Committee for Russian Economic Freedom

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.

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.

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.”

According to Jacob Plieth of the Wall Street Journal, if the Rusal IPO goes as planned later this month, it will be a “latter-day miracle.” As you recall, Goldman Sachs declined to be an underwriter for this deal and the Hong Kong Stock Exchange has dragged its feet, even though completing this complex IPO would mean millions in fees and additional revenue for the exchange and the investment bankers willing to bring troubled Russian companies to the international capital markets counter.

Rusal is a company that operates with $16 billion in debt and even with a partial sale of Norilsk Nickel and the pending partial IPO, there are doubts that a company hasn’t reported operational profitability can keep up with its interest payments.

According to the WSJ’s article, “Rusal Listing Delay Won’t Derail IPO,” the various hurdles to Rusal’s IPO are just bumps on the road to the first Russian listing in Hong Kong. Rusal is the world’s largest aluminum producer and is expected to raise about $2.5 billion in the IPO.

But an exchange not known for onerous listing requirements has requested more information from Rusal and Goldman Sachs was dropped as a book runner “after the investment bank expressed reservations about sponsoring the deal.”

The proceeds from the Rusal IPO would go to repay part of its $4.5 billion loan largely held by the Russian state-run VEB bank, also Rusal’s biggest single creditor. It seems like Goldman Sachs and the Hong Kong Stock Exchange are having second thoughts about facilitating a deal that would line the pockets of an oligopolistic petrostate.