Committee for Russian Economic Freedom

Jamison Firestone describes the highlife and crimes of Russian official Pavel Karpov and Sergey Magnitsky lies in prison.

The same day Russian president Dmitry Medvedev announces his new “national strategy” to counter corruption, the German and US authorities begin a $10 million bribery probe into Hewlett-Packard executives. The investigation involves an incident that occurred over seven years ago, according to an Hewlett-Packard spokesman. Medvedev has made combating corruption a priority for his administration, but the corruption in Russia has deep roots.

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.

Despite a recent article linking Russian Medvedev’s liberalization efforts as gloss on Putin’s authoritarianism, there remains a way for political outsiders, Russians and foreign investors to effect change in Russia, and that is through company ownership. With no political opposition and cronies heading up the country’s largest companies, the current political structure is in place to maintain Russia as an ATM for the political elite. According to Transparency International Russia,

Since Putin came to office in 2000, Russian officials are estimated to have skimmed some $200 to $300 billion a year from the economy.

The most important job of the Russian government is to ensure that all the stolen money remains hidden and that the system aiding and abetting the pilfering of national assets remains in place. So, even though 93% of Russians believe that the government is not doing enough to combat corruption, Medvedev will not enact meaningful reform and rock the boat he helped build with Putin.

One of the only ways to make Russian political and business elite to take notice, is shareholder activism. By using his minority ownership of state-run companies, Alexei Navalny has shone the spotlight on the mismanagement and embezzlement by government officials. Foreign investors in Russia can do the same by demanding a greater percentage of ownership and management input from Russian companies that seek to tap into international capital markets. From this ownership position, accountability and transparency can start to take root in the Russian economy.

Recently Bill Browder, CEO of Hermitage Capital Management was on CNBC with Maria Bartiromo discussing the risks and rewards of investing in Russia. In this segment he describes the reality of investing in Russia and lengths authorities there go to expropriate private property for personal gain.

In the March 1, 2010 Christian Science Monitor article, “Vancouver Olympics: Embarrassed Russia looks to 2014 Sochi Olympics,” Fred Weir writes about allegations about corruption, poor planning, environmental violations and government suppressing Olympic snafus.

According for former deputy prime minister Boris Nemtsov,

Sochi is the warmest place in Russia, with no infrastructure, no experience in winter sports – it doesn’t even have a hockey team – and many other problems.

With a budget of $17 billion and over 200 buildings and infrastructure Russia needs to build, the scramble has begun for construction contracts. Additionally, the road linking the mountain top sports venue with the seaside Olympic center will be the world’s most expensive at $130 million per kilometer, 50 times higher than the average cost of a kilometer of highway in the United States.

At the September 2009 Committee for Russian Economic Freedome event, Jamison Firestone spoke about the need for greater respect and adherence to the rule of law in Russia and how institutional corruption worked to seize Hermitage Capital’s assets.

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.