In Russia's Bear of a Market, an Ounce Of Prevention Is Worth a Pound of Bullets
Russia's "atmosphere of unrestrained crime" is stifling American investment here, wrote Republican leaders in the US Congress to Russian President Boris Yeltsin this week. The members prodded Mr. Yeltsin to resolve the case of Paul Tatum, who earlier this month became the first prominent American killed in Moscow's violent business scene.
Since Mr. Tatum's murder, a bombing at a Moscow cemetery killed 14 people connected to an Afghan veterans' organization in a tragedy that appears to have roots in the group's lucrative tax and customs exemptions as a charity.
In the now-legendary lawlessness of the post-Soviet Russian economy, business disputes can quickly escalate into violence.
But just how dangerous is Moscow, and for whom?
On one hand, the number of contract murders in Moscow is at an all-time high - at least 234 so far this year. In cities such as Moscow and Yekaterinburg, the homicide rates rank up with cocaine-choked Colombia and parts of Sicily, says Louise Shelley, who studies organized crime in Russia from American University in Washington.
On the other hand, for tourists and average residents, Moscow may be safer than most American cities. In fact, the overall murder and violent crime rates dropped significantly in Russia since last year.
So the country may be growing safer in some respects.
One Western businessman, who has worked in Moscow since the early 1990s, says he has never been threatened by racketeers in Russia. His only acquaintance to fall victim to violence was Paul Tatum.
The only crime he has personally encountered, the businessman says, was a would-be mugging late one night by a drunken military officer, whose sober driver convinced the officer to hand the businessman's wallet back.
"The incidence of random crime, I personally believe, is lower here than in the United States," says an American Embassy official, who adds that he and his wife feel safe strolling central Moscow at night.
At the other extreme stand Russian bankers.
Vitaly Sidorov, executive director of the Association of Russian Bankers, compares the risks of the banking profession here to that of test pilots. In the past four years, 78 bank employees - mostly senior executives - have been murdered, and another 31 have been seriously wounded. Fewer than 10 culprits have been caught, and none in the most prominent cases.
Learning the rules to avert mafia
But even in the physically and economically treacherous realm of Russian finance, risk is not unmanageable. Both Russian and Western businesspeople say a business can stay out of trouble with the so-called mafia and still prosper by learning the local rules of business behavior.
"There are a lot of examples of persons who have high moral principles, decisive character, and a pioneering spirit who do honest business in Russia and find many opportunities to do well," says Alexander Krylov, deputy director of Amulet, a security firm that specializes in protecting Russian banks.
But they need to take security much more seriously than in Western Europe or North America, he stresses. And security is not primarily a matter of bulletproof vests and armed bodyguards, but more one of intelligence and diplomacy.
One foreign entrepreneur, Rostislav Ordovsky-Tanaevsky Blanco, began opening restaurants in Moscow in 1988. He now owns and operates 25 in Russia. Up through 1994, he says, the managers of his restaurants in Moscow were frequently approached by gangs for protection money. Several times, the gangs threatened the managers and demanded to meet them out in the street. But the managers always said they would only deal with the police, and then brought the police in directly. They have never had any violence.
"You don't need to show that you are weak," says Mr. Ordovsky-Tanaevsky, "and you don't need to be explosive." But stick to your position, he says. "The first time you pay, you're stuck."
His restaurants in Moscow are no longer approached by gangs, he says, because gangs know now that the establishments are part of a larger chain that has a good relationship with the Ministry of the Interior militia. His restaurants outside of Moscow are still approached, so good relations with the local police are important. This doesn't mean paying bribes, he says, but can mean goodwill gestures such as contributing occasionally to a fund for the widows and orphans of fallen officers.
Running for 'cover'
A key part of security in Russia is checking out prospective business partners, and the typical Western analysis of balance sheets will generally reveal very little. Two companies may look equal on paper, says Mr. Krylov of Amulet security, but the paper trail leaves out the key question of patronage, which Russians call a company's "roof" or "cover." "There is hardly a business in Russia without a cover. It can be criminal or militia or high government officials, and often it is an odd combination of all three," he says.
Cover is important in Russia because the legislative groundwork of property ownership, finance, and contract enforcement is still unformed. Commercial courts for resolving contract disputes are brand-new, few in number, and untested. And the police are not entirely accustomed to viewing the business sector as worthy of protection. As recently as the 1980s, the Soviet Union was still inflicting capital punishment for "profiteering."
Most businesses here seem to rely on establishing personal relationships with the police, often by hiring former law-enforcement officials as security, rather than expecting neutral professionalism.
So cover becomes a form of security. And business owners should understand that if, for example, they sign a contract with an outfit that has the patronage of a politician who is facing reelection, the terms of that contract may change if that politician loses, Krylov says.
An important part of his business, says Krylov, is taking preventive action when he has reason to believe a client may start coming under pressure from a criminal group. This means meeting with the criminals and warning them off.
Part of his firm's ability to successfully warn criminals off stems from the firm's well-known relationship with police. (Many of Amulet's employees, including Krylov, are former law-enforcement officers.) And part of this ability, he says, lies in his firm's absolute insistence on never taking part in any illegal business - so that criminal groups never make inroads into his clients' businesses. Most of his security work, in fact, is negotiation. "If I am physically protecting a banker's life, then I have already failed in my work," he says.
Bankers in particular have been a target of criminals because they have made fantastic sums of money in these early years of Russian capitalism - and have often grown financially well beyond the limits of their banking skills, says Krylov. So they frequently face financial crises - nonpaying borrowers, for example - that draw criminal groups to their doorstep, offering their services.
Once these groups are in the door, perhaps as collectors, they move in to use the bank for money-laundering and other illegal operations.
Strangely, Krylov says, he often prefers to deal with illegal covers. The criminal world is more predictable and has its own strict set of rules and customs.
For example, he would make sure not to arrive late to the first meeting with the cover of the other side. If the cover is a legal entity, then it will not much care.
But if it is a criminal group, punctuality is part of the criminal code, and arriving late to a meeting with an illegal cover could lead to unpleasantness.
And if the cover of the other side is a police organization, negotiations are more complicated, both because Krylov must preserve his own relationships with the police and because some police have been corrupted by criminal groups.
"Just because he wears fatigues doesn't mean he's honest," he says.