Security and enforcement as private business

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 information³.

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 1992-95⁴, this shift has nonetheless largely gone unexamined by scholars⁵. 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 centuries⁶. 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 power⁷. 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 12^th, 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 agencies⁹. 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 permanently¹⁰.

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 prikomandirovannye¹². 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 11^th of March, 1992 and the special Government Decree of 14^th 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 organizations¹³. 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 positions¹⁴. 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 agencies¹⁵.

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 group¹⁷. 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 country¹⁸. 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-France¹⁹. 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.

(
Sources: Mir Bezopasnosti, 2, 1997; 3, 2000; Biznes i bezopasnost', 2, 1999)

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 option²³.

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 basis²⁴. 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 business²⁵.

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 trust²⁷. 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 decisions²⁸.

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 goods²⁹. 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 enforcers³⁰.

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 1995³¹. 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 state³². 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 center³³. 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 network³⁴.

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.