Committee for Russian Economic Freedom

Time magazine’s Simon Shuster today posted an article about young Russian entrepreneurs fleeing the country. The piece features a 22-year-old tech guru named Alexei Terentev, whose web hosting company, NKVD.pro, is now valued in the millions of dollars. But thanks to a business climate marked by fraud and fear, the economic activity Terentev’s company is to produce will not be benefitting his homeland: Alexei left Moscow for the Czech Republic to develop his business and hasn’t looked back:

The reasons for his move, as well as his haste, are the typical worries of the young entrepreneurs […]: corruption and bureaucracy, the forces that are driving the biggest exodus since the fall of the Soviet Union. […] Now the country is stable and the cities are thriving. But small-business owners seem to feel less safe than ever.

Shuster cites data that shows Russians paid nearly $600 million in bribes to authorities for “security provisions,” in 2010 – 13 times more than in 2005 – and then describes the calamity that befalls business owners if bribes aren’t paid: visits from inspectors, auditors or the police until the company is overwhelmed. If that doesn’t work, expect a corporate or government raid to follow, as was the case in 2000 for NTV television or in 2003 for Yukos Oil.

Earlier this year, Agava, one of Russia’s leading web hosting companies was raided by police, its server farm raided just weeks later. And this is happening , Shuster writes, while the Russian government is trying to enlist businesses to move to Skolkovo, Russia’s notional version of Silicon Valley. But the businesses that have signed on for Skolkovo are, not surprisingly, having trouble recruiting talent.

To drive the point home, Shuster quotes a California venture capitalist, Alexandra Johnson, who advises Russian businesses. “You need an entire ecosystem to support innovation,” she says. “You need incubators, entrepreneurship, managers to run the businesses. You need the rule of law. Many elements of this ecosystem are still missing in Russia.”

Read Shuster’s full article here.

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

It was the best of times. It was the worst of times.

On Thursday, January 14th the European Court of Human Rights (ECtHR) is hearing the case of YUKOS Oil Company v. Russian Federation, the first time in six years of litigation that both sides will meet face-to-face in a legal battle on the Russian authorities expropriation of YUKOS and its assets beginning in 2003.  Foreign policy and Russian officials have acknowledged that the imprisonment of YUKOS’s CEO Mikhail Khodorkovsky was due to political reasons stemming from his support of opposition parties.

Meanwhile, the Rusal continues on its IPO path, even as more doubts about the process have surfaced. Its controlling shareholder Oleg Deripaska continues to be linked to organized crime, was refused a visa to enter the United States on those grounds and has received millions in government money funnelled through Russian state-run Vnesheconombank (VEB), controlled by Prime Minister Vladimir Putin.

YUKOS’s Mikhail Khodorkovsky is being charged in a second round of trumped up charges while Rusal’s  Oleg Deripaska is being rewarded for his cooperation and collaboration with the Russian government, stating publicly that he would transfer Rusal back to the government at any time saying, “If the state says we need to give it up, we’ll give it up.”

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.