudy Amirkhanian. Trinity managers were told that the new lease on the property was being awarded to a little-known company with friends at the Kremlin.

"Somebody at the presidential administration wants this facility. I have my hands tied behind my back," an agent from the property administration told Amirkhanian in a tape-recorded conversation a week before the bouncers showed up.

"Are you telling me the presidential administration is above the law?" Amirkhanian queried.

"The president is above the law -- of course above the law. We do not live in a law-governed state, though the actions we're taking are strictly legal," the federal property services agent replied. "Bandits? OK, we're federal bandits. And if you want to see who's stronger, you're welcome."

In the 1990s, when Russian capitalism was young and the law was pliable, business disputes routinely were settled by teams of thugs and showers of bullets.

It's not supposed to be that way in 2005. Now, contract laws are in place; uniformed bailiffs deliver eviction notices; courts mediate disputes. Most of the time.

In the new, "normal" Russia -- which concluded a strategic partnership agreement on key economic issues with Europe in May and hopes to join the World Trade Organization by next year -- business disputes are still sometimes settled by fleets of SUVs showing up at the curb. Men with buzz cuts and big neck muscles get out, and property abruptly changes hands in favor of the guy who hired the neck muscles.

Last year, operators of the Aerostar Hotel, one of Moscow's longest-operating four-star hotels, found themselves thrown out onto the street by 30 security toughs after their landlord suddenly demanded a $30-million rent increase for their long-term lease -- after the Canadian managers had invested $40 million of their own money in upgrading the hotel. Registered guests were ejected 36 hours later.

A few months earlier, the Moscow office of billionaire philanthropist George Soros' Open Society Institute was raided at midnight by the landlord and 50 men in camouflage outfits, who burst through a window, shocked the organization's guards with electric prods, covered up surveillance cameras and then proceeded to lock up the building and all its contents, including files and computers.

A few days later, 20 masked men bearing clubs swooped into the building in an apparently unsuccessful attempt to take it back.

Such transactions are often wryly referred to by lawyers in Moscow as "self-help" -- the act of advancing a troublesome legal case by swiftly establishing new facts on the ground.

"You can't legally throw the other party out if you have a rental dispute, but it happens here all the time," said Jamison Firestone, an attorney who represents business clients in Russia. "The other party can't get to their possessions, they can't run their business, so they capitulate because by the time they get it back, there'll be nothing left."

The point, many businessmen say, is not who is right or wrong in these often-murky contract disputes, but the frequency with which they are decided by physical force.

Of particular concern, said Firestone, is in a case like Trinity's, where the government uses muscle.

"With Trinity Motors, there should have been a court case, and even then, only the bailiffs can throw somebody out of possession. They just didn't bother to wait," he said. "Actions like that don't give investors warm, fuzzy feelings.

"It sets a horrible precedent, and it's one of the reasons that capital flight out of this country is estimated to be $14 billion over the next two years."

The number of such cases is far fewer than in past years but seems to be experiencing a minor upsurge, some business leaders said.

"In the early '90s, this was very commonplace. It was the Wild West. And then, it seemed like the country was stabilized. But suddenly it seems like, in the last 18 months, things have gotten worse," said Andrew Ivanyi, who managed the Aerostar for AeroIMP, a joint venture of a Halifax, Nova Scotia-based investment group, IMP Group, and Aeroflot Airlines.

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