Committee for Russian Economic Freedom

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.

IKEA, the global furniture giant, recently fired their two executives who turned a blind eye on government bribes, but only to move their expansion project forward. Mikael Ohlsson, the chief executive and president for the Ikea Group, Ikea’s largest franchisee, which includes the Russian operation, said in a statement, “Corruption is totally unacceptable for Ikea.”

Corruption is a serious issue in Russia and it is routinely discussed by President Medvedev as a top priority for his government, however, not much as changed. The investment environment in Russia remains toxic and Russia is now falling behind economically and academically its BRIC rivals Brazil, India and China. In a recent Financial Times article, a large pension fund manager asked this question,

Russia defaulted in ’91, restructured in ’95, defaulted in ’98, took assets away from Yukos, from Shell from BP. If you cmplain, you get expelled from the country and then if you continue to complain you may die in London from polonium poisoning, or die in pre-trial detention in Russia. Now tell me why I should invest in Russia?

After dragging its feet for four years, the Russian parliament ratified the European Court of Human Rights’ (ECHR) Protocol 14 earlier today. Russia had been the only country out of 47 participating states to refuse to ratify Protocol 14, which improves the efficiency of the Court. The current process has created a backlog of complaints, a third of which are filed against Russia.

Dmitri F. Vyatkin, Russian Parliamentary member mentioned that the impasse was overcome because the ECHR had addressed Russia’s concerns by providing written commitments that Russian judges would be included in reviews of potential cases against Russia, the Court would not begin investigating complaints before cases were formally accepted and the Court would not have new powers to enforce rulings.

Taken together this sounds like Russia wants to transform the ECHR into a Russian court: by hearing complaints against Russia that the Russian government approves of, not delving too much in to the details of complaints filed and if the complaint is accepted for the Court to have no ability to enforce its ruling.

However, Thomas Hammarberg, the human rights commissioner of the Leaders of the Council of Europe, presents a different view of Russia’s approval of Protocol 14, that Russia’s concerns where heard but ultimately Russia will be held to the same rules that apply to other members and that no changes to the protocol were made.

Leaving for now, what Russia’s ratification of Protocol 14 actually means for the ECHR, a central question remains, “What propelled Russia to ratify the protocol after all these years?”

“Smoothing over differences” appears to be the official reason media outlets are reporting, however there may be other reasons political and financial reasons why Russia is offering this carrot to the West.  

Earlier this week, the $100 billion lawsuit YUKOS v. Russia was postponed for the third time because two Russian representatives were unavailable. Perhaps the Russian authorities feel that ratification of Protocal 14 could pave the way for this case to be dismissed.

Additionally, the Financial Times reported earlier this week that Russian companies would be seeking $90 billion over the next two years to finance debt restructuring and capital improvements and perhaps to rebuild the coffers for politically connected Russian business owners who saw their fortunes collapse during the 2008 financial crisis. As demonstrated with the Rusal IPO, concerns over the management of Russian companies remain and ratifying Protocol 14 may be a signal to the investment community that Russia wants to play nice.

Russia may see ratifying Protocol 14 satifying many goals: to reduce the effectiveness complaints against Russia in the ECHR while reassuring investors that Russia abides by the rule of law. But as the trial against former YUKOS chief Mikhail Khodorkovsky and a Russian policeman’s open letter to end authorized corruption demonstrate, Russia remains a feudal state, where

in absence of functional legal or law enforcement systems, people’s only real protection lies in a network of personal and professional relationships with powerful individuals.