Reuters: The Hermitage case and corruption in Russia
October 20, 2009
Foreign investors have come to accept that Russia is a pretty unforgiving place to put your money. Just ask BP, which was embroiled last year in a bitter feud at its joint venture TNK-BP, during the course of which BP endured a slew of questionable investigations and court cases. Or Norway’s Telenor, pressured recently into settling a dispute with its local partners under pain of seeing its stake at Russian mobile operator Vimpelcom confiscated by the government.
Such cases show how powerful interests seem able to use the legal process to extract money and concessions from foreign investors. But one foreigner’s tale makes even these well-known controversies look mild. Hermitage Capital Management, once the largest foreign investor in the Russian stock market, has become embroiled in a case that raises even more disturbing questions about the Russian justice system.
Hermitage claims to have uncovered evidence which shows that Russian gangsters conspired with bent cops and corrupt courts to steal three of its Russian subsidiaries, and subsequently used them to loot $230 million from the Russian budget by reclaiming taxes those companies had paid.
The Telegraph: Russia jails sawmill foreman for largest ‘tax fraud’ in country’s history
October 19, 2009
Viktor Markelov has pleaded guilty to “fraud by prior collusion by a group of persons and in an especially large amount” in a Moscow court, after the case was brought to the authorities’ attention by Hermitage Capital Management, the hedge fund battling to expose corporate corruption in Russia.
According to the verdict, Mr Markelov, 42, “a foreman for deliveries of lumber from sawmill DOZ-160”, used three former Hermitage subsidiaries to reclaim RUB5.41bn (£106m) of capital gains taxes paid by the hedge fund in a highly complex fraud. He will serve five years “in a correctional colony … with no fine”. There is no mention of any attempt to recover the lost taxes in the verdict or pursue other conspirators.
Mr Markelov’s sentence was reduced from 10 years after the court took “into consideration personal information”. It omitted to mention that he had previously been sentenced to two-and-a-half years for manslaughter.
Hermitage, the biggest foreign investor in the Russian stock market until 2006, has claimed that the sophisticated fraud could only have been committed with the collusion of senior figures in the nation’s law enforcement agencies and tax offices.
Bill Browder, the founder of Hermitage, has stepped up his campaign against Russian corruption by posting his allegations on YouTube.
Article by Philip Aldrick was published in The Telegraph.
The Times: Hermitage alleges fraud in high places in Moscow
October 19, 2009
In a letter Hermitage Capital accuses senior government officials of conspiring with a criminal gang to steal £235 million.
Fraudsters operating within the Russian Interior Ministry and the Moscow Tax Authority have stolen 11.2 billion roubles (£235 million) from the state budget, according to a complaint filed today with the Accounts Chamber of the Russian Federation.
In a letter to Sergei Stepashin, the chairman of the chamber and head of Russia’s anti-corruption committee, Hermitage Capital, a British-based hedge fund manager that formerly was the biggest foreign portfolio investor in Russia, accuses senior government officials of conspiring with a private criminal gang to steal the money.
Leading officials in the Moscow Tax Authority covered up crimes involving billions of roubles embezzled from the state budget, Hermitage alleges in its letter, which names individuals, accuses them of covering up the fraudulent activity and urges the Accounts Chamber to investigate.
Evidence uncovered by Hermitage, the company stated in its letter to Mr Stepashin, pointed to “an organised criminal group comprised of private individuals and government officials”. The frauds “would not have been possible without the direct involvement of officials” from the Moscow Tax Authority, Hermitage wrote.
Newsweek: Where Vultures Prey
October 17, 2009
Last month Dmitry Medvedev set out his bold new vision of a “more civilized” Russia, no longer prone to the “legal nihilism” that has rotted the fabric of Russian capitalism and turned the courts and police into tools for settling private business disputes. Many hoped that such a powerful signal from the president would set Russia on course to establish the rule of law. Now, a high-profile test case will show who runs Russia — crooks with official connections, or the state itself. This week a criminal suit filed in a Moscow court details a scam in which senior bureaucrats, judges, and police defrauded the Russian taxpayer of half a billion dollars — and then used the courts to persecute the scam’s victims when they tried to blow the whistle.
The Washington Post: ‘Raiding’ Underlines Russian Legal Dysfunction
August 13, 2009
3 Lawyers Targeted After Uncovering Seizure of Firms
Philip P. Pan
When three of Russia’s finest lawyers agreed to represent the investment fund Hermitage Capital, they thought they were taking on a routine tax case.
Then they uncovered evidence of a breathtaking crime: Top police and tax authority officials appeared to have quietly seized ownership of Hermitage firms and used them to arrange a $230 million tax refund.
Now, the lawyers themselves are in legal trouble. One has been jailed. The two others have fled the country. All three face charges that seem intended to discredit Hermitage and divert attention from the enormous theft.
Their plight highlights the hazards of practicing law in Russia’s corruption-ridden courts despite nearly two decades of reforms supported by hundreds of millions in U.S. and European aid. Prosecutors and police continue to dominate the judiciary as they did in the Soviet era, but unrestrained by the institutions of the old Communist system or the checks of a genuine democracy, the opportunities for abuse have grown.
No crime illustrates the state of the legal system better than what is known as “reiderstvo,” or raiding — the takeover of businesses through court rulings and other ostensibly legal means with the help of crooked judges or police. The practice is so widespread that local media have reported what raiders charge: $10,000 to alter a corporate registry, $50,000 to open a criminal case, $300,000 for a court order.
Hermitage, once Russia’s largest foreign shareholder with more than $4 billion in holdings, says it encountered a bold variation on reiderstvo: When raiders failed to seize its assets, they looted the Russian treasury instead, then went after the lawyers who caught them.
For more information please visit