Economics, Politics, Social Commentary and occasionally Superstring Theory.

Tuesday, December 21, 2004

Russia's Devolution

The New York Times (free registration required) has the latest installment in the Yukos saga here. This story has interested me for a while.

In the old days, Russia would just send soldiers to a business when they wanted to take it over. However, that tends to make foreign shareholders a little edgy these days. So, today Putin uses taxes. It's not exactly parking a tank outside the storefront, but the effect is the same. Here's how they do it:

All of the sudden, you get an enormous bill for back taxes. "Absurd," you say to yourself. "Tax rates aren't this high, and I paid all my taxes." You try to work this out with the tax agency, but to no avail. You go to court, which is a joke. The judge easily finds for the government. So, how will the government collect its money? They'll auction off your business, of course. But wait, the government can't just auction the business to itself. Instead, it gets a couple of buddies to stand at the auction and make the bid for the government. To add insult to injury, the bid is less than the company is valued. It's all a sham, of course, these guys are going to transfer your business to a government-owned subsidiary pretty quick. But, at least it looks more official than a tank outside your storefront.

Who does this ultimately hurt? The Russian people. Foreign investment is critical for job creation in Russia. But no one is going to invest in Russia if they think the Kremlin can confiscate their investments at the drop of a hat. The blind spot for this Kremlin has always been their inability to connect the dots between domestic sovereign action and foreign private reaction. Like it or not, Russia depends on the rest of the world. It cannot continue to act as if it governs in a vacum. Doing so will only exacerbate their problems, not solve them.


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