A Wall Street Journal op-ed urges investors and policy makers to exploit Russia’s position as a declining energy power. Others such as Malcolm Rifkind, chairman of the United Kingdom’s Intelligence and Security Committee and Ian Bremmer, president of the Eurasia Group agree.
With new discoveries of shale gas all over the world from the US to China to Germany, dependence on Russian oil has lessened and should be used to embolden foreign governments to acknowledge Russia for what it is, an authoritarian government solely concerned with its survival. This is Holman Jenkins’ view in the WSJ op-ed. He also asserted the charade behind Russia’s supposed competitive presidential election in 2012.
Bottom line: The world, and Russia, may be living with Mr. Putin for a long time…Don’t bet on Mr. Medvedev. Bet on the crude logic of Russia’s declining energy power, which Western policy should do everything possible to exploit, to deliver better behavior in Moscow.”
Bremmer agrees with the basis of the WSJ op-ed and goes farther to asset that it doesn’t matter whether Putin or Medvedev is elected in 2012.
Despite a handful of people and media publications who see right through Russia’s vexing charade, there is a deep rooted reason why they continue to put on such a show — Russia’s insecurity complex.”
Increasingly, geopolitical power is closely tied with economic power. And as Russia’s ascendant neighbor China continues to grow its economy and flex its geopolitical muscles, Russia is left on the sidelines cheerleading its energy based economy. Russia’s economy is burdened with not only political stagnation but a weak legal framework that dissuades foreign investment.
Rifkind squarely addresses Russia’s weak rule of law as one of the main reasons investors have stayed away.
The consequences of Russia’s denials are far-reaching. Investors have looked at the Yukos case and subsequent machinations and concluded that Russia is far too risky an investment prospect. The failed sale of a Moscow airport just last month was an ominous sign that the ‘Khodorkovsky discount’ is alive and well.
The main victim of this outflow of capital is the Russian economy, which now rests precariously upon high oil prices. Any drop in the price of crude could lead to major crisis.”
With declining oil prices and increased shale oil discoveries, Russia will have a hard time maintaining their bullying foreign policy and hopefully their corrupt power structure as well.
As the St. Petersburg Economic Forum gets underway, Prime Minister Putin is telling investors to trust him and put away their wariness of heightened risk because of corruption and weak rule of law in Russia. Russian authorities are pulling out all the stops to encourage much needed foreign investment. Deputy Economy Minister Stanislav Voskresensky, Putin’s director of foreign investors had this advice:
Do not scratch your head and wait: Russia is open for business and the potential profits are huge.”
Russia needs to offer high rewards for investing there as its attractiveness has faded despite recent strong commodity prices. Recently Chevron ended its partnership with Rosneft in the Shatsky Ridge deal in the Black Sea. Russian authorities loathe to cede any profits to multinationals, but the Shatsky deal was a concession to the fact that Russia cannot conduct offshore exploration without outside assistance.
Capital outflows have reached record heights from foreign and domestic capital. Over $55 billion has left Russia over the past eight months according to the International Monetary Fund.
Mikhail Khodorkovsky, former CEO of YUKOS estimates that due to graft in the economy, oil would have to be $200 a barrel before Russia can match the growth of the BRIC powerhouses China and India.
Economic reforms require 100 percent guarantees for private property and an effective, lawful state,” Khodorkovsky, 47, said in written answers to questions relayed through his lawyers. “Under the current political and economic model, to get a 10 percent growth rate for the Russian economy the oil price would have to remain solidly above $200 per barrel.
The World Justice Project released their 2011 Rule of Law Index and had this to say about Russia’s situation:
Russia shows serious deficiencies in checks and balances among the different branches of government (ranking 55th), leading to an institutional environment characterized by corruption, impunity, and political interference. Regulations are not always enforced (ranking 52nd), and civil courts, although accessible, are corrupt and inefficient. Crime rates in Russia are not as high as those in other middle- income countries (ranking 8th out of 19), and the criminal justice system is relatively effective (23rd). Violations against some fundamental rights, such as freedom of opinion, freedom of association, and arbitrary interference with privacy are areas of concern. [Read the full report here.]
With all these warning signs investors are right to be cautious about Russia. The market efficiency hypothesis in economics states that financial markets are “informationally efficient”. This hypothesis explains why Russia lags China and India in foreign investment and why until Russia makes comprehensive and visible changes to its legal and judicial systems, even the promise of excess market returns by the Prime Minister will not convince investors.
In Paul Gregory’s latest analysis, “The Khodorkovsky Ruling: Something Fishy in Strasbourg?” he takes a closer look at the Court’s decision on Khodorkovsky’s claim that his 2003 arrest was an incidence of Article 18. Despite ruling that the arrest was illegal and Khodorkovsky was kept in inhumane conditions, the Court didn’t review the facts of the case to come to this decision. As Gregory writes,
Notably, the Strasbourg court did not review the facts of the case. It punted the football by basing its decision on fear of setting a precedent for others is a position similar to Khodorkovsky…It seems that Strasbourg declined to examine the facts for fear of a rash of other complaints concerning Russia, asserting political motivation. Their docket is already bursting at the seams.
The Court when making the determination about Article 18 stated,
While Mr. Khodorkovsky’s case might raise some suspicion as to what the real intent of the Russian authorities might have been for prosecuting him, claims of political motivation behind prosecution required incontestable proof, which had not been presented.”
Gregory suggests that “incontestable proof” is an “impossible standard” and concludes,
It seems as if Putin and his power ministry gang can rest easily. So far, the European Court of Human Rights has proven itself as paper tiger. Such a court might work for countries that have a reasonable rule of law, but it is citizens of the Zimbabwes, Russias, and Chinas of this world that require the protection of such an international court.”
Paul Gregory, a Hoover Institution research fellow, holds an endowed professorship in the Department of Economics at the University of Houston, Texas, and is a research professor at the German Institute for Economic Research in Berlin. His most recent book is Politics, Murder, and Love in Stalin’s Kremlin: The Story of Nikolai Bukharin and Anna Larina (Hoover Institution Press, 2010).
Washington Post reports that massive and unprecedented outflows from Russia signify deep uncertainty about Russia’s future and its ability to provide a stable platform for economic growth. Russia has well-known domestic infrastructure needs and President Dmitry Medvedev has made modernizing and diversifying the economy as a central issue in his presidency. But with $30 billion leaving the country in the first four months of 2011, the loss of confidence in the Russian government to make infrastructure changes and support the rule of law is evident in both domestic and foreign investors.
Russia’s currency reserves are buffered by the high price of oil, but that usually meant a stem in capital outflows. Not so this year. Evsey Gurvich, head of the Economic Expert Group in Moscow cites political uncertainty in the 2012 presidential elections as one of the reasons for capital flight,
In our country, personal guarantees, personal relations, are still more important for big businesses than laws and rules and formal regulation.”
Another reason he cited was the “weak business environment” in Russia due to the pervasive corruption and expropriation of private business by government officials.
That is another way of talking about corruption, bureaucratic capriciousness and courts that take their orders from on high.
The reaffirmation this week of the conviction of Mikhail B. Khodorkovsky, the onetime oil tycoon who lost his company and his freedom after he challenged Putin, probably translates into “several more billion dollars on the run from Russia,” Gontmakher said.
Domodedovo Airport, the only privately owned airport in Moscow, has come under relentless pressure publicly from the authorities, and that, [Yevgeny] Gontmakher, [deputy director of the Institute of Contemporary Development in Moscow] said, sets a very visible and “awful” example.”
European Court of Human Rights
The European Court of Human Rights delivered its ruling on Khodorkovsky vs. Russia and ruled in Khodorkovsky’s favor in 8 out of 15 claims. The press likes a neat analysis, but the rulings caused divergent headlines to appear. The rulings by the ECHR doesn’t mean that Putin is innocent or that Khodorkovsky is guilty as the Court’s findings were narrowly focused on the events in October 2003 during Khodorkovsky’s arrest at gunpoint through his first trial in 2005.
In fact, the ruling announced this week pertains to a 2004 claim and does not address the underlying merits of the wider case against Khodorkovsky or the orchestrated verdicts in his first and second trials. Many reporters have seized on the claim regarding Article 18 relating to whether Khodorkovsky’s arrest was politically motivated. On this point the Court said they need further documentation to meet the high standard required to show political motivation. If anything, the Court’s standard of “incontrovertible and direct proof” of political motivation is impossible to meet.
Lawyers familiar with the case have said there have only been two positive findings of so-called Article 18 violation since the court was established since 1959. One of them was in 2004 when the court determined that the Russian government’s attack against Vladimir A. Gusinsky, head of independent NTV network in Russia, was politically motivated after reviewing evidence including an actual written memo stating that he was jailed in order to make him sell his media company to the State.
Since then, the Kremlin has learned and no longer documents such incriminating evidence. However, Khodorkovsky’s lawyer Yuri Schmidt believes that three further cases pending before the Court relating to Khodorkovsky’s second trial will be able to present more evidence of official meddling in the case, including the testimony of a senior court worker who alleged that the second trial was orchestrated “from above.”
In its ruling the ECHR acknowledged that there is some evidence to support argument for political motive. The court wrote that MBK “had political ambitions which admittedly went counter to the mainstream line of the administration, that the applicant, as a rich and influential man, could become a serious political player and was already supporting opposition parties, and that it was a State-owned company which benefited most from the dismantlement of the applicant’s industrial empire” and that “the Court admits that the applicant’s case may raise a certain suspicion as to the real intent of the authorities”.
The ECHR ruled that Khodorkovsky was kept in a “inhumane and degrading manner” as well as other procedural infractions and ordered the Russian government to pay Khodorkovsky $35,000.
ECHR Press Release: Khodorkovsky v. Russia