Russia’s Top Bankruptcy Expert Gunned Down

On the morning of Wednesday, April 28, the former head of Russia’s Federal Bankruptcy Service, Georgy Tal, was shot on the street outside his office in downtown Moscow. The 48-year-old Tal headed the Federal Bankruptcy Service from January 1998 to February 2001, and helped write the 1998 law on bankruptcies. He was the target of an assassination attempt in 2002, but a few months ago dispensed with his bodyguards.

Tal’s tragic assassination serves as a reminder that contract killings remain a feature of the Russian economic landscape – despite President Vladimir Putin’s much ballyhooed drive for law and order. And it draws our attention to the ruthless and often violent role of bankruptcy suits in the ongoing struggle for control of Russia’s industrial assets.

Tal was involved in thousands of cases during his time at the Federal Bankruptcy Service, and hundreds more in his subsequent career as a private consultant. His killer was presumably hired by one of the businessmen involved, worried about what incriminating information Mr. Tal was harboring (Vedomosti, Moscow Times, April 30).

Since leaving the bankruptcy agency in 2001 Tal had headed a private firm providing receivership managers for firms in bankruptcy proceedings. His company was founded in 2003 under the sponsorship of the Russian Union of Industrialists and Entrepreneurs (RUIE), the main organization representing Russian businesses. In 2003 the RUIE set up a new dispute resolution procedure, and Tal was a mediator in its first case, a dispute between Stiltex and Alfa-Eko involving money paid to the latter by the Russian Aluminum conglomerate. The case was arbitrated by Mikhail Khodorkovsky, who was a member of the RUIE board, shortly before his arrest in fall 2003.

The new bankruptcy law introduced in 1998 allowed a company to be declared insolvent by a court at the request of any creditor with a debt of US$12,000 or more unpaid for 90 days. The number of insolvency filings doubled to more than 5,000 the next year, as unscrupulous entrepreneurs started using the procedure to seize control of rival firms – either with a view to taking them over, or merely to disrupt their operations. Regional judges were often under the sway of local bosses or regional governors, and could easily be persuaded to agree to the declaration of insolvency and appointment of an emergency manager. Then it was a matter of using a security team to take over the plant and install the new management. In many cases this involved physical confrontations with rival teams of hired thugs, with the plant workers sometimes getting involved. The flaws in the new law were widely recognized, and in December 2002 it was amended to make it more difficult for creditors to file a claim.

Vadim Volkov, of the European University in St. Petersburg, has analyzed the process of hostile takeovers in dozens of cases involving major firms. Some of the most prominent cases included Oleg Deripaska’s Rusal (now renamed Base Element) and the Alfa group, which controls Tyumen Oil Company. Volkov argues that this wave of takeovers under the cover of court rulings amounts to a third wave of privatization, following the voucher scheme of 1992-94 and the loans for shares of 1995-97 (see PONARS memo No. 273, October, 2002, at www.csis.org/ruseura/ponars).

Volkov’s findings are bolstered by a study written by Ekaterina Zhuravskaya and others of the Center for Economic and Financial Research (CEFIR) in Moscow (the study was released on June 18, 2003; see www.cefir.org). Volkov stresses the extent to which public security organizations – the police, the Federal Security Service – have been increasingly involved in these hostile takeovers. Zhuravskaya notes how regional governors have often used this procedure to protect local firms from outside competition, and from federal tax inspectors.

In Western eyes, bankruptcy should be used to discipline managers, harden budget constraints, and improve efficiency. Shifting decision making from state bureaucrats to independent courts should lead to more efficient contracting. But the Russian reality is quite different. Bankruptcy is used to enrich corrupt entrepreneurs and their political allies, and to protect firms from competition. The courts are just as likely to be used to evade contracts as to enforce them.

During his four years in office, Putin has repeatedly insisted on the importance of a dictatorship of law. But organized crime seems undiminished, and the legal system is at the disposal of security agencies and their business cronies to pursue their economic interests beneath a veneer of legality.

Indeed, Putin has used this very mechanism to take down the Yukos management. This means that it is unrealistic to expect him to take any decisive steps to stamp out such manipulation of the legal system by regional governors.