Global Policy Forum

By Sabrina Tavernise

Deep in the pine forest of the Russian north, a battle is being fought over the shape of a Russian economy increasingly concentrated in the hands of just a few tycoons.

In an action giving new meaning to the concept of a hostile takeover, corporate raiders employed by one of Russia's most powerful businessmen have put a large pulp and paper mill - quite literally - under siege. A brigade of the tycoon's private security guards lies in wait, ready to take the mill, 575 miles northeast of Moscow.

The mill's current owner, a smaller company, has barricaded factory territory with buses, train cars and guards of its own. It refused to yield last week when court bailiffs drove up with orders to install a new chairman.

The scene is more than just a fine piece of Russian corporate theater. These are the front lines of a phenomenon that has transformed the economy in the last three years. A handful of large business groups have been moving through systematically, buying up entire industries.

Using their financial might and political connections, the groups have swallowed the coal industry, steel, car manufacturing, aluminum, and now timber. One result has been a concentration of Russia's wealth: just eight business groups control 85 percent of revenue from Russia's 64 biggest private companies, according to a recent report by Peter Boone and Denis Rodionov, economists at the Moscow-based subsidiary of UBS Warburg, a Swiss investment bank.

As strange as it may seem in economic terms, this is progress. Unlike the oligarchs of the era of Boris N. Yeltsin, who had political influence but not the same kind of economic sway, these groups have begun reshaping the rusting hulk of the Soviet economy, in ruins after a decade of looting and neglect. They pay taxes and invest. Some are seeking to entwine their companies with the West.

Tycoons themselves often compare their experience to J. P. Morgan's organization of trusts in early 20th-century America, when financial plotters used aggressive takeover tactics and malleable state legislatures to form giant monopolies like U.S. Steel, and began obeying the rules only after they established control.

But serious questions remain about whether the tycoons - who made their fortunes riding roughshod over Russia's weak legal system - will be willing to give up the heavy-handed ways that propelled them to the top, and abide by equal rules for all.

"There is much manipulation in the courts and law enforcement," said Grigory A. Yavlinsky, leader of the liberal Yabloko political party. "It is a kind of corporate, partly criminal system - a legal marriage between business and power."

The standoff at the pulp and paper mill is emblematic of that marriage. It began this month, after Oleg V. Deripaska, at 34 one of Russia's biggest business tycoons, plucked away legal control of the mill in an elaborate legal maneuver - a takeover tactic he had perfected in the last three years of piecing together a vast business empire.

This time, the victim, a Russian company called Ilim Pulp Enterprises, refused to concede defeat.

The choreographed dance that is this takeover began in a Siberian region five time zones east of the paper mill, where a hitherto unknown individual with just 20 shares in the mill and a baffling corporate consciousness filed suit in a local court charging that Ilim Pulp had not complied with all the conditions of its 1994 privatization.

Before Ilim even knew about the court case (Mr. Deripaska's advisers said Ilim had been notified by mail), the Siberian court confiscated two-thirds of the mill's stock and returned it to the far-off St. Petersburg branch of the state property committee, which promptly sold the stock to Mr. Deripaska.

"At first, I thought it was a joke," said Frank Graves, a Canadian who was hired in April as the chief operating officer of Ilim Pulp. "But then I realized we had a serious problem. It's not that the bully wants to take our ball. He wants the whole bloody playground."

Mr. Deripaska, who owns several playgrounds already - three-quarters of Russia's aluminum industry and a large slice of car manufacturing - was expecting to get it. But Ilim fought back with methods Mr. Deripaska probably recognized: The mill managers enlisted Koryazhma's mayor, prosecutor and court bailiffs to defend it. Mr. Deripaska's cohorts accuse the managers of paying them off.

It is unlikely that any shots will be fired over the barricades at Koryazhma. Times have changed since the early turbulent years of Russian capitalism, when big business relied on violence to eliminate rivals. For instance, the aluminum industry, where Mr. Deripaska made his first fortune, was torn by contract killings in the mid-1990's as different groups fought for control. (Indeed, Mr. Deripaska, who is married to Boris N. Yeltsin's step-granddaughter, has been refused a visa to the United States, apparently because of his early unsavory connections.)

The real casualty is Russia's legal system, already deeply scarred from the bare-knuckled tactics of the last decade. President Vladimir V. Putin's reformers have been rewriting laws to strengthen it: just last week, a new Arbitrage Procedural Code took effect, prohibiting the use of civil suits in corporate disputes like Koryazhma.

But for the changes to work, tycoons have to be willing to moderate their methods as they have adapted to new business reality, Mr. Yavlinsky said.

The new tycoons differ both from the state monoliths of Soviet times, when the state owned everything from oil companies to grocery stores, and the oligarchs of the Yeltsin era. Then, when the state began selling its crown jewels in the mid-1990's, a handful of bankers amassed fortunes in property.

But for all their bravado, their access to the halls of power and their control of the media, the oligarchs' economic influence then did not reach much further than oil and metals.

Several of the bankers were destroyed in the collapse of the ruble in 1998. Still others were banished two years later, when Mr. Putin was elected president, and their political connections to Mr. Yeltsin proved unpalatable.

The handful that survived have now quietly extended their reach to the far ends of the economy. They were joined by several newcomers, like the gruff, lanky Mr. Deripaska, who at the tender age of 26 was already director of a large aluminum plant in Siberia.

A key question will be how Mr. Putin, who has been doing some consolidation of his own in politics and the media, chooses to coexist with the business groups.

The tycoons themselves say there has been tension. Their existence "makes politicians uncomfortable," said Mikhail M. Fridman, 38, chairman of the board of Alfa Group, whose holdings include oil, retail and a mobile phone company. "Business groups have many levers of influence. I don't think Mr. Putin likes this."

But others, like Mr. Yavlinsky, say the president's relationship with big business looks friendly.

"Mr. Putin is a representative of the business groups," he said.

As for Mr. Putin, he once promised to liquidate the oligarchs as a class. Yet many have gone on to build large empires in the economy. He banished them from government where they used to dictate policy under Mr. Yeltsin, but they continue to use their might to influence poorly paid bureaucrats and judges in Russia's provinces.

All this runs counter to Mr. Putin's pledge to crack down on corruption and modernize the Russian state.

Economists like Mr. Boone argue that the legal system is less imperiled than it may seem because the tycoons, with immense empires to protect, in fact have more reason now than ever to want to play by the rules.

In the American case a century ago, while judicial and political corruption were also rife, it was the lobbying of small businesses that eventually led to the breaking of the trusts and a more evenly applied rule of law, Ron Chernow, author of biographies of J. P. Morgan and John D. Rockefeller, said in an interview.

That same force in Russia is virtually nonexistent. Small businesses, in many countries an engine of economic growth, have barely emerged in Russia. Small companies have a harder time protecting themselves from predator bureaucrats and larger competitors, than do large wealthy business groups.

A recent study by the Center for Economic and Financial Research, a Moscow-based institute that polled 2,000 small business across Russia, found that companies stop growing once they reach a size of six or seven employees.

At that size, the "administrative pressure," or expensive, time-consuming encounters with Russia's sprawling bureaucracy, "becomes more severe," said Yekaterina Zhuravskaya, director of the study. That creates what she called a "glass ceiling."

Mr. Fridman, the Alfa Group chairman, put it more bluntly: "We have an advantage as a big group, and we use it. It's natural. But it's not so good for the economy."

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