Time: The Danger of Doing Business in Russia

December 19, 2009

On Oct. 13, Russ­ian lawyer Sergei Mag­nit­sky, impris­oned on tax eva­sion charges, told Russ­ian Inte­ri­or Min­istry inves­ti­ga­tors that he was being denied med­ical care and sub­ject­ed to “inhu­mane and humil­i­at­ing con­di­tions” in Moscow’s noto­ri­ous Butyr­ka jail. The treat­ment, he said, result­ed from his refusal to give false tes­ti­mo­ny against him­self and oth­ers. A month lat­er, Mag­nit­sky, 37, was dead. The Inte­ri­or Min­istry, which had charged the lawyer with con­spir­ing to help William Brow­der, head of the Lon­don-based invest­ment firm Her­mitage Cap­i­tal, alleged­ly evade more than $3 mil­lion in tax­es, said it had not been aware that he had been ill. In prison notes released by his attor­neys, how­ev­er, Mag­nit­sky repeat­ed­ly com­plained about being refused treat­ment for pan­cre­ati­tis, a con­di­tion his friends and col­leagues say led to his death.

Wid­ow Natalia Zhariko­va grieves over her hus­band Sergei Mag­nit­sky’s body

Mag­nit­sky’s death has trig­gered a wave of pub­lic dis­cus­sion in Rus­sia — reach­ing as high as the Krem­lin — about the squalid con­di­tions in the coun­try’s jails and bureau­crat­ic incom­pe­tence. But it has also renewed focus on an odi­ous crim­i­nal prac­tice that embod­ies what Pres­i­dent Dmit­ry Medvedev describes as the “legal nihilism” per­vad­ing the coun­try. It’s known as rei­der­st­vo, or “raid­ing,” a term that describes an array of ille­gal tac­tics — includ­ing iden­ti­ty theft, forgery, bribery and phys­i­cal intim­i­da­tion — used by cor­rupt police­men, tax offi­cials, lawyers and financiers to seize a per­son­’s busi­ness or prop­er­ty. (See pic­tures of Hillary Clin­ton in Russia.)

Her­mitage claims it was tar­get­ed in just such an attack two years ago and that Mag­nit­sky was arrest­ed in retal­i­a­tion for going pub­lic with the scam. Accord­ing to Mag­nit­sky, the raid began in June 2007, when police burst into Her­mitage’s offices with war­rants and seized com­pa­ny records, cor­po­rate seals and tax cer­tifi­cates, which were then used by cor­rupt gov­ern­ment offi­cials and oth­er mem­bers of their crim­i­nal gang to take own­er­ship of three Her­mitage sub­sidiaries. Months lat­er, the com­pa­ny claims that pho­ny law­suits were filed against the three firms, lead­ing to sev­er­al judg­ments against them. With the assis­tance of tax offi­cials, Her­mitage says the raiders then alleged­ly used the judg­ments to secure a fraud­u­lent $230 mil­lion tax refund from the government.

The Inte­ri­or Min­istry has denied any ulte­ri­or motives in Mag­nit­sky’s deten­tion, say­ing he was being held sole­ly because of the tax eva­sion charges. (Brow­der says those charges were with­out mer­it.) In April, a Moscow court con­vict­ed a sawmill fore­man, Vik­tor Markelov, of fraud in con­nec­tion with the raider scam, sen­tenc­ing him to five years in prison. The ver­dict men­tions only “uniden­ti­fied per­sons” as Markelov’s co-con­spir­a­tors and does not include any ref­er­ence to the Her­mitage sub­sidiaries being stolen. But the com­pa­ny says Markelov was like­ly just a bit play­er and notes the $230 mil­lion has yet to be returned to the Russ­ian trea­sury. To get to the bot­tom of who was respon­si­ble for Mag­nit­sky’s death, “one needs to find out who got the stolen $230 mil­lion,” says Brow­der, whose fund was once the largest for­eign investor in Rus­sia and who has been barred entry to the coun­try since Rus­sia deemed him a threat to nation­al secu­ri­ty in 2005. (See pic­tures of Vladimir Putin.)

Kir­ill Kabanov, a mem­ber of Medvede­v’s human rights coun­cil and head of the Nation­al Anti­cor­rup­tion Com­mit­tee, a non­govern­men­tal orga­ni­za­tion, said the attack on Her­mitage assets was a high­ly sophis­ti­cat­ed exam­ple of rei­der­st­vo. “The tac­tics were dif­fer­ent, but the strat­e­gy was the same,” Kabanov said.

There are no reli­able sta­tis­tics on the num­ber of cor­po­rate raider attacks car­ried out each year, although media reports have put the num­ber as high as 70,000. But the impact of the crim­i­nal prac­tice on the econ­o­my is quite clear — busi­ness lob­by­ists and cor­rup­tion experts say it is par­a­lyz­ing small- and mid-sized busi­ness­es, as well as scar­ing off for­eign invest­ment. “If an Ital­ian is doing busi­ness here and is tar­get­ed in a raider attack, he’s going to tell his coun­try­men,” says Alexan­der Brechalov, vice pres­i­dent of Opo­ra, a Russ­ian lob­by­ing group for small busi­ness­es. “Who is going to want to come to Rus­sia after hear­ing that? It’s an epi­dem­ic that needs to be con­tained.” (See pic­tures of Russ­ian police break­ing up an anti-Krem­lin rally.)

Experts say that busi­ness­men not only risk los­ing their assets when they’re tar­get­ed, but they can also end up in jail on trumped-up charges brought by cor­rupt law enforce­ment offi­cials and pros­e­cu­tors. Russ­ian busi­ness­man Alex­ei Kozlov, who claims he was the vic­tim of a raid aimed at seiz­ing his syn­thet­ic leather fac­to­ry in Moscow, was con­vict­ed of fraud in May and sen­tenced to eight years in prison. In a tele­phone inter­view from prison, Kozlov said that Butyr­ka is teem­ing with entre­pre­neurs locked up on pho­ny charges brought against them in raider attacks. “Before I land­ed behind bars, I thought only crim­i­nals were in jail,” Kozlov said. “Now I know it’s not only crim­i­nals.” (Read: “Putin: Yes, I May Run Again. Thanks for Asking.”)

The destruc­tive effects of rei­der­st­vo have not escaped the atten­tion of top offi­cials. Medvedev has called the prac­tice “shame­ful” and expressed sup­port for mea­sures aimed at eas­ing pros­e­cu­tion of such crimes. “The seizure schemes are con­duct­ed very pro­fes­sion­al­ly, that is a fact,” he told Russ­ian sen­a­tors on Nov. 5. “Some­times it’s sim­ply impos­si­ble to get to the bot­tom of them. But that does­n’t mean that our law enforce­ment author­i­ties should­n’t be try­ing.” The issue was even raised dur­ing a live call-in TV show with Prime Min­is­ter Vladimir Putin ear­li­er this month. Respond­ing to a ques­tion about how the gov­ern­ment planned to tack­le rei­der­st­vo, Putin said a pro­pos­al to uni­fy var­i­ous raider tac­tics under a sin­gle crim­i­nal statute would help law enforce­ment offi­cials work “more effectively.”

Then, on Dec. 15, came a sign that author­i­ties may be crack­ing down on indi­vid­u­als sus­pect­ed to be involved in the raid on Her­mitage’s assets. The Krem­lin said that Medvedev had dis­missed Ana­toly Mikhalkin, the head of the tax crimes depart­ment of the Moscow police. Police spokes­woman Zhan­na Ozhim­i­na denied the move was linked to the Mag­nit­sky case, say­ing that Mikhalkin had stepped down because of his age. But Her­mitage says Mikhalkin may have been fired because he had signed off on doc­u­ments used in the seizure of its sub­sidiaries. (See pic­tures of Rus­sia cel­e­brat­ing Vic­to­ry Day.)

Even if this is the case, Brow­der stress­es that a harsh­er response from the gov­ern­ment is need­ed to stem the tide of raid­ing in Rus­sia, name­ly crim­i­nal pros­e­cu­tion. “There is no com­par­i­son between the loss of a job and the loss of an inno­cent man’s life,” he says.

By Carl Schreck / Moscow

Arti­cle pub­lished in TIME mag­a­zine.

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