Committee for Russian Economic Freedom

A trial against popular opposition leader of a new generation, Alexei Navalny, continues in Kirov. Four years ago a company of Navalny’s acquaintance bought a medium lot of wood and then sold it with a 7% margin. According to the state prosecutor, Navalny and his friend “have stolen all the wood”. This is only one of five investigations against the opposition leader.

Navalny case will determine the investment climate in Russia for many years

Politically motivated persecution of Mr. Navalny will further undermine Russia’s unwelcoming investment climate. Any businessman could be accused of embezzling all his revenue and locked into prison for many years. According to Alexei Kudrin, Putin’s Minister of Finance in 2000-2011, this trial puts at risk the foundations of the market economy in Russia, including the freedom to sell and buy goods and services. Any verdict will influence the willingness to start new and invest in existing ventures, continues one of the most trusted Putin’s allies.

The Navalny case resembles the campaign against YUKOS, when the largest and most efficient Russian oil company was ruined in several months. Ten years ago, pro-Putin liberals hoped that the prosecution of Khodorkovsky would be an exception. However, the conviction of YUKOS owners and management opened the Pandora box of unlawful expropriation. “Siloviki” employed the technology from the YUKOS case to acquire thousands of large and small companies. Thousands entrepreneurs were imprisoned or squeezed out the country by Russian legal system.

The charges against Navalny reproduce the logic of the second Khodorkovsky’s trial, in which former tycoon, his partners and managers were accused in embezzlement of all oil produced by YUKOS. Two processes also share similar politically motivated goals. Nobody in Russia doubts that Kremlin will lock Navalny out of the legal political process. Khodorkovsky’s case ten years ago harmed Russia’s investment climate a lot, but high oil prices, Kudrin’s macroeconomic stabilization and the effect of Yeltsin’s market reforms cushioned all the negative impact. Now Russian economy approaches stagnation and after the government convicts the freedom of entrepreneurship one more time, it may well head to a hopeless recession. Siloviki and state-owned companies will be the only entrepreneurs left in the country.

The New York Review of Books

Alexey Navalny, Los Angeles Times

Alexey Navalny speaks with Sergei L. Loiko of the Los Angeles Times about his efforts to uncover corruption in Russia. His profile has recently been elevated as Russian authorities take note of his efforts by opening a criminal fraud case against Navalny.

What’s your advice for those thinking about investing in Russia?

On the whole, investments in Russia may be profitable, and I am in no case warning against investing in Russia. But the gains for investors could be significantly higher if Russian companies were at least abiding by the basic rules of corporate management employed in the West. Investing in Gazprom [the state natural gas monopoly] could yield profits too. But if we made some basic steps aimed at curbing corruption within Gazprom, the company’s worth would rise by about 30%.

In practice, investors have no possibility to influence major Russian companies’ performance and receive information about it. My associates and I have spent three hard years constantly trying to get the basic documents about the performance of big companies such as [oil firms] Rosneft and Transneft. Finally we got a court order that the most basic documents be opened to us. But as a rule, the information about the work of such companies still remains a closely guarded secret.

When did you start to work to expose corruption?

It all started about five years ago as I realized that I needed to do something to safeguard my personal investments. The most interesting investment venues in Russia are oil- and gas-sector companies. These are a bunch of so-called major companies in Russia. Some of them are formally private, but they are all under state control. When I started to invest in those companies, I quickly saw that the dividends were very small while their management were leading luxury lives in their lavish villas in France, Spain and so on.

How seriously has corruption infiltrated the power hierarchy of Russia?

Russian power structures are corrupt inside out. People who don’t become part of corrupt schemes cannot efficiently work within the Russian government.

What are your thoughts on a fraud case opened against you by the Russian Investigation Committee?

It is a purely political and completely falsified case initiated at the very top. None of the cases I initiated have ever reached that level of attention. The Kremlin [leaders are] very irritated by the fact that they cannot control my blog in any way, [so they are responding,] be it scare tactics, a system of licensing or blunt money. I know they can do anything to me if they want.

It is the risk that comes with my job. But I am ready to take that risk. We have already received anonymous telephone calls with threats unless we drop our investigations. They have been digging dirt on me all this time and have come up with such a flimsy case in which they are not even accusing me of embezzling the money but just fraudulently causing some damage to an obscure provincial company. They want to scare me. For them the best outcome would be if I emigrate. But I will not give them that pleasure. I choose to stay and face the risks.

People who fight corruption in Russia take great risks. I am prepared to take these risks to make life in our country better. I will continue to do my work against all odds.

Russia is a land of big appetites. But it’s starting to look like investors’ hunger for risk has become “very dainty,” a trader at CF Global in London tells Bloomberg News. Indeed, Russia’s Micex Index is the first among benchmark measures in the world’s 20 largest equity markets to fall at least 10 percent from a recent peak, the common definition of a correction, since mid-March, Bloomberg reports.

Yandex, the Russian internet firm, is preparing for a $1 billion IPO on the NASDAQ but news about its IPO is mainly about the political and oligarch takeover risk in the prospectus as well as having to provide information for the FSB, Russia’s secret service, on contributors to well known whistle blower Alexey Navalny. Investors may flock to the IPO as Yandex is the sixth most visited website in the world.

However, they should take note that just seven months after Mail.ru IPOed in London in November 2010, Mail.ru’s founders sold their stake last week and the stock fell 20%. With pervasive government and oligarch intervention in business in Russia, accessing foreign exchanges and investors may be the only way for Russia’s entrepreneurs to recoup their initial investment.

Alexey Navalny released a new video on his research into Transneft and other large scale projects underway. According to official documents provided by the Russian Federal Audit Chamber, the government has already spent over $15 billion in the Eastern Siberia-Pacific Ocean Pipeline with billions embezzled during the construction.

Boris Nemtsov at an event hosted by Columbia University's Harriman Institute and the Institute of Modern Russia

On November 17, 2010, Boris Nemtsov, a leader of the Russian democratic opposition and a former Deputy Prime Minister of Russia, spoke at Columbia University’s Harriman Institute on the current political situation in Russia and his perspective for its future. Echoing his thoughts and research in his recently published pamphlet, “PUTIN: What 10 Years of Putin Have Brought,” Mr. Nemtsov equated Prime Minister Vladimir Putin’s economic policy with Russia’s corrupted state. “If you break corruption, you will break Putin,” Mr. Nemtsov said.

The symbol of corruption in Russia remains the imprisonment of Mikhail Khodorkovsky. Mr. Nemtsov speaks in this video at length about how Khodorkovsky’s imprisonment is an impediment to foreign direct investment and perhaps even more importantly, how freeing Khodorkovsky allows President Dmitry Medvedev the opportunity to break free of Putin’s vertical power chain.

Allegations of corruption on a grand scale continue to dog the Kremlin. Transneft was accused by minority shareholder Alexey Navalny of embezzeling $4 billion during the construction of the East Siberia-Pacific Ocean pipeline. Some of the materials that support his allegations come from mid-level civil servants in the Audit Chamber, perhaps implying that vertical power is most profitable at the top.

Although much is written about the corruption in Russia, estimated by Russian authorities to be between $200 and $300 billion annually, the main indicator for investors is their return on investment.

There was another call today, to remove Russia from the group of emerging market powerhouses, BRIC and replace it with Indonesia. Although a fabricated group of emerging market countries, the allure of BRICs remain and companies from BRIC companies dominate indexes. Indonesia has a younger, growing population, maturing social and political institutions and commitment to education and public health and make it more attractive to foriegn investors. Above all, investors seek growth on their investment, as long as the Kremlin continues to siphon off working capital to grease their vertical power structure, Russia will only continue to be less productive and become less attractive to investors.

PUTIN: What Ten Years of Putin Have Brought