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. Last Updated: 07/27/2016

The Fox, the Hare and the Bear

At the end of last year, in far-off Siberia there was a changing of the guard at the Ust-Ilimsky timber production facility.

The Ust-Ilimsky facility is the second largest of its kind in the country, with an annual turnover of $400 million. A controlling stake in Ust-Ilimsky was owned by the firm Kontinental-Invest. Last fall, the firm brought in former managers of Lev Chyorny to help run the timber business. As a show of thanks, the guests tossed out the lawful owners. Kontinental-Invest then appealed to Russian Aluminum, or RusAl. And the aluminum giant came to the rescue. But for RusAl's help in regaining control of Ust-Ilimsky, the owners of Kontinental-Invest were forced to surrender it in turn to their benefactors. And the once-owners became managers.

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This little story brilliantly illustrates a humanitarian trend in the country's economy: Our oligarchs just love to help the insulted and the injured.

In 1996, copper production resumed at the Karabashsky copper foundry, thanks to an injection of capital from the owners of the Kyshtymsky copper foundry. The new investors convinced the managers of the old plant to transfer all their property to a new, debt-free company. They also promised to buy up all stock in the old plant -- shares now emptied of their value like an eggshell once the chick has hatched -- for $1 million.

The old owners of the Karabashsky foundry waited for their money for several years before they finally realized they'd been had. They sold their shares in the plant for pennies on the dollar to the Urals Mining and Metals Co., a major competitor of the Kyshtymsky foundry.

And war broke out.

In 1999, Gazprom transferred a controlling stake in Rospan to the firm Itera. Rospan owned the Novy Urengoi natural gas fields. Despite its own multimillion-dollar debt to Rospan, Itera refused to pay off debts owed to the contractors who had laid the pipes and built the roads in the gas fields. After hanging around gas fields for awhile, the contractors sold their debts to Alfa Group. And suddenly Itera had big problems.

This is the trend. The fox offends the hare. The hare takes the fox to court. The court isn't interested. So the hare turns to the bear.

The times are gone when an oligarch would simply rip the Krasnoyarsk Aluminum Plant, for example, from a colleague's hands. The oligarchs no longer favor excess and this is clearly a positive development. Now, they're wiping away the tears of orphaned managers, lifting the burden of intolerable taxes and, in a pinch, they'll restore order to the thrice-looted GAZ automobile plant, for instance.

In other words, the oligarchs are doing what the courts will not, the main difference being that the courts restore justice for the good of society, while the oligarch does so for his own good. When justice is restored by the courts, a free market results. But when an oligarch doles out the justice, vertically integrated companies are the result.

We try our best to compare the new Russian super corporations -- which yoke together everything from gaz out of the ground to GAZ, the Gorky Auto Works -- with U.S. multinational corporations. Or at least with the Korean chaebols.

But when you get right down to it, this sort of thing occurred in all crumbling empires. It is called feudalism. Feudalism is when the disarray in a country reaches such extremes that producers -- from peasants to shareholders in tiny provincial Yamalstroy -- trade in their freedom for security. It's when businesses consolidate into holding companies not because this is economically sound, but because only the krysha, or protection, afforded by an oligarch can ensure a more or less normal business environment for the businesses involved.

There are two ways out of this situation: a strong state and liberal laws that everyone can live by, or orphaned managers flocking under the wing of some oligarch or other.

The economy today functions only because of the oligarchs. They ensure that it functions according to informal "understandings," which provide a counterweight to the corrupt and inviable state.

Companies in Russia are integrating all right, but feudally not vertically, because our society is held together not by laws but by personal obligations.

Yulia Latynina is a journalist with ORT.