If This Were Russia, Nancy Pelosi Would Own Google (But There Would Be No Google)

In my many conversations with Russian entrepreneurs, they repeatedly told me: “We cannot become too big or too profitable. If we do, ‘the structures’ will notice us and gobble us up.” Instead of rewarding success in business, Putin’s Russia offers entrepreneurs “deals” they cannot refuse. The “deal” is that powerful state and state-connected officials will take their share of your success.

I used to dread flying into Moscow’s Sheremetova airport, consistently rated the worst international airport in the world. There were no lights, the lines were endless, and restrooms were disgusting. In a word, it was terrible. I then learned to fly into Domodedova (airport code DME).

Under the private management of East Line Group, DME was transformed from the dismal hulk I flew out of in 1993 to a brightly-lit, passenger-friendly airport scarcely distinguishable from any other international airport. There were some 90 check-in counters, manned by friendly personnel. International carriers got the message: They switched operations to DME. DME’s revenues rose to $1 billion per year – one of the few success stories of private business in Russia.

East Line Group decided last May to go public with an IPO. It was time to cash in and to raise more capital for expansion.

Not so fast. The prosecutor general initiated an investigation that declared East Line’s offshore ownership “unacceptable,” designed “to hide the real owners.” Offshore ownership is standard in Russia and is a favorite tool of the Russian nomenklatura. We have no idea who owns the multi-billion dollar shadow offshore companies through which top government officials (including Putin himself) hide their considerable wealth.

With the threat of government reprisal, East Line shelved its IPO. Who would pay good money for a company that may share the fate of Khodorkovsky’s Yukos?

All hope is not lost. It turns out that a former energy minister under Putin and special deputy of Medvedev has come forward as a potential “peacemaker” between the government and the airport’s owners. His group of investors (imagine who they might be) will purchase a big chunk of East Line Group for pennies on the dollar, and in return they will call off the prosecutor.

Such a shakedown would make the New Jersey mafia proud. They could not have done it better. The difference is that, instead of thugs threatening murder and mayhem, this mafia is “respectable” state servants in business suits. The result is the same.

The outcome is obvious: East Line Group must cave to the state mafia. The return from its entrepreneurship will go to the bureaucratic mafia in business suits and they will be allowed to carry on.

What is going on at DME is the equivalent of Nancy Pelosi deciding she needs a 20 percent stake in Google for pennies on the dollar as a payment for shutting down an anti-trust suit.

Any U.S. company considering doing business in Russia must consider the East Line case. Any potential Russian Bill Gates, Steve Jobs, or Sergei Brin should think twice about founding any company, investing any capital, or taking any risk. The result: There will be no Microsofts, Apples, or Googles in Russia, despite the high-tech city that Medvedev and Putin are building in Skolkovo.

For more on this, see Joe Nocera, “How to Steal a Russian Airport,” NYT, June 6, 2011.

Mafia in Pinstripe: The Real GE Scandal

The transition from street thug to state mafia took a decade in Russia. I was an eyewitness to the Russian process: In 1992, I saw businesses being shaken down by bullies in jogging suits and shaved heads. Six years later, I talked with business owners harassed by crooked tax, sanitation, police, and fire inspectors. Under Putin, these petty thugs were replaced by officials in pinstripes, politely shaking down businesses in meetings in government offices and swank hotels. It has become civilized, but the outcome is still the same.

What does the Russian story have to do with GE?

GE is unique among American corporations. Since its founding, it has been consistently in Fortune’s Top 10 – the only long-term survivor of Schumpeter’s creative destruction. GE adapted better than others to changing tastes and technology under executives like Gerard Swope, Charles Wilson, and John Welch Jr., who wrote the book on the art of corporate management.

GE is still in the top ten under CEO Jeffrey Immelt, but it is a different GE. Instead of adapting to the marketplace, GE structures its businesses to harvest government subsidies, tax preferences, and bailout money. GE fits Schumpeter’s pessimistic forecast of bureaucratized, influence-peddling capitalism, which he had the temerity to call socialism.

A casual glance at GE’s annual report shows that most of GE’s businesses depend on favor with the government. Energy generating windmill turbines make money because of government subsidies and state orders. Nuclear power requires government licenses. Energy-saving turbines receive subsidies. GE’s lending arm may again need a quiet $140 billion bailout. Its huge medical services division must receive favorable treatment under a new health care law. Even its competitive jet engines could use a diplomatic boost when foreign airlines buy new aircraft. Its NBC division needs broadcast licenses and other forms of protection.

The GE scandal is not that it paid no U.S. taxes. It was simply following the social-engineering instructions of our tax code, which its tax department is able to nudge at times. The true scandal is that the once mighty GE has become a crony capitalist in its “partnership” with Washington. The hundred million or so in campaign contributions is chump change compared to the cost of its lobbying behemoth and its vaunted tax department.

The new winners in creative destruction at first naively think they have no need of government. Silicon Valley's Microsofts, Apples, Googles, and Facebooks create products no one had ever dreamed of. They can outstrip the competition on their own. They are then baptized by fire. Government agencies politely worry that they have grown too big; an anti-trust suit may be in the works. Revenue-hungry politicians may decide that taxing the internet is a good idea. Facing this reality, the creative-destructors open expensive offices on K-Street and join the crowd. An ounce of protection is worth a pound of cure, they reluctantly conclude.

There is an invisible cost to all this that few of us notice or understand. The mighty GE has been diverted from innovating and developing products that stand on their own to producing those things that its Washington partners want for the “good of society.”