The Danger of Doing Business in Russia

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Mikhail Voskresensky / Reuters

Nataliya Magnitskaya, mother of Sergei Magnitsky, grieves over her son 's body during his funeral at a cemetery in Moscow, Nov. 20, 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.

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.

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.

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."

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."

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.

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.