Committee for Russian Economic Freedom

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.

Today’s Bloomberg article details Jamison Firestone’s revelation that Russian Interior Ministry officials tried to collect $21 million in taxes using forgery and theft. The method the government officials used were similar to the expropriation in the Hermitage Capital case through taxes. In April 2009 and again in October 2009, Firestone filed complaints with the tax authorities and the General Prosecutor’s office but neither offices responded.

Russia’s issues with government, institutionalized corruption is well-known. Ranked 146th in Transparency International’s 2009 Corruption Perception Index is having a real financial effect on the Russian economy. According to data by EPFR Global,

Perceived lack of law is one reason Russia has attracted less than one-fifth the investment in China and Brazil and half of what’s invested in India, its fellow members of the so-called BRIC group of emerging nations.

Firestone supported this assertion with,

Corrupt law enforcement is the single biggest risk to business in Russia.

At last September’s Committee for Russian Economic Freedom event in New York, Firestone had this to say about the rule of law in Russia.

Transparency International released its 2009 Corruption Perception Index (CPI) and again Russia’s low ranking, 146^th out of 180 countries, demonstrates it needs to do more to reign in corruption and strengthen its legal system.

This annual survey shows that concern among business people and analysts over state corruption and legal abuse deters direct foreign investment and harms Russia’s economic health. President Medvedev himself has repeatedly stated his commitment to ending “legal nihilism” and spurring a new era of foreign investment.

Yet, Mikhail Khodorkovsky, once Russia’s most successful businessman, remains in jail on a second round of fabricated charges, further eroding business confidence. Mr. Khodorkovsky recently passed the six-year mark of his imprisonment and faces another 22 years in Siberia if convicted in this second trial. This is taking place as capital outflows totaled over $169 billion, approximately 10% of Russia’s 2008 GDP, between October 2008 and March 2009 according to U.S. State Department statistics. Multinational companies, such as IKEA and Carrefour, have announced plans to withdraw or reduce investment in Russia due to extortion and lack of judicial independence.

Pressure on business is building following the recent death while in custody of leading Russian corporate counsel Sergei Magnitsky, 37, a key witness in another absurd legal battle over alleged tax fraud between the Kremlin and Hermitage Capital, once Russia’s top investment fund. The International Bar Association and the U.K. Law Society decried Magnitsky’s death as did Firestone Duncan Managing Partner Jamison Firestone who said the government ignored calls by business and legal leaders to release his former colleague.

“There is no law in Russia at the highest level,” Firestone said. “The higher you go the less there is law. Any lawyer who tells you he can protect you in Russia is a liar.”

Risks to the financial system mount as Russian President Vladimir Putin backs energy deals with German and Italian corporations and moves for the state to take a stake in the controversial initial public offering of the embattled aluminum giant UC Rusal. As Finance Minister Aleksei L. Kudrin seeks government bond financing from London bankers, the Kremlin Deputy Chief of Staff Vladislav Surkov warns Russia risks collapsing into chaos if officials try to fix the political system by adopting liberal reforms.