THE STRATEGIC LAWYER

::.law + strategy.::.law + governance.::.law + politics.::. ::.you get the jist.::

The Great Pyramids of Russia

I wrote a paper during law school about governance in Russia. When I told people this, I generally got some variation of: that’s going to be a short paper (note: this is similar to the response I’d get when I told people I was writing a paper about human rights in Saudi Arabia). But, to allude to the opening of a famous Russian novel, it’s the ways in which the lack of governance manifests that make each case study so interesting. In the case of Russia, there are fascinating complexities. There’s the long lineage of patriarchy, dating back to the early Tsars (industrialization took place under the auspices of the Tsars–with their sponsorship and control, for instance, rather than as a result of private initiative and the hard work of ambitious, ruthless and visionary individuals), for instance. Russian Communism, in this context, can be seen as a replacement of one kind of patriarchy with another.

There are also other different entrenched cultural and ethical mores–for instance, the disparity between executive and worker compensation levels is regarded as being far more problematic and “wrong” than is the practice of things like taking bribes or having two versions of the account books, both of which are seen as excusable, if not business as usual.

Here is another example of the kind of difference that goes deeper than “you say potato and I say kartofel”: http://www.reuters.com/article/2012/09/17/us-russia-pyramid-idUSBRE88G08H20120917 Sergei Mavrodi is known for his pyramid schemes. He essentially tells everyone that they’re pyramid schemes–and people still invest. So is it fraud, if people know the mechanism and shoulder the risk? Mavrodi insists not.

But of course, the issue is whether they actually know the risk. Just like those email chain letter things (send someone on the top of the list a recipe, cross the name off, put your name at the bottom of the list and send it to five people–and you’ll soon be inundated with great recipes!), the fulsome promises presuppose that everyone is as enthusiastic as you are about it, and will rush to invest after you. A promise of returns based on a theoretical range and topping out at an unrealistically high, maximum number of participants isn’t a particularly clear portrayal of the risks.

It fascinates me, as an example of cultural difference–that this guy, as a seasoned and overt Ponzi and pyramid schemer, is not in jail and is, indeed, moving from one scheme to the next with aplomb. This is apparently okay there, even as it’s deeply problematic here. Then again, we have practices here too, which to an outsider are problematic at best.

Still: it doesn’t inspire confidence. The whole point of something like governance around these sorts of things is to mitigate risk, and to provide some assurance to investors that there is at least some form of oversight and recourse. Investors understand risk–but when the risk derives from abuse, corruption and fraud, then investing becomes a losing game for everyone but those who are rolling the loaded dice. And, while it appears that lawmakers are finally getting around to implementing some new legislation that would make such schemes illegal, whether or not such laws will be enforced remains an open question.

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This entry was posted on September 18, 2012 by in Governance and tagged , , , .
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