Committee for Russian Economic Freedom

According to the WSJ’s article, “Rusal Listing Delay Won’t Derail IPO,” the various hurdles to Rusal’s IPO are just bumps on the road to the first Russian listing in Hong Kong. Rusal is the world’s largest aluminum producer and is expected to raise about $2.5 billion in the IPO.

But an exchange not known for onerous listing requirements has requested more information from Rusal and Goldman Sachs was dropped as a book runner “after the investment bank expressed reservations about sponsoring the deal.”

The proceeds from the Rusal IPO would go to repay part of its $4.5 billion loan largely held by the Russian state-run VEB bank, also Rusal’s biggest single creditor. It seems like Goldman Sachs and the Hong Kong Stock Exchange are having second thoughts about facilitating a deal that would line the pockets of an oligopolistic petrostate.

Mikhail Khodorkovsky shares his thoughts with NEFTE Compass on the future of Russia’s oil reserves, the need for Russia to develop alternative energy technologies and Russia’s role in the shifting oil and gas geopolitical landscape in light of alternative energy developments. Khodorkovsky posits that countries will lessen dependence on one supplier or a group of suppliers as more competition in the form of alternative energies begin to play a role. These changes will not only bring about new technological and economic realities, but improve and preserve human life as well.

Russia may very well experience an obvious reduction in the role of rents from the realization of hydrocarbons in the country’s budget. Russia needs to diversify its economy given the competitive challenges posed by a growing China, and, in the future, India.

NEFTE Compass is a leading weekly oil and gas publication focused on Russia, Eastern Europe, Central Asia and the Caspian Sea.

Ian Bremmer and Alexander Kliment published an interesting article in the World Politics Review today called, “State Capitalism and the Future of Globalization.” In it they argue that the assumption that globalization and capitalism will lead to free markets and free ideas must be reconsidered.

Far from blossoming into the pro-Western, market-oriented democracy that the 1990s shock therapists dreamed of, the successor to the Soviet Union has developed into a quasi-authoritarian petro-state, strongly committed to a form of tightly managed oligopolistic capitalism, in which elements of free market ideology coexist with strict government control over sectors that the Kremlin considers vital to Russia’s economy and security.

In Russia today, Bremmer and Kliment point out that Prime Minister Vladimir Putin has crafted a public policy that puts the interests of the state and its officials above the interests of investors, domestic or foreign. These state capitalists have codified their behavior by passing the “strategic sectors law” of 2008, where foreign investors must receive special governmental approval to obtain large stakes in Russian companies in the 42 sectors deemed of national strategic importance.

As an example of this state control, Bremmer and Kliment point to the energy sector where the state now controls 50% of Russia’s oil output, up from 10% when Putin initially come to power. Part of this was accomplished by

jailing in 2003 of Mikhail Khodorkovsky and the state takeover of his Yukos oil company. [And] several years later, the state pressured the Shell-led consortium at the Sakhalin-2 oil and gas project to cede a controlling interest to Gazprom for below-market value.

Interestingly, the 13 largest energy companies on Earth are owned and operated by governments and these state-owned companies now control nearly 80% of global crude oil reserves. As Russia and China take the lead to dominate sectors domestically, they are also funneling the wealth from these state organizations into sovereign wealth funds, maximizing not only their investment returns but also international political influence.

A witness in the trial of former Head of YUKOS oil Mikhail Khodorkovsky, and former Group Menatep Director Platon Lebedev, revealed in court on Monday 23rd November that a secret and illegal parallel investigation is underway for a new case against the two political prisoners, used by the prosecution to put pressure on witnesses.

Nadezhda Sheck, a former employee of the International Financial Alliance MENATEP said during her cross-examination in court that investigators: summoned her into the Prosecutors Offices on Wednesday 18th November, just two days before her testimony in court on Friday and was interrogated regarding a new investigation against Mikhail Khodorkovsky and Platon Lebedev. Ms Sheck signed a non-disclosure agreement and was prevented from sharing any additional information in court on the subject of her questioning last week.

This new information shared by the witness in open court on Monday is a clear example of how the prosecution continue to use illegal tactics and place undue pressure on witnesses before giving their testimony in court. Under Russian law, use of secret parallel investigations against defendants to obtain information or meet with witnesses in the ongoing trial is prohibited practice.

In response to the witness’ revelation, Judge Viktor Danilkin openly aided and abetted the prosecution, threatening Ms Shek with criminal liability if she discussed further details of her recent interrogation.

Commenting on the new evidence of corrupt practices by the prosecution and Judge Danilkin’s reaction, Vadim Klyuvgant, Khodorkovsky’s Lead Defence Lawyer, said:

“The whole time this second case has been going on, we have been relentlessly insisting that there is a parallel investigation taking place. What the witness Shek said – this is just one of a multitude of illustrations, evidence that there is a parallel inquiry going on – constantly, ceaselessly, secretly, and illegally.”

“…the behaviour of the presiding judge…shows a major shift in his position. If before he merely sat by silently and did not try to stop all this illegal activity by the party of the prosecution as a whole – both that of the prosecutors in the courtroom and that of the investigative bodies behind their backs, about which we are learning – today he openly aided and abetted them. He helped conceal the traces of this activity, even to the point of intimidating the witness, even to the point of obvious discrimination against the defence in relation to the prosecution during the questioning of the witness, when the prosecution has the opportunity to ask everything it wants, irrespective of whether this does or does not bear a relation to the case.”

“…the court has no right to intimidate a witness. A witness in court is obligated by law to answer all questions irrespective of any other circumstances whatsoever. Intimidating a witness with some kind of consequences of some kind of written undertaking, made with respect to some obscure case — this is simply a complete and total outrage.”

Transparency International released its 2009 Corruption Perception Index (CPI) and again Russia’s low ranking, 146^th out of 180 countries, demonstrates it needs to do more to reign in corruption and strengthen its legal system.

This annual survey shows that concern among business people and analysts over state corruption and legal abuse deters direct foreign investment and harms Russia’s economic health. President Medvedev himself has repeatedly stated his commitment to ending “legal nihilism” and spurring a new era of foreign investment.

Yet, Mikhail Khodorkovsky, once Russia’s most successful businessman, remains in jail on a second round of fabricated charges, further eroding business confidence. Mr. Khodorkovsky recently passed the six-year mark of his imprisonment and faces another 22 years in Siberia if convicted in this second trial. This is taking place as capital outflows totaled over $169 billion, approximately 10% of Russia’s 2008 GDP, between October 2008 and March 2009 according to U.S. State Department statistics. Multinational companies, such as IKEA and Carrefour, have announced plans to withdraw or reduce investment in Russia due to extortion and lack of judicial independence.

Pressure on business is building following the recent death while in custody of leading Russian corporate counsel Sergei Magnitsky, 37, a key witness in another absurd legal battle over alleged tax fraud between the Kremlin and Hermitage Capital, once Russia’s top investment fund. The International Bar Association and the U.K. Law Society decried Magnitsky’s death as did Firestone Duncan Managing Partner Jamison Firestone who said the government ignored calls by business and legal leaders to release his former colleague.

“There is no law in Russia at the highest level,” Firestone said. “The higher you go the less there is law. Any lawyer who tells you he can protect you in Russia is a liar.”

Risks to the financial system mount as Russian President Vladimir Putin backs energy deals with German and Italian corporations and moves for the state to take a stake in the controversial initial public offering of the embattled aluminum giant UC Rusal. As Finance Minister Aleksei L. Kudrin seeks government bond financing from London bankers, the Kremlin Deputy Chief of Staff Vladislav Surkov warns Russia risks collapsing into chaos if officials try to fix the political system by adopting liberal reforms.

In 2003, in the blink of an eye, Mikhail Khodorkovsky (“MBK”) was transformed from Russia’s most respected businessman as head of Yukos Oil Company (“Yukos”), to Russia’s most famous political prisoner. And Yukos went from being Russia’s most progressive and profitable company, lauded for its transparency, corporate governance, and international business practices, to a bankrupt company under the burden of more than $40B in fictitious tax debt. The regime stole its assets, selling them in sham auctions to state-owned companies at knock-down prices. Its shareholders, many of them US citizens, lost $40 billion in equity.

MBK and his colleague, Platon Lebedev (“PLL”) were jailed, charged and convicted, in a show trial of theft, fraud and corporate and personal tax evasion. They were sentenced to eight years in a Siberian penal colony. The European Court of Human Rights has found that PLL’s rights were violated during the pre-trial phase of the proceedings. Appeals to the ECHR by MBK and PLL are pending. MBK and PLL became eligible for parole in 2007, which was denied.

Just before they became eligible for parole, the Russian government again charged both men, this time with embezzlement and money laundering. Specifically, the regime alleged that MBK and PLL embezzled all of Yukos’s oil production (350 million metric tons) and shares held by a Yukos subsidiary in six operating companies, and laundered the sales proceeds of the oil and the shares themselves. The trial on these charges began in March 2009 and is ongoing.

The current allegations against MBK and PLL go beyond meritless; they are absurd. The oil embezzlement charge requires that MBK and PLL physically stole the oil. However, the prosecution offers no evidence that any oil was ever missing or of where the defendants may have stored 20% of Russia’s annual production. In fact, the allegedly embezzled oil is more than Yukos produced in six years.

Contrary to what is alleged, Yukos booked all oil sales revenues on its independently audited financial statements. Yukos could never have paid operating expenses, taxes (Yukos was Russia’s largest taxpayer), capital expenditures, dividends, or acquired companies for cash, if they had embezzled the oil. The allegedly embezzled shares were actually moved for a legitimate business purpose, asset protection, as part of transactions that benefitted all of the company’s investors. What’s more, the allegedly embezzled shares remained on Yukos’s books as reflected in its independently audited financial statements. In essence, MBK and PLL, as part of the majority shareholder in Yukos, are accused of stealing from themselves! The new charges cannot be squared with the prior tax evasion conviction. The new charges are irreconcilable with MBK and PLL ‘s conviction in the first case. MBK and PLL could not have caused Yukos to evade corporate taxes on the sale of oil, i.e., the first case, if, as they are now being charged, they embezzled the same oil and laundered the proceeds for their personal gain.

The impetus for what is now known as the “Khodorkovsky Affair” was the fear among Russian President Putin and his supporters that MBK and Yukos’s success posed a political and personal financial threat. World leaders are united in condemning the attack on MBK, PLL, and Yukos as politically motivated. For example President Obama, VP Biden (then Senators) and Senator McCain co-sponsored a Senate Resolution 322 (in 2005) condemning the prosecution of MBK and PLL. German President Merkel publicly condemned Russia’s political prosecution of MBK and PLL. The Parliamentary Assembly of the Council of Europe has adopted reports and passed resolutions finding the attack violated human rights and was politically motivated. Recently, the Italian Parliament called for government officials in Italy and throughout Europe to use diplomatic channels to compel Russia to give MBK and PLL a fair trial.

Perhaps most telling, in July 2009, ex-Russian Prime Minister Mikhail Kasyanov, in a sworn affidavit to the European Court of Human Rights based on his first-hand knowledge, confirmed that the Yukos-related cases were politically motivated. Kasyanov was stating fact, not opinion, based on his direct conversations, as Prime Minister, with then-President Putin. The reliability of Kasyanov’s remarkably courageous testimony must be read in the light of Russia’s history of retaliation against political opposition.

Independent Courts in the United Kingdom, Switzerland, the Netherlands, Lithuania, Cypress, Israel, and the Czech Republic have ruled that the attacks on MBK, PLL, and Yukos are politically motivated and have refused extradition requests, denied Russian mutual legal assistance requests related to the attack, and refused to recognize related Russian Court Orders, respectively. Several courts expressly found that no one affiliated with MBK or Yukos could receive a fair trial in Russia.

As some of you may already know, Chicago will be hosting Russian National Exhibition at McCormick Place, from November 18 to November 21, 2009.  Along with the exhibition, McCormick Place will host a forum Russia-US: “Reset” of Relations.

This is a great occasion to voice your support of Mikhail Khodorkovsky and other prisoners who were unjustly tried and convicted in Russian Courts. To that end, I am organizing a Protest in Support of Mikhail Khodorkovsky, to be held in front of The Drake Hotel, on Wednesday, November 18, at 8:00am.  If New York could do it – so can we!!!

If you know someone who may be interested – pass it on!!