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

Several anticorruption probes became public in Russia last week. First, the defense minister was ousted and some of his close associates were arrested. Second, a former deputy head of the Ministry of Regional Development was arrested. Third, several high-ranked officials were dismissed in the course of investigation in the Federal Space Agency. In all these cases high-ranked officials are suspected in embezzlement of state funds.

Anatoly Serdyukov was a defense minister in 2007-2012 and served as the head of The Federal Taxation Services before that. He spearheaded the tax prosecution of YUKOS during his time in the tax office. His high-ranked associates were in the center of the tax fraud schemes, discovered by Sergei Magnitsky. According to the investigation of Novaya Gazeta, an independent newspaper, the federal budget lost around one billion dollars in such schemes. For now the investigators’ claims against Mr Serdyukov’s employees (but not himself) total three billion rubles (less than 100 million dollars). Roman Panov from the Ministry of Regional Development is suspected in defrauding the federal budget of 90 million rubles (less than three million dollars) out of many billion dollars wasted in the highly inefficient construction projects dedicated to the APEC summit.

KGB veteran Sergei Ivanov is in the center of the anticorruption campaign

The loud anticorruption campaigns don’t help to curb the corruption burden on the Russian economy. Plenty of famous cases, investigated by anticorruption activist and publicized in the media, are left without any attention from the officials. Anticorruption campaigns usually reflect the internal Kremlin fights. The real reason for Mr Serdyukov’s fall was either that he was not able to maximize cash flows from corruption or was not willing to share the wealth with his influential colleagues from the Mr Putin’s team. Charges against his associates most likely were triggered by his decline to buy the obsolete but overpriced production of the domestic defense industry.

More competitive political system is much needed to cure corruption in Russia. Free media, independent law enforcement authorities and court system are efficient instruments for combating corruption. An alternative is a dictatorship headed by a cruel but incorruptible leader – a model of governance that Russia experienced in Stalin’s years. The Putin’s Russia is equally far from the both poles of low corruption. As a result, corruption is flourishing as well as loud anticorruption campaigns.

CBS News

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.

Washington Post reports that massive and unprecedented outflows from Russia signify deep uncertainty about Russia’s future and its ability to provide a stable platform for economic growth. Russia has well-known domestic infrastructure needs and President Dmitry Medvedev has made modernizing and diversifying the economy as a central issue in his presidency. But with $30 billion leaving the country in the first four months of 2011, the loss of confidence in the Russian government to make infrastructure changes and support the rule of law is evident in both domestic and foreign investors.

Russia’s currency reserves are buffered by the high price of oil, but that usually meant a stem in capital outflows. Not so this year. Evsey Gurvich, head of the Economic Expert Group in Moscow cites political uncertainty in the 2012 presidential elections as one of the reasons for capital flight,

In our country, personal guarantees, personal relations, are still more important for big businesses than laws and rules and formal regulation.”

Another reason he cited was the “weak business environment” in Russia due to the pervasive corruption and expropriation of private business by government officials.

That is another way of talking about corruption, bureaucratic capriciousness and courts that take their orders from on high.

The reaffirmation this week of the conviction of Mikhail B. Khodorkovsky, the onetime oil tycoon who lost his company and his freedom after he challenged Putin, probably translates into “several more billion dollars on the run from Russia,” Gontmakher said.

Domodedovo Airport, the only privately owned airport in Moscow, has come under relentless pressure publicly from the authorities, and that, [Yevgeny] Gontmakher, [deputy director of the Institute of Contemporary Development in Moscow] said, sets a very visible and “awful” example.”

A joint resolution from the European Parliament was published yesterday and successfully adopted by the European Parliament this afternoon, the subject of which was “The Rule of Law in Russia.”

The EU Parliament points out that Russia, as a member of the Council of Europe, has signed up to fully respecting European standards as regards democracy, fundamental and human rights and the rule of law.

Watch the debate that preceded the passing of this motion and see the EU Parliament resolution below.

EU Parliament’s Resolution on the Rule of Law in Russia

Verdict Destroys Hopes for the Rule of Law, Independent Courts, Protection of Property Rights and Government Anti-Corruption Drive in Russia

Defense Slams “Charade of Justice”

Reuters

New York, December 27, 2010 – Today a Moscow court found Mikhail Khodorkovsky and Platon Lebedev guilty of embezzling a staggering two thirds of the total production of the Yukos Oil Company over a six-year period. The conviction in this 22-month mock judicial process confirms the subservience of the judicial system in Russia to corrupt officials who continue to view Khodorkovsky as a threat and who seek to prevent his scheduled release in 2011. Khodorkovsky is already serving an 8-year sentence, handed down in 2005, but dating from his arrest in 2003. Had he been found not guilty he would have been released in 2011, a few months before Russia’s 2012 presidential elections. The new unlawful prison term will be announced either this week or shortly after the Khamovnichesky Court reconvenes from holidays in mid-January. Prosecutors have asked for 14-year sentences for Khodorkovsky and Lebedev.

According to lead defense lawyer Vadim Klyuvgant: “The trial was a charade of justice, the charges were absolutely false, but I fear the sentencing will be very real.”

The behavior of the prosecutors and of the judge turned the trial into a fiasco. Despite filling time by reading from a 188-volume case file, and parading numerous witnesses into court, prosecutors were unable (and did not even try) to prove how it was possible that Yukos covered its operating costs, invested heavily in capital expenditures and acquisitions and paid taxes and dividends when the entire oil production of Yukos over a six-year period was being stolen, as alleged in the indictment. At the end of the trial, prosecutors further confused their case when they attempted to save face by reducing the volume of oil allegedly stolen by approximately one third.

“This verdict diminishes Russia’s legitimacy in the world stage and signals to policy makers and investors that Russia’s political leaders apply the law as they see fit,” said Pavel Ivlev, former corporate counsel to Khodorkovsky.

The authorities misleadingly attempted to portray the process as legitimate. The defendants were permitted to speak in court almost without restrictions, but the judge blocked their lawyers from introducing exculpatory documentary evidence and refused to hear many witnesses and experts. Illusions of adversarial process and legitimacy were created by allowing the defense to file motions and objections to serious procedural violations, however the judge routinely quashed the vast majority of these motions and failed to react to the objections. The defense and the defendants persisted to the end in doing anything they could to document the full extent of the mistrial, and have publicly released online all submissions rejected by the court.

The verdict in this trial is based on patently false allegations that are incompatible with the first case against Khodorkovsky and Lebedev and with the enormous tax claims that bankrupted Yukos to the benefit of persons controlling state-run Rosneft. The conviction is also impossible to reconcile with numerous decisions of Russian courts that have recognized the tax claims against Yukos. Today’s ruling also contradicts Russia’s official position as it attempts to defend its treatment of Khodorkovsky, Lebedev and Yukos before the European Court of Human Rights. There, the Russian authorities allege that it was lawful to impose grossly punitive taxes on proceeds from the sale of oil owned, sold and accounted for by Yukos. On the other hand, in the Khamovnichesky Court the prosecutors allege on behalf of the Russian Federation that the same oil was stolen from the company by Khodorkovsky and Lebedev, and therefore could not have been sold by Yukos. The court supported the slanderous allegations of oil theft despite the fact that the so-called “injured parties”, production subsidiaries of Yukos, received not only full compensation for their production costs but also 2 billion USD profits from sales.

Politically it is notable that in the most high-profile trial in Russia, closely-watched by the public and media all over the world, the court could so openly ignore applicable procedural and substantive laws as well as basic notions of fairness. This is testament to the power of those corrupt officials who zealously seek to justify their seizure, control and ownership of Yukos assets and to isolate Khodorkovsky and Lebedev from Russia’s business and public spheres – and to keep them in jail as long as possible to achieve these goals. Prime Minister Vladimir Putin’s most recent (but far from the first) public intervention in the case and undisguised pressure on the court came in televised remarks on December 16, 2010, one day after a last-minute postponement of the reading of the verdict to December 27, 2010. With the judge still deliberating on the case, the Prime Minister directly mentioned the current charges and stated that Khodorkovsky’s guilt had been proven in court and that he must stay in jail.

The trial and its verdict are an open challenge – and indeed an affront – to President Dmitry Medvedev’s highly-publicized efforts to ensure the rule of law and to reform Russia’s criminal justice system and to fight government corruption. If upheld on appeal, this verdict shall be a triumph of corrupt officials controlling Russia’s law enforcement and judicial bodies, and a setback for an entire country that aspires yet continually fails to modernize.

Russian President’s chief economic advisor Arkady Dvorkovich acknowledged in a BBC interview that his country is having a perception issue. He also suggested that 1,000 years of corruption is a hard habit to kick but the authorities are looking into violations of the rule of law. Acceptance is the first step to change and Russia is in need of much change. In the latest Transparency International  survey, Russia declined in ranking again this year to 154 out of 178 countries.

Perception is based on reality and a whistleblower came out today to implicate Prime Minister Putin at the top of an elaborate multiyear scheme to extract contributions from Russian businessmen. Sergei Kolesnikov, a business associate of Putin, has offered the most detailed description of how Putin has engaged in a combination of corruption, bribery and theft to amass his own personal wealth. Read the letter here.

In the open letter to President Medvedev, Kolesnikov reveals Putin’s secret funding network. This letter was delivered Tuesday to the Russian U.N. mission in New York. Two or three times a year Kolesnikov regularly briefed Putin on his personal wealth accumulated through contributions by businessmen. Washington Post columnist David Ignatius wrote today that “it’s one of the most detailed allegations I’ve seen of the links between Putin and Russia’s “crony capitalism.”

Additional reporting by Ellen Barry at the New York Times show how corruption and politics prevent uncovering the truth about the death of Sergei Magnitsky. Contradictory official statements and lack of oversight have prevented the truth to be known. President Medvedev established the Public Oversight Commission to look into the case but after an initial thoughtful review was hijacked by security forces.

These same Federal Security Service (FSB) forces also known as the siloviki are the subject of an article in the New York Review of Books which refers to them as the New Nobility in Russia. In the assessment the FSB runs the country with Putin at the top.

…the FSB focuses its efforts on protecting the Kremlin’s vast economic interests, suppressing legitimate political opposition, and ensuring the Kremlin’s control over the press and television through intimidation and violence.

Today the postponement of the verdict for Mikhail Khodorkovsky was announced by Judge Danilkin without much fanfare. Already a strong litmus test for President Medvedev’s commitment to end legal nihilism, the Khodorkovsky trial has become a bellwether for the future of Russia. Moving the verdict to December 27th, the traditionally quiet period between Christmas and the New Year seemed to some like the Russian government wanted to reduce the world’s focus on Russia’s most famous prisoner.

US Senator John McCain recently said at a speech at John Hopkins University,

And then there is the sad ongoing saga of Mikhail Khodorkovsky, whose company was stolen from him, and who has languished in jail for seven years.  When his sentence expired recently, new charges were manufactured against him. He is not being tried by a jury, just a single judge, and the political fix has been in for a long time. He could now face up to 12 more years in prison. If ever there were a case of ‘legal nihilism’ – of an affront to the very values of equal justice that we hold dear – the case of Khodorkovsky is it.

David Remnick, editor-in-chief of the New Yorker, wrote the lead Talk of the Town article this week when he addressed the issue of the Khodorkovsky trial and what it means for Russia’s future

Khodorkovsky exploited the lawlessness of the era no less than his fellow-oligarchs did, but he was more reserved than the rest…Over time, he also displayed unusual signs of independence from his Kremlin patrons. And, for Putin, there was the rub. Khodorkovsky began to see the necessity of playing a less sleazy game—not least in order to attract foreign investors…
The Khodorkovsky affair long ago erased any notion in Russia of an independent judiciary; it made plain that the courts do the bidding of a corrupt hierarchy that will stop at little to enrich itself.
Russia undermines its pretense to modern statehood with such an appalling abuse of state power. Putin’s ruthlessness is apparent. President Dmitry Medvedev ostensibly has the power to pardon, and he has shown some small measure of independence from his patron, speaking of the “legal nihilism” that prevails in Russia today. Does he have the capacity, much less the courage, to release Mikhail Khodorkovsky?

In his article, “What now for Russia? Part Three” Anthony Harrington argues that not only does the Khodorkovsky trial blatantly flaunt the rule of law, the actions of Khodorkovsky and his business associates indicate that he was getting Yukos in financial shipshape for a possible sale to foreign investors and listing on the New York Stock Exchange.
Which leads us to the question of what does the postponement mean? While reading into the nondecision is a little like reading tea leaves, it is probably safe to say it indicates a neutral or negative final outcome. With the delay, the authorities may try to mitigate negative public reaction to a guilty verdict. Alternatively, it could be that the judge, who obviously had made his own opinion so far, was unable to get approval from his supervisor. Or it could be something else more germane, such as needing more time to write the decision. Ultimately, the postponement demonstrates to the world that Russia’s judicial system is far from independent.

Pavel Khodorkovsky and Mikhail Kasyanov

On Friday, October 22, former Russian Prime Minister Mikhail Kasyanov spoke about the potential for political change in Russia at Columbia University’s Harriman Institute. Some issues he mentioned included the need for political opposition, rule of law and greater foreign investment in Russia. Kasyanov also mentioned the need for Russia to have an active political opposition, something Russia currently lacks. Over 100 people came to listen to the potential 2012 presidential candidate as he described a Russia that leads through example and cooperation, not words and intimidation.

Foreign investors are finicky and there are a lot of options. Last week, Transparency International released their latest Corruption Perception Index and Russia dropped to 154th out of 178 countries, making it the most corruption country in the G20.

“The Kremlin says Russia is a country of great opportunity. But my trial demonstrates that it is also a country of great risks.” – Mikhail Khodorkovsky