Committee for Russian Economic Freedom

He’s stuck between an (alleged) $40 billion fortune and a hard place.

Prime Minister Putin

Michael Bohm writes in the Moscow Times that the only way for Prime Minister Vladimir Putin to ensure his continued economic prosperity – not to mention his freedom – is to stay in power, as the once-and-future Russian president could be subject to “possible corruption and other criminal charges” should he leave office.

Bohm explains:

As long as Putin remains in control, Western leaders will continue to do business as usual with him and his administration, and they will ignore or downplay allegations of corruption at the very top.

Should an opposition leader rise to power, a Putin trial – over the theft of Yukos, or over “corruption […] at Gazprom, VTB, Transneft, Russian Technologies, National Media Group, Gunvor, the Rotenberg brothers’ enterprises, Bank Rossia, arms trader Rosoboronexport and dozens of other companies that make up Putin’s ‘Russia, Inc.’” – would soon follow.

Bohm writes that Western leaders have shown in the last decade they have no trouble turning on a former dictatorial ally (Mubarak) or to go from tolerating a dictator to actively seeking his removal from power (Gadhafi).

“A similar fate could await Putin,” Bohn concludes, unless, of course, after two more presidential terms a 72-year-old Putin flees to friendly Belarus – or finds a way to stay in power into his sunset years.

Read the full article here.

Pavel Khodorkovsky

As rigged parliamentary elections provoked an outcry across the globe, Russian citizens have risen up to demand accountability from their leaders, writes Pavel Khodorkovsky, son of jailed former Yukos CEO Mikhail Khodorkovsky, in the World Policy Journal.

The protest movement is Russian through and through, Khodorkovsky explains, not provoked by an outside source. It’s a movement that he expects will only gain momentum as the nation heads toward a spring presidential election.

Read the full article here.

A man protesting the results of the Duma elections is arrested. Credit: Reuters

Tai Adelaja of Russian Profile notes that this week’s demonstrations in Moscow “may have started to take a toll on the country’s economy,” as state bank VneshEconomBank canceled its Eurobond placement and two Russian mining companies have completed their escape from the MSCI Index to the FTSE 100.

VEB’s bond postponement is the first of its kind since the early 1990s, as “bond investors who initially showed interest in buying VEB bonds have started to withdraw their applications, as uncertainty clouds political future in Russia.”

Meanwhile mining companies Polymetal and Evraz became the first Russian firms admitted to London’s FTSE 100, with analysts seeing “a political undertone in their decisions.”

Two other Russian companies, Russian Railways and TNK-BP,­ are planning to meet with investors next week, the results of which could signify how money managers feel toward Russia after the election.

Read the full article here.

The cover story in the Russian Weekly New Times gives a well-constructed overview of how Prime Minister Vladimir Putin and his cronies have “divided up the country” to create an all-powerful “Russia, Inc.” that controls 10 to 15 percent of the nation’s annual GDP. Yevgeniya Albats and Anatoliy Yermolin write that the process begun after the arrest of Mikhail Khodorkovsky in 2003 has continued through a series of hostile takeovers, questionable auctions and security service intimidations, as huge industries have returned to state control.

Essentially, a vertically integrated holding company has been created in the country’s expanses – it has its own credit organizations that provide working capital, its own cash factories that pump oil and gas from the land, its own pipeline systems, its own transport of all possible kinds, its own structures that ensure security and weapons for it, its own communications, its own social amenities, its own services, including media services, and its own instruments of political control.

Vladimir Putin

Putin’s strategy was to completely control the political process, remove Yeltsin-era elites from government and replace them with loyalists and audit to death the private companies created in the aftermath of the fall of Soviet Union.

With the Yeltsin-era business leaders out of the picture and his own cronies in place, wresting control of major industries – finance, energy, military and infrastructure – became possible.

The full article, in Russian, is available here.

Blackstone Group's Steven Schwarzman

The executives of J.P. Morgan Chase, the Blackstone Group and Citigroup were in Russia last week advising President Dmitry Medvedev on how Moscow can improve its business and investment climate, writes the Wall Street Journal.

“Funds are actually scared to put money here. That’s the problem you must solve,” Blackstone’s Stephen Schwarzman told Medvedev.

Schwarzman counseled the Russian president to sell off state companies to private investors, while J.P. Morgan Chase CEO James Dimon recommended developing a “very strong set of legal rights” to lure investors, as the country’s notorious legal system and high levels of corruption often drive away investment.

You can read more here.

The Kremlin’s human rights council earlier this week called for an amnesty for economic crimes in order to attract foreign investment and boost economic growth, according to Bloomberg News. 

Kremlin observers say that putting this proposal into action, which is unlikely, would improve President Medvedev’s standing ahead of the 2012 elections. According to a top Russian business lobbying group, one in six entrepreneurs has faced criminal charges.

Medvedev set up the human rights panel back in February.

Alexey Navalny, Los Angeles Times

Alexey Navalny speaks with Sergei L. Loiko of the Los Angeles Times about his efforts to uncover corruption in Russia. His profile has recently been elevated as Russian authorities take note of his efforts by opening a criminal fraud case against Navalny.

What’s your advice for those thinking about investing in Russia?

On the whole, investments in Russia may be profitable, and I am in no case warning against investing in Russia. But the gains for investors could be significantly higher if Russian companies were at least abiding by the basic rules of corporate management employed in the West. Investing in Gazprom [the state natural gas monopoly] could yield profits too. But if we made some basic steps aimed at curbing corruption within Gazprom, the company’s worth would rise by about 30%.

In practice, investors have no possibility to influence major Russian companies’ performance and receive information about it. My associates and I have spent three hard years constantly trying to get the basic documents about the performance of big companies such as [oil firms] Rosneft and Transneft. Finally we got a court order that the most basic documents be opened to us. But as a rule, the information about the work of such companies still remains a closely guarded secret.

When did you start to work to expose corruption?

It all started about five years ago as I realized that I needed to do something to safeguard my personal investments. The most interesting investment venues in Russia are oil- and gas-sector companies. These are a bunch of so-called major companies in Russia. Some of them are formally private, but they are all under state control. When I started to invest in those companies, I quickly saw that the dividends were very small while their management were leading luxury lives in their lavish villas in France, Spain and so on.

How seriously has corruption infiltrated the power hierarchy of Russia?

Russian power structures are corrupt inside out. People who don’t become part of corrupt schemes cannot efficiently work within the Russian government.

What are your thoughts on a fraud case opened against you by the Russian Investigation Committee?

It is a purely political and completely falsified case initiated at the very top. None of the cases I initiated have ever reached that level of attention. The Kremlin [leaders are] very irritated by the fact that they cannot control my blog in any way, [so they are responding,] be it scare tactics, a system of licensing or blunt money. I know they can do anything to me if they want.

It is the risk that comes with my job. But I am ready to take that risk. We have already received anonymous telephone calls with threats unless we drop our investigations. They have been digging dirt on me all this time and have come up with such a flimsy case in which they are not even accusing me of embezzling the money but just fraudulently causing some damage to an obscure provincial company. They want to scare me. For them the best outcome would be if I emigrate. But I will not give them that pleasure. I choose to stay and face the risks.

People who fight corruption in Russia take great risks. I am prepared to take these risks to make life in our country better. I will continue to do my work against all odds.

Peter Pomerantsev’s look into Russia’s growing television industry reveals the challenges of doing business in Russia. Among the unique features of working in Russia include diversion tactics for tax collectors seeking bribes, strategies for avoid kickbacks or otkat for broadcasters and overcoming societal indifference to rules of the game.

Pomerantsev starts his diary with the production company Potemkim Productions itself, the elaboate set up of gruff security men and rooms behind rooms are a ruse to persuade tax collectors that the company was small and warranted smaller levies.

No entrepreneuer paid their taxes in full: it wouldn’t occur to them. Taxes, he said, were just a way for bureaucrats to buy themselves holidays in Thailand…Ivan haggled with the tax police to keep down the size of the pay-off…then Ivan would bring out the fake accounts from the front office to support his case and they would sit down together to negotiate, with tea and biscuits as if this were the most normal of business deals. And in Russia it was.

Pomerantsev was hired to produce reality tv shows like the ones in the West, but those mainly flopped. The Russian version of The Apprentice closely followed the aspirational themes of those in the West, with someone succeeding after hard work, perserverence and some panache. The problem was:

…no one in Russia believed in the rules. The usual way to get jobs in Russia is not by impressing at an interview, but buy what is known as blat – “connections”. Russian society isn’t much interested in the hard-working, brilliant young business mind. Everyone knows where that type ends up: in jail like Mikhail Khodorkovsky, or in exile like the mobile phone billionaire Yevgeny Chichvarkin. Today’s Russia rewards the man who operates from the shadows, the grey apparatchik, the master of the politique de couloir – the man like Putin…The shows that did work were based on a quite different set of principles. By far the biggest success was Posledny Geroi (“The Last Her0″), a version of Survivor, a show based on humiliation and hardship. this chimed in Russia – a country where being bullied by the authorities is the norm.

The structural and cultural obstacles to aspiration and innovation are reflected Russia’s low ranking in Transparency International’s Corruption Transparency Index where it is the most corrupt major economy. Bloomberg reported on a Freedom House report that

Russia risks turning into an autocracy that resembles authoritarian regimes in the Middle East if Prime Minister Vladimir Putin prolongs his rule in 2012 elections…As venal Middle Eastern authoritarians give way to popular pressure for democratic change, Russia’s systemic corruption is becoming especially conspicuous.

The political risk in Russia remains higher than other emerging markets and for that reason the US private equity firm Blackstone doesn’t invest there. Could concerns with complying with US Foreign Corrupt Practices Act be a resaon too?

Arkady Gontmakher, the owner of Global Fishing in Seattle, Washington was arrested in 2007 in Moscow for money laundering and poaching king crabs from Eastern Russia to sell to the US market. After being acquitted in December 2010, Gontmakher was charged again with money laundering on the same grounds.

After three years in pretrial detention his health has deteriorated, but he fears for his life if he has to have heart surgery in Russia

Who can guarantee that an operation can be carried out successfully under such police pressure?

Gontmakher just wants to be released and go back to the US where his wife lives. He would not continue to work in Russia, Gontmakher said — and he “wouldn’t advise that to anyone, either.”

Police general Alexander Bokov was arrested in a $46 million fraud case involving Volgotanker, the former shipping giant linked to Yukos. Bokov along with accomplices Mikhail Kreimer and Sergei Stepanov, tried to get businessman Alexei Chegodayev to give them $46 million in exchange for a controlling stake in Volgotanker.

How did a police general get control of the world’s largest river tanker company?

Former Volgotanker executive Ilya Katsnelson testified in front of the US Helsinki Commission in 2009 to describe how the company was illegaly taken over by corrupt Russian law enforcement from its managers and shareholders in the shadow of Kremlin’s orchestrated attack on Yukos. Volgotanker, like Yukos before it, was crushed by a bankruptcy process based on invented tax claims.

However,  the money-making business of the Ministry of the Interior, same organization which denied attorney Sergei Magnitsky medical attention that led to his death, never stops. So once Bokov had Volgotanker under control, he tried to sell it to Chegodayev. Something went awry in the transaction as Chegodayev never got the business he paid for and now the FSB (successor to the KGB) is persecuting the generals. Most probably, the FSB have their own perspective purchaser for the same asset. 

At Davos, President Dmitry Medvedev announced the creation of a special sovereign fund to attract foreign capital. This fund would allow foreigner to invest in state property; it is unclear if that means Rosneft or other strategic assets. Russia has the third largest reserves in the world but it is quickly shrinking due to capital leaking out of the system through corruption and expropriation.  The Reserve Fund, which is used to cushion budget gaps decreased by 58% to $25.4 billion last year.

As Russian officials continue to divide up the economic pie among themselves, they are seeking newer sources of capital from foreign investors. But investors should remember the fates of Yukos and Volgotanker and the corrupion tax on any potential returns.

Helsinki Commission Katsnelson Remarks 2009