August 1st, 2011

5 years since Yukos liquidated: what we’ve learned

It’s been five years since Yukos was forced into bankruptcy, its assets seized by the state and top officials imprisoned. The shutdown still haunts foreign investors, writes Tim Osborne of international holding company GML (the former majority shareholder of Yukos) in The Moscow Times — not to mention the Russian economy and the Russian people, who have suffered the most from this liquidation and the precedent it set:

[T]he fallout from the Yukos affair cannot be measured in financial terms alone. The longer term and far more detrimental effect is that there is now an assumption of political interference, corruption and the arbitrary use of state powers in civil disputes.

Half a decade after the forced bankruptcy of the most successful post-Soviet concern, Russia still severely lags behind other BRICs in terms of GDP growth. That assets can be taken away so easily is alarming to both domestic entrepreneurs and foreign investors, Osborne writes, making the risks of investment outweigh any potential success.

Sure, the Russia government faced corruption accusations prior to Khodorkovsky’s arrest. But the destruction of Yukos, accompanied by the decision to withdraw Russia from the Energy Charter Treaty and other backward-looking measures, was a huge step in the wrong direction. Investors have yet to be incentivized to return en masse.

Is there a solution? Osborne cites an IMF report that suggests two options: reform, by strengthening property rights and modernizing the judiciary and the bureaucracy, or face another recession. He concludes:

As the Russian government once again prepares to embark on a major state privatization program, foreign investors must clearly make their own calculations about whether the potential success of their Russian ventures outweighs the risks. For us, that calculation is simple. We have lost far too much already.

A personal plea from someone who learned the hard way what it means to invest in Russia.

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