Committee for Russian Economic Freedom

“Trust, but verify” – “doveryai, no proveryai” or “Доверяй, но проверяй” – was President Ronald Reagan’s catchphrase in pressing Soviet leaders for weapons inspections. Now nearly a quarter-century later, trust between the US and Russia is in short supply as President Obama and Russian President Medvedev were unable to show progress on missile defense. Tension levels were already edging higher after the U.S. State Department raised concerns over a Moscow appeals court’s decision to uphold a guilty verdict for former Yukos CEO Mikhail Khodorkovsky on a second round of politically motivated charges, spurring capital flight from Russia amid investors fear that Prime Minister Putin will elbow Medvedev from power.

Pavel Ivlev, CREF’s chairman remarked,

The US and the Western world shall not forget what President Reagan said. “Trust, but verify” is very much applicable to Medvedev today, who is known of saying right words, but very weak on delivery.

Russsia’s stock market is falling the most in the world and investors are fleeing the country’s equity funds just as a Moscow appeals court upheld a guilty verdict for former Yukos CEO Mikhail Khodorkovsky on a second round of politically motivated charges brought by the Putin government. Investors withdrew more than $420 million from May 4 through May 18 as stocks surrendered gains amid falling oil prices, slumping economic growth and mounting concern over the increased odds of a renewed Putin presidency.

Unlike the Russian courts, the markets don’t lie,” said Pavel Ivlev, founder and chairman of the Committee for Russian Economic Freedom. “Khodorkovsky’s continued conspired imprisonment is costing investors billions of dollars.”

Tony Avelar/Bloomberg News

News that Goldman Sachs engineered a major stake in Facebook, the world’s most popular social networking website, by Moscow-based investment firm DST Global offers more evidence to support Mikhail Khodorkovsky’s observation in the Washington Post last year that corruption ranks as a leading Russian export.

“The source of the funds used to make the Facebook investment merits further investigation,” said Pavel Ivlev, chairman of the Committee for Russian Economic Freedom. “It’s increasingly clear that money stolen by corrupt Russian officials is being spirited out of the country and invested in legitimate Western businesses.”

Created in 2005, DST is owned by oligarch Alisher Usmanov and Yuri Milner, founder of Russia’s most successful Internet ventures, including Mail.ru.

Usmanov, a native of Uzbekistan, spent six years in an Uzbek prison on a conviction of fraud and embezzlement in the 1980s, charges he says were politically inspired. A Soviet court later dismissed the charges and Usmanov eventually made billions of dollars in the post-Soviet era by managing steel mill subsidiaries for Gazprom before they were spun off as his own businesses.

The record shows that Usmanov’s relationship with Vladimir Putin and other Kremlin leaders has made him one of Russia’s wealthiest men. From his lead role at Gazprom, the state-controlled energy giant that absorbed assets stolen from Khodorkovsky’s Yukos in 2003-2004, to his current company Metalloinvest, Usmanov has made the money he used to invest in Facebook by capitalizing on what former Prime Minister Mikhail Kasyanov calls “Putin’s capitalism for friends.”

Milner got his start in business working for Khodorkovsky’s bank Menatep, setting up a brokerage and investment arm before leaving in 1997, the Financial Times reported. Officials aligned with the regime later prosecuted former Menatap financial executives and tried to force them to testify falsely against Khodorkovsky. But not Milner, who shifted into investing in the Internet with the backing of Usmanov and others tied to Putin.

Following Khodorkovsky’s conviction last month a second round of trumped up charges, Russian Foreign Ministry spokesman Andrei Nesterenko dismissed protests from leaders in Washington and EU capitals, saying “we expect everyone to mind their own business, both at home and in the international arena.”

Investors in Russia have done just that, “minding their own business” by pulling assets out of the country at an accelerated pace, according to Pavel K. Baev in a post-verdict analysis.

The conviction of Khodorkovsky proves that Prime Minister Putin and not President Medvedev controls Russia and “translates into a re-evaluation of business and personal prospects in a country of self-serving bureaucracy – and into capital flight that increased sharply in the last months of 2010 and is set to reach $25 billion to $30 billion,” Baev wrote.

“Medvedev tries to explain away this worrisome trend by emphasizing the need to improve the investment climate, which in his view “leaves something to be desired; it is bad.” Medvedev has also initiated a package of reforms in economic legislation that should take effect in 2011-12, and quite probably he simply does not understand that the Khodorkovsky case is not a minor setback for the markets, as it was five years ago, but the irrefutable verdict on his “modernization” strategy.” Yet the verdict renders hollow Medvedev’s statements supporting the rule of law and enforceable contracts in Russia.

“Investors in PepsiCo, Morgan Stanley, Facebook should closely question their board members about the prudence of those companies risking capital with the Putin regime given the growing list of major Western companies that have been defrauded by corrupt Russian officials,” Ivlev said. “But more telling are the latest statistics which show that Russian businesses that have benefited from the regime are now eschewing further investments in the country given the lawlessness that they themselves helped promote.”

The CREF letter sent to forum attendees has also made it into media.  Reuters and the Moscow Times recently posted the article below. The entire letter is in the previous post.

Ex-YUKOS lawyer warns Russia forum guests

* Previous YUKOS lawyer says Russia dangerous for business
* Sent e-mail to 1,000 Russian forum participants

By Jessica Bachman

MOSCOW, June 11 (Reuters) – A week before Russia rolls out its largest annual economic forum, an ex-lawyer for YUKOS who currently heads a nonprofit organization promoting transparency in business warned almost 1,000 foreign participants against going into the event with rose-colored glasses.

In a mass e-mail sent late on Thursday, Pavel Ivlev, who fled Russia in 2005 and now leads the Committee for Russian Economic Freedom, reminded participants including Citigroup (C.N) Chief Executive Officer Vikram Pandit and ConocoPhillips (COP.N) head James Mulva that Russia is an “extremely dangerous” place to do business.

“As you listen to Russian officials and businessmen discuss potential gold mines in investing in Russia, be mindful that there are numerous land mines as well,” reads the final line of his e-mail.

Several European leaders, including French President Nicolas Sarkozy, are expected to attend the international economic forum, which opens in Russia’s second city of Saint Petersburg on June 17.

The three-day event is Russia’s answer to Davos in Switzerland, where foreign corporate and political leaders come to clinch billions of dollars worth of contracts and hobnob with the creme de la creme of Russia’s political and business elite.

Ivlev, a former lawyer for oil firm YUKOS, told Reuters on Friday his e-mail was a “call to action.”

“I am not suggesting a boycott of the forum; rather I am calling on the business community to stop being quiet and start speaking out about the lack of transparency and rule in law in Russia,” he said by telephone from the United States.

Ivlev worked for an independent law firm in Moscow that represented YUKOS, the former oil giant dissolved by the Kremlin and bankrupted in 2007.

Charges were brought against Ivlev in 2005 for theft, money laundering and helping YUKOS in tax evasion schemes, two years after his client, the company’s former CEO Mikhail Khodorkovsky, was arrested and jailed.

Khodorkovsky, in prison in eastern Siberia, is now facing a second round of trials, also on charges of theft and money laundering. (Reporting by Jessica Bachman)