WATCH Duncan DeVille, Guest Editor Graham T. Allison, Director Analysis and Commentary Danielle Lussier, Assistant Editor Strengthening Democratic Institutions Project Editorial Staff: Melissa Carr, David John F. Kennedy School of Government Rekhviashvili, Annaliis Abrego, John Harvard University No. 7, March 2002 Grennan

Rule of Law in Russia: The Wild East No More?

Russian support for U.S. efforts in The new Criminal the war on terrorism has surprised Procedure Code. Long many Western observers. But this advocated by Western legal was not the only recent surprise experts as an important step in the development of the rule of law, from Western — the new Criminal Procedure Code advocates for the rule of law in will divest power from Russia’s (continued on p. 3) Russia also had much to celebrate in the closing months of 2001. Under IN THIS ISSUE: strong prodding by President , p. 9 , the Duma passed several impressive pieces Chairman of the Auditing Chamber of the Russian Federation of reform legislation, including an entirely new Criminal Rule of Law and the Peculiarities of Russia Procedure Code, a potentially revolutionary land reform * law, new shareholder protections in amendments to the Scott Boylan, p. 10 Joint Stock Company Law, and the first post-Soviet Labor Regional Director for Eurasia, U.S. Department of Justice Long Awaited Russian Criminal Procedure Code is Enacted Code. * All of these bills had been stalled in the State Stephen Handleman, p. 13 Duma since the mid-1990s despite — or because of — Time Magazine International former President ’s efforts to get them passed. Russia’s Terrorism - Organized Crime Yet Putin, with little fanfare, managed to do what Yeltsin * with all his bravado could not do: push the notoriously Yelena Mizulina, p. 15 Member of the Russian conservative Duma to approve these sweeping laws. A New Criminal Procedure Code Of course, the more difficult task of actually * implementing these new laws lies ahead. We should not be Lee Wolosky, p. 17 Pollyannaish about this prospect. In a country without rule Former Director for Transnational Threats, National Security Council of law traditions or the civic institutions so important to Rule of Law and National Security the rule of law, implementing these four sweeping pieces * Bruce W. Bean, p. 18 of legislation is easier said than done. Passage of these Clifford Chance Puender laws may have been the easiest part of the reform process. Perspective on Corporate Governance Progress under Putin But if properly enforced, these new laws will make for * enormous changes in the lives of ordinary Russian citizens. Sarah Carey, p. 21 They will provide Russia’s citizens with a measure of Squire, Sanders & Dempsey U.S. Investors in Russia: A Greatly Improved Landscape personal and economic freedom not previously enjoyed. * This issue of Russia Watch surveys the recent Elena Gerasimova and Irene Stevenson, p. 23 progress toward making Russia a rule of law state. A quick Labor Lawyer and Field Representative, Solidarity Center/AFL-CIO look at these new laws is revealing. New Labor Code in Russia * Adrian Moore and Ilya Petukhov, p. 26 “A dictatorship of the law is the only kind Baker & McKenzie The New Russian Land Code of dictatorship that we must obey.” * Vladimir Putin, January 31, 2000 Evgeny Reyzman and Maxim Kalinin, p. 29 Baker & McKenzie The New Russian Federation Labor Code * “As good government is an empire of U.S.-Russia Business Council and laws, how shall your laws be made?” American Chamber of Commerce, p. 31 Policy Recommendations for the Bush Administration John Adams, “Thoughts on Government,” 1776 * Ruben Vardanian, p. 33 BACK ISSUES OF RUSSIA WATCH CAN BE FOUND Troika Dialog Bank Corporate Governance: Russia’s Present Day Perestroika AT: www.ksg.harvard.edu/bcsia/sdi

Russian Supreme Court website, http://www.supcourt.ru/EN/rj.htm

Levels of Trust and Mistrust in Police 28.1 28.5 30 25 22.5 Complete Trust 20 Mostly Trust 13.3 15 Mostly Distrust 10 7.6 Completely Distrust 5 Hard to say 0 Level of Trust

ROMIR Consulting poll of 2000 respondents in 62 regions of the Russian Federation October 2001, www.romir.ru

2

(continued from p. 1) prosecutors and invest it in the blows with proponents of the measure in the Duma session country’s judiciary. It does this by taking away from during which the bill was passed. The opponents then prosecutors the right to issue arrest and search warrants, and marched out of the Duma en masse and sang old placing this power in the hands of judges. The new code also revolutionary songs outside. allows criminal defendants to retract confessions, many of Not only does this land reform bill allow private which are still beaten out of suspects by Russian police. ownership of land by Russian citizens, it even allows land Under the new code, once retracted by a defendant, such ownership by foreigners — a remarkable change. confessions cannot be used as evidence. Russia’s markets have been slow to develop in the Finally, and perhaps most importantly, the new atmosphere of uncertainty that currently exists over the issue code guarantees the right to jury trials in criminal cases. of whether or not individuals can really own land. In Under the current system, Russian prosecutors often do not addition to the obvious economic benefits of legalizing even show up at trials, so confident are they in the likelihood private land ownership, this law takes a major step towards that the judge will convict, since there is no jury to hamper reducing the power of organized crime groups in Russia. the court. The absence of legal land ownership has created a bonanza Russia actually began a jury trial experiment in for mafia groups who currently control property through a 1993, but jury trials were only held in nine of the country’s violent black market system. eighty-nine regions, and in recent years juries heard only 2 Adrian Moore and Ilya Petukhov of Baker & percent of Russia’s criminal trials. The results of even this McKenzie’s Moscow office explores the new land reform small experiment have been startling: while the acquittal rate law on p. 26. in old-style Russian criminal trials today is about 1 percent, The new Joint Stock Company Law. The year in areas with the jury trial experiment nearly 20 percent of 2001 also saw President Putin sign the first substantial all accused have been freed by juries. overhaul since 1995 of Russia’s basic corporate law, the Joint Stock Company Law. The changes are designed to protect minority shareholders’ rights, including measures to Russia desperately needs tougher prevent dilution of ownership through issuance of new anti-trust laws. shares. Other amendments require that there be, in most cases, a seventy-five percent quorum of shareholders before a vote may be taken regarding the issuing of new shares. The new criminal procedure code expands this right Finally, the new amendments provide enhanced access to to all Russians accused of serious crimes, allowing them to shareholder lists and accounting records, the right to have their cases heard by ten-member juries of their peers. nominate candidates for board and management positions, This will force prosecutors to actually prove their cases with and an easing of the requirements for removing a company’s hard evidence, rather than relying upon the rubber-stamps of general director/CEO. judges or so-called lay assessors — two hand-picked citizens In this issue of Russia Watch, Bruce Bean of who sit with the judges— a vestige of the Soviet system. Clifford Chance Puender’s Moscow office reviews the new Once implemented, the new code will force Joint Stock Company Law on p. 18. Ruben Vardanian of prosecutors throughout the entire country to bring stronger Russia’s Troika Dialog Bank suggests areas for further cases, or else face a loss at the hands of suspicious juries. improvement of corporate governance in Russia (p. 33), and Furthermore, a stamp of public approval comes with a jury Sarah Carey of Squire, Sanders & Dempsey (which has a verdict, and serves to make credible the actions of the state. large Moscow office) evaluates current conditions for Juries also act as a check on state corruption. Russia sorely Western investors in Russia (p. 21). needs such a system of checks and balances as it attempts to confront organized crime and establish the rule of law. Yelena Mizulina, a member of the Russian State Even the best laws will be Duma, and Scott Boylan of the U.S. Department of Justice, examine the new criminal procedure code in their articles in ineffective if not properly this issue of Russia Watch (p. 15 and p. 10, respectively). implemented. And Time’s Stephen Handleman (author of Comrade Criminal: Russia’s New Mafiya) provides an update on Russian organized crime on p. 13. Lee Wolosky, formerly The new Labor Code. On the last day of 2001, with the National Security Council, discusses post- Putin signed into law the new Labor Code, an important September 11 U.S. national security threats that might result component of his economic program. The provisions of the from unchecked crime in Russia on p. 17. Labor Code had been argued for the last five years and faced The land reform law. Equally far-reaching in the vocal opposition from the Communists in the Duma. But the historic change it represents, the land reform law will do Kremlin was able to get its bill through the Duma largely something that would have been anathema to Communists: intact. The new Labor Code will replace the 30-year old allow the private ownership of some land in Russia. So Soviet Labor Code that was absurdly at odds with a free- offensive is this concept to the old guard that some market system. The new code allows private firms to hire Communists and Agrarian party members actually came to and fire workers. At the same time it guarantees certain 3 worker rights, including a minimum wage, a 40-hour work- Westerners tend to label as a reformer any Russian week, paid leave after six months at a job, representation by leader who speaks some English and doesn’t pound his shoe a single union chosen by the majority of a company’s on tables. We should be cautious then in assessing Putin, a workers and mandated vacation time. It also penalizes former KGB agent who rose to prominence under suspicious employers, including state-owned joint-stock companies, circumstances following apartment bombings in Russia, and who are late in paying wages to employees — an all too who has on many fronts been anything but reform-minded. common problem in Russia. International human rights organizations have alleged that The most important provisions of the new Labor serious human rights violations have been committed in Code are reviewed on p. 29 by Evgeny Reyzman and Maxim Chechnya, resulting in the death or disappearance of Kalinan from Baker & McKenzie’s Moscow office. Some thousands of people. The Kremlin’s recent moves against of the shortcomings of the code are addressed by Elena NTV and TV6 also have troubled many. Putin’s reform Gerasimova and Irene Stevenson of the AFL-CIO on p. 23. actions on legal, land, shareholder, and labor reform are therefore all the more surprising and bear further watching. To be sure, these new pieces of legislation do not Only time will tell whether Putin is serious about go far enough. For instance, as Putin critic Judge Sergei reform, and even the best laws will be ineffective if not Pashin has argued, the new Criminal Code does not provide properly implemented or if thwarted by corrupt officials criteria by which a judge can approve or reject a proposed (this issue of Russia Watch begins with Sergei Stepashin, warrant, nor does it do away with the ability of prosecutors Chairman of the Auditing Chamber of the Russian to reject some defense-gathered evidence. Likewise, critics Federation, examining the peculiarities of applying the rule in the liberal have correctly noted that of law to Russia on p. 9). But in a country about which there the land reform bill has serious shortcomings. In an effort to has been little good news to report in recent years, Putin’s get something passed by a recalcitrant Duma, Putin dropped newest actions are a welcome change, and credit should be a provision that would have also authorized the sale of given where credit is due. In criticizing him, we should agricultural land. This, he promises, will be taken up in a avoid being what the poet Robert Browning called being subsequent bill. Furthermore, Russia desperately needs “faultless to a fault.” In our demand for perfection, we must tougher anti-trust laws and enforcement to break up not be too quick to find fault in actions that could go a long monopolies. And some believe that the new Labor Code way toward establishing the rule of law in Russia. • takes too many rights away from workers in exchange for —Duncan DeVille promises of timely salary payments and a minimum wage.

Summary of Legal Reforms

Judicial Reform Package (Amended Law on Status of Judges, Law on Judicial Systems, and Law on the Constitutional Court) • Sets age limits for federal and Constitutional Court judges at 65 and 70, respectively. • Reduces judges’ immunity. • The tenure of office of presiding judges at courts of all levels, except for those of the Constitutional Court, is set for six years. In addition, the same person cannot be appointed as the presiding judge or deputy presiding judge at the same court for more than two consecutive turns. New Criminal Procedure Code • Reduces power of prosecutors. • Increases protection of criminal defendants. • Expands use of jury trials in criminal proceedings (jury trials will go into effect in all regions by January 1, 2003). Land Reform Law • Allows for private ownership of land by Russian citizens and by foreigners. New Labor Code • Allows private firms to hire and dismiss workers. • Guarantees workers’ rights such as a minimum wage, 40-hour work week, representation by a single union chosen by worker majority. • Penalizes employers for wage arrears by requiring payment of interest. Amended Joint Stock Company Law • Protects minority shareholders’ rights. • Increases access to shareholder lists and accounting records.

4

Thoughts on Rule of Law in Russia from the Harvard University Kennedy School of Government’s Fifth Annual Russian Investment Symposium, November 1-3, 2001

“The Russian government should focus on improving corporate governance and transparency.” James Harmon, Former Chairman, Export-Import Bank of the U.S.

"The new corporate governance code will be enforced." Igor Kostikov, Chairman, Federal Commission for the Securities Market of the Russian Federation

"Improvements in the tax system have made it more transparent and improved the government’s ability to interpret and apply the law." Stanley Fischer, Former First Deputy Managing Director, International Monetary Fund

"Unification of the legal system is taking place." German Gref Sergei Yastrzhembsky, Aide to Russian President Vladimir Putin

"Investors in Russia should never break rules that they wouldn’t break at home." David Jones, President and CEO, The U.S. Russia Investment Fund/Delta Capital Management Donald Evans

"Russian companies should not wait for the laws to change. They should choose to comply voluntarily with corporate governance and business ethics standards." , Chairman and CEO, Oil Company

The Fifth Annual Russian Investment Symposium, entitled “Reform and Renewal,” brought together more than 80 speakers and 400 delegates in Boston from November 1-3. They discussed the most pressing issues facing the Russian economy. The Symposium was highlighted by addresses to the delegates by U.S. Secretary of Commerce Donald Evans, Russian Minister of Economic Development and Trade German Gref, Harvard President Lawrence Summers, Undersecretary of State John Taylor, and many others. Delegates had the opportunity to share insights and perspectives on investment in Russia with these and many other figures. President George W. Bush sent a letter greeting the symposium participants citing the event as “an important step in creating stronger economic ties and greater prosperity for both of our nations.” President Bush further expressed that, “Through the Russian Government's market reform programs, the Russian economy now presents both immediate and long-term trade and investment opportunities for foreign companies.”

For more information on the Symposium, please visit http://www.ksg.harvard.edu/USRIS/

Examples of International Assistance for Russian Rule of Law

European Union Technical Assistance to the CIS (TACIS) Support for Institutional, Legal, and Administrative Reform in Russia (2000-2003) • EU’s Common Strategy on Russia of June 1999 identifies rule of law as a priority area in EU-Russian relations. • Projects include assistance in taxation reform, state budget reform, control of public expenditures, protection of intellectual property, and harmonization of environmental standards. • TACIS Action Programs including those that deal with rule of law issues have been in place in Russia since 1991. • Budget: EUR 17 million in 2000.

United States Freedom Support Act USAID Rule of Law Program and other programs • Since 1992 USAID has supported judicial training and improved judicial administration, and has provided greater awareness of legal issues affecting women and respect for human rights through support to select non-governmental organizations (NGOs), and has conducted efforts to combat . • Financial support has been increasing on an annual basis (FY2001—$2,978,000, proposed FY2002 $3,880,000).

World Bank Legal Reform Loan ($58 million) • In June 1996 the approved a $58 million loan to finance 65 percent of an $89.4 million Russian legal reform project. • The loan provides for technical assistance in legal drafting, classification and dissemination of legal information, legal education, judicial reform and alternative dispute settlement, as well as other high priority activities.

5

Key New Features in the Criminal Procedure Code

1. The task of battling with criminality is excluded from the list of tasks of criminal legal proceedings. These tasks include the defense of rights and legal interests of individuals and organizations victimized by crimes, and also the defense of individuals from unlawful and groundless accusation, conviction, or restriction of rights and freedoms (Article 6). Many generations of Soviet investigators, public prosecutors, and judges were raised on the belief that any of their actions and decisions during criminal processes were justified by the battle against criminality. The fact that procedural coercion, including arrest, search, interrogation, and eavesdropping on telephone conversations, was applied to someone suspected or accused, though not yet proven guilty, was not questioned. More than a little time is needed before this conviction can be replaced by another based on respect for human rights, and on the understanding of the fact that during a criminal process there is always the possibility of erroneous application of coercion towards the innocent. 2. The principal of presumption of innocence for the first time belongs to the order of the founding principles of the criminal legal procedure (Article 14). 3. It is established that the participation of defense counsel is obligatory in all criminal cases with the exception of those in which the accused refuses defense. 4. The witness has the right to consultation with an attorney during the interrogation (Point 6 Part 4 Article 56). 5. The institution of inadmissibility of evidence is introduced, and of exclusion of evidence acknowledged as inadmissible from the list of evidence produced in the legal examination (Article 75). 6. Conditions for applying preventative measures of detainment under guard are changed. It is important to note that detainment under guard is stipulated by the general system of criminal punishment in Russia, that the deprivation of freedom can be established for a period of six months up to thirty years or more, and that the deprivation of freedom for three to five years is not considered protracted. 7. A rule is established that repeated interrogation of the accused for the same accusation if he has refused to give testimony in the first interrogation might take place only at the request of the accused himself (Part 4 Article 173). This position allows Russia to eliminate the practice of interminable interrogations of the accused that aim to force confessional testimony. 8. The court is divested of the powers to return cases to the public prosecutor for additional investigation. With this rule the practice of interminable investigation of criminal cases should become part of the past. 9. A special order is introduced for court examination in agreement with the accused of evidence presented to him (Chapter 40). This new institution resembles the American institution of “plea bargaining,” but differs significantly from it. 10. A rule is introduced preventing double jeopardy (Article 405), — the possibility of repeated conviction of a person for one and the same crime is eliminated.

Outlined by Yelena Mizulina, member of the Russian State Duma. See p. 15 for Mizulina’s commentary on the new Criminal Procedure Code

Comparison of Incarceration Rates in Selected Countries Source: British Home Office Japan Annual International Comparison of England & Wales Criminal Justice Statistics, May 2001 South Africa (data is for 1999, the most recent year available) Russia

USA

0 200 400 600 800 Number of people incarcerated per 100,000 population

6

Comparison of Homicide Rates by Country*

56.49 60 50 Source: British Home Office Annual International Comparison 40 of Criminal Justice Statistics, 30 20.52 May 2001 20 6.26 10 1.45 1.04 The data for Russia and Japan 0 also include attempted homicide, thereby increasing their totals.

Countries

Comparison of Homicide Rates by City*

60 50.82 50 Source: British Home Office 40 Annual International Comparison 27.47 30 of Criminal Justice Statistics, 18.2 May 2001 20 9.38 10 2.36 The data for Moscow and Tokyo 1.17 also include attempted homicide, 0 thereby increasing their totals.

Cities

*Since the definition of homicide is similar in most countries (as opposed to other categories like “serious crime” or “violent crime”) absolute comparisons are possible.

7

Foreign Shareholders’ Rights and the Courts: The Lomonosov Porcelain Factory

One important benchmark case involving rule of law in the commercial sphere is that of the Lomonosov Porcelain Factory and its major foreign shareholders, The U.S. Russia Investment Fund (The Fund) and Kohlberg Kravis Roberts & Co. (KKR).

Brief History: • The Fund and KKR collectively purchased 59.6 percent of the Lomonosov Porcelain Factory’s stock and other foreign investors acquired an additional 25.6 percent of the factory — totaling 85.2 percent foreign ownership in the enterprise. • On October 11, 1999 the St. Petersburg and Leningrad Oblast Arbitration Court overturned the factory’s 1993 privatization on the grounds of procedural errors. No provision was made in this decision for the $8.5 million that The Fund, and KKR, or other foreign owners had invested. • The Fund and KKR’s first appeal was heard and rejected in December 1999. • Investors appealed further and held a shareholder’s meeting in January 2000 while the court tried to interfere. • After a weeklong standoff between the factory’s old management and the group selected at the January 2000 shareholder’s meeting, new management entered the premises of the factory, prompting the Lomonosov Porcelain Factory to appeal the October 11 court decision alongside investors in the Federal Arbitration Court of the North- Western District. • On March 2, 2000 the initial decision was overturned, and the legality of the factory’s privatization was upheld.

Though fought through the courts, this case was a political battle from start to finish. Personal interests on the part of the factory’s ruling management rather than apparent violations of the law inspired the initial lawsuit. In 1999, both the initial ruling in October, and the rejected appeal in December sent out warning signs to foreign investors throughout Russia. The March 2000 decision was hailed as a victory for foreign investors in Russia and acclaimed as an important precedent. However, the precedent-setting aspect of this case has little to do with the actual legal process, and more to do with the signal it sent that the Russian state was willing to uphold foreign shareholders’ rights. Although the legal case brought forth by the investors was very strong, the court’s decision in favor of foreign investors was as much the result of effective political lobbying as of juridical persuasion. The court was reluctant to rule against the claim brought up by the state. To counter this pressure, The Fund and KKR sought the support of influential politicians throughout its appeals process. Apparently, the Ministry of State Property stopped applying pressure and the case was heard on the grounds of its legal merits in the Federal Court. Had the court not ruled in The Fund and KKR’s favor, a strong message could have resulted in potentially devastating consequences for Russia’s quest for foreign direct investment and overall acceptance in global markets.

Sources: EWI Russian Regional Report, March 9, 2000; EWI Russian Regional Investor, January 26, 2001;The Russia Journal, March 6, 2000; The St. Petersburg Times, March 3, 2000; , January 21, 2000, January 22, 2000, March 3, 2000.

Special thanks to Eva Baxter from Delta Capital Management for supplementing the details of this article.

SDI Fellow Mitchell A. Orenstein recently published an East European Constitutional Review article with coauthor Ilian G. Cashu that seeks to overturn conventional wisdom in the news media and academia about the Russian people’s supposed “antipathy towards law.” In particular, the article responded to a symposium published in 1999 in East European Constitutional Review in which leading scholars such as Kathryn Hendley, Anders Aslund, Stephen Holmes, and others asserted that part of the failure to establish rule of law in Russia resulted from a lack of popular demand. However, Cashu and Orenstein’s article, “The Pensioners’ Court Campaign: Making Law Matter in Russia,” shows that demand for law in Russia has risen among an unlikely population group: former Soviet pensioners. During the late 1990s, Russian pensioners organized a “coordinated, national court campaign” that threatened to embarrass courts and state institutions into raising the amount of pensions to correspond with existing law. Pensioners, never seen as a likely avant-garde of legalism, filed hundreds of thousands of suits in a largely successful effort to establish greater rule of law in state social provision. The example of the pensioners’ court campaign should cause us to re-evaluate the extent of popular demand for law in Russia, and move away from the pessimistic assumptions that Russians somehow prefer arbitrary rule. A response to Cashu and Orenstein’s article by Kathryn Hendley, Professor of Law and Political Science at University of Wisconsin-Madison, is published in the same issue (Vol. 10, No. 4, Fall 2001). These articles are available on-line at www.law.nyu.edu/eecr. The direct link to Cashu and Orenstein’s article is: http://www.law.nyu.edu/eecr/vol10num4/special/cashuorenstein.html

8 Insider Information Analysis of rule of law in Russia by leading Western and Russian specialists

Rule of Law and the

Peculiarities of Russia

by Sergei Stepashin Sergei Stepashin is Chairman of the Auditing Chamber of the Russian Federation.

Today the idea of the rule of law, which has its origin in rejection of the institutions of law as they are understood ancient times, is not only an important theoretical by and presented in Western theories. postulate, but also a fundamental principle of state building Indeed, despite the fact that the formation and in developed democratic countries. development of legal thought in Russia is an objective The modern understanding of the idea of the rule process that has proceeded according to laws that apply of law is based, on the one hand, on recognition of the law equally to all states, there are particular features in it that as a phenomenon of civilization that unites not only the have also defined, in the long run, a unique societal norms of positive law, but also the traditions, accumulated attitude toward the law and legal culture. values, and achievements contained in the legal In Russia, the absence of private property, the consciousness of society. These include inalienable communal structure of life and the reforms of Peter the individual rights, morality, justice, and mercy. On the Great, the vastness of the country itself, the church schism other hand, society’s growing recognition of the value of and the character of Russian autocracy (which did not have the individual was dependent on an understanding of the to deal with the presence of any opposition) the special state as something primarily connected with human rights fate of the intelligentsia—this is but an incomplete list of and freedoms. the socio-political, economic, historical, and finally, psychophysical factors that have contributed to the formation of an enormous gap between the popular legal Official law was connected with consciousness and the official formulation of the law. The autocratic power and interpreted development of the latter objectively followed the formation and development of the state and has a rich as a command—and an unjust one history, from the “Russian Justice” of Yaroslav the Wise to the Code of Law of the . In the minds of at that. the people, however, official law was connected with autocratic power and hence interpreted as a command— Clearly, in the context of that interpretation in and an unjust one at that. The rule of that kind of law constitutional practice, this idea is used as the theoretical directly opposes the Western understanding, since that basis for consolidating a number of legal postulates. First official law was backed up exclusively by coercion, and and foremost this concerns the principle of lawfulness, not on the basis of an intrinsic awareness that lawfulness which grew out of the principle of the rule of law and is and justice are the same thing. historically connected to it. The principle of lawfulness includes: the rule of law in the system of legal acts; the way the law connects the state, government institutions, Today Russian reality demands public organizations, public officials, and citizens; the exclusive lawmaking power of the highest representative application of world experience. body, etc. For Russia, careful study of the accomplishments A real shift in the public consciousness in Russia of the international community in this area has special (including the problems of building a law-governed state significance. The 1993 Constitution of the Russian and the related idea of the rule of law) began in the second Federation proclaimed Russia a law-governed state half of the nineteenth century. Based on economic and (Article 1) that recognizes the principles of the rule of law, political changes, new trends united the best Western ideas lawfulness, and the priority of individual rights and with the achievements of Russian liberals, reflecting the freedoms. In fact we must admit that these ideas have only growing understanding in society of the significance and begun to win public recognition. value of the law as an independent social force. After In discussions on the subject of “the peculiarities October 1917, however, the conceptions of Russian of Russian thinking;” it is customary to note Russians’ lawyers and political leaders in this area were forgotten.

9 For modern Russia, the principle of the rule of oversees observance of legal requirements in the area of law in the formation of a national model for a law- the budgetary process, including the legality of movement governed state is neither a tribute to political fashion nor a of state resources in financial and credit institutions, use of blind attempt to copy European traditions. Today Russian federal property, credit and loans, and implementation of reality demands it: Russia’s practical and effective the federal budget. In addition, changes in the role of the integration into the international community gives rise to upper house of the Russian parliament—the Federation the objective need for recognition and application of world Council—have strengthened the role of the Auditing experience, while taking into consideration Russia’s own Chamber in the lawmaking process, not only in the form of national characteristics. expert analysis of already prepared draft legislation, but In this regard the Auditing Chamber is growing in also in the preparation of proposals aimed at perfecting the significance as an institution of state oversight that upholds budgetary process, as well as elimination of discrepancies the rule of law. Setting forth its activity exclusively on the with legal requirements as they are discovered.• basis of the principle of lawfulness, the Auditing Chamber

Rule of Law in the Criminal Sphere

Long Awaited Russian Criminal Procedure Code is Enacted by Scott Boylan Scott Boylan is Regional Director for Eurasia at the U.S. Department of Justice, Criminal Division, Office of Overseas Prosecutorial Development, Assistance and Training (OPDAT). The opinions expressed in this article are the author’s and do not reflect any official position of the United States Department of Justice or the United States Government.

Is the Soviet police state dead? Is Russia a democracy? The public prosecutor in the , and Some observers may have trouble answering these subsequently in Russia, could issue its own search questions when confronted with recent events in Russia. warrants, unlike established democracies around the world. Men in black masks breaking down doors, holding office Russian prosecutors and police did not need to be bothered workers at gunpoint, and seizing records from banks, with obtaining judicial approval for their actions because businesses and oligarchs, have been a familiar sight during they could authorize, indeed validate, their own actions. the Yeltsin and now the Putin era. Many observers just This made raids on NTV, oligarch offices, bank vaults, and assumed that these raids were simply abuses of power by just about anywhere else simple and uncomplicated. These the Russian government — the Kremlin using its days should, however, be over with the passage of the new paramilitary police units to harass political and other Russian Criminal Procedure Code. enemies. But in fact, until quite recently these raids were indeed legal under Russian — or should I say “Soviet” — law. The code fulfills some of the key The 1993 Russian Constitution made many promises of the 1993 Constitution. promises that for the past eight plus years went unfulfilled because they were predicated on the passage of new laws that were necessary to breathe life into these Constitutional In the closing weeks of 2001, the Russian protections. The Criminal Procedure Code was one law parliament passed — and President Putin signed— a new that needed to be significantly reformed to institute these code of criminal procedure. The code is significant in that constitutional promises. Communist parliamentary it finally fulfills some of the key promises of the 1993 majorities, stiff resistance from law enforcement and Russian Constitution — promises that human rights would prosecution bureaucracies, and a lack of political will be protected and fundamental rights should be guaranteed. prevented an expeditious passage of a reformed and Some key provisions of this law would require: Russian constitutionally compliant criminal procedure code. The prosecutors and police to obtain judicial approval for criminal procedure code in effect in Russia until June 2002 searches, seizures, and arrests; expansion of the jury trial is the old, albeit heavily amended, Soviet procedure code system throughout Russia; a form of plea bargaining; and a — a code that was not conceived to protect individual process for guilty pleas. rights and democratic values, but to facilitate the Passage of the new code of criminal procedure is authoritarian power of one of the most tyrannical regimes the culmination of a process that began in 1991. in the history of the world. Significant reform of the criminal justice system was recommended during Glasnost and some of these reforms,

10 including an experiment with jury trials, were appealed his capital murder conviction based upon the subsequently enacted, but many of the recommended equal protection clause of the Russian constitution— reforms were not. Anti-reform and anti-democratic arguing that his right to equal protection was violated elements, especially in the procuracy (the public because he was not afforded the opportunity of a jury trial. prosecutor’s office) fought these reforms. The procuracy’s He based his argument in part on the fact that conviction opposition was largely predicated on the belief that the rates in jury trial regions are much lower than bench trials. reforms would significantly reduce the powers of the The Russian Supreme Court agreed and stayed all procuracy and police and, therefore, hinder their ability to executions in Russia until each and every defendant in a deal with the already crippling levels of crime in Russia. capital case was afforded the opportunity to have their case Many in Russian law enforcement and their conservative heard by a jury. The Russians were forced by this judicial backers in the legislature and parliament, being children of decision and the inclusion of the provisional right to a jury the Soviet police state, revolted against reforms that would trial in the 1993 Constitution to either amend the curb their power. Constitution and eliminate jury trials or make provisions in the law to have jury trials available throughout the country. The decision was the latter and jury trials will now be Many in Russian law enforcement available under the new code of criminal procedure in revolted against reforms that appropriate cases for all defendants by 2003. But jury trial is only an option in a small number would curb their power. of very serious cases. Most cases in Russian courts are tried before one or three judges. And this will still be the Jury trials were reintroduced to Russia, having case when the new Criminal Procedure Code is fully been part of the Russian judicial system prior to the implemented. The one significant change is that under Bolshevik Revolution, by legislation that predated the certain circumstances three-judge panels are currently 1993 Russian Constitution. This jury trial legislation was composed of one professional and two lay assessors. Lay ironically one of the latter pieces of legislation assessors in the Soviet Union were usually selected from promulgated by the last Supreme Soviet to convene in the ranks of loyal Communists who earned the nickname Moscow. This was the same Supreme Soviet that was “nodders” for their proclivity to always agree with the destined to perish in the flames of the Russian White decision of the professional judge. The professional judge House in the Fall of 1993. But this reform survived the would normally consult with the Communist party crises of 1993, and jury trials were subsequently hierarchy before rendering a decision. This was known introduced in nine of Russia’s eighty-nine regions. throughout the Soviet Union as “telephone justice” and A provisional right to jury trial requiring was a significant reason why courts and “nodders” were implementing legislation was included in the 1993 Russian held in such low esteem. Lay assessors’ reputations were Constitution. Although preparations were made during the so bad with the public at large that those reformers Yeltsin years to conduct jury trials in other regions of working on the new code of criminal procedure deemed it Russia, the jury trial was never extended beyond those necessary to eliminate the position and replace “nodders” original nine regions. The Communists in the Duma with professional judges, who are enjoying an improving fought expansion of jury trials. Yeltsin cited lack of funds reputation amongst the populace because of several for expansion and even the United States’ assistance reforms put in place with the intention of bolstering efforts to enlarge the use of jury trials were greatly judicial independence. curtailed. In the late 1990s, it appeared that the jury trial expansion was doomed. But some Russians and a few assistance providers from the United States and other The rights of the defendant were countries did not abandon the effort to spread the jury trial frequently pushed aside in the to other regions of Russia. Many then argued that the right to a jury trial was a provisional right in the Russian quest to determine the ultimate Constitution. If democracy were to indeed flourish in truth. Russia, Russians must, at a minimum, obey the dictates of their own constitution. The 1993 Constitution did indeed provide for the In the Soviet and subsequent Russian system the jury trial being available to defendants in specified cases. search for the truth in any given criminal matter was of The drafters of the Constitution expected that legislation paramount concern. The rights of the defendant were would promptly pass that would extend the jury trial frequently pushed aside in the quest to determine the experiment from the original nine, experimental regions of ultimate truth. One of the effects of this search for the Russia. But throughout the decade of the 1990s, the truth was that investigations frequently were bogged down Communist-dominated legislature was loath to support with irrelevant detail. Preparing a case for trial was expansion of jury trials. In the closing years of the Yeltsin extremely time consuming, and because bail was rarely if administration, a defendant in a non-jury trial region ever used, defendants could sit in confinement for an 11 exceptionally long period of time. This alone would be of criminal justice system to a functioning democratically concern, but when combined with the horrendous based system. It will require thoughtful and dedicated conditions of Russian pre-trial detention facilities, it work on its implementation by all members of society, but became a serious health and human rights concern for especially by the legal profession. The current prosecutor Russia, that became an international embarrassment for the general’s steadfast opposition to these reforms raises Russian government. Something had to be done. concerns that the procuracy will not work to implement Plea bargaining was thought to be one method to this legislation with the dedication and enthusiasm alleviate the severe overcrowding in Russian pre-trial necessary for its successful establishment as a functioning detention facilities. Some Russians thought that plea criminal justice system. bargaining was an abhorrent system and much controversy arose from its potential adoption. Opposition to plea bargaining came mostly from the reformist camp, unlike Russia should focus on creating a most of the reforms adopted by the new code. The liberals public prosecutor’s office that were concerned that plea bargaining could be used by an overly powerful Russian government to force innocent reflects Russia’s democratic people to admit guilt for crimes they did not commit. A number of people raised concerns that plea bargaining was values. a return to Stalinist show trials. But in the end, it was recognized that plea bargaining, with proper procedural It is also very clear that the promulgation of this protections in place could protect citizens from overt code and its implementation is not the end of criminal influence by the government and at the same time help to justice reform in Russia but truly is just the beginning. It alleviate overcrowding in pre-trial detention facilities. To is encouraging to note that the Duma-sponsored Working placate those in opposition to plea bargaining, the Group that drafted the new code will continue to function procedure will be limited to crimes punishable by as a monitoring body of the code’s implementation and sentences of three years or less. The procedure will be will be able to seek amendments where experience and examined in several years and if its implementation is practice indicate it is necessary. Other reforms have acceptable, plea bargaining will be considered for passed through the legislature, including legislation on the expansion for all, or a larger set of crimes. status of judges, all part of an effort to move towards a Western-based criminal justice system that protects the rights of the individual. The procuracy was created to The Russian legislature should now turn its attention to the procuracy itself. The procuracy was an serve an authoritarian organization that was created to serve an authoritarian government. government. The procuracy was as feared by Soviet citizens as the KGB and was considered its partner in Throughout the drafting, legislative debates, and repression. Russia should consider dismantling the passage of this new Criminal Procedure Code the Russian procuracy, discarding its name that carries too many bad prosecutor’s office has been at the forefront of the memories from the past, and erecting in its place a new opposition to many of the key liberal reforms that this institution to serve as the public prosecutor’s office. As a legislation has introduced. This opposition included member of the Council of Europe, Russia can be guided in attacks on provisions that were constitutionally guaranteed. reforming the functions of the procuracy by a recent The procuracy and its allies were successful in delaying Council of Europe paper that outlines the functions of a these reforms for nearly a decade. The current prosecutor public prosecutor’s office in a democracy. Russia should general of Russia was at the forefront of this opposition. focus on creating a public prosecutor’s office that reflects The new code of criminal procedure is not a thaumaturgic Russia’s democratic values, now that there is significant document that will immediately transform the Russian momentum behind criminal justice reform efforts.•

12

Russia’s Terrorism — Organized Crime by Stephen Handleman Stephen Handelman is the author of Comrade Criminal: Russia’s New Mafiya (Yale University Press, 1995), and writes for Time Magazine International. Since September 11 the global virus of organized crime — continue to pay protection money for “krishas” (roofs) particularly its lethal Russian variety — has seemed less established by competing mob baronies. The largest menacing beside the threat of transnational terrorism. groups are economic powers in themselves, holding sway Unfortunately, that’s a shortsighted view. Gangsterism in over some of the nation’s biggest banks and commercial Russia and other post-communist states may be less enterprises (often indistinguishable from them) — and shocking in its actions, and less random in its targets (few their influence continues to expand through coercive might eulogize a banker or government official killed as a relationships with politicians and government officials at consequence of his mob connections); but it is terrorism every level. nonetheless. Organized crime is to the societies of the Yet the commentators weren’t completely wrong. former Soviet Union what terrorism now appears to the Putin has dramatically converted the old Yeltsin crime- West: a corrosive threat to long-term economic well-being, fighting rhetoric into some useful concrete measures. A political stability, and personal security. recharged police force has scored successes in breaking the power of several potent gangs, and the domestic business climate has become measurably safer for domestic and “Mafiya-related” crimes increased foreign investment, though it is still unpredictable. And by 83 percent last year. greater public awareness — and outrage — has strengthened the hand of legislators and the media in their slow, persistent efforts to resist the trend. Ironically, in And despite some reports to the contrary, light of September 11, one of the rhetorical tools which has organized crime has not gone away. Even before come in handy is the identification of gangsterism with the September 11, many commentators believed the crime terrorist threat. Senior government officials have begun to wave that sent Russia staggering through the 1990s was treat criminal groupings as enemies of the state, and in fact largely petering out. The country had reached a level of the connection between organized criminality and economic stability by 2001 that seemed unimaginable terrorism would be a fruitful source of investigation in during the previous decade. Moreover, the ascension to Russia, as well as elsewhere in the world. power of President Vladimir Putin, whose early moves to restructure security forces, tackle the legacy of corruption left by the Yeltsin government, and bring forward long- Mafiya groups are said to control delayed judicial reforms — all reinforced by his image as an incorruptible young president with a KGB background up to 50 percent of the private — persuaded observers that the era of “Wild East” economy. capitalism was safely behind Russia. In fact, the available statistics suggest things are not much better, and perhaps even a little worse. Over the past decade, there have been numerous According to the Russian Ministry of Internal Affairs but hard to document cases of gangsters serving as go- (MVD), “mafiya-related” crimes increased by 83 percent betweens for the supply of stolen arms and laundered last year, and Russia’s homicide rate was second in the money to terrorists. It is no coincidence that the huge world only to South Africa. Some 3,500 criminal groups supply of Afghan opium which financed the Taliban of widely varying size and influence operate across the purchases of weapons was routed through Russian and country, ranging from racketeers who terrorize a city Central European gangs. (More than 80 percent of the neighborhood or district to tightly-structured paramilitary heroin entering Western Europe originates in Afghanistan). organizations whose reach extends across several regions. Even after the Taliban’s fall, the drug business was still In several respects, this snapshot of the Russian mafiya has booming. About 20 kilograms of Afghan heroin were been largely unchanged since it emerged from the Soviet confiscated in the Tyumen region in late November (worth underground and black economy in 1992 as a powerful about $1 million) apparently destined for Siberia. In Latin player. But political and economic circumstances have America, authorities have observed increasing steadily altered the landscape of Russian crime. Mafiya collaboration between Russian crime groups and drug groups are now said by Russian law enforcement cartels. As in Afghanistan, drugs are negotiated in authorities and academic researchers to control up to 50 exchange for weapons that can be used by the narco-cartels percent of the private economy in Russia (and 60 percent as well as narco-guerillas, including the FARC of state firms), with as many as 40,000 companies — (Revolutionary Armed Forces of Colombia). Many of including a third of the nation’s banks. Thousands, these weapons originate in official Russian army depots. perhaps hundreds of thousands, of individual entrepreneurs The link between organized crime and terrorism is doubly ironic because many of today’s most powerful 13 Russian and Georgian gangs gained their power in the criminals and bureaucrats now feed on the insecurity they waning years of Communism and the rise of the “new help to create. According to the MVD, ordinary crime Russia” by posing as protectors of the civil order against worsened in almost all Russian cities in 2001 (after a alien and dangerous elements operating in the chaos of the period of decline), with personal assaults and thefts up by new society, whether they were drug dealers, muggers, or 20 percent. Crime statistics, which continue to be bandit groups from the Caucasus. In many areas of the unreliable, are not the only indicators. Like terrorism, the country, gangland “Avtoriteti” (Authorities) or “Vory v most telling sign of organized crime’s impact is in the Zakone” (Thieves in Law) continue to act as upholders of lasting damage to social cohesion. Russians continue to civic virtue, donating to the largest charities and in many tell pollsters, as they have for the past decade, that cases running for public office themselves. With the personal security is highest on their list of worries. state’s enforcement and administrative structures weak and Considering the sheer brazenness of some of the predators vulnerable, organized crime has, if anything, burrowed on Russian society, this isn’t surprising. In one celebrated deeper into national life. case last year, a Samara hitman advertised his services on the Internet, offering “assisted death, possibly without the agreement of the patient” (he was eventually arrested by Organized crime has burrowed undercover agents). Private gun purchases by citizens in deeper into national life. St. Petersburg became so noticeable last year that local authorities began a Western-style weapons “buy-back” program. Meanwhile, drug use has increased The mafiya has accordingly changed to reflect phenomenally over the past decade (coinciding with a Russia’s changed political and economic institutions. spreading AIDS epidemic), with some 3 million registered What began as tightly structured criminal societies existing addicts — many of them under the age of thirty. Some on the margins of Russian and Soviet life since the turn of 50,000 deaths each year in Moscow and St. Petersburg are the century evolved into business conglomerates and ascribed to drug-related crimes. Against this background, cartels with a rising measure of political power. The Russian organized crime is merely a sophisticated version reason for the evolution is relatively straight-forward: of the fierce survival games Russians face in their daily Russia’s framework of criminal and commercial law was lives. poorly equipped to deal with the pressures of an unregulated economy. As that economy grew increasingly more complex and globally oriented, so have the groups Russian organized crime is a attempting to exploit its weaknesses. One indication of this is the increasing share taken by white-collar crime in sophisticated version of the fierce crime statistics (a trend that also reflects the fact that survival games Russians face in police forces are now better equipped to handle that type of crime). The MVD announced in September 2001 that it their daily lives. was investigating over 1,000 state officials who had links with organized crime. What that figure implies is an Can it ever end? The first wave of mafiya increasingly equal partnership between the bureaucracy violence in Russia was occupied with turf wars, and many and criminal cartels, which is a substantive change from of the old gangster warlords have since faded from view. the extortion and protection rackets that characterized the Russia is now in the midst of a second wave, this time bent early phases of Russian business formation. That also on establishing power and influence inside government makes things more complicated for the government. With ministries and bureaucracies. The targets of contract corruption and tax evasion pouring an estimated $15 killings are a useful map to areas where Russian organized billion into the shadow economy every year, a government crime groups are currently focused: a sample of some of perpetually strapped for cash finds it difficult to avoid last year’s victims includes the first deputy prefect of stepping into gray financial areas. It must choose its targets Moscow’s Zelenograd district (in charge of retail and carefully. wholesale business); the head of the Northwest Customs It’s no wonder that bribery and graft continue to terminal in St. Petersburg; the director of the Nakhodka be a way of life at every level from traffic cops to senior Port Authority; and the director of the Krasnokamenskaya police commanders and military officials. A poll taken in coal mine in Kuzbass. Moscow, Vladivostock, Volgograd and Voronezh last As Putin’s reforms begin to take effect, with the winter showed as many as a quarter of the 1,000 establishment of standard norms for law enforcement, respondents willing to admit they had given or accepted corporate governance and bureaucratic accountability, the bribes. If petty thievery and embezzlement is rampant, it latest round of violence may subside. But the history of only mirrors the larger and more serious corruption in Russia offers no comfort for a similar easing of the major economic sectors like oil and gas extraction and coal corruption and venality which allows organized crime to mining and in government ministries. prosper. For this kind of terrorism, there are no commando The further one travels from the fall of the Soviet forces.• Union, the harder it is to blame Russia’s mob problem on the chaos of post-communism. The new cartels of

14

A New Criminal Procedure Code: Russia’s Path Toward Justice by Yelena Mizulina Yelena Mizulina is a member of the Russian State Duma and was Chair of the Working Group on the Draft Criminal Procedure Code.

"…in a government in which [departments of power] are Federation in which it was originally introduced. What’s separated from each other, the judiciary, from the nature more, in the CPC project, adopted by the Russian Duma in of its functions, will always be the least dangerous to the the first reading on June 6, 1997, the jurisdiction of juries political rights of the constitution, because it will be least declined from forty-seven criminal-legal structures to five. in a capacity to annoy or injure them." Even more depressing proof has been the activity of the Alexander Hamiltion, Federalist no. 78, May 28, 1788 Appeals Chamber of the Supreme Court of the Russian Federation, which overturned over 50 percent of “not Judicial reform in Russia did not begin yesterday. Its guilty” verdicts by juries and only 15-16 percent of history is over ten years old, if counting from October 24, “guilty” verdicts between 1997 and 2000. 1991, when the Concept of Judicial Reform was approved by the Supreme Soviet of the Russian Soviet Socialist Republic. During the first stage of judicial reform, The old code did not differentiate emphasis was placed on the organizational working between being found guilty and conditions of judges—in particular, on securing the independence of the court by separating it from the Soviet being charged with guilt. party apparatus, as well as introducing the principle of judges’ appointment for life. The independence of the The elaboration of a new Criminal Procedure Court presupposes its procedural independence. Applied Code, however, only began on June 7, 1994, when the to Russian conditions, this meant guaranteeing a judge’s Russian president issued a decree forming within the State independence from the criminal prosecutor during the Legal Administration a working group for the preparation investigation and accusation phase of a concrete criminal of a new CPC. Even here, in my opinion, one mistake was case, on the one hand, and a judge’s constraint, while made that doomed the fate of the CPC, and, as it turned reaching a verdict, by the idea of the presumption of out, the fate of judicial reforms on the whole. This group innocence, on the other. This kind of procedural was not designed to include specialists of the relevant independence of the court can be guaranteed only by the departments, specifically, the Supreme Court, the Office of new Criminal Procedure Code (CPC), based on a new the Public Prosecutor, the Ministry of Internal Affairs, the conception of the designation of the procedures of criminal Federal Security Services, and the Ministry of Justice. It is law as a sphere that guarantees the rights and freedoms of not surprising, then, that this working group failed to citizens. The old CPC could not guarantee a judge prepare a new code. In August 1994, the working group procedural independence, because it was permeated by the published the first results of its work— the General spirit of battle with criminality and did not differentiate Section of the CPC— and with this its work ended. between being charged with guilt and being found guilty. At the same time in the Duma, the Legislative Although it granted the broadest freedom for judicial Committee then headed by Communist Party discretion, it was the “freedom for,” and not “freedom representative Anatoly Lukianov formed another working from,” accusation. Can a judge possibly be impartial if he group, in which specialists from the relevant departments reads aloud the accusatory resolution, examines the first came to play a key role. The CPC project of the Russian witness of the prosecution, and then sends the case for Federation, prepared by this working group, was adopted additional investigation? Is it possible to expect that such by the Duma on June 6, 1997. By July 1, 1999 its a judge actually forms a presumption of the defendant’s preparation for first reading consideration was almost innocence? completed, and only the principal disagreements between Toward the end of the 1990s, it became departments on the question of the investigation of increasingly apparent that judicial criminal procedure criminal cases had prevented its adoption by the previous practice was not developing in favor of justice and the law, Duma. I will note that the probability of adoption of this because it defended whoever was stronger (the project was very great, for all the departments supported it, government-prosecutor) over whoever was right. It is including the Supreme Court of the Russian Federation sufficient to mention that the introduction of jury trials was and the Ministry of Justice. According to many experts, limited to the initial nine subjects of the Russian that CPC project in many respects would have reproduced 15 the status of the acting CPC of the Russian Soviet Socialist Moreover, accusations resound from a wide variety of Republic and contradicted the Constitution of the Russian critics, including the most reactionary opponents, a number Federation, as well as universally recognized principals of departmental representatives, as well as from people and norms of international law and international treaties of who are known for their liberal opinions. In my opinion, the Russian Federation. Most importantly, it would have in the majority of cases these accusations are conditioned strengthened departmental interests over the interests of by not being familiar enough with the original documents separate individuals. The adoption of such a code for the of the criminal-procedure reform, which consists of long term would have thrown Russia back into the approximately seventy volumes. A familiarization with embrace of arbitrariness and police rule. The history of these documents allows one to clarify how criminal- Russia demanded otherwise. procedure reform developed, and— most importantly— to understand the limits within which choices were made in favor of one or another procedural status. The new code is built on the The new Criminal Procedure Code is built on the ideology of the rule of law. ideology of the rule of law, of the unconditional primacy of unshakable values common to all—such as an independent and impartial court, the presumption of The 1999 parliamentary elections changed the innocence, and the competitive equality of the defense and political composition of the Duma. The Communist prosecution. I dare assert that the words of famous Italian faction—along with the communist ideology, which does academic Enrico Ferri, who studied criminal sociology, not recognize individual worth—lost the leading position could become an epigraph for the code: “If a criminal code in the Duma. These conditions made it possible and is the code of the criminal population, then a procedural necessary to attempt to realize the basic beginnings of the code is the code of honest people who are not yet concept of judicial reform and to adopt a CPC that acknowledged as guilty.” defended individual rights from all kinds of arbitrariness, especially from the state. Therefore, when I was approached in April 2000 with the proposal to lead a new Can judicial reform change the CPC project in the Legislative Committee, headed at that time by Pavel Krasheninnikov—a representative of a relationship to the law and to liberally oriented party (Union of Right Forces)—I agreed. courts in Russia? Work sped up after November 29, 2000 when the Russian president issued a decree on the formation of a working group for the improvement of legislation on the There are numerous new aspects of the CPC that judicial system, under the leadership of Dmitrii Kozak. differentiate it from the previous Criminal Procedure Code The group prepared a package of legislative projects (for a list of the most noteworthy aspects of the new CPC guaranteeing the continuation of judicial reform. This time as identified by Mizulina, please see “Key New Features in the CPC project turned out to be at the center of judicial the Criminal Procedure Code” on p. 6). The new CPC is reform. Both working groups began to work in close rich in content. Moreover, it leaves an open question: can cooperation with each other, allowing them not only to judicial reform on the whole and reform of the criminal quickly form necessary agreements on principal questions, court procedure in particular change the relationship to the but also to insert the attained agreements into the law and to courts in Russia? In my view, yes. Any legislative reform. On the more pointed question of government, and Russia is not an exception, achieves, agreement among the leaders of interested departments, through the court, not so much the utilitarian goal of Vladimir Putin personally took the lead. All of this cleansing society from criminals, as the lifting of respect enabled the adoption of the CPC in a second reading in the for the law and for the individual citizen as the bearer of Duma on June 20, 2001, and then in a third reading on rights. This is possible when the court examines the November 22, 2001. On December 17, 2001 the CPC was citizen who stands before it as a free individual, and when signed by the president of the Russian Federation and it respects his rights and freedoms. In a society where the published. The period June 1, 2002-January 1, 2004 will court is founded on extreme oppression of the human see its gradual introduction into action. In order to avoid individual, respect for a person and his rights and freedoms the fate that befell the Judicial Statutes of Russia in cannot exist. Laws introduced into the package of legal 1864— when through a series of amendments beginning reform allow judges to be materially independent, while just one year after their adoption, many progressive legal remaining at the same time responsible for the conditions were repealed— the Legislative Committee and conscientious fulfillment of the law. The new procedural the Administration of the president of the Russian law helps judges to find the freedom of spirit by means of Federation created a joint program to monitor the which respect for the individual and his or her freedoms introduction of the CPC into action in the period until can take place. People will believe in the kind of court that January 1, 2004. The goal of this program is to generalize respects rights and freedoms of people. Only a court that the practice of introducing and applying the CPC and to enjoys the trust of its citizens can guarantee an atmosphere publish semi-annual reports on the results of monitoring. of social intolerance for all crime and infringements of the Many different rumors and accusations law, and form a commitment to justice that ensures the concerning the new CPC are circulating within Russia. punishment of the guilty and does not allow the punishment for the innocent. 16 The introduction of a new Criminal Procedure political justice dominated, and beginning a new period Code for the Russian Federation allows Russia to finally characterized by the creation of genuine justice— justice turn a page in its history, leaving behind the time when for its citizens.•

Rule of Law and National Security by Lee Wolosky Lee Wolosky served as Director for Transnational Threats on the National Security Council under Presidents Bill Clinton and George W. Bush. He is now an attorney at Boies, Schiller & Flexner and an adjunct fellow at the Center for Strategic and International Studies.

Russia and the United States face common security threats the United States has vital security interests in the resulting from unchecked criminality. As Presidents Bush successful transition of Russia — a country with thousands and Putin recognized at Crawford, these transnational of nuclear weapons — into a stable, prosperous, and threats implicate first-tier national priorities of both states. Western-oriented democracy. Since the end of the Cold War, powerful Russian Unchecked Russian criminality also threatens organized crime groups— in some cases with thousands of political and economic transitions in Central and Eastern members— have emerged on the world stage. They are Europe. That is because major Russian organized crime engaged in, among other activities, the trafficking of arms, groups are almost as pervasive there as they are in Russia. drugs, and persons; large-scale money laundering, The longstanding presence in Hungary of Seymon financial crime, and embezzlement; corporate, bank, and Mogilevich, the criminal mastermind with reported securities fraud; acts of official corruption; and the connections to the Bank of New York scandal, provides “capture” of legitimate firms, especially in the natural just one example. resources and commodities sectors. Russian criminal penetration in Central and Eastern Europe is a problem not only because of U.S. interests in assuring successful post-Communist Russian authorities report that transitions. These countries are NATO members or they have broken up 601 nuclear- aspirants. Credible evidence exists of criminal penetration of local politico-military structures. Accordingly, NATO smuggling deals. secrets may be vulnerable — not only with regard to disclosure to Russian criminal groups, but to others with Russian criminal groups are also involved in the whom they may associate. smuggling of nuclear, radioactive and possibly biological Russian organized crime groups also threaten materials, and have known associations with international U.S. and Russian interests outside of Europe. Indeed, they terrorist organizations. Accordingly, they are in a position are fueling regional instability, undermining U.N. sanction to provide weapons of mass destruction to groups regimes and participating in the drug trade across the dedicated to the destruction of the United States and planet. In Afghanistan and Central Asia, they traffic in Russia. In the last three years alone, Russian authorities guns and heroin. In Latin America, guns and cocaine. In report that they have broken up 601 nuclear-smuggling Africa, guns and diamonds. deals, many involving established criminal syndicates. For these reasons, the United States and Russia should look to broaden beyond military operations in The United States should Afghanistan the targeted and effective intelligence and law acknowledge that the problem enforcement cooperation that has evolved since September 11. Recent steps toward the entry into force of a bilateral extends beyond Russia. Mutual Legal Assistance Treaty, the enactment of the Russian Criminal Procedure Code, and the establishment The Victor Butt Organization (VBO), perhaps the of a Russian financial intelligence unit — some of which is largest arms trafficking organization in the world, provides described in greater detail elsewhere in this edition of a case in point. According to the State Department, the Russia Watch — are steps in the right direction. VBO delivers large and small arms from sources in the Russian crime and corruption threaten Russia and former Soviet bloc to all of Africa’s major conflict zones. the Russian people most of all. These problems have It has also reportedly delivered millions of dollars worth of consistently overwhelmed weak governmental institutions arms to the Taliban, and operates in locations ranging from and fledgling private enterprises. Consequently, they have the United Arab Emirates to to Russia to the jeopardized Russia’s political and economic transitions United States. In fueling the death and destruction of and have undermined the confidence the Russian people innocents, this pernicious criminal organization offends have in the ultimate success of those transitions. And in shared Russian and American values. And in arming this regard they also threaten core U.S. interests, because

17 rogues and terrorists, VBO offends our common interests other international criminals that has been fostered by in promoting international security and the rule of law. developments in international communications, travel and Russian organized crime groups also, of course, information-sharing, and the end of the Cold War.” To operate in the United States — both on our streets and create a stable post-Cold War international order, the within our financial system. As the Bank of New York United States and Russia need to address these threats and FIMACO scandals make clear, billions of dollars of together. Russia should acknowledge that the problem questionable Russian money moves through the U.S. and extends beyond drugs, an area in which it has eagerly international financial systems, perhaps with the assistance sought deeper cooperation with the United States. The of insiders. Russian criminal elements have reportedly United States should acknowledge that the problem taken over the banking sector of an entire nation — Nauru extends beyond Russia (and Russians), and encompasses — from which they have had largely unrestricted access to domestic and international enforcement systems that have the international financial system in fleecing the Russian not kept pace with the rapid pace of globalization. state. Russian criminal groups are engaging in securities Among other things, the United States should fraud and are using front companies to gain access to U.S. actively support Putin’s efforts to restore law and order capital markets, all of which threatens the integrity of our consistent with basic rights and freedoms. The stakes are markets and our financial system — and compromises too high to do anything less. • Russian interests in assuring that Russian capital stays inside Russia and finds productive uses there. In 1995, President Clinton recognized “the growing nexus between terrorists, narcotics traffickers, and

Rule of Law in the Commercial Sphere

Perspective on Corporate Governance

Progress under President Putin by Bruce W. Bean Bruce Bean is a Partner at Clifford Chance Puender in Moscow.

On August 7, 2001, Vladimir Putin signed the first meant there was no revolutionary ouster of the substantial overhaul of Russia’s basic corporate law, the government. While the political and economic Joint Stock Company Law (the JSC Law). Whatever one philosophies of Engels, Marx, and Lenin were abandoned thinks of President Putin’s politics or policies, it is clear as ineffective between 1985 and 1991, the believers in that that 2001 will stand as the best year yet for Russian system (if any), and that much larger group whose careers reform. The rights of a shareholder in a Russian company, and daily lives were based entirely upon the philosophies until recently deemed non-existent by most commentators of the past, discredited or not, remained in place and in and woefully inadequate even by optimists, made power. incontrovertible progress during 2001. Even the most cynical left-over Sovietologists, and crisis-craving journalists should agree that there was significant genuine Russian judges were broadly reform in Russia in 2001. immune from prosecution for A brief review of the unique nature of dissolution of the USSR will remind us of the political, economic, and accepting bribes. social conditions, which led to the development of shareholder abuse in Russia, among other, even more President Boris Yeltsin and his various economic important social ills. teams were new, and they consciously and irrevocably rejected prior philosophies in favor of private property and Origins of Shareholder Abuse individual freedom. But the bureaucrats who staffed virtually all governmental functions, including the leftover While the failure of the USSR’s command economy was Soviet “judiciary,” had come of age and prospered in a clear to many well before 1990, the events of the 1990s time when seeking private gain was a criminal offense. make it clear that development of a market economy is, as While perhaps not obvious or appreciated in those heady Schleifer and Treisman have described in their book, times, these circumstances were not ideal for a smooth Without a Map, much more easily discussed than effected. transition to a free market based upon private property and The non-violent nature of the dissolution of the USSR protected by the rule of law. 18 The first years of the Russian Federation were presidential impeachment threats from the Duma, a characterized by political pandemonium and devastating sixteen-month period during which Russia had five prime economic chaos. Indeed, much of the period since 1991 ministers and reached its nadir with the bursting of the may best be understood as a continuing, non-violent “GKO bubble” in August 1998. The Russian financial revolution which has been necessary, though not yet crisis, which is usually dated from August 17, 1998, sufficient, to effect the fundamental economic and social involved the 20th century’s only domestic debt default by a changes required to build a market economy. sovereign, a further 300 percent devaluation of the ruble, Economic chaos continued with the well and the temporary or permanent loss of savings held in publicized MMM scandal in July 1994. Up to this point many private banks. The ensuing social and economic Russia still did not have most of the essential legal chaos led to further incentives and opportunities for abuse building blocks of a private-property-based market of minority shareholders and a temporary boost for economy. It was only in November 1994 that Yeltsin criminal elements. While on balance the Russian financial established by presidential decree what is now Russia’s crisis has been a net positive for Russia, among its corporate governance watchdog, the Federal Commission immediate effects were additional questionable corporate on the Securities Market, or FCSM. Shortly thereafter, on asset transfers, fraudulent insolvency practices, and sales January 1, 1995, Part 1 of the Russian Civil Code took of company assets to affiliates which should have triggered effect. The Civil Code provided the first purely Russian “interested transaction” voting by non-interested legislative basis for contractual relations involving private shareholders. property and introduced the first broad, legislative framework for the organization of Russian joint stock companies. It was only at the very end of 1995 that the The oligarchs were likely grateful Joint Stock Company Law (JSC) was enacted. for any assurance received from Given this lack of a legal foundation, the optimists may note the relative success of the development this “KGB agent.” of Russian corporate governance in a society with no history of private ownership of property, no clear legal Although Vladimir Putin was then a complete framework for operating companies owned in part by unknown, an (“enigma wrapped in a black hole,” to update others and no reason to expect an impoverished, not very Churchill’s famous phrase, identified in the press only as a independent judiciary to instantly understand, accept and “former KGB agent”) his election without a runoff in enforce rights with which they had absolutely no March 2000 was aided immensely by the fact that the familiarity. Communist Party once again offered the electorate Initially, the introduction of the Civil Code and Gennady Zyuganov, Russia’s “politician without a clue.” the JSC Law had no perceptible impact on shareholder That corporate governance was an early priority abuse. Like most laws, these contained both ambiguities for Putin is evidenced by his prompt appointment, after and “bright lines.” With sophisticated legal guidance only one month as acting president, of Igor Kostikov as either or both could be exploited while providing a Chairman of the FCSM. Like many of Putin’s colorable argument that the transaction was within the appointments, Kostikov hailed from St. Petersburg. He letter of the law. In addition, there was no effective replaced Dmitry Vasiliev, the outstanding first FCSM enforcement of the spirit or intent of the law available Chairman who had resigned in November 1999, after from the courts or the understaffed FCSM. Unlike our serving five years, no mean achievement for one in such a common law system, where the law often develops in the high profile post under the mercurial Boris Yeltsin. courts rather than the legislature, Russia’s civil law system Shortly after his inauguration, Putin summoned to had no such tradition. Rather it had a seventy-year history the Kremlin most of Russia’s oligarchs, who by then had from the command economy of “telephone justice,” where acquired control of a huge portion of Russia’s GDP, to it was believed that a judge simply waited for a phone call explain the new “rules of the game.” While the terms of prescribing the result in a particular case. Even without this “Putin Armistice” have never been revealed, it appears this legacy, the Soviet judiciary, which was still in place in that these oligarchs were informally assured that the state the Russian Federation following the dissolution of the would not challenge their current ownership or past history USSR, had neither a tradition of independently seeking to so long as they paid their Russian taxes, repatriated and “do justice” nor judges with any experience with corporate reinvested in Russia some of their unreported offshore or commercial matters. Finally, Russian judges were paid wealth and, most importantly, stayed out of politics. The significantly less than a living wage and were broadly oligarchs were likely grateful for any assurance they immune from prosecution for accepting bribes. received from this “KGB agent.” This would be true Little more need be said to make clear that this regardless of whether they had accumulated their wealth environment would not quickly lead to an efficient rule of with scrupulous regard for the law or otherwise, since, law. Indeed, these uncertain times and conditions were under Russia’s ambiguous legal framework, a challenge to fertile breeding grounds for what became known in the their ownership by the state could be initiated at almost West as “Mafia-infested Kremlin Kapitalizm.” any time. Russia’s chaotic drama continued after the 1996 During 2000 Putin assembled his team, some of presidential election, featuring the heyday of the loans for whom were outstanding lawyers from the law faculty of shares oligarchs, a presidential quintuple bypass, repeated St. Petersburg University where he had studied. They 19 outlined a wide-ranging program of reform for Russia, specifically authorized and their status and characteristics much of it in cooperation with Duma Committees. One memorialized in the Law. important aspect of these reforms was improvements in Interested Transactions: An important improvement is the Russian corporate governance; the most significant aspect clarification of procedures to be followed when a company of corporate governance reform to emerge in 2001 was the contemplates an “interested” transaction, that is, one set of amendments to the JSC Law which Putin signed in between the company and a member of the board of August. directors, a 20 percent or greater shareholder or other interested person. The procedures for approving such a transaction have been tightened and the definition of an The 2001 Amendments to the JSC “interested” party has been expanded. Two further Law are an important step changes make clear that (i) a transaction effected in violation of the JSC Law may be invalidated, but (ii) such towards making Russia more a transaction may be challenged only by shareholders or the company itself. attractive for investors. Spin-offs and split-ups: Attacking one further area of abuse, the new JSC Law provides that in a reorganization Attacking shareholder abuse involving a spin-off of a new company or the dividing of the company into two or more new companies, a Seventy-six of the ninety-four articles of the JSC Law shareholder who votes against such a proposal or does not were changed. The most significant of these amendments participate in the voting must receive a pro rata portion of are specifically designed to prevent abuse of minority the shares of the any newly formed entity. shareholders. While there are already reviews of these Other Improvements: In the many changed articles of the amendments prepared for legal audiences, a general JSC Law are other improvements that benefit non- overview for a non-legal audience will be informative: controlling shareholders and generally enhance the corporate governance environment. These include Pre-emptive rights: The amended JSC Law now more enhanced access to shareholder lists and accounting effectively protects shareholders against dilution of their records, the right to nominate candidates for board and percentage of ownership through issuance of new shares. management positions and a easing of the requirements for The law grants shareholders pre-emptive rights to existing removing a company’s general director/CEO. shareholders to protect their proportion of ownership. Further protection is provided by prohibiting any waiver of Conclusion this pre-emptive right, whether by vote of shareholders or otherwise. The 2001 amendments to the JSC Law are an important Closed subscriptions: One of the specific areas addressed step towards making Russia more attractive for both is the dilution of shareholders through the use of a “closed Russian and foreign investors. Obviously, much more subscription,” which is an offering of shares to a specified needs to be done. However, we should neither delude class of offerees. Closed offerings may now be undertaken ourselves into expecting, nor permit commentators to lead only upon approval of a 75 percent majority of us to expect, more from Russian society than we have shareholders voting at a meeting and a company charter achieved in our own. There will always be “abuses” or, at may impose a higher, but not a lower, required vote. least, transactions which some will perceive as abusive. Making this protection even more secure, the new JSC This continues to be true in America despite more than Law grants shareholders who vote against or do not vote at sixty-five years of experience with our federal securities all on the authorization of a closed subscription the right to acts and a successful, aggressive, and well funded protect their pro rata ownership in the company by Securities and Exchange Commission. purchasing additional shares in such an offering, even The fact is that in legislating one must regularly though it is “closed.” draw the line somewhere. Once that line has been drawn, Issuing large blocs: Another amendment provides that good lawyers, and Moscow has quite a few, will find when a company wishes to issue new shares constituting, legitimate ways to get their clients as close as possible to or convertible into more than 25 percent of its common that line. Inevitably, there will be lawyers who get it shares, this may be authorized only by vote of 75 percent wrong, clients who step over the line and others who of the shareholders participating in a shareholders meeting. believe that the legislature did not intend to permit one to Here too, the company charter may impose a higher voting get so close. Just as the Delaware General Corporation threshold. As noted, shareholders will have the possibility law is revised at least every two years, so we should expect of protecting their existing proportion of ownership and support the many other corporate governance related whenever such an offering is authorized. reforms in the legislative pipeline, including further Fractional shares: The existence of fractional shares, which revisions of the Russian JSC Law. • may arise, inter alia, in the exercise of pre-emptive rights and rights of first refusal granted by the JSC Law are now

20 U.S. Investors in Russia:

A Greatly Improved Landscape by Sarah Carey Sarah Carey is a partner with the law firm of Squire, Sanders & Dempsey, which maintains a large Moscow office.

Investors from the U.S. and other industrialized countries operation of a market economy was drafted and enacted; have been exploring the Russian market since the late these evolving laws began to meet international standards, 1980s when , with a few bold strokes but enforcement mechanisms were lacking and there was of the pen, dismantled the government monopoly on little faith in the judicial system. This uncertainty, foreign trade, permitted investment by foreigners via joint combined with poor economic performance and capped by ventures with Russians, and legalized private commercial the financial crash of August 1998, chilled investor interest activity. These gestures were followed by bold actions in Russia and the press quickly labeled Russia a pariah. taken by both Gorbachev and Yeltsin dismantling the The Clinton administration strongly supported power of the Communist Party, eliminating the state U.S. business and, having the luxury of no major military agencies that had administered the command economy, or security contests that directly imperiled the U.S., freeing prices, launching the biggest privatization program lectured the Russians and their former Soviet colleagues the world has ever known, and enacting a constitution that on everything from inflation control to accounting guarantees entrepreneurial activity and recognizes the standards, to systems of taxation, to methods for sanctity of private property. At the same time, the country privatizing the power sector. The Russians, long used to was opened to travel, immigration, freedom of assembly being barraged with propaganda, continued to work on and religion, and other basic rights. their difficult reform agenda. By the end of the 1990s, Russia’s legal and investment regime had stabilized and the rules of the game The legal revolution of 2001-2002 had become predictable, but thorny problems still is making Russia a much more remained. Vladimir Putin, upon his designation as heir apparent to Yeltsin in 1999, began a serious assessment of desirable place to invest. these problems. He shared his conclusions regarding the state of the nation and the economic challenges it faced in Initially, global giants in finance, oil and gas, a series of public addresses noteworthy for their candor. mining, and other sectors viewed the opening of the Shortly after his election, President Putin began to Russian market as a new klondike, a chance to capture systematically address the problems that constitute the key resources, reserves, and markets and to incorporate them barriers to investment (by Russians or foreigners) and to into their own empires. These and other players were economic growth. In 2000-2001, Putin’s extremely able thrown off balance by the chaos and confusion that team of economic reformers prepared a legislative package resulted from the multi-dimensional reform programs that constituted a major rewrite of the laws, the likes of occurring simultaneously, and few understood that the which has not been seen since the early 1990s. Combined major competition would come not from their Western with the administration’s campaign against corruption, its colleagues but from Russian entrepreneurs and efforts to make life easier for small- and medium-sized businessmen with their own ambitions to become global businesses and its insistence on the preemption of federal players. In the oil sector, for example, Russia was not law over regional promulgations, the legal revolution of Kuwait. It was a country that had long been a major oil 2001 — 2002 is making Russia a much more desirable producer that needed capital and modern management place to invest. skills, not a concession operator. The legislative reforms of the past two years have Russia spent the first half of the 1990s included: reorganizing its society, taking apart the Soviet economy, • an overhaul of the tax system that includes and beginning to create the legal infrastructure for the replacement of a 36 % income tax with a 13% flat private sector and a market economy. It reoriented its tax; reduction of the corporate profits tax from education system and sent thousands of young people to 35% to 24%,; the West to be trained in law, accounting, business, and • redesign of the methods for calculating the finance. Russian capital fled the country in search of more corporate tax to permit standard business stable havens. Investment was difficult because the deductions, and limitation of permissible regional country was in the middle of a revolution transitioning and local taxes; from communism to capitalism; it was made more difficult • a revamp of the Customs Code to reduce tariffs by the attitude of some U.S. companies (and to a certain and bring them into conformance with World extent the U.S. government) who insisted on doing things Trade Organization standards; “our way or no way.” In the second half of the 1990s, a massive volume of new legislation essential for the 21 • a revision of corporate law, including improved Financial Times editorializes that Russia was one of the corporate governance and strengthened world’s fastest growing economies in year 2001 and protections for minority shareholders; prospects for 2002 are bright because private consumption • urban reform; is driving the current expansion. And, most eloquent of • labor reform; all, Russian capital is returning, as evidenced by the fact • reforms intended to restructure the natural that last year Cyprus (where many Russian individuals and monopolies (electric power, railroads, and the gas companies have offshore accounts) was the second largest industry); and investor in Russia. • a massive reform of the judicial system, including What does all this mean for U.S. companies? A overhaul of both Civil and Criminal Procedure New York businessman heading a delegation of US codes and the strengthening of the judiciary. companies in Moscow last December asked a roundtable of Russian business executives what Russia had done The judicial reform package also includes recently to level the playing field for foreign investors. increased salaries for the judiciary and the creation of self- The spokesman on the other side of the table listed many regulatory structures to discipline judges and lawyers, as of the laws cited above and said: “We welcome U.S. well as jury trials (which are guaranteed by the Russian investors; you will be guaranteed the same rights as are constitution). Equally important, it limits the powers of Russian companies. But I’m afraid it’s not equality that the procuracy in regard to preventive detention, searches you seek; you want special treatment. You want Russia to and seizures and other easily abused powers. be like the U.S., but it isn’t and it won’t be for some time.” These laws meet international standards. Now the task is to ensure their fair and equitable The U.S. remains the number one implementation, no small challenge for a country with an extremely small budget relative to size and a shortage of investor in the Russian economy. talent at the mid management levels in the government agencies responsible for enforcing these new laws. In short, conditions for investors have improved The 2000-2001 legal revolution has coincided but it will be some time before they approach conditions in with significantly improved economic performance. the G-7 countries. Many Russian companies are not Russia’s economy grew by 5.5 percent in 2001, its stock competitive. Roughly $160 billion of Russian capital market was one of the best performers among emerging continues to be legally held outside the country and an markets and inflation was held in check. Fueled by high estimated $50 billion is held by Russian citizens in cash. It oil prices and by the development of local manufacturing will take time to effectively implement the reforms of the resulting from the devaluation of the ruble in 1998, as well past two years and the agenda for completing essential as by a new mood of confidence among Russian managers reforms is both long and challenging. It includes: reform and a consumer commitment to buying Russian (as of the banking system, reform of the financial and contrasted with the early 1990s when everything Western mortgage markets, reform of the bureaucracy, pension was in vogue), Russia offers a much more appealing reform, reform of agricultural land policy, and reform of investment climate than it did three years ago. key social services such as health care. At year end, a range of players from the Russian U.S. investors in industries where Russia is government to world financial institutions were praising experiencing growth, has unique assets, or is privatizing the performance of the Russian economy. The president of (such as telecommunications, natural resources, and the the American Chamber of Commerce in Russia claims that power or railroad sectors) will find significant the business climate has never been better. The head of a opportunities and a much easier path to realizing them than Moscow-based investment bank notes a “new morality” existed a few years ago. The U.S. remains the number one among Russian business leaders and asserts that actual investor in the Russian economy, but long term other Russian risk has declined due to the improving macro players closer to the region will increase their roles, economy and because of political changes. He points out including Europe, China, India, and Iran. And, in the long that current economic growth is fueled by household run, the major investors in the region are likely to be the consumption and investment demand in all industries, Russians themselves. • including food, machinery, light and chemical. The

22

New Labor Code in Russia by Elena Gerasimova and Irene Stevenson Elena Gerasimova is a Labor Lawyer and Irene Stevenson a Field Representative of Solidarity Center/AFL-CIO, Russia.

On December 30, 2001, a new Russian Labor Code was individual contracts. Contracts must be signed within signed into law by President Vladimir Putin, effective three days after the employee starts to work; there must be February 1, 2002. For more than ten years, reformers had two originals of the contract — one of which remains with wanted a new code, but had faced major opposition. The the worker —- and the contract must specify all of the speed with which this ten-year battle was concluded work conditions. If the employer seeks to change work coincides with the fast pace of legislative reform in Russia conditions significantly and the employee does not agree, over the past year — the Russian State Duma passed it in a the employer no longer has the ability to fire the employee. first reading on July 5, 2001; the second and third readings The employer must propose a different job to the given took place on December 19 and 21, 2001. The Federation employee. Council approved the text in less than thirty minutes on Despite reports in the press, the actual duration of December 26, 2001, and the president signed it into law on vacations has not been increased. However, here too, there December 30. Seven drafts were considered at the first are positive aspects in the new code. Previously, workers State Duma reading; between the first and the second could only receive monetary compensation for unused reading a special commission considered 2,500 proposed vacation days upon their dismissal. As of February 1, amendments. The resulting law generated a record amount workers can receive this compensation on a yearly basis. of commentary and controversy both during its In addition, employees are entitled to vacation days after consideration — including a hunger strike in protest by air only six months on the job, as opposed to the previously traffic controllers in forty regions — and since its required eleven months. adoption. New terms for payment to workers when a factory or production line stands idle are more problematic. According to the new code, if workers are idle due to The very success of the reform management’s fault, they are entitled to two-thirds of their process depends on the degree to average salary. This is a significant increase over the previous entitlement of two-thirds of their base salary, due which workers have access to to the large percentage of take-home pay that is qualified justice and equity. as bonuses. However, in order to receive two-thirds of their average salary, workers must prove that management is at fault — something that they have not been able to do Those who worked on the new Labor Code were during the past seven years of late wage payments. If the motivated by several goals: to update an out-of-date code guilt of management is not proven, workers are entitled to that was written when the government was the sole two-thirds of their base salary — if they inform employer, to resolve those labor issues that have arisen in management in advance of the pending idleness in written the new economic reality, and to strengthen — according form. Those who do not inform management in advance to one’s orientation — either workers’ or employers’ are not guaranteed any payment. rights. The degree to which any of these goals was actually achieved will become evident only in the coming years. Loopholes provide ample Normal Russian citizens have borne the brunt of the cost of economic reforms over the past twelve years — opportunity to fire workers who non-payment of wages, subsistence wages and hidden stand up for their rights. unemployment; in the coming year, they will be absorbing the costs of housing, utility, and transportation reforms, which foresee consumers paying the full cost for these A definite plus concerns penalties for the services. These reforms are being conducted in a society continuing problem of late wage payments — in January in which up to one-third of the populace lives below the wage arrears in the private sector increased 9.5 percent, state-mandated survival level and wage arrears and month on month. For each day wages are delayed, the inflation are on the rise. Workers’ ability to stand up for employer is now obliged to pay workers 1/300 of the their rights and demand a living wage has assumed commercial lending rate of the , a enormous significance — the very success of the reform daily penalty equal to 0.08 percent of the delayed wages. process depends on the degree to which workers have A more problematic sanction for late payment of wages access to justice and equity. involves workers’ legislated right to stop working after In terms of workers’ rights, the new code fifteen days of delay. Unfortunately, the new code does provides more concrete procedures and conditions for not include mechanisms for payment during this work stoppage. In effect, if a worker continues to work, despite 23 non-payment, he/she has the right to demand his/her wages contradict each other. As a result, a legal loophole permits plus the penalty cited above. If the worker refuses to a situation in which a union that exists at an enterprise but work, he/she may forego the ability to claim lost wages does not represent more than 50 percent of the workforce during the protest. can be replaced as the workers’ representative in The new Labor Code expands the use of fixed- negotiations by “another” representative body. The ILO term contracts, as opposed to permanent employment, Declaration on Fundamental Principles and Rights at allowing such contracts to be concluded with pensioners, Work, which is obligatory for all member nations, clearly workers in organizations that employ less than forty states that the right to conduct collective negotiations is employees (covering most small- and medium-sized first and foremost the right of trade unions. businesses), those who are hired due to “increased” This loophole jeopardizes the right of newly production needs, and others (the list includes nineteen founded unions at an unorganized workplace to participate conditions that permit fixed-term contracts and is not all- in negotiations. For example, the trade union at inclusive). In the current environment, employers are McDonalds has existed for three years and has yet to freed from the obligations entailed with permanent conclude a collective agreement. Management was simply employment, and employees are left holding the bag for waiting until the new code went into effect, removing the bad business plans, etc. necessity of dealing with a minority union. In addition, management in Russia has proven particularly successful at “persuading” members to leave unions. In metallurgy, The new Labor Code significantly the history of the Zap-Sib Metallurgical Combinat diminishes a trade union’s ability provides a good example — the union was targeted by management due to its activism, and membership to protect workers’ interests. decreased below the 50 percent margin. Only hard work over a number of years allowed the union to overcome the In addition, the new Labor Code expands the 50 percent barrier — in the interim, according to the new conditions according to which a worker can be dismissed code, the union would not necessarily have had the right to at the employer’s initiative. The most dangerous articles represent members in negotiations. In Novorossiisk over concern the ability to fire a worker due to his/her revealing 80 percent of the port workers were “persuaded” to leave a commercial secret, which is not strictly defined, or due to the union in the course of two weeks after the union violations of health and safety regulations. If one encountered resistance from new management. considers that the majority of workers are forced to violate Even those trade unions that are recognized by the health and safety regulations in order to perform their jobs new legislation will not find it easy to retain their — due to the catastrophic condition of equipment, etc. — independence. Previously, in order to fire any elected the latter condition can be applied against the majority of trade union official, the employer had to receive the workers who are simply performing their jobs. Previously agreement of the trade union. As of February 1, 2002, questionable grounds for dismissal have not been removed, however, agreement is only required for three types of e.g., the ability to dismiss a worker in education for dismissal, and these requirements only apply to the chair immoral acts — without specification of what exactly and his/her deputy. Due to simplification of the dismissal constitutes an immoral act. These loopholes provide procedure, it could prove all too easy to fire “troublesome” ample opportunity to fire workers who stand up for their trade union officials. rights. These loopholes have been criticized by the International Labor Organization (ILO) as providing potential grounds for discriminatory dismissal. The new Labor Code legalizes However, the most negative aspects of the new violations of international labor Labor Code concern the regulation of collective labor relations and the role of trade unions in labor relations. law. Legislators have directly interfered with the internal structure of trade unions by dictating that only those The new code does not provide for the conclusion “locals” that depend on higher union bodies for their status of agreements that relate to a particular profession or have the right to represent workers at the enterprise level. occupation. Russian labor regulation depends upon a tri- This structural requirement denies, for example, the right partite system of agreements at the national level, to represent members to a local union that unites a according to which representatives of the government, majority of workers but registered itself independently at employers, and trade unions establish base labor the Department of Justice and only subsequently affiliated guarantees. Previously, these agreements could be limited to a higher union body. In its analysis of the draft Labor to particular professions or occupations. From February 1, Code, the ILO clearly states that trade union members, not they are industry-wide. For example, previously air traffic legislators, should retain the right to determine trade union controllers concluded a separate tripartite agreement that structure, be it top-down or grassroots-up. applied to their profession. From February 1, the air traffic Only unions that unite a majority of workers are controllers will be forced to sign an agreement that applies granted an unqualified right to represent members during to all workers in the aviation industry — from janitors to collective negotiations. In the new code, the articles that aviation factory workers. At the enterprise level, inclusion determine authorization of workers’ representatives of professional or occupational specifics in a collective 24 agreement is also no longer foreseen by law. ILO employer is free to fire the worker. The worker’s only recommendations on the draft law included the desirability resort is the Russian Labor Inspectorate or the court system to address professional, not only industrial, concerns in — but no procedures will have been violated. As is true agreements. The new code does not incorporate these throughout the world, court decisions rest on procedural recommendations. violations. Overall, the new Labor Code significantly It is worth noting that despite the press’ extensive diminishes a trade union’s ability to protect workers’ coverage of the fact that the new Labor Code establishes a interests. Previously management had to agree with the minimum salary at the state-decreed survival level, this trade union vis-à-vis a number of work conditions — the aspect of the code did not enter into effect on February 1, wage system, the level of wages, the terms for over-time, 2002. In order for this article to go into effect, the State etc. The new Labor Code simply states that management Duma must adopt a separate law on the minimal wage — must consider the trade union’s opinion on these issues; it there is no timetable for the drafting and adoption of such a is then authorized to ignore the trade union’s opinion and law. implement its own labor policy. If the trade union is not During consideration of the draft, much was in agreement with management’s decision, it can appeal to written about Russian industry’s need for a mobile labor the court or start a strike procedure — however, these force. In accordance with this “necessity,” reformers and rights entail their own problems. employers successfully lobbied simplified dismissal procedures. However, the greatest impediment to labor mobility is not labor legislation — it is the internal The greatest impediment to labor registration system, which denies citizens who are not mobility is not labor legislation—it registered in a particular city from accessing any state- guaranteed social benefits, from ambulance service to the is the internal registration system. school system. A myth exists that there is only a problem with registration in Moscow — this myth continues to live In accordance with the new Labor Code, trade only because most commentators live in Moscow. The unions no longer have the right to declare a strike or make fact is that not a single settlement in Russia will provide strike demands — these actions are only possible with a residents with state-guaranteed benefits in the absence of majority vote of two-thirds of the entire workforce, registration — and registration is not easy to receive. As a including top management. In assessing this requirement, result, displaced workers who move to another city in one must remember that many Russian industrial giants search of work become fodder for the informal economy, employ from 20,000-40,000 workers. The ILO assessment which promises “easy” money, without taxes and without of the draft law repeated ILO Expert Commission registration. The new Labor Code makes it easier to fire comments on previous Russian legislation as to the workers. However it does not increase labor mobility necessity of lowering the quorum required to declare a within the “official” economy — it simply facilitates the strike, yet the quorum actually increased with the new transfer of workers from the formal to the informal code. In addition, commenting on the draft law and economy. previous Russian legislation, ILO bodies have written that In addition to the problem with registration, the necessity of declaring the duration of a strike previous Russia faces the consequences of such legislation in the to its inception is not in compliance with international international arena. Both the European Union and the conventions. They have also stated that limiting strikes to United States’ special benefits in the General System of collective labor disputes — denying the right to conduct a Preferences in trade require the observance and support of solidarity strike, for example — violates basic the basic, international labor standards of freedom of conventions. The new Labor Code legalizes all of these association and the right to conduct collective negotiations. violations of international labor law. The new Labor Code legalizes violations of these The new code removes trade unions’ veto vis-à- standards and threatens to exclude the Russian Federation vis the dismissal of members: previously certain grounds from important trade benefits that would make the export for dismissal required the agreement of the workers’ trade of Russian goods to the United States and the European union — as of February 1, only the trade union’s opinion Union far more profitable. • is required. Following the receipt of this opinion, the

25

The New Russian Land Code by Adrian Moore and Ilya S. Petukhov Adrian Moore is a partner, and Ilya S. Petukhov an associate, at Baker & McKenzie, Moscow.

As the year 2002 begins, Russia is faced with the task of made effective only seven years later, no longer reflected implementing many of the legislative reforms that passed the current view of land rights and were not sufficiently into law during 2001. Of critical importance to the real detailed to offer efficient solutions to the practical estate industry is the new Land Code. The Land Code ambiguities generated in the emerging Russian land represents a particularly significant reform because of the market. A Land Code therefore remained a prerequisite for sanction and encouragement that it established on the successful fundamental reform. federal level for the creation of private ownership rights to Finally, by mid-November 2001, a government land. The new Land Code of the Russian Federation came draft of the Land Code passed through all three readings in into force on October 30, 2001. Over the next few years, the Duma, was approved by the Federation Council on the effects of these reforms are likely to be considerable. October 10 by 103 votes to 29 (with 9 abstentions), and was signed by the president on October 26, 2001. Historical Background Although surprisingly quick, the process was not entirely smooth. Initial readings in the Duma were accompanied by It has taken time to secure these reforms. The 1991 Land significant resistance from the pro-Communist deputies Code, a holdover from the Soviet system and the and by demonstrations in front of the Duma building predecessor of the 2001 Russian Federation Land Code, condemning the Land Code. did not provide for private land ownership. The adoption of the current Constitution of the Russian Federation in 1993, which broke new ground by declaring that land and The full provisions of the Land other natural resources could be held in private ownership, Code apply only to approximately led to hopes of major reform, including the enactment of federal legislation permitting free land turnover. The need 2 percent of Russia’s land surface. for revised land legislation became even more apparent in 1995, when the first part of the Russian Federation Civil In preparing the Land Code, the Russian Code came into force. In the absence of a comprehensive government consulted with both Russian and foreign reformist land code, some of the key provisions in the lawyers and commercial real estate developers. While the Civil Code had to be held in abeyance, their effectiveness final version of the code, as with all legislation, is to some made conditional upon enactment of a new Land Code. extent a political compromise, it is nevertheless a reform Since the early 1990s, a number of Land Code of major importance and one that will hopefully be a drafts were presented to the Duma, but they were unable to cornerstone for new investment and further growth in the overcome the resistance of the Communist and Agrarian economy. political groups. Frustrated by a lack of progress at the federal level, individual subjects of the Federation began to Scope of the Land Code pass local land codes that dealt inconsistently with land ownership issues. The need for a federal standard therefore The Land Code has limited applicability to agricultural continued to grow in importance. land as it is expressly provided that the circulation of such Despite this pressing need for reform, the first land will be the subject of a separate federal law. In the real progress was made only in April 2001, when President Implementing Law it does though provide that, for the Putin’s administration succeeded in introducing an moment, foreign entities and individuals may only hold amendment to the Federal Law “On Implementation of the and use agricultural land under leases and may not acquire First Part of the Russian Federation Civil Code,” thereby ownership to it. Similarly, it is specifically provided that making effective Civil Code Chapter 17, “Right of state and municipal agricultural land may not be Ownership and Other Property Rights to Land.” This was privatized. Thus the full provisions of the Land Code apply accomplished by excluding farmlands from its only to certain non-agricultural land which, it is widely applicability until the subsequent adoption of a special reported, constitutes approximately 2 percent of Russia’s federal law on the turnover of agricultural lands, an land surface. The importance of the Land Code should not, arrangement that satisfied both the reformers and the however, be underestimated. The land covered by this 2 Communists. Despite this political compromise, putting percent is that connected with settlements and other Chapter 17 into force was a tremendous achievement and, developed areas of the country. It therefore comprises the although seemingly legalistic, was a crucial political move areas upon which most of the non-agricultural in securing the adoption of a new Land Code. The development within the country has taken place. provisions of Chapter 17, however, drafted in 1994 but 26 building located on the land that is the subject of the land Types of Land Rights ownership rights application. Pending a decision by each subject of Russian Federation on the rates that they are to Rights to land will now consist of ownership (by the state set within these limits, the Implementing Law imposes an municipalities or private individuals and legal entities), interim price mechanism based on the minimum rates perpetual or indefinite use, free fixed term use, lease, applicable. This is an incentive for applications to be made lifelong inheritable possession and easements. Many swiftly before higher rates are set. existing holders of rights will however need to reconsider Unfortunately other than in the case of permanent what they have. use right holders who do have a choice, the Land Code is not entirely clear as to whether existing building owners Upgrading Land Rights have the ultimate choice of land ownership or lease, or whether the state or municipality has an element of In the future new rights of perpetual use may only be discretion. It therefore remains to be seen how this will be granted to state and municipal institutions, Federal implemented. Treasury-owned enterprises, and state and local As a further encouragement to ownership (but authorities. Legal entities (other than those listed in the with minor exceptions) and where existing buildings, previous sentence) with existing rights of perpetual use facilities, or structures are concerned, the Implementing will no longer be able to transfer them. They will have, Law provides that any future privatization of such objects, under the terms of the Implementing Law, until January 1, including specifically those used for industrial purposes, 2004 to convert and re-register their perpetual use rights as may not be affected without privatization of the land (at their option) either lease or ownership rights. The beneath them. Implementing Law provides that rent rates for these land plots will be set by the Russian government. In cases other than acquisition by a partnership of housing owners where Existing rights of lifelong the transfer is made free of charge and acquisition of inheritable possession and relevant land plots underneath existing buildings for which cost of ownership right is set out below, the price payable perpetual use will remain valid for land ownership rights has yet to be finalized. It is particularly worthy of note that any legal entity looking to but no new rights of this type can contribute its land rights to another legal entity (such as a be created. joint venture) will now first need to upgrade its rights before any contribution can be made. Existing rights of lifelong inheritable possession and perpetual use held by individuals will remain valid but Owners of existing buildings will no new rights of this type can be created. Existing rights of lifelong inheritable possession may only now be now enjoy the right to purchase transferred by inheritance. Individuals holding rights of lifelong inheritable possession and perpetual use rights the land plots beneath such now have the opportunity, without charge, to upgrade such buildings. rights to ownership.

Owners of existing buildings, facilities, or Acquiring New Land Rights for Construction structures located on land owned by a third party will now enjoy the pre-emptive right to purchase or lease the land The Land Code contains a number of general rules plots beneath such buildings. Where such land is owned by establishing procedures for the allocation of land plots to the state (including the state itself or a subject of the investors for construction purposes on green and brown Russian Federation such as the cities of Moscow and St. field sites, although the language of the Land Code is Petersburg) or a municipality, this amounts to an option to sometimes confusing in this respect. There are clearly two privatize or to obtain land lease rights. More detailed different procedures, which are applicable to the allocation provisions deal with residential and non-residential of such rights to investors. buildings held in multiple ownership. The first procedure will be most commonly used The Implementing Law provides that the price for in cities where land plots will be made available by tender acquisition of relevant land plots underneath existing by the appropriate authorities. The land plot must first buildings will be set by the subjects of the Russian have been “prepared” for sale or lease: its boundaries Federation within limits prescribed by the Implementing defined; a cadaster number assigned; and technical Law that are based upon the size of the relevant conditions for the utilities connections determined. In such community in which the land plot is located. The basic rule cases the Land Code provides for either acquisition of land is that land will be more expensive in larger communities. directly into private ownership or lease (subject in both Furthermore the value of land will also be multiplied by cases to the investment obligations prescribed by the factors ranging from 0.7 to 1.3 (to be set by the Russian tender). Where land rights are to be disposed of by tender, government), the intention being to reflect the use of the the terms of the tender will set the minimum bid price. The Land Code does not appear to further control this. 27 The second procedure for the allocation of land for construction purposes will most commonly be used for Third Party Rights industrial investment outside of cities, when the placement of an industrial facility will require a thorough A direct result of extensive private land ownership rights investigation of ecological, sanitary, architectural, and will be an increase of third party requirements for access. other issues and a specific request for land rights from an The Land Code recognizes this and makes provision for investor. This may involve the investigation of public the creation of both public and private easements for opinion as to possible construction in the area. In such specific purposes. All land users will need to consider the cases no tender is required. The land will however be extent to which this will be relevant to them. given on lease only and the Land Code does not prescribe a price. It leaves this to be negotiated by the parties to the Foreign Individuals and Legal Entities extent not determined by local law. An upgrade to right of ownership will though be available once the building is Foreign individuals and legal entities (“foreigners”) are complete. treated equally with Russian individuals and legal entities under the Land Code and the Implementing Law with a Land Leases number of exceptions. Although there is no express provision permitting The Land Code imposes a number of general duties on land ownership by foreigners, the Land Code may clearly leasers of land along with other types of land users. be interpreted as allowing such ownership other than Significantly, the Land Code also supplements the where it is specifically prohibited. The rights to acquire provisions of the Civil Code in so far as they apply to land land ownership under existing buildings or for construction leases in a number of areas. that are set out above are therefore equally applicable to foreigners subject to the following restrictions: (i) the relevant rights must always be paid for and can never be Although there is no express granted free of charge (as contrasted to the position for provision permitting land Russian partnerships of housing owners and Russian citizens who can obtain free of charge rights in certain ownership by foreigners, the Land specified circumstances); and (ii) foreigners are specifically prohibited from owning land plots in border Code may be interpreted as areas, a list of which is to be drawn up by the president, or allowing such ownership. in other special territories of the Russian Federation pursuant to other federal laws. Moreover the president may First there are new provisions that deal with the establish a list of types of buildings and other structures to which pre-emptive buy-out or lease rights to land plots for termination of land leases in conjunction with a court order. Now the following will also constitute grounds for foreigners may not apply (“Excluded Buildings”). termination: (i) misuse of the land plot (a more stringent Although drafted potentially widely, these provisions are expected to be applied only to limited areas of land and test than that under Article 619 of the Civil Code which requires either substantial or repeated violations); (ii) use there are no published plans for the president to create a of the land plot that results in a decline in fertility of list of Excluded Buildings. Under the Implementing Law and pending preparation of the presidential list, the border agricultural land or, importantly for industrial users, a material deterioration in the environmental situation; (iii) a restrictions will however apply to all border areas. As failure to correct a range of other intentional violations of mentioned above, foreigners are also prohibited from owning agricultural land (although in the absence of a applicable land use regulations of an environmental nature; and (iv) a failure to use the land plot for its designated federal law permitting the ownership of such land, such a purpose for a period in excess of three years. restriction is of more academic than practical interest). Foreigners are expressly permitted to lease land Second and more encouraging are a series of modified rights for land lessees. Their application will in subject to the general restrictions placed upon Russian part be dependent upon the precise drafting of a lease. For citizens and legal entities. There are no indications in the Land Code that example, the presumption under Article 615 of the Civil Code that a lessee needs a lessor’s consent to sublease has Russian legal entities with 100 percent foreign ownership been reversed for lessees of land. Then, of particular will be discriminated against when compared to Russian legal entities without a foreign shareholding. Any of the significance is the provision that lessees of state or municipally-owned land under leases, with a term restrictions imposed on foreigners can therefore be avoided by the use of a Russian subsidiary entity. exceeding five years, now have a free right to assign their rights subject only to the provision of notice to the lessor. In other land leases this rule will also apply (in contrast to Environmental Issues the provisions for prior consent under Article 615(2) of the Civil Code). A notable improvement is also made in The Land Code both repeats and appears to expand some conveyancing procedures with the new provision that the existing land user obligations. With its emphasis on the protection of the environment, the widely drafted assignee of a land lease does not need to enter into a new land lease. 28 environmental responsibilities of the code will have the latter seeks to alter the balance of certain aspects of the particular significance for land users. relationship between the leaser and lessee of a land plot. Only when the Civil Code is updated to reflect all of the Implementation of the Land Code changes introduced by the Land Code will there be legal certainty on these issues. A review of the Civil Code is a The provisions of the Land Code are detailed and, as is major task however and although drafting work has begun, often the case with a new law of this size, there are both a the process is bound to take some time. number of discrepancies with existing laws and areas that On a lower level, cities like Moscow and St. lack clarity within it. Significant follow-up is therefore Petersburg need to review local laws and procedures to required on both the federal and local levels in order to ensure that they comply with the Land Code. This is a fully give effect to the Land Code. The efficiency and considerable task that is also likely to take time to willingness with which this task is undertaken will impact complete. Until procedures reflecting the new provisions all those who wish to take advantage of the reform. are in place, it may in practice prove difficult for the So what is required Russia-wide? As already owners of buildings in Moscow and in St. Petersburg, for discussed foreign individuals and companies are not example, to enforce their rights to claim ownership of the discriminated against under the Land Code. They will land plot beneath. Official position in both cities is that however be subject to special treatment in respect of land they are working hard on these issues. in border areas and land beneath certain sensitive buildings The Land Code is a very important reform, but and structures. Therefore lists of relevant border areas and the devil of implementation will be in the detail. It is to be buildings are to be produced by the president. Guidance as hoped that the required detail is quickly provided in order to the ownership of sensitive buildings is also required. for the theory to become reality. • Work for the Duma will involve a review of certain provisions of the Civil Code which now appear outdated in view of parts of the Land Code. For example,

The New Russian Federation Labor Code by Evgeny Reyzman and Maxim Kalinin Evgeny Reyzman and Maxim Kalinin are partners at Baker & McKenzie, Moscow and St. Petersburg offices, respectively.

On December 30, 2001 the long-awaited Russian Labor or her employment duties; an employee’s falsification Code was signed into law by President Vladimir Putin. of documents or information upon his or her The Labor Code entered into force on February 1, 2002, conclusion of the employment agreement; an and significantly altered the existing regulation of employee’s making of an ungrounded decision, acting employment relations in Russia. as the head of the enterprise, or his or her deputy or The new Labor Code’s provisions will overrule chief accountant, if this decision causes damages to any contrary provisions in all existing and future the property of the enterprise). individual employment agreements, which will need to be • More rigorous hiring procedures are required by the changed, introduced, or abolished as a result of the new new Labor Code (e.g., a written employment code. agreement must be executed with every employee not later than three days after the employee commences The New Provisions work—an order on hiring must be presented to each employee for his or her acknowledgement by Although the new Labor Code will retain some of the signature within three days after an employment provisions from the old Soviet-era code, there are a agreement is signed). number of significant changes which will be introduced. • An employee has the right to refuse to perform work Some of the biggest changes for employers and employees when requested to perform work which is not are highlighted below: stipulated under his or her employment agreement, or • The employer will be obligated to pay compensation in cases where there is an immediate danger to the (i.e., interest) for delaying the payment of salary and employee’s health or life. other employment-related payments to an employee. • Detailed regulations on health and safety in the • Detailed procedures for collective labor disputes and workplace have been introduced. strikes have been introduced. • The new Labor Code defines in more detail the role • An extended list of grounds for the unilateral and the authority of the state labor inspectors. termination of the employment relationship by the • The new Labor Code has introduced new employer has been introduced (e.g., the disclosure by requirements connected with the granting of annual an employee of a trade secret which became known to vacations (e.g., at least one part of the annual vacation the employee in connection with the performing of his must be at least fourteen calendar days). 29 • New personal data protection requirements will be limited term has been introduced (e.g., an employee enforced under the new Labor Code. hired as the CEO of a legal entity, his or her deputies • The employer will also have the obligation to notify and chief accountants, irrespective of the type or the employee three days prior to the expiration date of ownership of such legal entity). the fixed-term employment agreement. • The new Labor Code expressly provides that Russian • Both the employer and the employee will have the labor legislation must be observed on the entire obligation to give to the other party three days prior territory of Russia by all employers, irrespective of the written notice before terminating the employment type or ownership of the employing entity, i.e., agreement during the probationary period. including foreign companies’ subsidiaries and Furthermore, the employer will have the obligation to representative offices and branches. provide the employee with reasons in written form • The new Labor Code expressly provides that the when dismissing the employee for his or her failure to Russian labor legislation will apply to employment pass the probationary period. relations with all foreign nationals working in Russia (e.g., employees of foreign legal entities and international organizations hired to work in Russia), Many of the fundamental labor unless a specific regulation is applicable pursuant to a law provisions which exist today federal law or an international treaty. • The new Labor Code expressly provides that its will not change. provisions will apply to the CEOs of all legal entities (e.g., the general director, etc.), including foreign • As a result of the new Labor Code, trade unions will national employees, with the exception of certain have some of their powers reduced (e.g., in certain limited cases (e.g., where the managerial functions instances when making decisions, an employer must have been transferred to an individual entrepreneur take into account the grounded opinion of its elected under a corresponding civil law contract). One of the trade union body; however, the employer is not new Labor Code’s chapters provides specific obligated to comply with the union’s opinion. regulations with respect to employees appointed as Nevertheless, the employer’s decision can be members of the legal entity’s executive body, including challenged by a state labor inspector or in court and, the conclusion and termination of employment in certain cases, the elected trade union body will be agreements. entitled to commence a collective labor dispute proceeding). It should be noted that many of the fundamental labor law • A new extended probationary period for certain provisions which exist today will not change, or in several categories of employees has been introduced (e.g., a cases will only change slightly. However, the employer’s six-month probationary period for the head of an liability for its failure to follow labor law requirements— enterprise or the sole division of an enterprise); including the liability of its manager responsible for the • In order to represent the employer’s interests and to offense— includes civil, administrative, disciplinary, and, protect the rights of its members when dealing with a in certain limited cases, criminal liability. • trade union or with government authorities, the new Labor Code grants to the employer the right to form a single union of employers. • A list of specific circumstances under which an employment agreement may be concluded for a

30

Policy Recommendations for the Bush Administration by the U.S.-Russia Business Council and the American Chamber of Commerce in Russia The U.S.-Russia Business Council, based in Washington, and the American Chamber of Commerce in Moscow and St. Petersburg, are the two leading trade associations representing the U.S. business community in Russia.

The Russian government is advancing structural changes domestic investment for the long term, further investor needed to sustain economic growth in several areas: tax protection measures are needed. Investors in Russia reform, investor protections, intellectual property rights, continue to express concern over weakness in protecting and international accounting standards. However, much the property rights investors are afforded under Russian reform still remains to be implemented. The following law. Among the primary risks to investors in Russia today update and recommendations are provided to the Bush are capital dilution, transfer pricing, and failure to comply administration for consideration. with information disclosure requirements. Further amendments to the current legal framework will address I. UPDATE ON U.S.-RUSSIAN COMMERCIAL ISSUES gaps and ambiguities associated with some of these risks. However, enforcement is the principal area of concern Tax Reform with respect to investor safeguards. The enhanced powers recently granted the Federal Russia’s tax system remains a major obstacle to foreign Commission on the Securities Market (FCSM) are an investment, although significant steps forward have been important step on the path toward effective corporate made in the past two years. The system is complicated, governance. During the first year under President Putin, intimidating, and far from transparent. However, there are the FCSM has imposed fines on more than 1,400 signs that the Putin administration is taking this issue companies for failing to comply with mandated disclosure seriously and is receptive to dialogue with foreign requirements, a tenfold increase in such fines in just one business. Recent progress has been made with the year. implementation of Part II of the Tax Code, with its radical liberalization of the income tax, social funds, and turnover tax regimes. Investors are cautiously optimistic Several important chapters of Part II were about Russia’s current economic adopted last summer and came into force on January 1, 2001. These chapters cover Personal Income Tax and political environment. (introduction of 13 percent flat rate in place of progressive rates up to 30 percent), the Unified Social Fund Tax Finally, the Investor Protection Association, (regressive scale down to 5 percent in place of 39.5 percent another private-sector initiative, organized small flat rate), Value Added Tax (VAT), and turnover taxes shareholders last year to contest board elections in thirty- (significant reduction and promised abolition). All these four major Russian companies. For 2001, this private chapters show significant benefits to foreign business and effort has identified seventy-two major companies for were influenced by positive engagement of both the U.S. which it will propose independent candidates for director government and Western business groups. seats. Such private-sector initiatives are just beginning in Russia, and official U.S. support and encouragement are Investor Protections vital to their success; financial assistance, however, is not required for effective U.S. leadership in this area. Investors are cautiously optimistic about Russia’s current economic and political environment. This optimism has Intellectual Property Rights been sparked by several key factors. First, Russia’s recovery from the 1998 financial crisis became evident in Intellectual property rights (IPR) violations affect both 2000, spurred in part by high oil prices. This in turn has foreign and domestic companies operating in the Russian brought investors back to the Russian market and has led market. Additionally, IPR violations pose significant costs direct investors already in Russia to expand their for the Russian government in terms of unrealized operations. Second, Russia’s new political leadership has investments and uncollected tax revenues and duties from recognized that the economic benefits of the post-crisis counterfeit producers. These combined public-private ruble devaluation will soon expire. losses from IPR violations far exceed $1 billion annually. However, to build necessary confidence in the Political awareness of IPR problems appears to Russian market and encourage meaningful foreign and exist at senior levels of the Russian government. Last year 31 President Putin acknowledged the importance of IPR II. Proposed Guiding Principles For The Bush protection and enforcement and subsequently tasked Administration To Consider In Formulating Its Russia certain officials to address the problem; however, few Policy concrete steps have been taken. Unfortunately, where proposals have been made, they promise simply to increase Articulate a clear commitment to effective engagement. the regulatory burden on producers while failing to address The foundation of prudent U.S. policy toward Russia must the real problem at the level of counterfeit manufacture be a commitment to effective engagement, not a laissez- and distribution. faire approach to Russia’s transformation apart from direct IPR violations—including trademark and patent national security threats. While Europe is increasingly infringement, counterfeiting, copyright violations, and seen to be taking the lead on the West’s “integrating piracy—remain epidemic. Incomplete anti-counterfeit Russia” agenda, both security and commercial concerns legislation, lack of enforcement, weak penalties, require that we not sit on the sidelines. The U.S. should corruption, and lack of education and training of law pursue broad, active engagement with Russia through enforcement and judicial officials in this area are key bilateral channels and, when appropriate, through impediments to better IPR protection and enforcement in partnerships with our European allies—mechanisms Russia. afforded by the G-8, EU, and the WTO should help shape the nature of our engagement. Continue to emphasize the importance of the Russia’s failure to protect economic/commercial aspects of U.S.-Russian relations. intellectual property rights is an A bilateral agenda focused exclusively on security issues is not in our national interest and does not accurately reflect obstacle to the country’s efforts to the challenges and opportunities associated with engaging Russia. As we define the nature of our engagement, the join the WTO. most prudent and productive U.S. policy will avoid an overemphasis in the security sphere to the detriment of our Russia’s failure to protect intellectual property economic and commercial relations. Commercial relations rights is an obstacle to the development of a stable should be properly viewed as the ties that will bind our two business environment, and to the country’s efforts to join countries over the long term, providing stability in the the World Trade Organization (WTO). The Russian relationship as we work through consistent differences in government’s ability to implement tangible reforms in the the foreign policy arena. High-level U.S. government IPR area will also be a key determinant of its ability to support is crucial to the success of the dialogue initiated by attract foreign investment. the American private sector with Russian government entities charged with structural transformation, and International Accounting Standards cooperative public-private engagement on the commercial front will help advance an overarching U.S. interest in The adoption of International Accounting Standards (IAS) further integrating Russia into the global economy. in Russia is an important qualification for Russia’s participation in world financial markets and a key determinant of Russia’s ability to attract a greater share of The United States should support worldwide investment. The transparency, timeliness, completeness, and truthfulness of financial information are a Russian domestic policy agenda. critically important to investors, as these factors influence decision-making processes and cash flows. Despite the De-link economics and commerce from foreign Russian government’s recent efforts to transition to IAS policy tools, except in extremis. While our members compliance, most Russian companies have not yet begun. believe that economic and commercial issues should be The Russian accounting system (RAS), based on the needs fully integrated into a broad agenda for U.S. policy toward of a formerly planned economy, is particularly unsuited to Russia, they simultaneously advocate that the constituent decision making in a market economy. planks of that agenda be operationally de-linked in all but Three years ago, the Russian government adopted rare and exceptional circumstances. Past over-reliance on an accounting reform program that envisaged an evolving economic sanctions as a foreign policy tool has been RAS system moving in stages toward compliance with misguided in its conceptual foundation and its practical elements of IAS. This is conceptually confusing and application. There is substantial evidence that sanctions do causes Russian enterprises to incur the high cost of not work and rarely achieve their intended outcome or maintaining dual systems for an indefinite length of time. influencing future behavior. The value of the “statement” Rather, Russian companies should be allowed to make the made by the sanctions is nearly always disproportionate to full transition to IAS as soon as possible. the costs involved, particularly when unilateral sanctions are enacted. Support a Russian domestic policy agenda. Russian ownership of the way forward is key to the success of restructuring initiatives. Many shortcomings and missed opportunities of the past can be traced to

32 attempts to impose U.S. (and multilateral) policy emerging in the Russian market, moving beyond prescriptions on Russia’s domestic transformation. The constraints that have forced American firms to cede market Putin government recognizes that current growth cannot be share to European competitors. Changed commercial sustained without serious structural reform. The “Gref dynamics in the Russian market call for new, creative Plan” adopted last year conveys both Russian ownership of approaches to risk management and increased access to the policy agenda and a sense of hardheaded realism. The capital at reasonable rates. U.S. should support the adoption of a Russian domestic Initiate a new public-private mechanism, policy agenda and the restructuring elements of that chaired at the cabinet level, to fulfill our commitment agenda as they are articulated. to engagement while reflecting new realities and Highlight the WTO accession process as an changed market conditions. The Russian government’s important element of our framework for engagement. restructuring program involves a massive effort, By working to facilitate Russia’s accession to the WTO complicated by both bureaucratic resistance and, at times, and its implementation of WTO agreements, the U.S. less than enthusiastic support from powerful segments of government can help Russia to realize its enormous the Russian private sector. A combined public-private economic potential and enable the country to become a effort is the most effective vehicle for supporting this more significant participant in the global economy. reform process. Precisely because Russia has identified WTO accession as a priority, the American response should support Russia’s aspirations and develop this multiyear process as an Use trade and finance as a positive important element of our framework for meaningful method of effective management. economic and political engagement. Rather than “interfering,” U.S. policy would support progress on issues ranging from market access to intellectual property rights Set a clear agenda for sanctions reform. The to Russia’s customs regime. business community strongly urges the Bush administration, in consultation with Congress, to undertake III. Practical Policy Recommendations For The a thorough review of U.S. sanctions policy that would Bush Administration generate a set of clear policy guidelines and a consensus for sanctions reform. An appropriate starting point might Use trade finance as a positive method of effective be the draft Sanctions Policy Reform Act (Crane-Lugar), engagement. Reinvigorating and expanding U.S. which offers a procedural mechanism for consideration of government trade-finance programs will allow U.S. unilateral economic sanctions. • companies to take advantage of new opportunities

Corporate Governance: Russia’s Present Day Perestroika by Ruben Vardanian Ruben Vardanian is President and CEO of Troika Dialog Bank in Moscow.

Fifteen years ago, Mikhail Gorbachev launched his Last year, Russia also enacted a Money acclaimed “Perestroika,” which is Russian for Laundering Law, thereby taking itself off the FATF list of “restructuring.” Now, Russia faces a perestroika every bit Non-Cooperative Countries and Territories. The law aims as challenging as that of the mid-1980s, however with to establish an “efficient system for reporting suspicious different elements. transactions” and removes obstacles to “international co- Russia’s current perestroika could be considered operation” in tracking down such activities. However, as an acronym. “P” stands for protection of investor rights, even the best-written laws will not prevail, unless they are “E” for enforcement, “Res” for restructuring. “Troika” properly enforced. stands for the “three” most pressing structural reforms. E: Law Enforcement P: Investor Rights Protection Russian courts are criticized for being slow, corrupt, In August 2001, President Vladimir Putin enacted incompetent, and far from independent. Clearly, it is time amendments to the Joint Stock Company Law, which is a to change. vast improvement on the previous version in some areas. Most notably, it invests shareholders (domestic and Court reform foreign) with the right of first refusal in respect to all share A five-year, $1.45 billion government program for court issues. system reform was adopted in 2001. It aims to promote public trust in courts by enhancing their competency and 33 independence. This involves paying judges higher salaries, make the government a stickler for good corporate building better courthouses, making court hearings truly governance, so as not to put at risk the value of its pension public, and raising teaching standards at Russian law money and the nation’s financial future. schools. Companies must be encouraged to behave well Land reform not only for fear of punishment, but because it pays to be On October 30, 2001, a new Land Code came into effect, a fair and friendly. The latter incentive will not work without colossal achievement even though the sale and purchase of structural reform. agricultural land remained taboo. Individuals and private companies, foreign as well as domestic, can now freely trade in urban land (2 percent of the total). Private ownership of Companies must be encouraged to industrial land should stimulate foreign direct investment, behave well not only for fear of which is a vehicle of good corporate governance. punishment, but because it pays to Deregulation The government has begun helping small business. It has be fair and friendly. lowered and streamlined taxes, if not radically enough. A law that takes effect in June 2002 makes it easier to start a RES: Restructuring, or Structural Reform business. Only 104, rather than 215, business activities will require a license from February 2002. The Kremlin has Troika 1: These three reforms are still largely at square also urged small businesses to talk to it directly, which one. should make regional bureaucrats curb their appetites for fear of being reported to the president. The cure for Audit reform another problem— underfinancing — is good corporate Last year’s biggest change to the Audit Law was the governance. By embracing it, companies can prove that establishment of a federal “superauditor” to check the quality they are responsible borrowers and worthwhile of audits performed by private companies. This seems to be investments. the wrong way to go about reforming the system. Greater investor protection provided by an extra pair of eyes is offset Troika 3: These three reforms are well underway. by greater investor insecurity because the super-auditor will apparently have unrestricted access to market professionals’ Tax reform confidential information. The tax reform has been a big success. Lower rates have helped dramatically improve collections, as many Russian Accounting reform companies and individuals decided that paying taxes was In May 2001, the Finance Ministry revised the program for less troublesome and expensive than evading them. the transition to International Accounting Standards (IAS), extending the deadline for full transition to end in 2010 and Restructuring of natural monopolies allowing public companies to report to the Russian The restructuring of natural monopolies is gathering pace accounting system (RAS) until the end of 2005. We hope that (sometimes this pace grows even too fast for comfort). the government will reject this shamefully “sluggish” plan Thanks in part to timely investor intervention, United when it discusses it later this year. Energy Systems (UES) now leads the field. It is to be split into generation, transmission, and grid operating Banking reform businesses by April 2004. Late in 2001, the government Progress on banking reform will remain snail-paced until the made a decision on the composition of the ten generation Central Bank governor, Viktor Geraschenko, steps down in companies, but has yet to determine which transmission September 2002. When the reform does come, it will electrify networks to include in the federal grid. Before long, it is to the sector by making banks compete for funds. This should send to the Duma a revolutionary bill creating a free stimulate them to go public, which would involve improving energy market. corporate governance and upgrading transparency in line with the Basel Committee recommendations. While a few skirmishes remain to Troika 2: These three reforms have started but are still at an early stage. be fought, the corporate governance war has been won. Pension reform In 2001, Russia overhauled its pension system. Beginning UES management is trying to make the in 2004, individuals will be allowed to choose a fund or reorganization process transparent. In August, UES set up a insurance company to manage their pensions. This should board committee to review progress on restructuring. It is widen the domestic investor base. chaired by one of three representatives of institutional Although the original reform proposals were investors. Also represented is the European Bank for watered down, the flow of funds to the equity and non- Reconstruction and Development, whose involvement government fixed income market will be strong enough to

34 should help ensure that the restructuring is fair and transparent. As Russian companies return to international markets, Gazprom’s main achievement so far has been the there is a good opportunity for corporate governance ousting of the old guard. The liberalization of its market for campaigns. shares has stalled, as Gazprom’s new managers are Our analysis shows that corporate governance is focused on recovering assets that disappeared under their best among companies that are preparing to tap predecessors. They are likely to regain some assets, which is international capital markets with American Depositary good for shareholder value, but other assets may be Receipts (ADR) or Eurobond issues. Clearly, corporate irretrievably lost. We want to see the Gazprom reform governance has its cycles, peaking at the pre-ADR (or pre- accelerated and urge the government to abolish the “ring- Eurobond) stage. This is a time of great risk and great fence” soon. opportunity. Risk, because the fair mask may be assumed on purpose in order to fool investors. It is also a time of Corporate governance reform opportunity, because investors have the best chance to Russia has made giant strides in improving its corporate persuade companies to really mend their ways. However, governance. The Corporate Law has been amended, a code this opportunity is easily missed. of conduct— drafted by the Federal Commission on the In late 2001, a prominent Russian company Securities Market (FCSM) market watchdog— is being issued Eurobonds, which Standard & Poor awarded a ‘B’ adopted, investor activism is strong, and companies accept rating, on a par with the country’s sovereign bond rating at the need to improve their business practices. While a few the time. However, this rating did not reflect the huge skirmishes remain to be fought, the corporate governance corporate governance risk which the company posed for its war has been won. That is, unless a fifth column of subsidiaries. In the run-up to the Eurobond issue, the “window-dressers” undermines the effort. company had stripped these subsidiaries of their value. The opportunity was to use this sensitive pre-Eurobond period How to consolidate success in 2002 to urge the company to improve its governance. • Implement FCSM code of conduct Unfortunately, this opportunity was missed and • Continue building up grassroots pressure for good international investors snapped up the bonds without a corporate governance. word. • Monitor compliance with good corporate More Russian companies are contemplating ADR governance principles to prevent ‘window- and Eurobond issues this year. Now is the time for dressing’ investors to tell them to reform. International investors • Persuade investors—particularly international should do a little “perestroika” of their attitude to Russian investors—to withhold money from badly corporate governance to help Russia accomplish its own governed companies, no matter the potential gain larger “perestroika.” •

35

The views expressed by commentators in Russia Watch do not necessarily represent the views of the Strengthening Democratic Institutions Project, the Belfer Center for Science and International Affairs, the John F. Kennedy School of Government, or Harvard University.

This issue of Russia Watch was sent to press March 4, 2002.

Russia Watch editorial staff:

Guest Editor: Duncan DeVille Copy Editor: John Grennan Production Director: Melissa Carr Consultants: Ben Dunlap, David Rekhviashvili Assistant Editor: Danielle Lussier Translators: Emily Van Buskirk, Ben Dunlap Production Assistant: Annaliis Abrego

Special thanks to Ben Dunlap, Anya Schmemann, Gautam Mukunda, Scott Canty, Seth Jaffe

The Strengthening Democratic Institutions Project works to catalyze support for three great transformations underway in Russia and the other countries of the former Soviet Union: to sustainable democracies, free market economies, and cooperative international relations. SDI seeks to understand these transformations, interpret them for Western audiences, and encourage initiatives that increase the likelihood of success. It provides targeted intellectual and technical assistance to governments, international agencies, private institutions, and individuals seeking to facilitate these three great transformations.

STRENGTHENING DEMOCRATIC INSTITUTIONS PROJECT BELFER CENTER FOR SCIENCE AND INTERNATIONAL AFFAIRS JFK SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY 79 JFK STREET CAMBRIDGE, MA 02138 Phone: (617) 496-1565 Fax: (617) 496-8779 Web site: http://www.ksg.harvard.edu/bcsia/sdi Email: [email protected]  Copyright 2002 by the President and Fellows of Harvard College

36