Doing business in Russia is notoriously difficult.

[Chris]

A combination of excessive bureaucracy and corrupt officials makes it a hazardous enterprise.

For example, producing milk is fairly straightforward in most parts of the world.

But it landed Dmitry Malov in jail.

Mr Malov owns a dairy business called Agromol in Kostroma, some 300km (190 miles) from Moscow.

He started out by buying a milk-packaging facility. Then he bought two old Soviet dairy farms. He poured his life savings into them, and took out a bank loan to modernise them. He soon had a thriving business.

Persuasive visitors
By 2009 it was delivering high-quality milk, butter, and other dairy produce across the region, even as far as Moscow.

The first sign that his investment was going to turn sour was when he had a visit from some men who turned out to be officers from the FSB, Russia's interior security service.

They tried to persuade him to sell his business at a knock-down price to an unknown buyer.

Mr Malov refused.

The FSB officers threatened that if he did not sell he would end up in prison.

Mr Malov's wife, Tatiana, believes the officers were paid, perhaps by someone involved in property development, as the company's small factory is on a prime city-centre plot.

Mr Malov went on refusing to sell the company. Then, soon afterwards, he was charged with fraud.

He was accused of not using his bank loan for the purpose given in the application.

Mr Malov fought the charge, believing right up until the day of the verdict that he would be cleared.
But he was found guilty and sentenced to five years in prison, just as the FSB officers had threatened.

'Fighting wrong people' "I knew that there was a criminal investigation and that he was having to attend court," says Mrs Malov.

"But I never believed it would get to this stage. They called me from the court. They handed him the phone and he said, 'I am being sent to prison'."

Business Solidarity, an organisation that works to protect small businessmen, estimates that one in six Russian entrepreneurs is in jail, and that one in three prisoners in Russia is a businessman.

Two of Dmitry Malov's employees were also given prison sentences, but theirs were suspended.

His finance director, Diana Grishina, is one of them.

She is trying to keep the business going in his absence.

Ms Grishina is recovering from brain surgery for a problem that she believes was made worse by the stress.

"If law enforcement didn't keep getting in the way of small business, things would be much better," she says.

Bribery alternative
"They should be fighting terrorism, not us. We are in the business of creating things, not destroying them. And we are not harming anyone."

Of course, not all businessmen end up in jail, but there is a reason for that, according to Alexander Brechalov, of the Organisation of Small and Medium Businesses.

He is not happy about it, but he is realistic.

"Most entrepreneurs - between 60% and 80% - are quite relaxed about the situation," he says.

"They share their profits with the police and people from the tax authorities. They don't complain about the difficulties of doing business. They just pay bribes to everybody."

Agromol is still trading and still employs 300 people, but the future of the company is in jeopardy without its owner and driving force.

Mr Malov is being kept in the local jail in Kostroma pending the outcome of his appeal.

Only a few hundred metres away at their small flat, Mrs Malov has not told their two children where their father is.

They think that he is on a business trip.




Source

[MrMann]

I just came here to post this story actually!

I wonder if there's more than meets the eye to this, or if it is as simple as just not playing by the (corruption) rules.

I remember when I looked into setting up a business in Moscow the amount of red tape involved just in setting one up was unbelievable, never mind actually running one.

The stories about Ikea having to rebuild the bridge and pay their electricity bills several times are well known I presume?

[Chris]

I wonder if there's more than meets the eye to this, or if it is as simple as just not playing by the (corruption) rules.

Hard to say, but its sad that an average guy who is making a go of things and employing 300+ locals has to put up with this.

I was once communicating with a lady over there who had her own business and back then 5-6 years ago things were pretty bad she was telling me. She was struggling due to all the corruption.

I remember when I looked into setting up a business in Moscow the amount of red tape involved just in setting one up was unbelievable, never mind actually running one.

The stories about Ikea having to rebuild the bridge and pay their electricity bills several times are well known I presume?

Yes red tape is another big problem, not just in Russia but Ukraine (my experience) aswell and no doubt most of the FSU is similar.

[Rasputin]

I wonder if there's more than meets the eye to this, or if it is as simple as just not playing by the (corruption) rules.

Occam's Razor: the simplest solution is usually the one that is correct. He was warned to sell or end up in jail, and he did not sell and ended up in jail. Corruption is the simplest explanation.

There are reasons why at least 1.25 million business people and middle-class Russians left their country in the last 3 years, and likely many more that have yet to be documented and included in the official stats:http://newtimes.ru/articles/detail/39135.

[Eduard]

in the 90s many men who otherwise would be honest workers/businessmen had to turn to criminal activities to survive and keep their families fed. I know some of these guys who are now successful businessmen, decent family men but I also know what they had to do during that tough period in the FSU.
Most guys who were into sports joined some kind of criminal gangs in those days, seemed to them like the only way to survive or die with some kind of dignity.
Now days things are different and there is order in both Russia and Ukraine relatively speaking. But this "order" still requires one not only to be a good business man with excellent work ethic and viable ideas but also the knowledge and the willingness to play the game - be part of the system, a corrupt system at that. Some people are a lot better at that than others. Some have better "connections" and have better protection due to those connections. Some became billionaires working the same system that put mr. Malov in jail.
I used to be very mad about all this corruption in the FSU until I saw that corruption is now destroying the USA and so it's hypocritical to criticize FSU with all the BS happening in the USA.

But FSU is paying the price by losing the best and the brightest, the more honorable people, who do not want to be part of that corrupt system to the West/ While the more ruthless, criminal minded people stay there and make fortunes while the masses suffer.

[Brasscasing]

But FSU is paying the price by losing the best and the brightest, the more honorable people, who do not want to be part of that corrupt system to the West/ While the more ruthless, criminal minded people stay there and make fortunes while the masses suffer.

Didn't similar conditions cause a wee ruckus back around 1917, Ed? 

Brass

[Eduard]

But FSU is paying the price by losing the best and the brightest, the more honorable people, who do not want to be part of that corrupt system to the West/ While the more ruthless, criminal minded people stay there and make fortunes while the masses suffer.

Didn't similar conditions cause a wee ruckus back around 1917, Ed? 

Brass

I don't think people changed much in the last 2-3 thousand years...history always repeats itself.

[Manny]

It happened a few years ago in the UK; it is happening again now with the new 50% tax rates on those earning big salaries. It is called "brain drain" - the bright and productive move overseas.

Russia is making a grave error jailing guys like Malov. It will give nobody confidence to invest in Russia. Russia needs foreign investment to help it become a proper country. Foreigners will not invest while they are locking up the locals for being successful.

[cufflinks]

I have it on very good authority that while the Moscow Officials (Notably President Medvedev) are promoting Skolkovo as the new Russian Silicon Valley outside Moscow - the smart Russian money is looking to off all places - the USA - seems the USA is considered to be a current Blue Light Special (Old K-Mart Bargain deal).  Especially compared to RU UA and EU prices for just about everything.

If you own a company here and pay your Property and Federal and State Income taxes (you would be amazed at what a business owner can deduct from the 35% Federal and up to 10% state and local business taxes).  It is unheard of that your business would ever be seized here - unfathomable really - whereas in Russia, Italy and much of Latin America and FSU if you work your arse off and build a biz to a level of prosperity there is always someone looking to "tap you on the shoulder" often with a kalishnikov.  Not unlike the USA back during the reign of Al Capone and later the "Commission" 

[Larry]

It's hard to imagine a country whose elected officials enact laws and policies that will clearly result in driving out some of the most productive people, and replacing them with hordes of newcomers, many of whom are much less productive, more prone to crime, and want to transform the country into a theocracy.

[Eduard]

It's hard to imagine a country whose elected officials enact laws and policies that will clearly result in driving out some of the most productive people, and replacing them with hordes of newcomers, many of whom are much less productive, more prone to crime, and want to transform the country into a theocracy.

Hard to imagine??? Look around you, Larry! It is happening right here in the US now! People are moving out while the politicians in charge are trying to legalize millions of illegal immigrants. Most politicians are only worried about lining their own pockets while in power and not what's good for the country. Too bad guys like Ron Paul who do not have that corrupt agenda and truly want what's best for the country won't be elected to the office. 

[Larry]

Yes Eduard, we're on that same road  too, especially with our horrible fiscal situation.  And it's hard to find a candidate who can win nomination or election who will stop it.

[el_guero]

It's hard to imagine a country whose elected officials enact laws and policies that will clearly result in driving out some of the most productive people, and replacing them with hordes of newcomers, many of whom are much less productive, more prone to crime, and want to transform the country into a theocracy.

Have you looked at the USA lately?

[JeanClaude]

It's hard to imagine a country whose elected officials enact laws and policies that will clearly result in driving out some of the most productive people, and replacing them with hordes of newcomers, many of whom are much less productive, more prone to crime, and want to transform the country into a theocracy.

Have you looked at the USA lately?

Tell us el gorilla,

What did we miss))

[el_guero]

President Clinton gave back some of the money he was given to give American jobs to China ....

Mortgage companies which backed obama were bailed out .... unions which backed him are being protected in the courts....

We are quickly becoming another European oligarch.

At least there, you know 'how to behave.'

[cufflinks]

Even the World's Largest Media Mogul NO MATCH for "Biznyessmen" in Moscow:

A Cautionary Tale about Business in Russia and especially Moscow - a real Eye Opener.

The Dark Side of Murdoch's Russian Billboard Business
By Simon Shuster / Moscow Monday, Aug. 01, 2011

http://www.time.com/time/world/article/0,8599,2085878,00.html

Pieces of Rupert Murdoch's empire continue to fall away. Last month, as British police continued to investigate phone-hacking claims against the News of the World, the media magnate sold off his Russian billboard company, News Outdoor, for around $270 million, less than a fifth of the value it had three years ago. The sale marked a quiet end to one of Russia's oddest corporate sagas, and looking back, the troubles of the British tabloids seem almost tame compared with the murder and corruption scandals in the Russian billboard market, which Murdoch's company dominated for nearly a decade.

By all accounts, the unexpected break for Murdoch in the Russian ad market came in 2002 after the assassination of Vladimir Kanevsky, then the billboard king of Moscow. In February of that year, at an intersection near the Kremlin, a man in a black ski cap walked up to Kanevsky's car and pumped five rounds into his head and chest. Because of a weapons check at the security firm that protected him, Kanevsky's bodyguards happened to be unarmed that day, and the killer managed to escape. But aside from this peculiar detail, the fact of the murder was not extraordinary. Kanevsky had a lot of enemies, and hired hits were still a fairly common way of resolving disputes in Russia, which had not yet tamed the capitalist free-for-all that followed the Soviet collapse. Between 1996 and 2004, at least 11 Russian advertising executives were killed or wounded in contract hits, with car bombs and knifings among the methods used. Only two of those crimes have been solved.
(See pictures of Murdoch career moments.)

For Murdoch, the killing of Kanevsky presented a surprise opportunity. The media mogul had acquired News Outdoor less than two years earlier, in November 2000, from a group of Russian businessmen, and had given the reins to Maxim Tkachev, a seasoned operator in Moscow's business circles. Tkachev had started out producing and selling bootleg CDs of bands like Deep Purple and Pink Floyd in the late 1980s, and went on with a group of college friends to create the billboard firms that Murdoch would later acquire. Less than two years after the deal, Tkachev had made News Outdoor the leading player in practically every major Russian city except for Moscow, where Kanevsky's company stood in the way.

The two men had known each other since 1995, when both were starting out in the billboard business. "[Kanevsky] was what I would call a hooligan, but a smart one," Tkachev says. "He was always willing to negotiate, and his business earned my respect." But one thing Kanevsky had never talked about was a desire to sell his assets, which included the most lucrative outdoor ad space along Moscow's central drags. His murder meant it would soon go on the market. "I had a revelation that it was time to get out," recalls Kanevsky's partner, Mikhail Lerner, who spoke to TIME by phone from his vacation home in Sicily. "I decided to go into a cleaner business — digital technologies."
(Read "Apologies, but No Answers, as the Murdochs Give Testimony.")

But Tkachev was not so easily spooked by the violence in his industry, even after a hit man came for him in June 2002. At the time, News Outdoor's offices were housed in an old Stalinist building on Moscow's Leningradsky highway, a hulking mass of yellow stone adorned with crests of the hammer and sickle. As Tkachev hurried into the entryway one morning, he was met by a man dressed like a newspaper vendor. As Tkachev recalls, the man raised his arm as if to offer a free newspaper, and then fired one round into Tkachev's chest from a gun concealed beneath it. When he tried to fire again, the pistol jammed and Tkachev survived.

Murdoch was furious over the incident. He sent a letter to Vladimir Putin, then Russia's President, demanding a thorough investigation. But it did little good. No one was ever charged with ordering the murder. A few months later, after having surgery to remove part of his lung, Tkachev dove back into the billboard business, and by the beginning of 2003, talks were well under way to acquire two-thirds of Kanevsky's company under terms that were highly unusual for Murdoch's News Corp. There was no time to do due diligence or have a retention period, as would normally take place before a major acquisition in the West. "They wanted the money now, and this was nonnegotiable," Tkachev says.
(See who's who in the phone-hacking scandal.)

So News Corp. agreed to lend its Russian company an undisclosed sum of money to buy the dead man's assets. Salim Tharani, who was News Outdoor's financial director in Russia at the time, says the deal was an incredible bargain: "They could have easily paid three or four times as much, because that deal made them the dominant player [in Moscow]. They could effectively dictate pricing after that." Never before had a foreign firm taken such a position in the Russian media industry.

Holding on to that position, however, required not just cash but the good graces of the Russian government, and Murdoch's ownership was likely not much help in that regard. His first major partnership in Russia, years before he went into the billboard business, had been with the oligarch Boris Berezovsky, one of Putin's oldest foes. In Moscow's political circles, some viewed Murdoch as an enemy by association. His main projects with Berezovsky, including plans to jointly control a major television channel, were blocked by the state in the late 1990s, and in 2001 Berezovsky fled to London after criminal cases were opened against him. (Berezovsky, who was granted political asylum in the U.K., has always denied the charges and claims they were politically motivated.) His departure finally severed Murdoch's most useful link to the Russian market, and it was up to the media mogul's Russian executives to make up for that.
(See more on Berezovsky.)

A priority for them, as for practically every major business in Moscow, was to establish decent relations with city hall, which Mayor Yuri Luzhkov ran from 1992 until last year. The mayor's son Alexander Luzhkov also happened to be in the billboard business, and he developed a close relationship with Murdoch's firm: News Outdoor had exclusive rights to market and service all of the younger Luzhkov's billboards.

Tkachev, the News Outdoor CEO, denies that this relationship earned his company any special treatment from authorities in Moscow. But while the relationship held, News Outdoor and the firm owned by Alexander Luzhkov won joint contracts for prime billboard space, including exclusive rights to post bills along the Third Ring Road that runs around central Moscow. In 2005, after Mayor Luzhkov renewed those contracts, his deputy, Vladimir Resin, wrote a letter to the mayor complaining that News Outdoor was unfairly cornering the city's billboard market. "I ask your permission to cancel these agreements and hold [a tender] for these advertising opportunities," Resin wrote, pointing out that city hall had ruled in 2001 that Moscow's billboard space should be handed out competitively. But the mayor dismissed his deputy's claims as "unfounded" and no competitive tender was held.

"That was the mayor's right," says Vladimir Makarov, who was head of the city's advertising committee at the time. "Since the mayor signed the first order [in 2001], he could sign another order." And it seemed to matter little if they contradicted each other.
(See more about Luzhkov being fired.)

That was the way the Russian billboard market operated. The whim of a local official could decide whether your billboards were granted a discount or taken down completely. And in many quarters, it was accepted practice that backroom deals were the way such matters got decided. As a result, interviewing the businessmen and bureaucrats involved in this market often feels like talking to the one unlucky saint in a den of thieves. All four of the nationwide players TIME spoke to said that the market is thoroughly corrupt, with envelopes of cash changing hands with officials as a matter of course. But all said they had not taken part in or been party to bribery themselves. Even Makarov, the former head of Moscow's ad committee, continues to profess his innocence, after having been convicted earlier this year of abuse of office for handing out discounted billboard space to two companies that News Outdoor later acquired. News Outdoor's offices were searched in 2008 in connection with the case, but no charges were ever filed against its managers, who deny any wrongdoing.

There is no evidence that Murdoch knew of the crimes allegedly committed in the Russian advertising market. Tharani, the former financial director of News Outdoor, says Murdoch's involvement in the Russian business was "practically zero." But a former employee of News Corp. intimately familiar with the operations in Russia says News Outdoor was by no means naive. "There is a great temptation in that business for low-level bribery," the former employee tells TIME. "You're trying to get a permit or you're trying to get permission to put a board up some place, and guess what, a person working at a very low level is sitting on it. So there is a great temptation to take him out for dinner or do something to get him off his butt." Asked whether News Outdoor had ever given in to that temptation, he says they did their best to follow News Corp.'s ethical standards. "But I cannot tell you with 100% surety that it did not happen." When TIME put the same question to Tkachev, he said News Outdoor had never taken part in corruption.

Only once, as far as TIME's investigation could discern, was News Corp. confronted head-on with claims of alleged corruption at its Russian subsidiary. In the fall of 2006, Martin Pompadur, who was chairman of News Corp. Europe at the time, met in a Moscow hotel with three Russian advertising executives. (That meeting was arranged by a former Russian security agent named Andrei Lugovoi, a mutual acquaintance of the executives, who would gain infamy later that year in connection with the murder in London of Alexander Litvinenko, a former Russian spy.) The ad executives complained to Pompadur of bribery, phone tapping and corruption at News Outdoor, and asked him to investigate the allegations. Reached by phone in New York City, Pompadur declined to comment on the meeting. Tkachev, the News Outdoor CEO, denies all of the claims of corruption and phone tapping, saying they are part of a "black p.r." campaign, and he declined to comment on any follow-up the Moscow hotel meeting may have led to.

But regardless of whether News Corp. looked into these claims internally, the Russian government began a series of probes and regulatory shake-ups in the billboard market after 2008, when Dmitri Medvedev replaced Putin as Russia's President. News Outdoor was hit with a $45 million tax claim, and new regulations have forced many of its billboards to be taken down or put up for competitive tenders. The departure of Mayor Luzhkov, whom Medvedev sacked last year, has also meant a reshuffle in city hall. Makarov, the head of the city's advertising committee, was fired in March; a few months later, he was found guilty of abuse of office. His former deputy, Igor Gavrilov, is now serving a three-and-a-half-year sentence handed down in 2009 for conspiracy to commit fraud.
(See pictures of Putin and Medvedev's ski vacation.)

And as the regulatory winds turned over the past few years, Murdoch scrambled to sell his 79% stake in News Outdoor. "The more successful we'd have been, the more vulnerable we'd be to having it stolen from us," he complained to the Financial Times in 2008. "Better we sell now." But three years, one financial crisis, and two sets of failed negotiations later, Murdoch settled last month for a price tag of around $270 million, sources close to the deal confirmed. It was a long way to fall from the $1.65 billion valuation News Outdoor got in 2007. This, of course, would likely be among the least of Murdoch's worries at the moment, and maybe he should even feel glad that his days in the Russian billboard game are over. He has managed to come away clean after a decade in a very messy business.