Security and enforcement as private business
Private protection companies and criminal groups
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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 later35. 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 group36. 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 charges37. 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 effect38. 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 parents41. 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 PPC42. 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 month43. 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 enterprise45. 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 value46. 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 debt47. 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 Schiffer49. 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
1 The earlier version of this paper was published as "Between Economy and the State: Private Security and Rule Enforcement in Russia. Politics and Society, Vol. 28, No 4, December 2000, pp. 483-501 2 Douglass North, Institutions, Institutional Change, and Economic Performance (Cambridge: Cambridge University Press, 1990), p. 4 3 The main data comes from interviews with experts, heads of private protection companies, entrepreneurs, police officers, and informal private enforcers (19 focused interviews altogether) as well as from specialized periodicals on private security. 4 On the privatization see Joseph Blasi, Maya Kroumova, Dougls Kruse, Kremlin Capitalism: Privatizing The Russian Economy (Ithaca: Cornell University Press, 1997); Maxim Boycko, Andrei Shleifer, Robert Vishny, Privatizing Russia (Cambridge (Mass.): MIT Press, 1995) 5 With the exception of: Timothy Frye "Contracting in the Shadow of the State: Private Arbitration Commissions in Russia," in J. Sachs and K. Pistor, ed., The Rule of Law and Economic Reform in Russia (New York: Westview Press, 1996), p. 123-137 6 Douglass North, Robert Thomas The Rise of The Western World (Cambridge: Cambridge University Press, 1973); Douglass North, Structure and Change in Economic History. (New York: Norton, 1979) 7 Vadim Bakatin, Izbavlenie ot KGB (Moscow: Novosti, 1992), 77 8 Vladimir Korovin, Istoriya otechestvennyx organov bezopasnosti (Moscow: Norma, 1998), 80-86 9 Michael Waller, Victor Yasmann, "Russia's Great Criminal Revolution: The Role of the Security Services, in P. Ryan and G. Rush, eds., Understanding Organized Crime in Global Perspective: A Reader (London: Sage, 1997), 198 10 Izvestiya, 2 March 1994 11 FSB Rossii, (Moscow, 1995), 18 12 Novaya Gazeta, 27, 13-19 July, 1998 13 Bdi, no. 4 (1995): 4 14 Biznes i bezopasnost' v Rossii, no. 2 (1999): 34 15 Sekiuriti, no. 2 (1995): 5 16 There are several cases of private detective agencies being subdivisions of large PPC. This reduces costs and gives the companies additional legal rights to conduct surveillance. 17 Olga Kryshtanovskaya, "Nelegal'nye struktury v Rossii," Sotsiologicheskie issledovaniya, no.8, (1995): 96 18 Biznes i bezopasnost' v Rossii, no. 2 (1997): 6 19 Lichnosti Peterburga. Bezopasnost', no.1 (1998): 36 20 Biznes i bezopasnost' v Rossii, no. 9-10 (1998): 28-29 21 Izvestiya, (3 March 1994) 22 Author's interview with Boris Markarov, 14.04. 1999 23 Mir bezopasnosti, no.1 (1999): 2 24 Vadim Volkov, "Violent Entrepreneurship in Post-Communist Russia," Europe-Asia Studies, 51, no. 5 (1999): 741-754 25 Ibid., 741 26 Charles Tilly, "War Making and State Making as Organized Crime," in P. Evans, D. Rueschemeyer, and T. Skocpol, eds., Bringing The State Back In (Cambridge: Cambridge University Press, 1985): 173 27 For the assessment of risks and the role business culture see Vadim Radaev, Formirovanie novykh rossiiskikh rynkov: transaktsionnye izderzhki, formy controlia i delovaia etika (Mosocw: Tsentr politicheskikh tekhnologii, 1998) :134-158 28 Federico Varese, The Emergence of the Russian Mafia: Dispute Settlement and Protection in a New Market Economy. DPhil thesis. The Faculty of Social Studies (University of Oxford, Oxford, 1996) 29 The criminal groups supervised and collected tribute from legal as well as illegal businesses without making any distinction. The argument for treating the market of private protection separately from the market of any other conventional or illicit goods was advanced in Diego Gambetta, The Sicilian Mafia: The Business of Private Protection (Cambridge (Mass): Harvard University Press, 1996) 30 Vladimir Tambovtsev, "Ekonomicheskie instituty rossiiskogo kapitalizma", in T. Zaslavskaya, ed., Kuda idet Rossiya? (Moscow: Logos, 1999):. 198 31 Bdi, no. 2 (1995):15 32 Kathryn Hendley, "Legal Development in Post-Soviet Russia", Post-Soviet Affairs. 13, no. 3 (1997): 228-251 33 Mir bezopasnosti, no. 9 (1997): 10 34 Lichnosti Peterburga, no. 1 (1998): 54-55 35 Operativnoe prikrytie, no. 1 (1997): 8-9 37 "Chastnye okhrannye predpriyatiya Sankt-Peterburga". Analiticheskaya zapiska Tsentra zhurnalistskikh rassledovanii. (St. Petersburg, 1998): 4-5 38 Biznes i bezopasnost' v Rossii, no. 2 (1999): 18 39 Chastnyi sysk, okhrana, bezopasnost', no. 9 (1995): 12 40 Operativnoe prikrytie, no. 3 (1999) :29 41 Author's interview with Vadim, the owner of pharmacy retail trade network, 16.01.1999 42 Author's interview with Vladimir, the company director, 20.02.1999 43 Den'gi, no. 24, 23 June, (1999) :p. 28 44 Author's interview with Dmitrii Moshkov and Dmitrii Tiutiaev, co-directors of Avanpost, 6.06.00 45 For more details see Viacheslav Zhitenev, ed., Mafiya v Ekaterinburge (Ekaterinburg: Novaya Gil'diya, 1993) :26 46 Andrei Konstantinov, Banditskii Peterburg (Petersburg, Folio-press,1997): 175 47 Ekspert, no. 2 (1996): 20 48 Ibid. 49 Author's interview with Roman Tsepov, 10.06.1999. Also see published interview in Lichnosti Peterburga, no. 1 (1998): 56 Download 97.44 Kb. Share with your friends:
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