Russian Capitalism Still Has Muscle Behind It

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.

“If this can happen to the Soros foundation, can you imagine what can happen to the little businessman?”

And not just the little businessman. In October 2003, Yukos Oil Chief Executive Mikhail Khodorkovsky found his private jet surrounded by masked law enforcement agents in commando gear, and the oil executive -- then Russia’s richest man -- was arrested on fraud and tax evasion charges.

Yukos was gutted when its main production unit, Yuganskneftegaz, was seized by the tax authorities and sold for a fraction of its value to a state-controlled oil company whose chairman happens to be a senior Kremlin official. Yukos shares, many of them held by foreign investors, plummeted, and the company is on the verge of bankruptcy.

In the case of the Aerostar Hotel, AeroIMP was forced out in August 2004 by a Russian company known as Aviacity, which AeroIMP alleged had illegally acquired property rights to the building. Aviacity jacked up the rent by millions of dollars and ordered a halt to all subleases at an adjoining office complex. IMP had by then sunk $40 million in the complex.

AeroIMP alleged that Aviacity was trying to seize a valuable piece of central Moscow real estate.

Aviacity went to court, alleging that AeroIMP was in violation of its long-standing lease by subleasing the office property without Aviacity’s permission. The court initially agreed. But instead of allowing the issue to be fully litigated or waiting for court bailiffs to execute any court orders, Aviacity’s attorneys showed up with what Ivanyi described as “about 30 goons” outside his office.

“Their lawyer said, ‘I would advise you to leave quietly. It would be better for you.’ The words he used were, ‘Or we’ll carry you out,’ ” Ivanyi recalled. “We picked up the papers on our desks and left.”

That was a Friday afternoon. Hotel guests were given until Sunday morning to decamp, while Ivanyi and his managers retreated to a room of a competing hotel across town.

The Russian legal system, notorious for corruption and government interference, was of little help. AeroIMP lost its first round in court, won on appeal, then lost again. Finally, the Supreme Arbitration Court issued an injunction, upholding the management’s right to possession of the hotel while the legal case played out.

Without explanation, the court reversed itself seven days later.

“I’m not going to say the obvious,” said the hotel management’s lawyer, Alexander Skoblo.

Aviacity officials said they were merely executing valid rulings of the court. “We did everything legally,” said Marina Khvostova, general director of the company.

“Do you think if they had a lease [that was] valid ... the courts could have ignored that? Now they are declaring to the entire world that they were evicted illegally. I can tell you, it’s not true.”

In the Trinity car dealer case, presidential property department spokesman Viktor Khrekov said the dealership’s lease on the federally owned property expired March 30, well before the eviction in May.

“They were directed to free the premises. They did not do so. The whole procedure was taped. It is clear no violence took place. So why they are making a big thing out of a small one, I do not understand,” Khrekov said.

One of the main sore points for Trinity was that the company had spent $860,000 renovating the building after assurances they would be allowed to renew their lease. Then they were told by Izvestia, the government-controlled firm administering the building, that the lease would be awarded to another company.

Trinity believed it had a legal right of first refusal. Then, during a conversation that Trinity spokesman Amirkhanian tape-recorded, an Izvestia official told Trinity that it would be fruitless to try to hold on to the property.

“You can hear on the tape where he says, ‘Go ahead and record,’ ” Amirkhanian said. “Either he didn’t believe we were really recording it, or he was so arrogant that he didn’t care.”

Corruption in its many forms is something foreign businesses have to deal with all over Europe, observed Andreas Romanos, head of the Assn. of European Businesses in Russia. The difference, he suggested, is that corruption elsewhere may be “more refined” than the Russians who show up in SUVs.

Despite the rough stuff, he said, most investors have decided that the potential returns in Russia outweigh the obvious risks.

“If you’re willing to bite your lips and go to work in Russia,” Romanos said, “your payback’s going to be faster and your growth is going to be larger.”

Ivanyi agreed. After all, nearly 10 months after he was thrown out of his office, he’s still in Moscow, ready to work.

“Despite all the difficulties and potential dangers, if you look at the number of multinationals working in this country, the answer is, we have to be here. It’s a country with a future,” he said. “It’s a country of 150 million people. The customers are here.”