Russian bear market; the bottom drops out.

• Author: Kagarlitsky, Boris
• Position: The MMM fraud case

Travelers on the Varshavskoe Highway in Moscow encountered an unusual sight late last July: A crowd of people waving homemade placards and portraits of a little-known bespectacled figure were shouting obscure slogans, chanting something incomprehensible, and arguing with the militia. This was not an opposition demonstration but a gathering of shareholders of the high-flying Russian company MMM. The company's chief, Sergey Mavrodi, accused of tax evasion and complaining of being "persecuted" by government bureaucrats, had announced that MMM would cut the price at which it redeemed its shares from 105,000 rubles to 1,000. Then it had stopped repurchasing shares altogether.

Observers of the protest in the street might have assumed that thousands of shareholders ruined by the company were trying to sack its offices. But what was happening on the Varshavskoe Highway was the exact opposite. Shareholders were swearing their loyalty to Mavrodi while demanding that the government compensate them for their losses and free MMM from liability for taxes.

To say Mavrodi was "evading taxes" is not quite accurate. Like other Russian entrepreneurs, he simply divided his takings with the government from time to time, handing over as much as he thought necessary. But now there were rumors that the managers of MMM and tax officials had been unable to agree on the bribes to be paid.

In any event, the MMM uproar was clearly linked to the crisis of the Russian government budget. Having privatized all the former state enterprises that were actually turning a profit, and finding no way to collect taxes from the impoverished population, the government was trying to force entrepreneurs to pay at least part of what they owed.

Mavrodi took this as a personal affront, but he also seized on it as a wonderful opportunity to rid himself of all obligations to his shareholders.

The shareholders remained true to Mavrodi no matter what he did to them, but for the government it was a no-win situation: If Mavrodi were to prevail, no entrepreneur would feel obliged to pay taxes, and the government would be compelled to compensate shareholders in any company for any fall in share prices. So the government refused to bail out MMM shareholders, and Mavrodi was arrested for massive concealment of taxable income.

When it arbitrarily cut the repurchase price of its shares, MMM not only wiped out the savings of hundreds of thousands of its investors, but it destabilized all of Russia's...