Committee for Russian Economic Freedom

It’s been a month since President Medvedev’s visit to Silicon Valley and burger lunch with President Obama. And almost a year since Medvedev’s “Forward Russia!” speech introducing his modernization efforts at diversifying the economy and promoting home grown technology.

Despite Medvedev’s words and perhaps good intentions, his plans to reduce the police force have stalled and his executive order ending pre-trial detention for economic charges ignored by the courts. All of this points to his “non-leadership” as Pavel Baev points out in the Eurasia Daily Monitor.

There is a strong demand for “for-of-the-same” in the welfare-oriented society and in the predatory bureaucracy, so Putin’s message is conveyed easily–and his authority unshakeable. Medvedev’s discourse of “modernization” remains foreign, and his attempts to encourage innovations are treated with the same ironic indifference as Nikita Khrushchev’s orders to introduce corn after his “historic” visit to the US in 1959. Medvedev is often reduced to complaining about the sabotage of his orders, which only signals to bureaucrats opposed to modernization that real executive power remains out of his grasp.

Civil liberties of different kinds depend on each other and Medvedev’s initiatives have had little effect on shifting Russian into a more open society.

The Russian Interior Ministry today reported that bribes have doubled since last year to $1,320 per occurence on average. And overall, the Russian economy leaks $300 billion as the result of bribes. With only 10%  going to rank-and-file policemen, that leaves a large chunk of change for provincial and Kremlin authorities.

And what could Russia do with an extra $300 billion in its coffers? Repair infrastructure, for sure, invest in alternative fuels or new techonologies, reducing its dependence on foreign investment to diversify the economy or perhaps postpone the largest state asset sale since the early 1990s.

Corruption remains pervasive and the current power structure is unwilling to kill the golden goose. Sergey Magnitsky died in pre-trial detention for refusing to renounce corruption activities of senior Kremlin officials. With much fanfare, Medvedev launched an investigation into his untimely death, but the investigation has stalled. According to Valery Borshchev, head of the government oversight panel responsible for the investigation into Mr. Magnitsky’s death,

They’re dragging their feet because some very important figures are implicated

Aleksei Dymovsky, the YouTube policeman, whose video galvanized a country inured to corruption spoke about his new quest to raise a grassroots campaign against corruption. He knows it won’t be easy as someone who participated in the pyramid corruption scheme that required police officers to hand off that day’s bribes to a “cashier,” a senior member of the police force. Those who didn’t comply were reprimanded.

The dubious charges against Russia’s mobile phone king, Yevgeny Chichvarkin show how hard it is for companies to do business in Russia, even domestic ones. The problems started for Chichvarkin in 2006 when he refused to pay bribes in order to prepare his accounting books for an initial public offering in London. His refusal resulted in the confiscation of $20 million of Motorola phones and the current charges against him. Motorola was his largest corporate partner and suffered huge losses when Department K, the interior ministry’s economic crimes division, released false warnings about the safety of their mobile phones. Motorola’s market share has dropped from 20% in 2006 to less than 1% where it is today.

Cisco has pledged a $1 billion investment in Skolkovo but John Chambers should have scratched Russia’s surface a little deeper.

Jamison Firestone describes the highlife and crimes of Russian official Pavel Karpov and Sergey Magnitsky lies in prison.

San Jose Mercury News
By Jamison Firestone
Special to the Mercury News
Posted: 06/23/2010 08:00:00 PM PDT

Russian President Dmitry Medvedev visited Silicon Valley this week in hopes of wooing executives to invest in Russia. But as high-tech leaders think through the pitch, they might want to consider what could happen when their Russian investments are up and running.

I am a member of the New York Bar who’s served on the board of directors of the American Chamber of Commerce in Russia for the past six years and managed a law firm in Moscow for 17 years. My firm represented the largest foreign investor in Russia, Hermitage Fund, which once had more than $4 billion invested there.

In 2007, officials from the Moscow Interior Ministry raided my offices and my client’s offices and took all of Hermitage Fund’s statutory documents and seals. Even the Russian government now concedes in Moscow court filings that those documents and seals were then used to fraudulently re-register the companies into the name of a convicted killer. A criminal group subsequently applied for a refund of the $230 million of taxes that the Hermitage Fund paid in 2006. The payment was granted in one day, no questions asked. It was the largest tax refund in the history of Russia, a country where even the smallest refunds take months, if not years.

Hermitage hired five law firms to report the thefts and recover the stolen companies. In the two years that followed, I personally witnessed Russian officials implicated in the crimes attempting to arrest every lawyer who was involved in the investigation or reporting of the thefts. In a classic case of Kafkaesque absurdity, two of Russia’s most famous and respected lawyers were criminally prosecuted for reporting the theft. They fled the country.

third respected corporate lawyer, my partner Sergei Magnitsky, refused to flee Russia because he thought the law would protect him. He testified against the corrupt officials. One month after his testimony, he was arrested by the very officials he testified against. The next day, they tried to arrest three more lawyers, all of whom fled Russia.

Magnitsky was kept in pre-trial detention for 12 months and was tortured to get him to withdraw his testimony, but he refused. On Nov. 16, 2009, Magnitsky died as a result of torture at the age of 37, leaving a wife and two young boys.

Since then, it became public that the same group of officers and criminals had been accused of similar crimes in the past. It was also discovered that immediately after the thefts were reported, the officers’ families acquired millions of dollars in assets.

Like many people, I find Medvedev confusing. He speaks about fighting corruption, building rule of law and fostering investment, but Russia’s level of corruption continues to increase. Silicon Valley may see him as the first Russian leader to surf the Web and use e-mail, but television news still is under state control, and independent journalists, human rights activists, businessmen and now their lawyers are arrested and killed with impunity.

I would like to believe that Medvedev is sincere. But he has done nothing to bring Sergei’s killers to justice, to find the stolen government money, to help my client recover its companies or to stop the attacks on lawyers.

What happened to my client can happen to anyone doing business in Russia, and no law firm in the world can defend you in a land without law. Large companies that were sure they would have government support, like Shell, BP, Carrefour, Telenor and Ikea, were left to the wolves. In each case, the Kremlin either attacked or allowed corrupt officials to attack foreign investors that bought into the same pitch you just heard.

Caveat emptor.

JAMISON FIRESTONE is managing partner of Firestone Duncan, Moscow. He wrote this article for this newspaper.

EDITORIALS
Wednesday, June 9, 2010

RUSSIA’S GOVERNMENT has calculated that it needs better relations with the West to attract more foreign investment and modern technology, according to a paper by its foreign ministry that leaked to the press last month. Prime Minister Vladimir Putin has recently made conciliatory gestures to Poland, while President Dmitry Medvedev sealed a nuclear arms treaty with President Obama. At the United Nations, Russia has agreed to join Western powers in supporting new sanctions against Iran.

Moscow’s new friendliness, however, hasn’t led to any change in its repressive domestic policies. The foreign ministry paper says Russia needs to show itself as a democracy with a market economy to gain Western favor. But Mr. Putin and Mr. Medvedev have yet to take steps in that direction. There have been no arrests in the more than a dozen outstanding cases of murdered journalists and human rights advocates; a former KGB operative accused by Scotland Yard of assassinating a dissident in London still sits in the Russian parliament.

Perhaps most significantly, the Russian leadership is allowing the trial of Mikhail Khodorkovsky, a former oil executive who has become the country’s best-known political prisoner, to go forward even though it has become a showcase for the regime’s cynicism, corruption and disregard for the rule of law. Mr. Khodorkovsky, who angered Mr. Putin by funding opposition political parties, was arrested in 2003 and convicted on charges of tax evasion. His Yukos oil company, then Russia’s largest, was broken up and handed over to state-controlled firms.

A second trial of Mr. Khodorkovsky is nearing its completion in Moscow, nearly a year after it began. Its purpose is transparent: to prevent the prisoner’s release when his first sentence expires next year. The new charges are, as Mr. Putin’s own former prime minister testified last week, absurd: Mr. Khodorkovsky and an associate, Platon Lebedev, are now accused of embezzling Yukos’s oil production, a crime that, had it occurred, would have made their previously alleged crime of tax evasion impossible.

Mr. Khodorkovsky, who acquired his oil empire in the rough and tumble of Russia’s transition from communism, is no saint, but neither is he his country’s Al Capone, as Mr. Putin has claimed. In fact, he is looking more and more like the prisoners of conscience who have haunted previous Kremlin regimes. In the past several years he has written numerous articles critiquing Russia’s corruption and lack of democracy, including one on our op-ed page last month.

Mr. Obama raised the case of Mr. Khodorkovsky last year, and the State Department’s most recent human rights report said the trial “raised concerns about due process and the rule of law.” But the administration has not let this obvious instance of persecution, or Mr. Putin’s overall failure to ease domestic repression, get in the way of its “reset” of relations with Moscow. If the United States and leading European governments would make clear that improvements in human rights are necessary for Moscow to win trade and other economic concessions, there is a chance Mr. Putin would respond. If he does not, Western governments at least would have a clearer understanding of where better relations stand on the list of his true priorities.

Today’s NYTimes article reinforces Yuri Schmidt’s op-ed in the Wall Street Journal on the show trial of Mikhail Khodorkovsky and lends support to Khodorkovsky’s assertions in his Washington Post op-ed that Russia’s great export is corruption.

Although most obvious impact is on the political prisoners, Russia’s attractiveness as an investment takes a hit as well. Recent declarations by President Medvedev and various ministers about the shift in foreign policy to focus on investment and technology should not put blinders on investors.

Musings continue about the Foreign Ministry’s leaked policy document on engaging with the West to help Russia modernize. This new leaked policy seeks to import Western techonology and expertise to improve Russia’s infrastructure and jump start its techonolgy sector.

While Deripaska looks towards East for future initial public offerings of his other companies, notably EN+ Group, Rusal’s holding company, and OAO EuroSibEnergo, a power utility company. Rusal is the trailblazer Russian IPO on the Hong Kong Stock Exchange, but with it’s dismal performnace its first six months, it could leave a bad taste for other Asian investors. Additionally, institutional money managers are wary of Russian companies with opaque management rules and only promises of profits.

Investors both from the West and from Asia need to see commitment from the Russian government and the Russian business elite that they are serious about developing the technology and financial sectors in Russia. Russian businessman routinely top Forbes list of the world’s wealthiest; they clearly have the means to invest in domestic techonology firms. Russia’s political system as it has concentrated power to the executive branch has the political will to end corruption and strengthen the rule of law and improve its perception among foreign investors. But so far Russian businesman prefer to use their money on overseas investments while Russian politicans strengthen their own power at the expense of the country’s economic development.

Alexander Zemlianichenko Jr./Bloomberg

Despite President Medvedev’s modernization initatives creating a Russian Silicon Valley, establishing of an international financial center as well as a new Russian identity, fundamental elements in the Russian economy and society remain broken. 

The recent spasms caused by the Eurozone’s response to Greece’s potential default have roiled global markets, erased gains for the year and pushed markets back levels from last fall. Russia’s stock market have followed suit and is now below its 200-day moving average. These global economic winds are difficult to manage as Russian IPOs continue to be delayed such as the $300 million RusAgro and the $200 million Strikeforce Mining & Resources (SMR).

However other IPO postponements can’t be simply chalked up to poor credit markets: Uralchem’s $600 million IPO was pulled after failing to meet ecological standards and Rusal, the first Russian company to IPO on the Hong Kong Stock Exchange, has fallen 31% from its IPO price, which is sowing doubts in foreign investors’ minds about the long-term profitability of debt-ladden Russian companies. It also doesn’t build investor confidence when Rusal’s CEO Oleg Deripaska gives himself a $70 million IPO bonus three months after Rusal’s IPO even as the stock continued its slide.

Russia’s infrastructure problems are well-known internally and externally, given Moscow’s predilection for putting politics ahead of economic concerns. In the latest World Competitiveness Yearbook 2010 from Swiss business school IMD in Lausanne, Russia’s ranking continues to decline in comparison to other BRIC countries despite its natural resource and higher GDP advantages. The Yearbook notes:

Russia is richer than it is competitive. Per capita GDP ranks 38th in the world, but its IMD ranking has slipped eight positions since 2007 to 51st—the lowest among the so-called BRIC countries. Among the main reasons: poor productivity and efficiency, weak management practices, unfavorable prices, and low marks for health/environment. Russia does a lot better in scientific infrastructure, fiscal policy, and international investment.

Attention was drawn to Russia’s lack of rule of law and corruption this week through the hunger strike of Mikhail Khodorkovsky and New York Times report on unsolved attacks on journalists who report on local corruption.

Khodorkovsky’s hunger strike sought to raise awareness that the legal reforms signed by President Dmitry Medvedev on April 7, 2010 are being sabotaged. The law, which resulted from President Medvedev’s efforts to halt abuses by officials of the criminal justice system from attacking legitimate businesses, and to make criminal law more humane after the death of Sergei Magnitsky, ordering that the courts can no longer use arrest as a pre-trial measure of restraint in cases involving allegations of certain economic crimes, including the alleged crimes in Khodorkovsky’s ongoing case. Through an intermediary, President Medvedev acknowledged Khodorkovsky’s plea and so ended the hunger strike.

According to the Committee to Protect Journalists, 32 reporters have been killed since the end of the Soviet Union and the beginning of perestroika and glasnost. As these unsolved persecutions show, corruption in Russia seeps down from above and spreads from below unchecked by any semblance of law or justice.

Khodorkovsky’s second trial continues to display the kind of “legal nihilism” Medvedev claims to end. Yuri Schmidt in today’s Wall Street Journal writes that François Zimeray, the French Ambassador for Human Rights visited the court last month, observed that :

“Mikhail Khodorkovsky’s resistance to being broken by the system has made him an icon for defenders of human rights.” He concluded that not just one man, but rather Russia’s future, is on trial.

For President Medvedev’s modernization to take place, much more needs to be done than creating fantasy technology and financial centers and redefining the national character.

Leading human rights and legal experts discuss the implications of the Khodorkovsky trial on political and economic freedom in Russia at a panel discussion held in conjunction with the US debut of Sketches of [in]Justice: The Khodorkovsky Trial from Putin to Medvedev.

"Territory of Liberty" by Julia Aryeh

Panel Discussion: The Khodorkovsky Trial – Human Rights and Economic Freedom in Russia

Venue: Dorot Center, 171 West 85th Street, New York, NY

Date: Tuesday, May 18th at 3pm

Sponsors: Committee for Russian Economic Freedom, Andrei Sakharov Memorial Museum, Institute of Modern Russia and Drawing the Court

The ongoing trial in Moscow of Mikhail Borisovich Khodorkovsky symbolizes the challenges all Russians face as they seek to build a society free of fear and corruption. In conjunction with the US premier of Sketches of (in)justice: The Khodorkovsky Trial from Putin to Medvedev, the Institute of Modern Russia is sponsoring a panel discussion in which leading human rights and legal experts will discuss the case’s social, political and economic implications.

Panelists will include Karinna Moskalenko, director of the International Protection Center and notable expert on international human rights who will provide an update on international human rights advances in the US Congress and other legislatures. Additionally, Ms. Moskalenko will provide context to YUKOS v Russia a pivotal international case currently being deliberated in the European Court of Human Rights. She testified before the US Congress on May 6 about Russia’s human rights transgressions.

Sergei Lukashevsky Director of the Andrei Sakharov Center (Moscow) will discuss the human rights situation in Russia specifically and the latest efforts by the Sakharov Center to preserve historical memory of the victims of political repression at the hands of the Soviet regime and promote an open democratic society and state in Russia. Mary Holland, NYU Law’s Director of the LL.M. Lawyering Program, will provide a legal context for recent legal developments in post-Communist Eurasian countries and its impact on efforts in the region to improve human rights. Pavel Khodorkovsky, president of the Institute of Modern Russia will discuss how his organization will continue the efforts of his father who strived to modernize Russia through education and opportunities for young people.

Moderating the panel is Pavel Ivlev, chairman of the Committee for Russian Economic Freedom (CREF) and a long-time legal counsel to YUKOS and its former CEO, Mikhail Khodorkovsky, who fled to New York from Russia under fear of unjust prosecution. Through his efforts and the CREF organization, Mr. Ivlev has raised the awareness of the risks of doing business in Russia and how the release of Mikhail Khodorkovsky would be a signal to the international investment community at Russia is back in business.

Admission: Free and open to the public.
General Information: Dorot Center, 171 West 85^th Street, New York, New York, 212-769-2850.

The same day Russian president Dmitry Medvedev announces his new “national strategy” to counter corruption, the German and US authorities begin a $10 million bribery probe into Hewlett-Packard executives. The investigation involves an incident that occurred over seven years ago, according to an Hewlett-Packard spokesman. Medvedev has made combating corruption a priority for his administration, but the corruption in Russia has deep roots.

Reuters recently released an article outlining three key risks in Russia: the variable price of oil, political shake up in the Kremlin and further insurgency attacks. Though the world’s largest energy producer, Russia’s manufacturing, construction and retail industries continues to contract as domestic consumption and foreign investment continues to lag, increasing the economy’s dependence on oil prices for growth.

Prime Minister Vladimir Putin remains popular and the driver behind the co-governance team with President Dmitry Medvedev. Despite highlighting their differences and indicating Medvedev’s intentions of political and judicial reform, Reuters notes that Russian markets would rebound only if Putin remained in place. The maintenance of the status quo despite Russia’s world renown for government corruption and weak rule of law seems curious. With foreign investors, such as IKEA, Hermitage Capital, and now HBK investments scaling back or pulling out of Russia due to corruption and extortion, why would the markets value Russian companies more if the status quo remained?

And how does the continued expropriation of private business by government officials add to Russia’s economic capital?

The extraction of Russia’s economic and natural resources by the politically connected few leads to only self-enrichment. Perhaps this self-enrichment would be tolerable if the proceeds were reinvested in Russia and the Russian people, but this is rarely the case. What Russia needs is investment to update oil and pipeline infrastructure, capital to encourage innovation and a stronger rule of law to benefit all Russian people.

Russia’s most famous political prisoner, Mikhail Khodorkovsky began his spirited defense yesterday against his Kafka-esque second trial. The government charged Khodorkovsky and his business partner Platon Lebedev with stealing 2.5 billion barrels of YUKOS’s crude oil or a third of the United States’ entire annual consumption of oil.

The trial is also viewed domestically and abroad as a test of Medvedev’s commitment to ending “legal nihilism” and his power and control within the Kremlin. Medvedev even started a national anti-corruption drive this March. According the Associated Press,

The trial is considered a test of whether President Dmitry Medvedev, himself a lawyer, is serious about reforming Russia’s judicial system. In other cases, judges have come forward to complain they face political pressure.

Only time will tell if Medvedev makes good on his words.