Palms & Company Document

WHAT'S NEW ----- About The Portal To Russia ----- Email Dr. Palms

MISTAKES IN THINKING CONTINUE TO RULE RUSSIA

by

Dr. Pyotr Johannevich van de Waal-Palms

Russian officials often caution not to "throw out the baby with the bath water". Yet they continue to advocate just that. Alexandr Livshits, head of the Russian President's group of experts, in an interview with ITAR-TASS on Sept. 6th said "the main cause of the corporate debt problem is the 'legalized immoral entrepreneurship' ". This is like saying that guns kill. Guns do not kill, people kill. There is no "immoral

entrepreneurship", there is only entrepreneurship just like there is oxygen in the air. There are also sometimes thieves who find a way to be working in such businesses.

Deliberately extending credit to customers, who are not expected to pay, is not immoral entrepreneurship it is a dishonest act by a business manager. Such actions by a dishonest business manager have nothing to do with "entrepreneurship" or the market economy or business. They have to do with criminals working in business or criminals working in government.

Protecting businesses from dishonest managers can be accomplished by sharing authority for credit decisions between two or three managers and this will eliminate the possibility of one thief making credit decisions or obtaining bribes to give credit. The decision to use such policy is the competence of shareholders and the board of directors.

Giving Businesses rule of law with which they can punish managers who are dishonest, is the function of the Government. Managing private property is the competence of the owners not the government.

The thinking that dishonesty can be corrected by transfer of functions to the government, is one of the great mistakes of Russian government thinking. You cannot solve problems by transferring them to government. The whole world knows that. Government is just as immoral as any citizen and more dangerous because it has authority and power as well.

The thinking to punish an innocent business, because an employee steals from the business is an unfortunate confusion in Russian culture coming from the last 70 years. In a rule of law state it would be impossible for Mr. Livshits to suggest an innocent business be punished by having the state buy up its shares. It would also be impossible for a State to force anyone to sell their shares. Mr. Livshits suggests the solution is for the government to buy all businesses "suspected" of making bad credit decisions. What a frightening thought. Innocent parties who have attractive assets can be "suspected" and their property taken over by the government. It is the manager who is the thief, not the business. It is immoral to punish an innocent business. Mr. Livshits suggests to legalize such an immoral act by the government in order to combat what he see as "legal immoral entrepreneurship". The real objective is to find a way to punish the thief who steals from a business. Mr. Lifshits will punish the wrong party if he can't understand who is the thief. How can Russian officials solve problems without a clearer dialectic?

In any case even punishment of the dishonest manager on the basis of suspicion is not the act of a rule of law state. In a rule of law state even the manager, who is the suspected party, must first be proven guilty according to specific laws which describe the elements of the offense in precise terms. In any case it is unrealistic to assume that a new government manager would "reestablish order". That assumes that all government managers act morally.

Mr. Livshits states that he who finds the solution to the non-payment problem will win a solid position in the future elections. I offer such a solution.

  • 1. If a court issues a judgment, it may be recorded with any bank where the debtor has funds and such bank must pay such money to the creditor when the creditor levies upon such debtors bank account. Creditors would have to agree to this before they receive and accept credit.
  • Anyone to whom money is owed by a Russian business can, together with other creditors, can file a motion for involuntary bankruptcy with the courts against the debtor. If the debts are not paid promptly, then the assets are auctioned by the court appointed referee in bankruptcy and the proceeds used to pay the creditors.
  • 2. Any manager of a business, who uses any part of the bank accounts of such business, whether in rubles or hard currency and whether in Russia or out-side Russia, for his personal use, is guilty of embezzlement and is subject to criminal penalties defined by law. Personal use includes all expenditures not specifically authorized by the board of directors in the budget.
  • 3. When a business has been declared bankrupt by the court, all further payments received by such business from its debtors shall be paid into a trustee account and used to pay the creditors of such business. What is left after payment of all debts is paid to the shareholders as liquidation of their equity interests in the company.
  • 4. Businesses and their shareholders may file charges in the court against directors and/or managers who steal company money or accept bribes and a rule of law will provide for punishment of the manager for such crimes against the businesses and their shareholders.
  • There are some other details that must be added. Actions of managers must be controlled by laws which define what is a commercial crime of "conspiracy to defraud shareholders" or "embezzlement" and also when the use by the manager, of money which belongs to the corporation, is not legal and constitutes "conversion of money to personal use", in other words stealing by the manager from the corporation. Any manager who accepts a bribe for giving credit to a customer, would be responsible, up to the full amount of all his personal property, for the repayment of losses which result from such actions by him.
  • There are hundreds of possibilities for punishing and preventing bribes and stealing by Managers or Government Officials. The purpose of government is to protect companies and shareholders from illegal acts by managers with laws. It is not the function of the government to operate business or punish businesses which are the victims of dishonest managers. It is also a mistake to assume that corruption will end if a government manager takes over a function from a private business manager. In many cases they are the same people.
  • The functioning of an economy depends upon a population which is predominately honest and in which thieves are in the minority. That is the kind of culture Russia must develop. Changing responsibility between private business managers and government business managers will change nothing until the morality and integrity of the culture is changed. In that sense Boris Mironov, former chairman of Russian Federation Press Committee is correct when he said on Sept 6th in Rabochaya Tribuna: "It is not the economic crisis or the political crisis that is preventing Russia from drawing itself up to its full height but, above all, the spiritual crisis, which has worn down the people's faith in themselves" ( and in their government).
  • A significant contributor to this spiritual crisis is the absence of a sense of private ownership. Property receives protection from its owners. A manager who gives away property for a bribe clearly thinks it is the property of someone else or he would not give it away for a bribe that is worth less than the property. If the shareholders or directors do not prevent him from doing this, they must not believe it is their property. Until it becomes absolutely clear who owns things, it is impossible to find protectors for property. Protection of property is the competence of the owner. Protection of ownership results in prosecution of immoral behavior. Productivity and Creativity in Businesses is always moral. That is a market economy. Absolute socialism creates criminal irresponsibility. Rule of law to implement property protection rights is the function of government. But the property right is greater than the government and the ONLY function of government is to provide the tool with which the owner can protect that right. The only competence of the government is to catch and punish the thief. The government has no right to decide how the owner should manage his property. Mr. Livshits is right to sense there is
  • something immoral going on, but he has not yet placed his finger on the real cause. He is not alone in Russia.

    • Go to TOP of this page

    RETURN to Palms' Lobby RETURN TO HOME PAGE

    Palms & Company, Inc., Investment Bankers (1934-1997): Palms Palms Bayshore Building, Penthouse Suite #408at 6421 Lake Washington Boluevard Northeast, Kirkland, State of Washington, United States of America, 98033-6876;
    http://www.peterpalms.com
    Phone: 1-425-828-6774 & 1-425-827-5528
    Copyright 1995, Palms and Company, Inc.; all rights reserved; email: palms@PeterPalms.com
    Date Last Revised: Sept. 9, 1997