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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