“The Kremlin says Russia is a country of great opportunity. But my trial demonstrates that it is also a country of great risks.” – Mikhail Khodorkovsky
James Beadle
Source: PRIME-TASS
Contributed by James Beadle, a private investment consultant
MOSCOW, Jun 23 (PRIME-TASS) — Since 2003 former Yukos executives Mikhail Khodorkovsky and Platon Lebedev have been incarcerated in Russia on charges of tax evasion. At present, as their eight year stint enters its final stages, the two are on trial once more, charged with stealing millions of tonnes of oil (reputedly the same oil that they didn’t pay taxes on).
The Yukos case has always been of fundamental significance to Russia investors. The original arrests marked the end of what might be called the “liberal progressive” period of Vladimir Putin’s presidency. As Yukos was transferred to the state through a series of corrupted political interventions, so Putin’s policies became increasingly harsh.
His efforts to placate investors by offering up Gazprom delivered huge profits to a minority, but had little structural impact. And although the Russian market soared from 2004-2008, the costs and implications of the Yukos case also lingered and stacked up. Russia became increasingly corrupted as the judiciary ceased any pretence of impartiality and the bureaucracy found its powers rejuvenated. The one-party system rebounded from 15 years in the wilderness.
Today, Russia faces a new set of challenges. Although it has not acknowledged the costs of nationalist policies and political risk, unleashed by the prosecution of the nation’s former richest man, it publicly recognises that dependence on oil and gas revenues is a limited and dangerous strategy.
As Khodorkovsky and Lebedev labour their way through their second show-trial, Russia’s new president is seeking to demonstrate that the nation is changing, that business risks are on the decline and that foreign investors are welcome, wanted even.
If the facts of the Yukos case were clean cut, or even uncertain, then the trial would be of limited importance; but the scale of the farce taking place in the Moscow courtroom is rapidly becoming a political embarrassment. Few Russia specialists, this one included, expect a fair hearing, or an honest outcome. But, as the evidence stacks up against the prosecution, so the case gains importance as a litmus test of how much has changed since Medvedev came to power on a promise to end corruption and clean up the judiciary.
In recent court sessions, Khodorkovsky has cross examined a series of high profile politicians from the Putin era: former central banker Viktor Gerashenko, former Prime Minster Mikhail Kasyanov (now an embattled opposition leader), former Economics Minster German Gref (now head of Sberbank) and incumbent Industry and Trade Minister Viktor Khristenko.
All have, to a greater or lesser extent, come out against the prosecution, stating variously that no oil was stolen, that transfer pricing was legal and normal practise or that they were not aware of any theft.
The cynical argument would be to say that this new freedom of speech – which would have been inconceivable just a few years ago – is an effort to make the trial look fair before putting the pair away again. The reality is that something has shifted in Russia.
Not to say that we should expect an honest or open result. Yukos investors are currently prosecuting the government for $100 bln in the European Court of Human Rights. (Note that there was no sign of contingency for this case in the pricing of Russia’s recent Eurobond.) A victory for the defendants would certainly increase the risk of Russia being put on the hook for an extremely large sum in this related case.
More important, it would also discredit the entire Putin era, undermining much of the power vertical that has been so meticulously constructed.
The sad fact is that Khodorkovsky and Lebedev are likely to be kept in jail for a long time yet. Many senior investors will talk about why this is justified. The truth is that it will continue to sustain the risk premium Russia faces as an investment destination. (The true cost of the policies that began with the prosecution of Yukos – in terms of reputation, investor risk premium and lost opportunity – are unmeasurable, but certainly higher than the $100 bln being sought by Yukos shareholders.)
Freeing Khodorkovsky and Lebedev would be a bold move implying that things are really on the mend in Russia. It would boost investor interest and bring a difficult transitional chapter to a close. Unfortunately, with so many of the victors of that chapter still in power (is it a coincidence that there is a lengthy article about Igor Sechin in the FT this week?) such an outcome is unlikely.
At last week’s St Petersburg Economic forum, President Medvedev announced the elimination of capital gains tax on long-term fixed investment projects. It is pertinent that Russia is doing what it can to sustain high returns as economic growth has slowed and risk remains high.
Witnesses at the Khodorkovsky trial have proven that things are changing in Russia. But freedom of speech is one thing, independent judiciary is quite another.
The case is likely to confirm my 2010 outlook that the changes under-way fall short of what is needed for Russia to embark on an optimal development path, but we should never forget that in Russia the unexpected is always possible.
End
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.
Los Angeles Times
The government is building a Russian version of Silicon Valley. But the Kremlin’s Big Brother approach, along with lawlessness and corruption, leaves entrepreneurs wary of taking risks.
Leon Aron
June 23, 2010
Having survived — barely — an 8% contraction in its gross domestic product (the worst among the G-20 countries), Russia’s prospects for the next few years are iffy at best. Unless oil shoots back up to more than $100 a barrel, the country’s economy may grow only slightly — or stagnate for the next few years.
In response to its economic woes, the Kremlin has decided that what Russia needs is the equivalent of a Silicon Valley. And so the government is building “Innovation City” in Skolkovo, just outside Moscow. The project is envisioned as a kind of free entrepreneurial zone, aimed at attracting the best and the brightest from Russia and abroad. The Kremlin has appropriated $3.5 billion to build the “technopolis” — a gated community surrounded by guards
This is hardly a new strategy. Importing ideas and technology from the West has been a key element in Russia’s “modernizations” since at least Peter the Great in the early 18th century. For two centuries, Russian leaders followed in the czar’s footsteps, including when Stalin implemented his five-year plans. But Russia has tightly controlled what it imported. Machines and engineers, yes. A spirit of free inquiry, a commitment to innovation free from bureaucratic “guidance” and, most importantly, encouragement of brave, even brash, entrepreneurs who can be confident they will own the results of their work — most certainly no.
Peter and his successors sought to produce fruit without cultivating the roots. During the 17th and 18th centuries, this approach could be seen in the Nemetskaya sloboda (German district), where foreign craftsmen lived but Russians were not allowed lest they be tainted by foreign influences.
When national economies were defined by the amount of pig iron, steel and coal they produced, a serf or a worker with no rights would do. They could cast Peter’s cannons and pour concrete for the plants of Stalin’s industrialization. But only a man or woman free from fear and overseers can build a Silicon Valley.
And such men and women are harder and harder to come by in Russia today. Disgusted and scared by the lawlessness and rampant corruption, they tend to shy away from ambitious plans and avoid taking risks.
To be fair, President Dmitry Medvedev, who will visit California’s Silicon Valley this week, is aware of the problems and says all the right things about the need for liberty, private property and a spirit of unfettered innovation. He speaks of the importance of the rule of law. But after two years in power, he is losing credibility, and his words are wearing thin. “How are things, really?” I recently asked a top Russian entrepreneur, having made sure that no one could hear us. “Poka ne trogayut,” he answered. “They are not after me yet.” Hardly an environment for an innovation-driven business model.
Paralyzed with fear and uncertainty, Russian entrepreneurs are investing very little in their country beyond their immediate production needs. Up to 80% of investment in Russia today comes from the government. Capital flight is rampant. Worse yet, according to recent research, some of the most successful Russian entrepreneurs, not satisfied with merely sending their children to live and study in the West, increasingly think of selling their businesses and leaving themselves. At the very least, almost all are building their lives and business around the “two-home” model: one in Russia, one in the West.
Today’s atmosphere is a far cry from the end of the 1990s and first few years of this century. Then, with the worst of the rough-and-tumble, raw and crude capitalism behind it, Russia seemed as if it would soon be capable of forging its silicon valleys. State power seemed to be finally detaching itself from property, and top Russian entrepreneurs, newly confident of their property rights, began to invest billions of dollars to create companies every bit as modern, efficient and open as the leading Western conglomerates. With their profits, they donated millions to charity, promoted computer literacy and Internet availability and invested in a “knowledge-based” economy.
One company and its entrepreneurial leader stood as symbols of the new business environment: the oil company Yukos and its chief executive and principal owner Mikhail Khodorkovsky. Today, the company is no more. It was taken over by the state for alleged nonpayment of taxes, broken up and sold at rigged actions to the state-owned Rosneft. Convicted by a kangaroo court on charges of fraud and sentenced to eight years in prison after his 2005 trial, Khodorkovsky today is in the middle of another farce of a trial, accused of stealing 350 million tons of oil from Yukos’ subsidiaries.
The road to a Russian Silicon Valley starts not in California, Mr. President. It begins with unlocking the door to Mikhail Khodorkovsky’s jail cell.
Leon Aron is director of Russian studies at the American Enterprise Institute.
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.
* 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)
EDITORIALS
Wednesday, June 9, 2010
RUSSIA’S GOVERNMENT has calculated that it needs better relations with the West to attract more foreign investment and modern technology, according to a paper by its foreign ministry that leaked to the press last month. Prime Minister Vladimir Putin has recently made conciliatory gestures to Poland, while President Dmitry Medvedev sealed a nuclear arms treaty with President Obama. At the United Nations, Russia has agreed to join Western powers in supporting new sanctions against Iran.
Moscow’s new friendliness, however, hasn’t led to any change in its repressive domestic policies. The foreign ministry paper says Russia needs to show itself as a democracy with a market economy to gain Western favor. But Mr. Putin and Mr. Medvedev have yet to take steps in that direction. There have been no arrests in the more than a dozen outstanding cases of murdered journalists and human rights advocates; a former KGB operative accused by Scotland Yard of assassinating a dissident in London still sits in the Russian parliament.
Perhaps most significantly, the Russian leadership is allowing the trial of Mikhail Khodorkovsky, a former oil executive who has become the country’s best-known political prisoner, to go forward even though it has become a showcase for the regime’s cynicism, corruption and disregard for the rule of law. Mr. Khodorkovsky, who angered Mr. Putin by funding opposition political parties, was arrested in 2003 and convicted on charges of tax evasion. His Yukos oil company, then Russia’s largest, was broken up and handed over to state-controlled firms.
A second trial of Mr. Khodorkovsky is nearing its completion in Moscow, nearly a year after it began. Its purpose is transparent: to prevent the prisoner’s release when his first sentence expires next year. The new charges are, as Mr. Putin’s own former prime minister testified last week, absurd: Mr. Khodorkovsky and an associate, Platon Lebedev, are now accused of embezzling Yukos’s oil production, a crime that, had it occurred, would have made their previously alleged crime of tax evasion impossible.
Mr. Khodorkovsky, who acquired his oil empire in the rough and tumble of Russia’s transition from communism, is no saint, but neither is he his country’s Al Capone, as Mr. Putin has claimed. In fact, he is looking more and more like the prisoners of conscience who have haunted previous Kremlin regimes. In the past several years he has written numerous articles critiquing Russia’s corruption and lack of democracy, including one on our op-ed page last month.
Mr. Obama raised the case of Mr. Khodorkovsky last year, and the State Department’s most recent human rights report said the trial “raised concerns about due process and the rule of law.” But the administration has not let this obvious instance of persecution, or Mr. Putin’s overall failure to ease domestic repression, get in the way of its “reset” of relations with Moscow. If the United States and leading European governments would make clear that improvements in human rights are necessary for Moscow to win trade and other economic concessions, there is a chance Mr. Putin would respond. If he does not, Western governments at least would have a clearer understanding of where better relations stand on the list of his true priorities.
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 85th Street, New York. Participants will include Karinna Moskalenko, Sergey Lukashevsky, Mary Holland and Pavel Khodorkovsky.
Reuters reports that Former police major Alexei Dymovsky, who posted a video about police corruption on YouTube, was arrested today on charges of fraud and abuse of power. Go to the Videos tab to watch Dymovsky’s appeal to Prime Minister Putin.
Transparency International released its 2009 Corruption Perception Index (CPI) and again Russia’s low ranking, 146th 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.
As some of you may already know, Chicago will be hosting Russian National Exhibition at McCormick Place, from November 18 to November 21, 2009. Along with the exhibition, McCormick Place will host a forum Russia-US: “Reset” of Relations.
This is a great occasion to voice your support of Mikhail Khodorkovsky and other prisoners who were unjustly tried and convicted in Russian Courts. To that end, I am organizing a Protest in Support of Mikhail Khodorkovsky, to be held in front of The Drake Hotel, on Wednesday, November 18, at 8:00am. If New York could do it – so can we!!!
If you know someone who may be interested – pass it on!!
Twitter @RusEconFreedom