Khodorkovsky Corner: Russia’s Red Capitalism
by Paul Springer
While the old Soviet Union recoiled at the thought of capitalism, the new Russia has becoming increasingly dependent on capital from other nations. But as Russia seeks investors to fuel its growth, the safety of its political climate is receiving increased scrutiny.
Russia’s treatment of Mikhail Khodorkovsky, one of the nation’s richest men, has led many critics to wonder if Russia’s government is as bad as the USSR’s totalitarian regime.
Khodorkovsky and business partner Platon Lebedev have been in jail for years on bizarre charges that they embezzled oil from Yukos, their own oil company, and now the pair have been found guilty of embezzlement and money laundering charges that could keep them behind bars for another seven years.
The charges against the pair came during Vladimir Putin’s time as the Russian Federation’s president, and many critics of the countries legal system say the trial was emblematic of a government where toxic influence rules. The Moscow Times observes:
Khodorkovsky fell foul of the Kremlin during Putin’s first term after he aired corruption allegations, challenged the state’s control over oil exports and funded opposition parties.
After his arrest in 2003, Yukos was bankrupted by back-tax claims and its assets sold off, most ending up in state hands, deepening Western concerns about property rights and the rule of law in Russia under Putin.
U.S. Embassy cables also reveal discussions with an unknown source who said Yukos’ business practices were common and legal—and that Khodorkovsky would probably remain in jail as long as Putin was in power.
Now Dmitry Medvedev is technically in charge as president, but Putin still looms large in his official capacity as Prime Minister. But his reach goes considerably farther. The Telegraph U.K. considers the recent guilty verdicts as symptoms of Putin’s control:
The convictions of Mikhail Khodorkovsky and Platon Lebedev, his former business partner, come as further confirmation that Vladimir Putin still holds the reins of power in Russia in spite of ceding the presidency to Dmitry Medvedev.
The Guardian was even blunter:
Vladimir Putin’s unforgiving brand of vendetta politics today claimed another prominent victim with the guilty verdict against Mikhail Khodorkovsky, the former oil magnate who dared oppose the Kremlin strongman.
There was never going to be any other result. In modern-day Russia, challenging Putin is like standing in front of a tank. Either get out of the way or expect – sooner or later – to be flattened . . . .
But the lengths (and depths) to which the former KGB spy appears ready to go have fuelled claims, such as those publicised by WikiLeaks, that Russia has become a corrupt “mafia state” under his tutelage.
Yuri Schmidt, one of Khodorkovsky’s attorneys, said in a New York Times piece that an appeal is in the works, though an appeal may be fruitless within a corrupt legal system. Schmidt says Putin effectively announced the verdict ahead of time:
It’s hard to say whether the judge himself was embarrassed by the verdict, but Prime Minister Vladimir Putin made it clear several days ago how the Khodorkovsky trial would unfold when, responding to a question on national television, he declared: “A thief should sit in jail.”
The situation highlights the challenges facing investors seeking to invest in Russia, and it is not the most dire. Sergei Magnitsky, an attorney for Russian-focused Hermitage Capital, died in a Russian prison after accusing the government of massive financial fraud involving companies Hermitage in which it was an investor.
From an account in The Record:
Indeed, Magnitsky’s job at a Russian-American law firm had drawn him into a battle between William S. Browder — once the largest foreign investors in the Russian stock market — and the Russian Interior Ministry, which oversees law enforcement. In 2007, Browder’s company, Hermitage Capital, based on Magnitsky’s research, accused police investigators of an immense act of corruption, charging that they had seized three of Browder’s subsidiary companies and used them to receive a $230 million tax refund.
Magnitsky ended up dead, and justice seems to be on a hit list in Russia. This clearly spells out caution for investors, and it also provides a reminder that Russia-intensive ETFs and mutual funds allow investment in more than just companies. The may also give you a stake in corruption.
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