SECURITY AND ENFORCEMENT AS PRIVATE BUSINESS:
The Conversion of Russia's Power Ministries and Its Institutional
Consequences[1]
Vadim
Volkov
(For
publication in: V. Bonnell (Ed.) New
Entrepreneurs in Russia and China. Westview Press, 2001)
The institutional analysis
of economic markets requires differentiating the rules from the players and
focuses on organizations that have developed as a consequence of the
rule-structure.[2] Following
that, I suggest that entrepreneurs can also be differentiated into those
concerned with rule-structure and conventional players affected by that
rule-structure. This article looks at how entrepreneurs concerned with
rule-structure emerge and evolve. Its major focus is on former Soviet state
security and enforcement employees who have created, over a very short period
of time, a new business sector which deals in rule-enforcement and property
protection, i.e. in particular institutional services.
The major players in the new sector are private protection agencies – legal commercial entities whose business consists in the management of organized force and information. Like other economic subjects, they operate in pursuit of profits. The commodities they deal in are nonetheless of different nature: they refer to some key elements of business environment rather than to any particular business. Yet, the activity of private protection agencies has turned the maintenance of institutional environment into a particular form of private business too. Private protection agencies produce and sell such services as protection, informational support, dispute settlement, and contract enforcement. The success of their business is conditioned by the superior ability to use and manage organized force and information[3].
Thus,
the article examines a major structural change resulting from Russia's liberal
reforms – the privatization of security and law enforcement organs. Comparable
in its significance to the rapid privatization of the economy in 1992-95[4],
this shift has nonetheless largely gone unexamined by scholars[5].
Economic historians have long established that in the past the formation of the
market economy was accompanied, if not conditioned, by the proliferation of
specific institutions that protect private property and ensure its orderly
transactions. This process took decades if not centuries[6].
In Russia, a new cycle of institution building was triggered by political and
economic reforms that shattered formal institutions of the state socialism. Its
outcomes are still far from clear, but some contours are already discernable.
Throughout the 1990s private protection and enforcement agencies have created a
hybrid sector between economy and the state. This creation did not figure on
the agenda of those who designed Russian reforms. Rather, it was a combination
of short-term political decisions aimed at reducing the power and capacity of
the old Soviet state security institutions, adaptive responses of the state
security personnel to these policies, and the institutional demands of emerging
markets that led to the quick formation of this whole new business sector. So
in contrast to the creation of the private economy which was the primary reform
target from the start, the privatization of protection and enforcement came as
an unintended and ambiguous development.
Reforms of the state security organs
On 22 August 1991, the huge
statue of Felix Dzerzhinsky, the founder of the Soviet security service, was
triumphantly toppled by the crowd of people in front of the KGB headquarters in
Moscow in the aftermath of the failed coup d'etat. It was the culmination of
the spontaneous popular protest against the communist system. The act was
deeply symbolic: the KGB was the embodiment of the coercive power of the state,
and the conspicuous popular violence towards it signified defiance and
liberation. In the mass consciousness the communist state and its coercive
organs represented a major obstacle to liberal reforms that was thus
symbolically removed.
Reforms
of the state security organs followed. Their aim, as Vadim Bakatin, Yeltsyn's
appointee to the post of the head of the KGB, overtly admitted, was to fragment
and decentralize them in order to diminish their power[7].
In 1991-93 several former KGB directorates were transformed into separate
agencies under federal or direct presidential jurisdiction. Thus the formerly
united organization was split into five separate agencies: the External
Intelligence Service (SVR), the Federal Agency for Government Communications
and Information (FAPSI), the Federal Counter Intelligence Service (FSK), the
Chief Guard Directorate including the Presidential Security Service, and the
Border Guard Service. In 1995, FSK was renamed into the Federal Security
Service (FSB)[8]. Under the
new Federal Law of August 12th, 1995 all of these agencies, plus the
Interior Ministry (MVD), the Tax Police, and the Federal Custom Service were
designated to carry out detective and operative work and to keep their own
paramilitary units. In comparison to the Soviet period the number of agencies
entitled to this capacity grew from three to seven. By mid-1995 Russia had 14
state internal intelligence, security, and law enforcement agencies[9].
The new division of the spheres of competence and jurisdiction were
ill-defined, the agencies competed with and duplicated one another, their
overall coordination became weak. Both FSB and MVD, for example, have
directorates in charge of fighting against organized crime as well as those
concerned with economic crimes, and all four target the same range of criminal
phenomena. Consequently, the efficiency of the state security and law
enforcement organs has decreased significantly.
The
restructuring of the state security was accompanied by the reduction of its
personnel. Negative public attitude created moral pressure that devalued the
status of this profession, while the shrinking of the state budget and
inflation devalued wages. All this produced strong incentives on the part of
security officers to look for alternative employment. Over 20,000 officers left
or were discharged between September 1991 and June 1992. A significant number
left after the crisis of October 1993, including members of the special elite
anti-terrorist units Alpha and Vympel. In 1992 President Yeltsyn
ordered that the 137,000-strong central apparatus of the former KGB be reduced
to 75,000 (a 46 per cent reduction) in the process of restructuring. While a
substantial proportion of the former staff of the central apparatus were
transferred in 1992-93 to the newly established bodies (SVR, FAPSI, etc.) and
to regional FSB directorates, 11,000 had to leave the state security
permanently[10].
According to expert sources,
besides these obvious factors that caused an exodus of the state security
employees into the private economy sector, there were more subtle operational
considerations that acted in the same direction. The new tasks set before the
state security organs included the struggle against organized crime and the
promotion of the state interests in the rapidly privatized economy. One form of
acquisition of information needed to fulfil these tasks became the direct
infiltration into the private business. Thus, while it is possible to
distinguish analytically between the search for a new job by ex-state security
employees and their new operative assignments, an empirical distinction between
the two phenomena has become virtually impossible.
Solutions
The first organizational solution – a counter-move –
that enabled FSB to address the new problems – personnel reduction, material
welfare, and infiltration – was the creation of the institution of the
so-called "assigned staff" (prikomandirovannye
sotrudniki). The article #15 of the Federal Law "On the Organs of the
Federal Security Service" maintains that "in order to carry out the
security tasks the military personnel of the organs of FSB, while remaining in
service, can be assigned to work at enterprises and organizations at the
consent of their directors irrespectively of their form of property"[11].
This provision allowed thousands of acting security officers to have jobs in
private companies and banks as "law consultants", as this position
was modestly called. Using their ties with the state organs and information
resources of FSB, they perform what became known as "roof" functions
– the protection against extortion and cheats by criminal groups and
facilitating relations with the state bureaucracy. Expert estimates suggest
that up to 20 per cent of FSB officers are engaged in informal "roof"
business as prikomandirovannye[12].
I will return to this subject later.
A
long-term solution for the commercial utilization of personnel, informational
and technical resources of the state coercive organs was found in the
legalization of informal security and rule enforcement business. The legal
framework for such activities was provided by the Federal Law "On Private
Detective and Protection Activity" adopted on the 11th of
March, 1992 and the special Government Decree of 14th of August,
1992 which specified some aspects of its application. Now private agencies were
entitled to "protect legal rights and interests of their clients" on
commercial basis. The law permitted private agencies a broad range of
activities: to exercise physical protection of citizens and property, engage in
security consulting, collect data on law suits, conduct market research and
collect information about unreliable business partners, protect commercial
secrets and trade marks, search for people claimed disappeared, recover lost
property, and conduct investigations into biographies of potential employees of
client companies.
Getting a license to set up
a private security agency is relatively easy: the Commission for Licenses and
Permissions, set up at every regional MVD directorate, requires from a
perspective head of security agency a higher education degree and evidence of
special qualification or of three or more years of professional experience in
state law enforcement or security organs. The procedure was designed so as to
facilitate registration for former security and police employees.
The most widely cited data
on the service origin of the heads of private security agencies is that
provided by the Executive director in charge of security of the Association of
Russian Banks V. Sidorov (former Deputy Minister of Interior) in 1995.
According to Sidorov, half of the chiefs of private security are former KGB
officers, another quarter are from MVD and the rest came from GRU (the Army
Intelligence) and other organizations[13].
These rough proportions are more likely to relate to Moscow banking sector. Exact
figures for the whole private security sector as of July 1, 1998 are the
following: of the total of 156,169 licensed private security employees in
Russia 35,351 (22,6%) came from MVD, 12,414 (7,9%) from KGB-FSB, and 1,223
(0,8%) from other security and law enforcement organizations. On the whole the
private security agencies have absorbed nearly 50 thousand former officers of
the state security and law enforcement organs, most of whom, especially the
ex-KGB, occupy key managerial positions[14].
The reemployment of the state security officers has been partly managed by the
professional association "Business and Personal Security" created by
former FSB employees in 1992. During 1992-1994 the association helped to
retrain and employ over four thousand former state security servicemen, half of
whom became heads of private security agencies[15].
Private
security agencies
The law defined the licensing procedures for three
types of security agencies and their personnel: chastnye detektivnye agenstva, private detective agencies (PDA), chastnye sluzhby bezopasnosti, private
(company) security services (PSS), and chastnye
okhrannye predpriyatiya, private protection companies (PPC). PDAs normally
execute narrow and specific tasks requested chiefly by private individuals with
regard to their private matters. Consequently, autonomous detective agencies
are few (just over a hundred for the whole country), and their services
expensive. They will not concern us in this paper[16].
All enterprises,
independently of their size and form of ownership were permitted to establish a
special security sub-division, the private security service. These were set up
in large numbers by private and state enterprises and financial institutions
for physical and economic protection, information gathering and analysis. Large
banks and companies, especially those entrusted to deal with the state
financial assets or strategic resources, were organized and filled by former
high-ranking state security officers. To give just a few examples, V. Zaitsev,
one of the former commanders of Alpha,
the special unit of the KGB, became the head of security of Stolichnyi bank, M. Gorbunov, who used
to serve in the Chief Directorate of Intelligence of the Soviet Army (GRU),
continued as head of security of Inkombank,
the former deputy chief of KGB Ph. Bobkov heads the corporate security service
of Most financial group[17].
The largest 13-thousand strong PSS of Gazprom,
the natural gas monopoly, is headed by the former KGB colonel V. Marushchenko
and consists of 41 subdivisions at the company's installations across the
country[18].
The majority of PSS, however, are much smaller. Many were created to secure a
one-time deal or just to legalize armed bodyguards for the company's boss and
continue to exist mainly on paper.
In contrast to PSS, private
protection companies are autonomous from their clients and act as independent
market agents supplying services on contractual basis. Originally, even before
the adoption of the law on private protection, many future PPCs started as private
guards or informal security services for concrete business projects. For
example, a Petersburg PPC Severnaya Pal'mira, headed by the former colonel
of military counterintelligence E. Kostin, was initially set up as a security
service of the city market of construction materials Muraveinik. Later it became an independent supplier of security to
a number of construction companies, such as Business
Link Development, Com & Com, and of the official Peugeot dealer in Petersburg Auto-France[19].
This case represents a typical evolution pattern of a PPC from being tied to
particular clients to becoming an autonomous supplier of services on the
market.
The corporate principle that
sustains the identity of employees of the state security ministries is also
closely observed in the private security sphere. Many successful PPCs were
founded by tightly knit communities of former officers of special task units
who sought to convert their skills and reputation into a marketable asset. Not
least, attempts by the central government to use special anti-terrorist units
as an instrument of internal political struggle during the crises of August
1991 and October 1993 caused frustration of the officers and led many to
discharge from service and consider a new employment. Thus the former
commanders of the KGB special anti-terrorist unit Alpha I. Orekhov and M. Golovatov left the unit to set up a family
of protection companies whose name openly points to the original affiliation of
its staff: Alpha-A, Alpha-B, Alpha-7, and Alpha-Tverd'.[20].
After the KGB anti-terrorist
unit Vympel had refused to
participate in the storming of the Parliament during the October 1993 crisis,
it was transferred under the jurisdiction of MVD. Of the 350 Vympel officers only five decided to
continue under MVD; 215 found new employment in FSB and other state security
organs; and 135 left to work in the sphere of private security[21].
Many of them were employed by the PPC Argus,
set up by one of the former senior commanders of Vympel, Yu. Levitsky. Now Argus
is one of the largest private security operators in Moscow region. In St.
Petersburg, the largest PPC Zashchita
was set up by former MVD special unit employees and is known to actively
recruit former officers of the Regional Anti-Organized Crime Directorate (RUOP).
A group of former officers of the Soviet Army paratroop units, who shared
combat experience in Afghanistan, stood at the origin of Aleks-Zapad, another large private security operator in the
North-Western Russia. In an interview with the author, B. Markarov, the chief
of Aleks, mentioned the corporate
principle of recruitment, admitting that he personally trusts "the army
caste much stronger than the militia or the KGB"[22].
Hence most large PPCs tend to preserve their corporate identity and resemble privatized
segments of the state defense and security ministries. The chiefs of PPCs
openly admit what they call mutually beneficial cooperation with the state
organs, meaning an exchange of operative information for money or equipment.
The structural
dynamic
Soon after the adoption of the law on private
security the new business sector began to expand at unprecedented rates,
especially in Moscow and Petersburg. By the end of 1999 the number of private
security agencies reached 11,652, including 6,775 PPCs and 4,612 PSSs, while
the number of licensed security personnel reached 196,266 (the total number of
employees exceeds 850,000). In 1998 the city of Moscow had the total of 3,125
and Petersburg 816 private security agencies, which amounted to 29 and 7,6 per
cent of their total number for the same year respectively. Between 1993 and
1996 the growth was especially dramatic; the number of private security
agencies almost doubled, reaching nearly eight thousand. After 1996 the growth
continued, but the rate slowed down (see the table and the diagram below).
|
|
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
|
Total number of agenices |
0 |
4540 |
6605 |
7987 |
9863 |
10487 |
10804 |
11652 |
|
Private Protection Companies |
0 |
1237 |
1586 |
3247 |
4434 |
5280 |
5995 |
6775 |
|
Private Security Services |
0 |
2356 |
2931 |
4591 |
5247 |
5005 |
4580 |
4612 |
|
Agenices closed down by authorities |
73 |
640 |
622 |
978 |
1364 |
1277 |
||
(Sources: Mir Bezopasnosti, 2, 1997; 3,
2000; Biznes i bezopasnost', 2, 1999)
Several factors were
responsible for the leveling of growth after 1996. First, the reshuffle of the
state security, which generated the supply of jobless specialists, receded.
Second, the initial market demand for protection services was met, and
possibilities of extensive growth were exhausted. Third, the MVD supervising organs
tightened control and inspection measures, closing down, after 1995, more than
600 agencies each year for violating the regulations. In May 1995 the
government of Moscow issued the decree that urged the regional MVD to intensify
control over the activity of private security agencies on its territory and
introduce an electronic accounting and identification system.
The diagram also shows a
structural trend: over the last three years the growth of the private security
business has been caused by the growth of PPCs, while the number of PSSs
decreased progressively. The head of the Committee for Licensing and
Permissions of MVD I. Mayatsky explained the trend by two basic factors. First,
many PSSs were created by banks during the period of their multiplication in
the early 1990s. As some banks subsequently went bankrupt, their security
services disappeared too. Second, for a bank or a company to maintain a PSS
proved more expensive than to contract an independent PPC, and gradually many
turned to the latter, more efficient option[23].
This second factor deserves
attention, for it seems to point to an important trend, that of the
externalization of protection. If in the beginning companies tended to
internalize protection by creating their own security service, later, many
turned to external protection. Because of the economy of scale and allegedly
better technical equipment large PPCs are more cost-efficient. PSS has a
different advantage. Being a subdivision of a private company or bank, it
operates under two different authorities, public regulations for this kind of
activity and private orders of the company's director general. The latter
authority is naturally stronger, and in case the two authorities clash the PSS
is likely to circumvent formal regulations of external (state) authorities. In
contrast to that, autonomous suppliers tend to be less constrained by their
customers (unless they are created by the latter). But because they produce
services for sale rather than for internal consumption, they are constrained by
the rules of the market. According to the public claims of their managers, PPCs
prefer to conduct their business on the basis of the formal contract and
respect the law. This, however, may be just a successful marketing strategy.
Whatever the actual practice, the degree of autonomy of PPC vis-a-vis PSS is
greater by definition. The growth of the former and the decline of the latter
after 1996 may indicate that for customers, considerations of economy are
becoming more important than the ability to exercise direct management of
force. If this is correct, then the outcome would be a growing differentiation
whereby economic and security enterprises are more clearly separated.
Functions
To be sure the downsizing of the army and security
sectors of the Russian state cannot alone cause the rapid growth of the private
security industry. No less important factors of this growth lie in the realm of
the nascent market economy. What generated the increasing demand for security
and enforcement services? How did private violence managing agencies integrate
into the economy and what institutional functions do they perform?
Elsewhere
I defined the activity of private agencies that manage organized force as
violent entrepreneurship – a set of organizational solutions and action
strategies enabling the conversion of organized force (or organized violence)
into money or other market resources on a permanent basis[24].
PPCs where not the first to discover this entrepreneurial niche. Since the late
1980s, as the first cooperative and private enterprises started to emerge,
organized criminal groups moved in to extract tribute from the private
business, as the latter received virtually no protection from the state. As
extortion became regular, it turned into protection racket – an
institutionalized practice whereby tribute is collected on behalf of a criminal
group that, in exchange, claims to offer physical protection from other such
groups. But as the private sector expanded and the intensity of business
transactions grew, criminal groups got engaged in more sophisticated activities
such as debt recovery, contract enforcement, dispute settlement, and
negotiations with the state authorities concerning registration, export
licenses, tax exemptions, and the like. I have distinguished these activities
from the protection racket and defined them as 'enforcement partnership' – the
function performed by a criminal group or other violence managing agency
deriving from the skillful use of force on a commercial basis and allowing to
maintain certain institutional conditions of business[25].
On the one hand, criminal
groups by their very methods created a dangerous business environment and
proceeded to extract payments from economic subjects for reducing the danger.
As a matter of fact, any wielder of force is able to provide protection only in
so far as it itself is capable of creating dangers. Its activities, therefore,
inevitably contain at least some elements of protection racket. As Charles
Tilly notes, "which image the word protection
brings to mind depends mainly upon our assessment of the reality and
externality of the threat. Someone who produces both the danger and, at a
price, the shield against it is a racketeer. Someone who provides a needed
shield but has little control over the danger's appearance qualifies as a
legitimate protector, especially if his price is no higher than his
competitors'"[26].
On the other hand, there was
a range of factors that generated independent demand for a variety of
enforcement services. Insufficient business experience and the propensity on
the part of some businessmen for dishonest conduct increased business risk and
lowered the level of trust[27].
The resulting disputes and tensions could not be resolved by the official
institutions due to poor definition of property rights, inefficiency of the
state courts of justice (gosarbitrazh)
and their incapacity to enforce decisions[28].
Having accumulated
considerable force (physical as well as firepower) and perfected intimidation
methods, multiple criminal groups, composed mainly of former sportsmen, came to
be best suited to act as private enforcers and mediators on disorganized and
unpredictable markets. It is private protection and enforcement rather than
traditional forms of illegal (drugs, arms, illicit services, etc.) trade or
theft that became the major engagement and the source of regular revenue of
criminal groups in the period of market reforms. Illegal and in most cases
compelled enforcement partnership is a new type of criminal business in Russia,
brought to life by a combination of the economic liberalization and the
weakening of the state. It should be distinguished from the Soviet-era
organized crime in as much as the market of private protection and enforcement
can be distinguished from the market of stolen or illicit goods[29].
Already by the beginning of the 1990s virtually no firm in the small business
sector could get by long enough without engaging or being engaged by a private
enforcement partner. In 1993-94 about 70 per cent of contracts (that were not
self-enforcing) were enforced without recourse to the state, that is by private
enforcers[30].
Of course entrepreneurs of
violence do not think in terms of institutional functions that they perform,
although generally they have a very positive image of themselves as people who
exercise justice and help to maintain order as they understand them. In their
language, they 'solve questions' for or 'work' with a certain businessman or a
company. The outcome of their joint effort is the reproduction of a particular
set of constraints that affect the behavior of private economic actors.
Entrepreneurs of violence, then, may be said to perform the function of
enforcement partnership, maintaining the institutional structure that enables
the development (not necessarily the most efficient) of certain segments of
private economy which, in turn, feed them.
In
1992-95 the rapid privatization and the rise of private financial institutions
brought new large segments of the economy, including medium and large enterprises,
into the sphere of free-market relations. Legal and institutional problems
mentioned above were still far from being resolved by the state powers, and the
level of business risks remained very high. According to rough estimates
presented at the seminar of the chiefs of security services of Russian banks in
January, 1995, in the beginning of 1994 the amount of unrepaid credits in
Russia equaled 3 trillions 609 billion rubles (1.64 billion USD) and reached 8
trillions (1.75 billion USD) in 1995[31].
Criminal groups, so it seemed, were moving towards attaining full control over
the privatized economy. However, it is precisely at this stage that criminal
syndicates encountered a powerful commercial rival in the form of private
protection and security agencies set up by former police and security
employees. This is not to say that the law on private protection was designed
as an anti-criminal measure (later we shall discuss its negative influence as
well). At that time the state authorities had neither a strategy of
institution-building nor an anti-criminal program, and it is more likely that
the legal provision for the business of private protection was adopted merely
as a tactical solution for the reemployment of the former staff of the
"power ministries". But it produced consequences that wend beyond the
initial pragmatic considerations.
By
mid- 1990s the business of private security became firmly integrated into the
new market economy. The demand for private enforcers increasingly came from the
milieu of enterprise directors who, as the recent study revealed, tend to avoid
dealing with the official justice out of the fear that they would loose their
personal influence if they rely on impersonal legal institutions of the state[32].
Understandably, the large established PPCs operate in those sectors that manage
to survive and are capable of generating profits, such as oil and petrol
industry, banking, communications, high-technology, export-oriented production,
and the like, including the majority of foreign companies. Among the clients of
the holding of PPCs Al'ternativa-M,
for instance, are the large chemical consortium Rosagrokhim and Gromov
aerospace research and test center[33].
In Petersburg, the PPC Staf, headed
by the former major of KGB M. Timofeev, started by collecting debts from the
clients of the telephone company Peterstar.
Then it became security and enforcement partner of PTS, the major state-owned
telephone network, as well as of a major cellular phone operator in the
north-western region Delta Telecom.
As a result, the PPC, which, as its chief has admitted, maintains close
relations with FSB, now supervises a vast regional communication network[34].
With
the entry of the KGB and MVD cadres to the market as private agents, the age of
'roofs' came into full fledge. 'Roof' (krysha)
is a key term in contemporary business lexicon, referring to an enforcement
partner, criminal or legal, and signifying a complex of services provided by
the latter to its clients in order to protect them physically and minimize their
business risks. Unlike some other business terms that gained currency in the
recent years, krysha did not belong
to the criminal jargon but came from the professional vocabulary of the
intelligence service where it signified an official cover-up – diplomatic,
journalistic, etc. – of a spy. Yet, the term was quickly adopted by racketeers
and acquired a criminal flavor.
Enforcement
partnership ('roof') should be distinguished from mere physical protection.
Physical protection and security, provided by PPCs by supplying private guards
and security equipment on contractual basis, is not their primary mission. The
actual practice of a successful PPC first of all includes the acquisition and
analysis of information about perspective business partners, the supervision of
business transactions, and, most importantly, the ability to engage in informal
negotiations with other enterprises and their enforcement partners in case of a
breach of contract or failure to return the debt. It is this informal practice
of negotiation between enforcement partners leading to the solution of the
problem and thus allowing for the business to continue that is most valued in
business circles and that creates the reputation of the violence managing
agency, be it a PPC or a criminal group. So, enforcement partnership is not
just protection of individual clients but an activity and a function that
relates to the institutional structure of the economy as a whole. It is the
extension of the activity of private protection agencies beyond mere physical
or informational security and into the sphere of business transactions and
civic property relations that makes the security industry in Russia of the
1990s different from its no less numerous counterparts in other countries.
Private protection
companies and criminal groups
To achieve success private protection agencies have
to steer between the legal regulations increasingly tightened by the state
authorities and the actual practice of private enforcement that rests on
informal dealings and frequent use of semi-criminal methods. This derives from
the highly informal character of business relations in Russia and a heavy
presence of criminal groups. The latter also strove to use the law on private
protection to their advantage, creating their own PPCs in order to obtain
licenses to carry concealed weapons and legalize their protection services.
Thus, in Petersburg one of the oldest protection companies Scorpion was set up and headed by A. Efimov (nickname
"Efim"), one of the leaders of tambovskaya
criminal group, and actively used to draw police officers to perform the
"roof" functions. Scorpion
was closed down by the authorities in the end of 1996; its director managed to
escape but was tracked down in Ukraine and arrested a year later[35].
The PPC Adris, providing protection
to over a dozen of companies, including the chain of ice-cream shops Baskin and Robins, is known to belong to
malyshevskaya criminal group[36].
The use of force and
intimidation in order to recover debts and settle disputes among businessmen is
one of the major activities of criminal groups. Many PPCs are also involved in
this business, using purely criminal methods. For example, in September 1996
the police arrested the director general of the PPC Barrs Protection, the former KGB major V. Zhukov, and his driver.
They were accused of beating up and threatening the director of Petrotrade, the PPC's client company,
and demanding 35 per cent of shares of this company and 20,000 USD in payment
of an alleged debt. The case, however, was settled informally and the PPC staff
were released without criminal charges[37].
In the last two years the MVD authorities intensified their control, trying to
eradicate the informal practice of debt recovery. They issued warnings and
published the list of companies known to practice debt recovery, but this
measures so far did not have any tangible effect[38].
Yet, on the whole, despite
many cases of PPCs' involvement in criminal affairs, the overall effect of
their activity was more positive than negative. While not being manifestly
anti-criminal agencies, they nonetheless managed to weaken the economic basis
of the organized crime and limit its expansion. "To save a company from
being taken under the 'roof' by a criminal gang is very hard", asserts
Levitsky, the head of the PPC Argus.
"That is why we are proud that none of our clients ended up 'under the
mafiya'. If the establishing of a [criminal] 'roof' is already under way, we
get in contact with the leaders of the criminal group and talk to them in the
language they understand"[39].
On another occasion, Levitsky summed up the overall effect of the private
security industry: "Several years ago all of the Russian business was
criminalized. We could become a 'bandit' state. Now, five years later 'roofs'
are [legal] security structures. We accomplished the task quietly, without
revolutions and shooting"[40].
Overall, the anti-criminal effects were achieved by higher quality of services
offered by PPCs at lower prices and by their active interaction with the state
police organs.
Already
in 1991 in pursuit of an addition to their devaluing salaries informal groups
of police and state security officers offered to the private business an
alternative protection and enforcement solution and thus entered into direct
competition with criminal groups. Those companies which managed to contract a
police or a KGB 'roof' could no longer fear a visit by gang members offering
their protection. The informal rule that "every businessman has to have a
roof", well known to all entrepreneurs operating on the Russian market,
was a peculiar way to acknowledge the burden of transaction costs, but it also
presupposed multiple options and hence a competition between those who claimed
these costs. While it requires a separate study to assess the impact of private
enforcers upon economic growth and to say which option is best for which type
of business, it is possible to describe the basic non-criminal options, the
logic of choice and its consequences.
The cheapest solution is to
have or make a friend among police officers, in particular in the special
anti-organized crime unit (RUOP). This gives the entrepreneur the opportunity
to claim RUOP as his 'roof' and to ask the friend to help out in case of an
attempt by a criminal gang to demand protection fee. The owner of a small
network of pharmacy shops in Petersburg would be a typical client of such an
informal 'friendly' police 'roof'. His payment for protection may consists in
occasional provision of medicines for the policeman's parents[41].
This solution pertains mainly to small business and gives advantages to those
who happen to have the right kind of friends. Its reliability, however, is low,
matching the low cost.
The hiring of an acting or
retired FSB officer as a 'manager' or 'law consultant' is another widespread
'roof' arrangement that enables a company to avoid paying protection money to a
criminal group. This 'law consultant' acts as a kind of multi-purpose fixer,
shielding the company from criminal and bureaucratic extortion and mediating
relations between the private business and the state authorities. Interview
sources indicate that hiring (formally as well as informally) of an FSB officer
became a widespread practice in medium-sized companies, especially in Moscow.
Such a "lawyer" would normally cost the company an equivalent of 1000
USD or higher per month. Thus, a Moscow-based company producing silicon medical
supplies was approached by a criminal group from the city of Kazan' where the
company's production site was located. Unwilling to end up under criminal
protection, the director had to urgently find an alternative solution. First he
hired a retired KGB colonel and later an acting FSB officer (prikomandirovannyi, see above) as his
company's 'roof'. Unfortunately, the officer was later killed in Chechnya
performing his state service duties. Subsequently, the company signed a
contract with PPC[42].
A
client company and a PPC normally sign a formal contract that specifies the
range of services and their price. If the company requires armed guards, the
price is calculated on the basis of the standard 4-6 USD per guard per hour or
up to 2,000 USD per month for an alarm system including the hotline connection
with a fast reaction team normally kept by PPCs. To obtain regular information
about another company costs 100-300 USD per month[43].
Alternatively, the contract may resemble a medical insurance when a monthly fee
of 250 USD or higher, depending upon the size and nature of business, is paid
to a PPC whose help is requested only in case a problem arises. If the problem
is serious enough, such as the need to recover a debt or to resolve a dispute,
especially if the adversary is a criminal group, the deal is likely to be
negotiated on a non-contractual basis and the fee, normally quite high, would
be adjusted to the value of disputed property, the level of risk, and the
amount of operative work. But not all PPCs provide such services. An
alternative protection strategy, then, is to assist the client in engaging the
state organs of justice to resolve the problem in the legal manner. In this
case the role of the PPC is to ensure efficient treatment of its client by the
state justice and help to enforce the decision. Many PPCs have a legal
subdivision that provides legal support to its clients and interacts with the
state organs of justice. According to the co-director of the Petersburg PPC Avanpost, "Now one can make the
state organs of justice work more efficiently. In case we need to help our
client return the debt we have a legal possibility to make them arrest the
accounts of the debtor, which carries a potential damage incomparable with the
amount of the debt. This is how we compel debtors to start peaceful
negotiations"[44].
Notwithstanding
the realm of private security and enforcement approximates a
"market", some serious limitations of choice remain, in particular,
the freedom of choice of enforcement partner. Once a company got caught
unprepared for a visit by representatives of a criminal group, yielded to
intimidation, and started paying protection money, it is likely to develop a
path dependency. Likewise, once a company appealed to a criminal group to help
resolve a problem, it would most probably continue under protection of this
group, and any attempt to break free would cause severe sanctions.
Understandably, a company is likely to engage or be engaged by illegal
enforcers if it operates in the shadow sector of the economy, not to mention
illicit trade. Criminal groups are known to lure clients by offering cheap
start-up credits and loans, which subsequently allows the group to hold sway
over this enterprise as shareholder. The most prominent example of this kind is
the fate of the Ekaterinburg machine-building giant Uralmash which suffered severe cash shortage in the end of 1991 and
was on the verge of closure. A local criminal group, now known as uralmashevskaya, supplied the badly
needed cash and thus established its control over several premises belonging to
the enterprise[45].
As interview sources
indicate, the contractual nature of the relationship, higher degree of
predictability of behavior, and higher quality of services make PPC a more
competitive security solution compared to the criminal one, given that the
constraining factors mentioned above do not interfere. Unlike criminal groups,
PPCs normally do not interfere into the business of their clients, but they
also would not provide loans. Experts have estimated that clients of criminal
groups are forced to pay up to 30 per cent of profits, while the cost of debt
recovery is normally 50 per cent of its value[46].
The price of security and enforcement charged by non-criminal PPCs is
negotiable and varies depending upon the size and the nature of the client
business. But it takes the form of a fixed monthly payment rather than that of
tax on profits or turnover as in the case of the criminal protection. The
charge for debt recovery varies between 15 and 40 per cent of the sum of the
debt[47].
Managers of large PPCs claim
to provide a better quality of services due to the professional experience of
their personnel. While maintaining a formidable firepower large companies rely
on informational and analytic methods acquired during their managers' career in
state service. The major emphasis is said to lie not on direct physical
protection or intimidation but on the preventive neutralization of potential
conflicts and threats. The vice-chairman of the security service of the
Association of Russian Banks A. Krylov thus described the methods of legal
enforcement partners: "To recover the debt one does not need recourse to
violent means – it is sufficient just to demonstrate that you have information
that compromises the debtor and the channels for its dissemination"[48].
The director of Aleks North-West
claims his company to have a database on all business enterprises in the
region, allowing it to assess reliability of its clients' potential partners
before entering into business relationships.
More directly related to the
anti-criminal activity are those PPCs which provide a rare but increasingly
demanded service, the so-called 'removal of the roof' (sniatie kryshi). Involving a great risk, this task consists in
forcing the criminal group that controls an enterprise to leave the latter. The
PPC would then naturally provide alternative protection. As was earlier
mentioned, it is very hard for a company to break free from a criminal group, –
the costs of such an action would normally exceed benefits. Yet, in case the
client company wishing to do so is not itself engaged in illegal business and
has high commercial potential, and the PPC is powerful enough and well
connected to police organs, it can decide to take the risk and force the
criminal group out of business. This practice represents a truly extraordinary
profit-motivated private form of anti-criminal activity, whereby manifest
commercial interest that drives the struggle for the client has the latent
outcome of relative de-criminalization of business. The first PPC in Petersburg
Baltik-Escort was set up in April
1993 by the former MVD employee R. Tsepov and former FSB officer I. Koreshkov.
The core of the staff of Baltik-Eskort
was recruited from the ranks of the former special task police unit (OMON)
stationed in Vilnus and Riga, the capitals of the ex-Soviet republics. The PPC
started by clashing with the Chechen gang over a car maintenance company Inavtoservis whose management was
seeking for an alternative protection arrangement. Far from peaceful, the
competition ended in favor of the PPC which thus acquired its first permanent
client. Then the company began to escort trucks that carried imported goods
from the West to Petersburg through Ukraine, – the route controlled by criminal
gangs and considered one of the most dangerous for drivers. This, maintains
Tsepov, was key to the company's subsequent commercial success as it earned Baltik-Escort a reputation of tough and
reliable security partner. Now the PPC provides protection to over twenty
companies, including Volvo dealer,
electric equipment plant Energomashstroi,
computer firm Cityline, as well as to
VIP visitors to St. Petersburg, including the business magnate Boris Berezovsky
and fashion model Claudia Schiffer[49].
Conclusion
The trajectory of the Soviet
security organs in post-communist Russia reveals an important aspect of the
complicated transition from state socialism with its emphasis on coercive role
of the state to a different model whereby owners of means of coercion enter
into commercial relations with private economic agents. It also enables us to
conceive of social change in non-teleological manner. The reform of the state
security was devised and executed out of short-term political considerations
when Yeltsyn and his team sought to strengthen political authority and
neutralize possible threats to the new regime. Radical liberalism and
anti-communism of the early 1990s made this policy fully legitimate. Blind to
longer-term structural consequences, the government did little to strengthen
security and law enforcement while launching economic liberalization. In this
context the downsizing of the state security quickly led to the proliferation
of the informal institutions of security and enforcement, as both discharged
and acting security officers discovered the way to convert their skills into a
marketable asset. Destroying the old Soviet system of coercion, the government
did not undertake to create new institutions for the protection of private
property. But the former state police and security employees had no idea of
institution-building in their minds either: most of them were just adapting to
the new economic conditions. Violent entrepreneurship, the methods of which had
already been perfected by criminal gang members, was their major adaptive
response. Looking back at the chaotic forces unleashed by the rapid collapse of
the old order and their violent struggle in the early 1990s it is important not
to miss the structural consequence that consisted in the formation of a set of
informal institutions that shaped the emerging markets. Organized force became
a major market resource convertible into profits irrespectively of the origin
and legal status of the group that managed this resource. Hence the rapid
proliferation of various armed formations such as criminal groups, private
guards, paramilitary units attached to fragmented state security and police
organs, and the like. Once the state failed to control the process of
institution-building it also lost the monopoly of force and fiscal monopoly
vital for its very existence.
The
law on private protection, adopted in 1992, can be seen as a successful example
of legal development whereby informal practices, in this case of the private
use of force and coercion, acquired legal status and became subject to state
regulation. This was a rare instance when the adoption of a law reflected the effort
to acknowledge, codify, and regulate an already existing practice rather that
to create something from above, although one may add that the state was simply
incapable of the 'from above' strategy. The growth rates of the new now legal
business of private protection and enforcement testify to the success of this
legal initiative and to that it met a huge demand. The context of the
conception and adoption of this law requires additional exploration. From what
I have found out so far it follows that it was pushed through by a narrow group
of former security employees seeking to expand and legalize their business. But
subsequently, it enabled the state authorities to achieve at least some degree
of account of and control over the private use of force and coercion.
The
most controversial consequence of the privatization of the state security and
law enforcement and of the legalization of the business of private protection
was its indirect anti-criminal effect achieved by the growing competition in
this domain. One is only left to wonder at the dialectical nature of the
legalization of private protection and enforcement in Russia. On the one hand,
it can be seen as a juridical acknowledgement of the de facto fragmentation of
the state monopoly of violence and justice. On the other hand, it may be seen
as a step towards the restoration of public control over the use of force and
thus towards the reconstruction of the state, as licensed protection agencies
were increasingly made accountable to the state authorities and compelled to
play by the rules set by the latter. Being itself incapable of efficient
protection and enforcement in the economic realm and facing the challenge of
the criminal sector, the state was led to delegate these vital functions to its
former employees on the private basis. The 'soft' monopoly of violence and
justice that thus emerged – a condition whereby the state has selective and
indirect control over the use of force in the civic domain – is likely to
undergo further evolution. To restore public control over the use of force and
dispute settlement (adjudication), the government does not necessarily need to
ban private security agencies but, rather establish and enforce a clear
division of competence, limiting the activity of these agencies to physical and
informational security while strengthening the state arbitration and
justice.
NOTES