The Financial Times: Russian sharks are feeding on their own blood

July 6, 2009

By William Browder

When presidents Barack Obama and Dmitry Medvedev met on Monday for their first major summit, the main agenda items were arms control and Iran, and progress was made on the former, at least. This may encourage those who believe these issues can be dealt with in isolation from other challenges to US-Russia relations.

As someone who has been familiar with the country for the past 15 years, I believe that approach ignores fundamental differences between Russia today and most other nations. Simply put, Russia is not a “state” as we understand it. Government institutions have been taken over as conduits for private interests, some of them criminal. Property rights no longer exist, people who are supposed to enforce the law are breaking it, innocent people are victimised and courts have turned into political tools.

Rather than a normally functioning bureaucracy, Russia’s clans fight over control of government positions and the power to use state resources to expropriate assets. While corruption and legal abuse go on everywhere, the scale of them in Russia should affect the way all countries, particularly the US, deal with it.

My own case is illustrative of the breakdown of the state in Russia. From 1996 until 2005, I was the largest portfolio investor in the country, with $4bn (£2.5bn, €3bn) invested. In November 2005, the government suddenly took my visa away and declared me a “threat to national security”, I believe because I was outspoken about corruption at state-owned companies. This was followed by a cascade of malfeasance so extreme it would make a hardened criminal blush – which I believe was orchestrated by the authorities.

First, the Russian police raided our offices and took all our corporate documents. These were used fraudulently to re-register our investment holding companies into the names of convicted felons. The same documents were used to fabricate backdated contracts the criminals then “enforced” in Russian courts, which obligingly awarded them $974m in fake damages – helped by a guilty plea from lawyers falsely claiming to represent us. The criminals used these fake losses to claim a fraudulent refund of $230m of taxes we had paid in 2006, which was paid out to them in just two days. This despite us reporting the unfolding fraud to Russia’s top law enforcement officials 21 days before the tax money was stolen.

Foreign investors get ripped off all the time in many countries. What makes this story unique is the state officials working together to steal $230m from the Russian state itself. The sharks have started to feed on their own blood.

What makes it even more worrying is that the Russian government took no action to recover the money when we reported the crime. Rather than going after the rogue officials and criminals, the government turned the full weight of the law enforcement apparatus against us for reporting it. They arrested our lawyer, Sergey Magnitsky, who uncovered the tax rebate fraud. He has since been kept in pre-trial detention on cases I believe were fabricated. Six other lawyers who filed criminal complaints or helped discover the fraud were harassed and fled Russia for safety.

What are we to conclude from this episode? Some may argue the rule of law in Russia should not concern outsiders, but if corrupt officials can steal such a large amount of money from the state with no questions asked, it is not a very big leap for a similar group of corrupt officials to sell some loose Russian military hardware to terrorists, or even help rogue states to acquire nuclear technology. Moreover, when government officials act not in the interest of the state but for themselves, the normal tools of diplomacy simply do not work. It becomes impossible to trust international commitments, be it in the area of arms control or nuclear security. Perhaps there was a line in the past that Russians would not cross, but with the spectacular recent decline in the rule of law, anything is possible in Russia now.

What should the US do in its dealings with Mr Medvedev? Most importantly, it should call a spade a spade. It doesn’t do the west or the Russian people any good to keep pretending that everything is normal in Russia. The “loss of state” needs to be made a primary issue for the west, both for our own security and for the 140m suffering Russians.

The writer is founder of Hermitage Capital Management

Atricle was published in The Financial Times

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