Val Karren - The Deceit of Riches

“About what then?” Richard queried.

“I have to put together a thesis for the term. I figured the two of you were probably the ones with the best oversight in the entire city about the reforms happening,” I was embellishing in sarcasm but speaking the truth at the same time.

“Oh, so you’ve chosen the light study courses!” Andrew replied with a stuttering chuckle.

“The never-ending rabbit hole of economic reform…,” was Richard’s reaction.

The thuggish character from behind the service counter called to Andrew to collect his hot pizza with an indescribable indifference.

“Well we certainly shouldn’t talk shop on an empty stomach,” Andrew remarked standing to collect his prize. “Would you join us for a slice or two?”

“I would be honored.” We continued our misplaced formality in the middle of the draughty, whitewashed fluorescent-lit pizza palace.

After a few triangles of soggy crust and hot cheese had been inhaled, Andrew sat back in his patio chair and made a dry comment: “That pizza crust was about as thin and soggy as the cover that this pizza joint presents for their other activities, wouldn’t you say?” and with that threw his napkin onto the empty platter.

“Yes, I don’t think that those Mercedes parked out front are the delivery boys’…,” Richard commented leering out the window to the makeshift parking lot. “So, what can we help you with, Peter?”

“Having trouble finding real data about companies that have already been sold to private investors, or entrepreneurs, or in general about new private start-ups. You being the local bankers I thought you could point me in the right direction. What can you recommend?” I asked.

“Don’t believe any of the data! That’s what we recommend. Nobody is reporting their real incomes and profits. On paper, every private company in Russia is failing.” Richard stated emphatically.

“That doesn’t add up,” I muttered scratching my chin.

“Exactly. Somebody is making money somehow and then turning that into something else and then taking over a factory and then selling the goods abroad and keeping the profits for himself and not reinvesting. Where the seed money is coming from and where the profits are going, as two economists in a shady pizza joint, we have our suspicions, but nobody is talking about that,” Richard speculated.

“Foreign investors?” I postulated.

“Yes, but it hardly accounts for half of the shadow deals going around,” Andrew stated.

“Funny money then. Off the books. Black money?” I concluded with a question mark.

“Yes, from one source or another,” Andrew confirmed.

“My advice for a thesis is to keep it local and keep it narrow. Use local sources and examples. Otherwise, you will get lost in data that you won’t know is true or not. Nobody knows what’s going on. It’s a huge mess on the national level. But if you stay focused on local efforts and start-up enterprises you might be able to put something interesting together, maybe even academic if you can cite your sources from interviews and whatnot,” Richard counseled.

“OK, I can chew on that for a while,” I replied

“Are you talking about the crust… or the advice?” Andrew remarked and we all laughed aloud in our common pizza poverty.

“So, what’s the World Bank’s role in all this? You can’t decide who owns assets can you?” I asked in a different vein.

“No of course not. We are more or less consulting the lawmakers about what type of transparency and governance the World Bank needs in order to extend loans and credits. The rest is up to them to bring those elements in an application. The biggest problem with this is that even though the rules are more or less acceptable, every Tom, Dick, and Harry thinks he can run a successful business, but there is no track record, no assets to mortgage for a loan, no contracts for production, no guarantee the lent money could ever be repaid or recovered. So, in the end, we are very conservative and very creative. It’s really the question of ‘which comes first: the chicken or the egg?’ It’s not a traditional lending market,” Richard explained.

“So, what are the new local banks doing?” I asked again.

“Well, perhaps that’s a discussion for another time in another venue,” Richard commented as he cautiously looked around the empty pizzeria indicating that it would not be prudent to go into such discussions in places where the walls have ears… and guns.

“Have you maybe heard of the local privatization auctions being held in Nizhniy?” Andrew asked.

“No. How does that work?” my curiosity was peaked.

“The local government is auctioning off small businesses, like grocery stores, restaurants and retail shops in the cities. They simply sell to the highest bidders. Sometimes the workers get together and buy it, sometimes an investor buys it up and keeps everybody working there. It’s been going on now for about two years. They haven’t auctioned the factories yet in this way, as that’s a bit more complex, but they are planning to do it in the next phase. Yegor Gaidar, Yeltsin’s economics guru, is a real fan of the process. The World Bank has been assisting via-via with that locally. Perhaps we could get you close enough to the auction process to give you a taste of the action,” Andrew suggested.

Del was in fine form after dinner, and seemed to have forgotten about any prudence and was venting his frustrations.

“It’s true, Peter. Yes, it’s true. Everything is on hold. Getting needed financing in this day and age in Russia has become nearly impossible in the last six months, and nobody has the liquidity in a currency that is worth its weight in paper. The laws are changing so quickly that nobody dares take collateral except in the form of cold hard cash parked in a numbered Swiss bank account. With new reforms and new laws coming out every three months it just keeps everything frozen. Why agree today when in just a few months the terms could be all the better? And those with the influence over the timing of the policies, they know what is coming and when, so they just stall with the expectation that they will simply take over our projects and ideas as the restrictions on foreign owners continue to pile up.”

“Are there no regulations from even the Soviet period that help to stabilize the situation?” I appealed.

“Maybe, but nobody believes they will be in place in three more months. Everything is shifting, it’s all on sandy ground. Nobody can put down a foundation in sandy soil,” he explained in his cowboy common sense.

“So how are the newer local businesses going forward?” I inquired.

“Well, the types running the new private businesses with success are those that don’t rely on their financing to be above board, come with standard interest rates, or even from a bank… and they certainly don’t rely on local lawmen to enforce their contracts,” Del explained.

“Are you referring then to trust and a hand shake, or do you mean breaking the knees of those who break an agreement?” The situation was starting to become clear to me.

“Broken knees, arson, intimidation of family members and the likes,” Del confirmed, “The biggest risk right now is that the groups that are starting out this way, taking the spoils while the sheriff has his hands tied, is that once they get strong enough and the dust all settles, these same criminals will control so much that it will be impossible to separate their lawful, legitimate money from the shadow money made in the illegal activities. They’ll have their own built in money laundering facilities in their business groups. It will be impossible to untangle them all when the laws catch up with the business men.”

“Well, as we all know, it’s the businessmen who run the politicians in any country,” I blurted skeptically, “So the laws will rarely catch up to the businessmen.”