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 # 410  

May 2002




Lack of Respect for Law and Private Property Rights Undermines Future of Democratic Capitalism in Russia


by Amy Ridenour

Taking of private property... nationalization of industry... violation of the sanctity of contracts and the destruction of intellectual property rights. It sounds like the tactics of the old Soviet government during the bad old Cold War days. Unfortunately, for an increasing number of companies doing business in Russia today, these Soviet-style actions are not a thing of the past.

The culprit: What the Wall Street Journal Europe calls "bureaucratic corruption."1

At risk: In the short run, normalized trade relations between the U.S. and Russia and Russia's entrance into the World Trade Organization (WTO). In the long run, Russia's free economy.

Thus, an issue on few radar screens outside the affected industries, the U.S. Department of Commerce and a low-profile subcommittee of the U.S. Congress could be a bellwether for determining if democratic capitalism will succeed or fail in Russia.

The background is as follows: After the fall of the Soviet Union, the new Russian government undertook an impressive program to privatize state-run enterprises and businesses. Government-run entities were sold into private hands. Success stories then abounded in which boondoggles were transformed into profit-making entities.

Russian President Vladimir Putin has pledged to continue the march from socialism to free markets. Under his leadership, Russia is pressing for inclusion into the WTO, and hopes to be granted normal trade relations status with the United States.

President George W. Bush will soon travel to Russia to discuss opportunities for expanded trade between the two former Cold War rival states.

But amid all this good news are some troubling issues that most of Congress and the Administration so far have largely ignored.

In the past few years, bureaucrats inside the Russian government have demonstrated a troubling tendency to use Soviet-style tactics when dealing with private companies. A situation exemplifying this growing problem has occurred in the case of world famous Stolichnaya Vodka.2

Vodka production is Russia's second biggest industry. After the fall of the Soviet Union, in 1991 the government sold the assets of the Russian vodka industry to private industry. SPI International, now based in the Netherlands, bought the rights to Stoli Vodka and has run the company successfully for over a decade. Over one and a half million cases of Stoli Vodka are imported into the U.S. each year.

But last October, the Russian state trademark industry turned SPI's vodka trademarks over to the Russian Ministry of Agriculture, which subsequently declared the trademarks void. A Russian court intervened on behalf of SPI but, to the chagrin of independent observers, the Russian government is ignoring the court's findings and orders. In fact, the government seized the company's assets and trademarks for its own purposes.

If this worrisome situation had occurred only to one company in one industry, it would be troublesome, but perhaps an aberration. Alas, SPI is not alone. Other private enterprises in Russia are suffering similar, all but catastrophic, fates.

If we imagine the havoc that would occur in the United States if our Securities and Exchange Commission (which regulates Wall Street), was corrupt, and officials of the President's cabinet felt empowered to seize the assets of industries as large as, say, our automotive industry - even if ordered not to do so by U.S. courts - then we have an approximate picture of the chaos into which Russia economy may be sliding.

This bureaucratic rot imperils Russia's democratic reforms. For Russia's sake, as well as our own, Congress and the President should press this point to Mr. Putin, who is the one man currently in a position to effectively reverse these dangerous trends in Russia. If necessary, normal trade relations and WTO membership should be withheld.

An impartial legal system that guards property rights is the irreplaceable cornerstone of democratic capitalism. No less than the future of an economically secure and democratically stable Russia is at stake.

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Amy Ridenour is President of The National Center for Public Policy Research, a Washington, D.C. think tank. Comments may be sent to [email protected].



Footnotes:

1 Boris Nemtsov, "Russia House: Mr. Putin: Stop the Rot," Wall Street Journal Europe, April 5, 2002.
2 For an excellent overview of issues involved in the Vodka case, refer to the testimony of Richard A. Edlin, Counsel for SPI Spirits, Ltd., before the Subcommittee on Trade of the U.S. House of Representatives Committee on Ways and Means' Hearing to Explore Permanent Normal Trade Relations for Russia on April 11, 2002. As of May 10, 2002, a transcript was available online at http://waysandmeans.house.gov/trade/107cong/4-11-02/4-11edli.htm.



 


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