When the Russian government suddenly decided to dump Dmitri Savelyev as president of the lucrative Transneft oil pipeline monopoly, Savelyev was defiant, protesting that the law required a 45-day advance notice of a shareholders' meeting.
"I told them that I was not going to submit my resignation," he recalled, "and that there was a certain procedure and it must be followed."
It wasn't. Within days, Interior Ministry riot police used chain saws to break down doors at Transneft and install a new president, Semyon Vainshtok. President Boris Yeltsin announced he would not interfere in the move, which was widely interpreted as an effort by Kremlin insiders to use the state's clout as majority shareholder to put their man at the head of a cash-rich company a year before presidential elections.
The episode was one of many recently that have unnerved investors and called into question some of the basic premises of Russia's troubled transformation into a market economy. Russian companies have been battered by arbitrary decisions of national and regional governments, and shaken by the use of force, rather than the law, to settle property disputes and win control over some rich corporate jewels.
When Russia underwent a massive sell-off of state-owned factories, mines, mills and refineries in the early 1990s, the architects of privatization said the most important goal was the creation of a new generation of property owners. These new owners, it was argued, would rejuvenate aging equipment, seek new investment, run their properties in an efficient and open way, and want a state ruled by laws to settle disputes.
But the new owners have hardly lived up to the goals championed by Anatoly Chubais and Yegor Gaidar, who spearheaded Russia's first years of reform. Nor has the Russian government proven to be much better at policing the rough-and-tumble system of market capitalism.
The ruble devaluation more than a year ago has boosted Russia's economy by raising the cost of imports thus encouraging the sale of Russian-produced goods. But recent controversies suggest that profound structural problems remain concerning who controls Russian companies, how they are operated, and whether they are restructured and can attract investment.
Even the highest authorities have shown little regard lately for the law. "Here in Russia we have the rule of force. We have total arbitrariness," said Savelyev, the Transneft executive who is fighting his ouster in court. "The law is not working."
"I will say openly that this has made a ghastly impression," said Chubais, who was the first privatization boss under Yeltsin and now is chief of Unified Energy Systems, Russia's electricity grid. "The way in which this was done was an outrageous chain of gross violations of the law on joint stock companies, the Civil Code, the constitution, a consistent brazen violation of the fundamentals of present legislation."
Chubais said the Transneft move was a bad signal to foreign investors. "How could you do business with Russia's government if it uses [riot police] armed with assault rifles and wearing helmets when dealing with corporate policy issues in the center of Moscow?" he asked.
A stock market analyst, who asked not to be identified, described the Transneft coup as "an attempt of the current government to ensure the financing of the reelection campaign. I don't think it is going to be successful--it is a dire effort to grab control of the major donors."
In another case that has underscored the hazards facing investors here, a St. Petersburg court recently annulled the stakes held by U.S. investors in the 255-year-old Lomonosov Porcelain Factory, a world renowned china manufacturer. The court ruling was based on an error made in the 1993 privatization of the company, but analysts said that behind it appeared to be an effort by Soviet-era factory managers to keep control of the company out of the hands of the American investors, the United States-Russia Investment Fund and the Wall Street firm Kohlberg, Kravis, Roberts & Co.
"It was the 'red directors;' they certainly were looking after themselves and their own interests in a very big way," said the stock market analyst, who added that the government came to their aid. The government "put themselves above the law in Transneft, in the Lomonosov case, and each time when their interests are endangered, they step in and cut the knot, rather than resolve the legal issues."
In the Lomonosov decision, the investors were ordered to return their shares, for which they had paid millions of dollars, to the state. The case is being appealed.
Another confrontation over ownership has rocked the Vyborg Pulp and Paper mill, near the border with Finland, where workers and management have been trying to prevent the British-based Alcem U.K. Ltd. from taking control of the factory. Violence erupted last month at the plant, which is in receivership because of past debts, when anti-riot police attempted to seize the premises on behalf of the owners.
Kakha Bendukidze, a Russian industrialist, told reporters recently that he admired Western European countries for their sense of order. "In this sense," he said, "order means laws that are observed by everybody, by both authorities and the people. These laws are written not in order to please someone or make life harder, but in order to live by these rules.
"We don't have anything like this in Russia," he added.
Confidence in Russia suffered another setback recently with the resignation of Dmitri Vasilyev, Russia's top stock market regulator, who had won the trust of Western investors but had been frustrated in several high-profile attempts to protect shareholders. He called the Lomonosov case an "extremely dangerous precedent."
"Only half the work was done on the market from the standpoint of investor protection, despite the fact that I have been working on this for five years," said Vasilyev, a former Chubais deputy, when he announced his resignation. He said he intends to head a consulting firm to carry on the fight for shareholder rights.
His departure coincided with a major setback for the Russian securities commission, which he headed, on a test case of minority shareholder rights. The commission had launched an investigation of Yukos, Russia's second-largest oil company, which diluted the stock held by minority shareholders in its oil production subsidiaries. The goal appeared to be to wrest control of the subsidiaries from the minority shareholders, among them investor Kenneth Dart.
Yukos is run by Mikhail Khodorkovsky, one of Russia's politically influential "oligarchs." Vasilyev said his probe ran into a wall of silence from other government agencies who refused to help his investigation. As Vasilyev was resigning, the securities commission voted to approve the share dilution of one of the three Yukos subsidiaries, Samaraneftegaz, a victory for Khodorkovsky.
In a recent examination of 10 sectors of the economy, the international consulting firm McKinsey & Company Inc. found that Russia's industrial landscape remains badly in need of restructuring, but that problems of corporate governance were of secondary importance.
"In nine out of the 10 sectors, the direct cause of low economic performance is market distortions that prevent equal competition," the study found. These distortions, the report said, are often arbitrary conditions within the same industry--such as different taxes, or energy costs, or red tape and corruption. The result is that some older, inefficient factories keep running while newer, potentially more efficient competitors have trouble making it, the study found.
CAPTION: Former privatization boss Anatoly Chubais deplores unlawfulness.