Committee for Russian Economic Freedom

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

A spate of recent articles have noted a 45% drop in foreign direct investment in Russia for the first six months of this year. Although the global economy has been challenging for all economies, China’s own FDI fell 35.7% through July of this year.

Cyprus leads with investment in Russia, but it is a well-known tax-advantaged locale for Russian businessmen. The other leading countries are Netherlands, Luxembourg and Germany.

Chris Weafer, a frequent Russian economics commentator and chief strategist at Uralsib, discounted a large portion of the cited FDI figure by saying “actual non-Russian sourced FDI is currently negligible.”

San Jose Mercury News
By Jamison Firestone
Special to the Mercury News
Posted: 06/23/2010 08:00:00 PM PDT

Russian President Dmitry Medvedev visited Silicon Valley this week in hopes of wooing executives to invest in Russia. But as high-tech leaders think through the pitch, they might want to consider what could happen when their Russian investments are up and running.

I am a member of the New York Bar who’s served on the board of directors of the American Chamber of Commerce in Russia for the past six years and managed a law firm in Moscow for 17 years. My firm represented the largest foreign investor in Russia, Hermitage Fund, which once had more than $4 billion invested there.

In 2007, officials from the Moscow Interior Ministry raided my offices and my client’s offices and took all of Hermitage Fund’s statutory documents and seals. Even the Russian government now concedes in Moscow court filings that those documents and seals were then used to fraudulently re-register the companies into the name of a convicted killer. A criminal group subsequently applied for a refund of the $230 million of taxes that the Hermitage Fund paid in 2006. The payment was granted in one day, no questions asked. It was the largest tax refund in the history of Russia, a country where even the smallest refunds take months, if not years.

Hermitage hired five law firms to report the thefts and recover the stolen companies. In the two years that followed, I personally witnessed Russian officials implicated in the crimes attempting to arrest every lawyer who was involved in the investigation or reporting of the thefts. In a classic case of Kafkaesque absurdity, two of Russia’s most famous and respected lawyers were criminally prosecuted for reporting the theft. They fled the country.

third respected corporate lawyer, my partner Sergei Magnitsky, refused to flee Russia because he thought the law would protect him. He testified against the corrupt officials. One month after his testimony, he was arrested by the very officials he testified against. The next day, they tried to arrest three more lawyers, all of whom fled Russia.

Magnitsky was kept in pre-trial detention for 12 months and was tortured to get him to withdraw his testimony, but he refused. On Nov. 16, 2009, Magnitsky died as a result of torture at the age of 37, leaving a wife and two young boys.

Since then, it became public that the same group of officers and criminals had been accused of similar crimes in the past. It was also discovered that immediately after the thefts were reported, the officers’ families acquired millions of dollars in assets.

Like many people, I find Medvedev confusing. He speaks about fighting corruption, building rule of law and fostering investment, but Russia’s level of corruption continues to increase. Silicon Valley may see him as the first Russian leader to surf the Web and use e-mail, but television news still is under state control, and independent journalists, human rights activists, businessmen and now their lawyers are arrested and killed with impunity.

I would like to believe that Medvedev is sincere. But he has done nothing to bring Sergei’s killers to justice, to find the stolen government money, to help my client recover its companies or to stop the attacks on lawyers.

What happened to my client can happen to anyone doing business in Russia, and no law firm in the world can defend you in a land without law. Large companies that were sure they would have government support, like Shell, BP, Carrefour, Telenor and Ikea, were left to the wolves. In each case, the Kremlin either attacked or allowed corrupt officials to attack foreign investors that bought into the same pitch you just heard.

Caveat emptor.

JAMISON FIRESTONE is managing partner of Firestone Duncan, Moscow. He wrote this article for this newspaper.

(Russian) CREF Chairman’s Letter to St. Petersburg Economic Forum Attendees

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)

The 2010 St. Petersburg International Economic Forum will start next week on June 17. This is a key capital markets event for investors, business people and policymakers and supported by the Russian Federation. Talk about the economy and banking is everywhere. This neatly dovetails into Russia’s own focus on economics as the main engagement point with other countries, especially those in the G20. Below is a letter from CREF’s Chairman Pavel Ivlev to forum attendees.

CREF Chairman’s Letter to St. Petersburg Economic Forum Attendees

Contemporary Russian Drawings and Paintings Including Works by Akhmetzyanova, Belyavskaya, Ermolaev, Garrido, Lomasko and Ozerova.

Following its well-received eight-month tour of Moscow, Brussels, London and Paris, Sketches of (in)justice: The Khodorkovsky Trial from Putin to Medvedev makes its US debut presenting more than forty works by twelve artists whose works reflect  the Russian peoples’ mounting frustration with corruption and hope for a freer society governed by the rule of law. The exhibition, created through “Drawing the Court,” a contest organized in Moscow by Sergey Kuznetsov Content Group (www.skcg.ru) and the Andrei Sakharov Memorial Museum and Community Center for Peace, Progress and Human Rights (www.sakharov-museum.ru), is on view from May 18 through May 22. The exhibition will then move to the Library of Congress in Washington, D.C.

The Khodorkovsky trial and the imagery it has inspired now serves as a reference point, being one of the significant phenomena of the Russian contemporary history, and another step in the eternal interaction of man and law. In assembling the exhibition, the organizers reviewed more than 400 works submitted in the categories “Painting,” “Courtroom Sketch,” ‘Illustration/Comic Strip,” and “Caricature.” Approaching their imagery from different political, aesthetic and ethical vantage points, all of the artists’ imagery shines through the prism of this bellwether case.

The genre of courtroom sketches first emerged in France, in mid 19th century, and quickly spread to other countries, including Russia. The history of Russian law would not be complete without drawings by Pavel Pyasetsky and Vladimir Makovsky made at the “March 1” Group trial, sketches from the Beilis Trial, and the Kukryniksy group’s graphic series “Accusation” created after the Nuremberg Trials. There are moments when a single drawing made in a courtroom can tell us more about prosecutors, lawyers, judges and other parties of a process better than scores of photographs.

The trial of Mikhail Borisovich Khodorkovsky has already become a factor of the Russian contemporary history and is attracting increased international attention. The trial has gone beyond a mere social phenomenon, and has become a fact of Russian contemporary culture, being covered not only by journalists, but also artists, poets, and novelists. Incarcerated Mr. Khodorkovsky himself still supports various cultural initiatives, and acts as a journalist

Admission: Free and open to the public.

Gallery Hours: May 18 – 22 from 2 p.m. – 7 p.m. For general information call 212-874-7188 or visit www.gelabertstudiogallery.com

Education and Public Programs
In conjunction with the exhibition, the Committee for Russian Economic Freedom will host a panel discussion featuring leading legal experts and human rights advocates discussing the artistic, social and political implications of the Khodorkovsky case. The panel will take place on Tuesday, May 18 at 3 p.m. at the Dorot Center, 171 West 85^th Street, New York. Participants will include Karinna Moskalenko, Sergey Lukashevsky, Mary Holland and Pavel Khodorkovsky.

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.

Out of all the recent articles, Eurasia Daily Monitor summed up the current Russian situation best: Medvedev’s Euro-Modernization Hits the Corruption Wall. The European Union is keen on establishing a more normalized business relationship with Russia and proposed a “Partnership for Modernization.” This partnership empasizes the rule of law and corporate governance as European businesses are wary of the Russian commerical climate. The crucial issue in the EU-Russia business relationship is corruption.

The US State Department issued their annual human rights report last week and described corruption in Russia as

widespread throughout the executive, legislative, and judicial branches at all levels, and officials often engaged in corrupt policies with impunity.

Additionally, TRACE International’s Alexandra Wrage mentioned in a Reuters interview that corruption extracts a high tax on development in emerging market economies. And in comparison to other BRIC countries, the corruption in Russia is especially pervasive,

Corruption in China is an inverted pyramid with most bribery at the top while India is the opposite with corruption rampant at lower levels but tapering off higher up. Russia is a solid block. There is bribery at all levels. There appears to be sense of near-complete impunity, a sense of entitlement.

To underscore the endemic corruption, Russian bloggers have found plans by the Interior Ministry to buy a $800,000 golden bed. With only government-sponsored news available to Russians, bloggers have taken on the role of whistleblowers in a country with few outlets for political discourse. But with only 30% of Russian households with access to the internet, the impact of the bloggers remain muted.

The Economist argues in the recent article, “Modernising Russia: Another great leap forward?” that President Medvedev’s efforts to modernize Russia by creating a Russian version of Silicon Valley without strengthening institutional weaknesses is the result of an authoritarian regime that trumpets the state as the “only force capable of making Russia great and respected again.”

As the article points out, changes to the existing system threatens not only the power and legitimacy of the existing ruling elite, but their immense wealth as well

Russia’s ruling elite, which consists of a corrupt bureaucracy, the security services and a few oligarchs, lives off the rent from natural resources or administrative interference in the market. Competition and the rule of law undermine this arrangement. Corruption holds it together, and ensures the loyalty of the bureaucracy.

The conflict between real modernization and the vested interests of this bureaucracy is summed up in the fate of Mikhail Khodorkovsky, once Russia’s richest man and now its most famous political prisoner.

Russia’s institutional weaknesses are well known, weak rule of law, endemic corruption, no respect for property rights and governmental favortism in dealing with the private sector and weaken Russia from within. Without political competition and property rights protection, capital investment in Russia will remain anemic.