I've long argued that the legal manipulation carried out during the state's theft of Yukos and other abuses of courts (see the spy-mania trials) by the Federation has had enormously negative implications for rule of law and development of the legal system. One of the clearest signs of this rapidly deteriorating independence of the judicial system is Russia's dramatic rise in corruption and bribery. This fall international watchdog Transparency International ranked Russia 143 out of 180 in the Corruption Perceptions Index, while other indications and informal reports show that bribery continues unabated. Given the more recent high-profile extortion by the Russian government of energy companies like Royal Dutch Shell, BP, Imperial, and Russneft by regulatory authorities, there is also credible evidence behind the theory of "centralized corruption" - as officials willing to wet their beaks go higher and higher up in hierarchy, the Russian government becomes a "one-stop shop" for bribery (credit due to Laura Citron at nEUrosis for that one).
There are many systemic issues at stake with regard to the corruption problem that reforms have so far failed to address (although it should be noted that some of the most important attempts to reform Russia's judicial system were carried out by Vladimir Putin during his first term in office - such as attempting to increase the salaries of judges, and modernizing the Code on Criminal Procedure). A 2005 report by the International Bar Association notes that many competent and independent minded judges are dismissed without reasonable grounds: "Sources interviewed and materials examined by the delegation provide support for the widespread perception of abuse of power by Court Chairpersons in such matters as dismissals, termination of probationary judges, assistance in obtaining apartments and other nonmonetary privileges, and allocation of cases. ... The delegation is particularly concerned by a number of cases of judicial dismissals where
undue influence appears to have been wielded by Court Chairpersons or other parties. ... there persists the pre-reform concept of the role of judge as supporter of the interests of the State rather than as an independent arbiter between the citizen and the State."
Corruption is furthermore engendered by the frequent asymmetry between parties in court, and the relatively large financial stakes, writes legal scholar Ethan Burger. "According to some Russian attorneys, a judge might first examine a case, decide which party should prevail on the merits, and then seek payment for issuing the proper decision. Other judges will simply favor the highest “bidder” for a favorable result."
Considering these challenges, what can be done to combat corruption, avoid bribery, and secure justice and fair process in a business dispute in the jungle courts of Russia? One advocacy group has come up with a very interesting theory of citing precedent - even though Russian law does not operate based on precedents. The authors of this great blog post argue that "in authoritarian and semi-authoritarian environments where mid-level or even high level bureaucrats are afraid to make decisions," citing precedents can be enormously effective because of a higher "proclivity for inaction."
From the CIPE Development Blog:
The Perm business advocacy coalition in Russia recognizes that with high demand for bribes, entrepreneurs are often willing suppliers. For individual entrepreneurs paying bribes is usually more cost effective than defending oneself against corrupt bureaucrats through a weak legal system. Therefore, the coalition decided to summon the powers of collective action to utilize norms and legal precedents in the fight for business rights.Member of the coalition - associations and chambers of commerce - decided to support an entrepreneur whose rights had been violated when city officials fined him for selling goods without a license. Those officials who attempted to fine him were not tax inspectors and exceeded their duties according to the law. Furthermore, the law clearly stated that in this circumstance the entrepreneur was not required to acquire a business permit. The court agreed that the fine was unjust and a precedent had been set for other entrepreneurs to use in defending themselves in similar cases.
Although Russian law does not operate based on precedents, the coalition finds that citing precedents in cases related to business are effective in getting judges to uphold the rule of law and setting norms for business people. The coalition is consolidating documents to be used in the defense of local business people when similar cases come up.
In many cases reminding a bureaucrat that a precedent has already been set, provides sufficient justification for the official to change his/her mind. The coalition has so far supported individual entrepreneurs in 10 cases. Out of these, the coalition won 3 lawsuits. In 6 additional cases, local government conceded that the coalition was right, even before local courts made a judgment.
Setting precedents can be particularly helpful in authoritarian and semi-authoritarian environments where mid-level or even high level bureaucrats are afraid to make decisions. The more authoritarian the environment, the higher up the totem pole we are likely to find a proclivity for inaction. By setting precedents, even in a legal system like Russia’s, which isn’t based on precedents, you give bureaucrats and judges the sense that a norm has been set. Thanks to the characteristically atrophied development of authoritarian systems, once you change something in such a system, it is unlikely to change again. Precedents can therefore be hard to change without directive from above, and the rule of law begins to work for entrepreneurs and other members of society.
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I'm sure some part of the information about corruption in Russian court system is true - I saw it several times.
But in regard of the Yukos and Russneft cases it's more of PR thing than a real analysis of court proceedings, circumstances and law infringement.
Back in 2001 I worked for Big5(4) company as a tax advisor and auditor for Menatep/Yukos group and I personally wrote letters to the top Yukos management about their bad tax risks and internal controls. They did consider the advice, but their choice was to continue tax evasion practices and try to get a deal with the authorities, including courts. Should I tell that it implies massive bribery and threats? Meanwhile, they got exactly the same outcome which was documented in our letter more than a year before everything started to look real bad for them. It worth noting that the "schemes" with internal russian tax heavens they were implementing also have been asked about by other big russian companies, Yukos's rivals. And they've got the very same advice and are alive now, because they didn't choose to take such a risk.
As to Russneft - these guys used a very unsophisticated tax evasion scheme, almost directly transferring earnings to some isle offshore company; in any american bank such transfers are considered as a trigger to begin an urgent investigation on money laundering or criminal activities. And surely, the tax authorities would sue to bankruptcy anyone who dare to do such things in Europe or US.
I'm advising for companies on russian (and some foreign) taxation almost for 10 years now. I don't like to participate in courts on tax issues, but I did it numerous times.
In my view, both these cases, as well many other less famous ones, were caused by the following:
1) russian civil and tax legislation itself is just developing (it's 10 years old at maximum) and most of our lawmakers from 1991 to 2001 were free-economy-minded and benevolent (like Gaidar), but completely incompetent thus failed badly in mechanism design. Even now every time I'm consulting on some international transaction, I feel a tremendous envy to my US/UK/Dutch/German/etc colleagues for scrupulously formed languages in tax codes that gives both simplicity in tax calculations and leaving enough space for business to maneuver without breaching social interests.
2) In addition to the above, most judges and tax inspectors are still infamiliar with even basic business and economic principles, because they have grew up in completely different framework of command economy. This positions were underpaid for 10 years even compared to middle salaries in business and only current president has enough budget to raise them somewhat. Pity, it's done also in a very unsophisticated almost 'command-economy' style, but liberals here do not have anything better to propose since 1991, so it's just best choice available.
3) Having all economic reforms and freedoms granted back in 1991, russian business have been simply wild for 10 years, and by the Putin's coming was not prepared to comply even with the newly developed laws. So the corruption has its roots in the late soviet and following privatisation years; and no liberal really cared about it before Putin - they were just screaming about it and were unprepared to do something with it even given enough power in parliament and government. Having all the soviet 'nomenklatura' inequalities and failed hopes for free economy growth with liberals, no wonder that most russians now are somewhat prejudiced against capitalism - they choose Putin just to get something in order. If it took Yukos or Russneft - dura lex sed lex, that's it, not more.
Sorry for being emotional, but reading how foreign press and economist's blogs mention Yukos leaves me with long forgotten feelings of cold war era.
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November 7, 2007 9:33 PM
Posted on November 7, 2007 21:33