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     In a sense the legal systems of all countries are developing. But emerging democracies demonstrate the most dramatic change. This is a chronicle of my experience with the evolving legal system in the USSR and Russia since 1985. Some may sound familiar as America has experienced many of the same issues and continues to struggle with them.
     With little violence, an immense revolution occurred in Russia:
     A government based on totalitarian dictatorship has changed to a democracy, and communism was shown to be an unworkable political theory.
     A judicial system based on decisions depending on the people involved is changing to one based on the rule of law.
     An economy based on central planning and government ownership has changed to one based on the free market and private ownership.
     These changes have not been smooth or consistent, but Russia is clearly moving in these directions. Although our form of democracy and capitalism are perhaps too young for us to know how well they will survive, it is clear that their greatest competitors in the World are failures.
     As the Soviet Union transitioned from a command to a market economy, the legal system was not prepared for private enterprise. As all businesses were previously State-owned, the entire system of regulating private transactions had to be developed. A friend was imprisoned for three years for committing the crime of "speculation," reselling items without further processing, an activity we recognize to be efficient and productive.
     Company Structure. The legal structure for companies evolved over the years. The first permitted private business was a cooperative, owned and operated by a small group of Soviet people. Later, joint ventures with foreigners were allowed so long as the Soviet partners owned a majority of the company. Clearly, the government was nervous about foreigners. Each of these joint ventures had to be specifically authorized by the USSR Ministry of Finance, so I developed a close friendship with the Deputy Minister and he soon enjoyed his first trip to America: New York and Little Rock. Having Soviet partners with no experience or knowledge of business was very difficult, so I obtained Ministry approval for one of the first companies wholly owned by a foreigner. The law erecting a barrier to foreigners was a bad idea.
     In the early 1990's President Yeltsin decided to privatize much of the State owned industry. He put the State-businesses into the hands of his friends at far less than fair market value. Yeltsin later justified this gift of state property by expressing concern the Communists would defeat him for re-election and by representing that it was better for industry to be in the hands of private owners, rather than a Communist led State. This "insider-trading" became the source of immense private wealth in Russia. I was the first foreigner to buy a small part of a privatized company in Moscow. The whole process was corrupt, improperly advertised, at far less than fair value, and intended only to benefit the general managers of the enterprises who generally knew little about the efficient operation of a business. Although the privatization process was good in theory, it was implemented corruptly and resulted in friends of the government gaining massive wealth.
     Taxation. The first income tax code for private businesses consisted of only a couple of paragraphs. Although this may seem attractive, there were so many unresolved questions that tax policy effectively rested in the hands of the local administrators. When chosen for one of the first income tax audits, I thought it would be an interesting historical event; I knew we reported properly. After several weeks, the auditors announced they were finished so I invited them to a big luncheon in a fancy restaurant. My after-dessert surprise was their announcement that we owed about $800,000 in taxes. This could not possibly be right, I explained, and proceeded to spend about $100,000 in legal and accounting fees with an international Big 5 firm as the "experts" tried to persuade the Tax Ministry. When I realized this would not solve the problem, a friend contacted a friend and the tax assessment was cancelled. The lack of adequate regulation totally empowered the administrators to set the rules.
     For the first couple of years Russia had no import duties. But the government soon realized there was a great opportunity for tax revenues because of the huge amounts of food and goods which would be imported to satisfy the new consumers. One day the President decreed that effective on that day importers must pay 40% of the value of the goods coming through customs. There was no advance notice. It just happened. That exciting day we had about $1 million in food products at the border, so we owed $400,000.
     A few weeks later our sea freight company held a seminar about customs procedures and announced that it was proud to be the carrier for our company because we paid full duties. I was proud for about three seconds, until the whole hall broke out into laughter: we must have been the only ones in the country paying the duties. Everyone else had a friend at customs who negotiated unofficial rates. An elaborate system of graft was created through money laundering, fake invoices and mislabeling (containers of electronics labeled "green beans") to obtain a cheaper duty.
     Because of the massive fraud, the government formed a special Economic Crimes Division and targeted prominent importers with criminal prosecution. Upon receiving notice that the Division was reviewing our company, my Russian and Finnish lawyers said the situation was so unstable I should leave the country immediately. Rather than take the sound advice of counsel, I went to the office of the Division. I knew I had made a mistake when I entered and everyone I saw was handcuffed to the wall. I showed the investigator a bunch of documents that reflected we were doing everything right, and he dismissed his investigation without a bribe.
     Tax prosecution continued to be a major concern. The uncertainties of the law made everyone a potential criminal target. Even the American managing partner of a Big 5 Accounting Firm in Russia was indicted for his Firm's alleged tax fraud.
     Banking. As there was no banking system for private international transactions, I carried over a hundred thousand dollars every month in my briefcase to pay bills. This was legal if declared at Russian customs; otherwise, the money could be confiscated. The customs officers had a habit of requiring that all the money be stacked on the table in front of them (and everyone else in the airport) so they could count it. This was an exciting experience. One of our young Arkansas women carried $40,000 to St. Petersburg to pay some unexpected bills. Her customs inspector called his friends to follow her to the company apartment and robbed her at gunpoint.
     Contracts. Contractual relationships between private parties were also being developed. The international law firms came to Russia with their lengthy and comprehensive contract forms. But a Russian explained that I should not waste time negotiating a contract with him because "Contracts mean nothing in Russia." Although not exactly true, developing and maintaining a close relationship with the other party was more effective.
     Dispute Resolution. Even when a contract was well written, the enforcement was uncertain. I purchased an insurance policy from the State owned insurance company. The form was copied from Lloyds of London, and it was well written. But when a claim arose neither the company nor the courts could understand the policy term "gross negligence" as that legal concept did not exist in Russia, and the dispute was finally resolved in the Russian way.
     Private parties generally agreed that disputes would be governed by the law of another country using arbitration. One of the first such cases was a dispute among the American and Russian partners of the Subway restaurant franchise in St Petersburg; the American managers were forced out at gunpoint and went into hiding in Helsinki. As we warehoused the restaurant's food inventory, each party demanded that it be turned over to them. An arbitration award was issued years later in Stockholm, but the Russian courts would not honor it and the contract was of little use.
     Commonly disputes were resolved in ways that did not clog the courts' calendars. For a while, a banker was assassinated about every week. A young American friend of mine who was a partner in the first American branded hotel in Moscow was assassinated outside the Radisson hotel after becoming embroiled in a dispute with City Hall. A competitor delivered a bullet to me in 2002, apparently in an extrajudicial attempt to restrain trade.
     One Russian commodity food importer who had been terminated by a prominent American company thought we were associated with the American company and sent its "dispute resolution team" by to see us. So we set up our own security. We hired an American security firm to maintain armed guards at our office. Steel doors were placed on all our apartments, and we were under strict rules not to open the door for anyone, including firemen unless we smelled smoke. I was given a special phone number for the security company's roving SWAT teams in case I felt threatened. The best advice was to just blend in with the Russians-but it was difficult for a group from Arkansas.
     A Russian friend who operated an American company told me he spent over $100,000 a month on security, complete with SWAT teams and former KGB officers. Once I had dinner with him in a small restaurant and he entered with four bodyguards who stood in the corners of the room while we ate. After dinner I saw six more in three vehicles, an entourage that accompanied him and his wife everywhere. The police were no match for organized crime during the mid 90's, so private security was commonplace.
     Even when disputes went to court, results could be manipulated. A fairly well developed system existed in one appellate court by which a party prepaying 15% of the desired judgment could assure himself of justice. And, one could avoid execution of a judgment simply by paying the marshal a 5% commission.
     Legal Formalities. Many legal niceties involved more form than substance. Notaries were big business because no document was official unless it was notarized. Just for opening a bank account, a notary was likely to charge $100 per signature per document. And nothing was official unless it had a SEAL. Every invoice, shipping document, receipt, and payment document had to have someone's official seal. No food product could be imported unless it had an official inspection certificate and seal. Our first container of Yarnell's ice cream was stopped at customs because it did not contain the certificate and seal of the US Ministry of Ice Cream. Since the US government did not issue quality certificates on ice cream we were faced with months of delay while the US and Russian bureaucrats could negotiate an ice cream treaty. We resolved the controversy by creating an "official" certificate and seal signed by "Elsie Borden."
     Freedom. A Russian friend told me recently, "You Americans make too much of freedom." She thought security was more important. Many basic freedoms grew in Russia after 1985: Freedom of Speech; Freedom of the Press; Freedom of Religion; Freedom of Travel; Freedom of Ownership; these simply did not exist 20 years ago. In 1990 as I was dining in the US Embassy with the head of security, he received a call that a young Russian had jumped the fence into the Embassy Compound. He told me the procedure was for the Marines to escort the Russian through the main gate into the waiting arms of the Militia, who would severely beat him and throw him in jail. No other result was possible, I was told, or thousands would follow him. In August of 1991 my driver took off work a few days and stood in front of the tanks aimed at the Russian White House behind him because he said he did not want his children to grow up under a totalitarian regime as he had. Freedom cannot be underestimated.
     Russia demonstrated that Freedom without law leads to chaos in society. The greatest success and rewards in business went to the most criminal, rather than the most efficient. Recently, President Putin has reduced the chaos and brought society under more control, but at the costly price of restricting Freedoms that existed under President Yeltsin.
     A while ago a Russian waitress told me she had just completed a short course about American business and learned four things:
   • You must have definite clear goals.
   • You must work very hard and never, ever give up.
   • You must be happy.
   • And, if you do these things, you are likely to reach your goals.
     I told her that was the American Dream. That no matter where you came from or who your parents were, you could improve your standard of living if you work hard and smart. It is a Dream that most people in the world think is unattainable. But this Dream provides hope for people and, with it, improving standards of living, political stability and security. It is a Dream that is founded on a workable legal system.
     Legal Development in America. It is easy to be smug as we think of the situations experienced in Russia. With more reflection we might remember our own history: the robber barons, incarceration of Japanese-Americans, the criminality of prominent leaders and restricted freedom based on race, sex and other characteristics unrelated to ability. Perhaps the legal system is not quite perfect yet in the US: Why does it take a year for a business dispute to be resolved in court? Why can a Member of Congress solicit money? Why are illegal drugs readily available? Why did our government violate the Geneva Conventions? Why does the law sometimes afford the least protection to those in the greatest need?
     Communication has made the world flat. In 1990 it would take hours to book a call to the US. Now, calls and emails can be received on a Blackberry while walking down the streets of Moscow as if one were in Little Rock. Arkansas banks' credit cards miraculously work in any restaurant in the world. But this flatness has not yet come to the world's legal systems, and in many respects we still operate as we did centuries ago. Walls exist which don't aid commerce, but protect the inefficient. Why must laws regulating those emails and credit cards be different in every country, and why must companies have different counsel in every country and state? Where is the efficiency in the 19th century paper filing system in Arkansas? So, we can't be too smug while watching the Russians develop their legal system; there is plenty left for us to do here.
     Lazily and with a strong dose of American arrogance, I did not register with the Moscow Militia during a recent trip as every foreigner must do. I was certain I would not be caught, and I objected to the registration requirement. But as I stepped out of the car at the airport for my trip back to the US, I was greeted by two officers asking for my documents. Soon, they invited me into the backseat of their car. They explained I was in a lot of trouble and it would take days to straighten it out. But one offered a solution: I could pay a $500 fine in cash to them and everything would be OK. I refused. So they again explained that I was in deep trouble and they were about to take me to a place which had no concierge. After about 30 minutes, I proposed a compromise: I would pay a $100 fine in cash or they could take me to jail. Big smiles immediately appeared on their faces as they gladly collected the fine. One stuck out his hand and said: "Americans and Russians are great friends." Maybe, but at least we have learned about justice.•