Academic journal article Demokratizatsiya

Violent Corporate Raiding in Russia: Preconditions and Protective Factors

Academic journal article Demokratizatsiya

Violent Corporate Raiding in Russia: Preconditions and Protective Factors

Article excerpt

Abstract: By using a database of 543 cases of violent corporate raiding in Russia from 2011-2013 assembled by the Center of Public Procedures "Business against Corruption," we tested several hypotheses: Violent corporate raiding is widespread in regions 1) with well-developed industrial, construction and trade sectors 2) rent-oriented law enforcement agencies cooperating with raiders and 3) low numbers of NGOs. The level of violent corporate raiding is connected to the economic appeal of the region and its capacity to implement raiding due to the rent-orientation of regional law enforcement. Because raiders can be considered rational economic actors who try to maximize their benefit, the best way to improve the situation is to increase the risks for raiders by developing civil mechanisms for the protection of entrepreneurs, for example, business associations and other NGOs.

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In the World Bank's ranking examining the ease of "Doing Business" across countries, Russia ranked 62nd out of 189 in 2014. (1) This negative result (in comparison with European countries) is a consequence of several factors including corruption and a high level of uncertainty for businesses. A key issue related to the interaction of business and government is the problem of violence and the rent-seeking behavior of different state agencies. The most important component of the market economy --property rights--cannot exist without developed mechanisms for their protection from both criminals and the predatory state. There are a variety of consequences for the absence of property rights protection, including corruption, contract killings, extortion and violent corporate raiding. We will focus on violent corporate raiding.

Violent corporate raiding is a phenomenon distinct from hostile takeovers typically found in capitalist economies in two main respects: the active participation of state agencies in the process and the use of physical or administrative power. The typical result of violent corporate raiding is the imprisonment of the entrepreneur and the destruction of his business. Therefore, violent raiding is clearly an example of "destructive entrepreneurship" as defined by Baumol. (2)

A good example of a violent raiding attack is the case of the energy company Volgaelektrosbyt (3) that occurred in 2011. This company supplies electricity to the entire Samara region (with approximately 1.1 million citizens), but the significance of the enterprise for the city and the region has not deterred raiders. In several incidents, the company was stormed by private guards, official regulators came to perform inspections, and the employees received threatening phone calls. One member of the board of directors was kidnapped. Finally, strangers threw Molotov cocktails into a company building, starting a fire. This situation resembled similar events in the 1990s, but they took place in contemporary Russia.

"Violent corporate raiding" has been generally discussed, but most analyses of corporate raiding in Russia are of a descriptive character, mainly because of the lack of official statistics. Using a database containing the 543 applications of Russian entrepreneurs to the Center of Public Procedures "Business against Corruption" that were received from 2011-2013, we undertook a thorough empirical analysis. Our main task was to identity the "preconditions" for violent raider attacks in Russia and to locate the factors that can reduce the probability of these tragic events.

Certain questions concerning this problem should be clarified. Who are the typical victims of raiding attacks (in terms of size, specialization, and geography)? Are the economic conditions in the region connected with corporate raiding? What are the factors that can reduce or increase the probability of raiding in the region (or the entire country)?

According to our analysis, the typical victims of raider attacks are small or medium sized companies in fast-growing sectors of the Russian economy (at least before 2014). …

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