In contrast to the first trial when the YUKOS’s executives faced allegations under 10 articles of the Criminal Code of RF, of which the central one was tax dodging, the second trial became an absurdist theater from the very start. The first trial criminalized one of disputable tax practices, which turned out a staggering development, though - because of its obvious selectivity, as it was not applied to other companies – and a severe punishment. In the course of the second trial it was found that Messrs. Khodorkovsky and Lebedev had stolen crude oil from themselves, that is, from the company they owned, and subsequently legalized thus stolen cash. According to the verdict, the fact of stealing was found in Mr. Khodorkovsly and his partner’s administering of transactions between JSC YUKOS and its own subsidiaries at “wrong” prices, while they had to do it at a “right” price (never stipulated in any law), and such acts constituted nothing but stealing.
Mr. Khodorkovsky’s sentence has appeared a kind of Russian authorities’ legal manifesto, which reads that any entrepreneur can be sent behind bars on the basis of the two articles to which Mr.
Khodorkovsky was found guilty. This, however, does not imply that this concerns all and any entrepreneurs. Rather, it sends a message to those who would be unhappy with the authorities.
The fact of the matter is, Mr. Khodorkovsky’s case is another proof of grave challenges facing the institution of private property in Russia. This institution bears signs of feudalizing (granting and/ or withdrawal of property at the authorities’ discretion), like in ancient China, medieval Turkey, to name a few historical examples.
As well, the verdict on the case once again raises the problem of excessive severity with which the Russian criminal law treats businesses, as one can be sentenced for an economic crime to a term of imprisonment longer than for an assassination. Russian authorities and Mr. Medvedev in particular have recently spoken much of fair trial for the accused of economic crimes and the RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES inadmissibility of depriving them of liberty prior to the trial, except for some very special cases.
They even approved a string of amendments to the criminal law in this regard; however, hardly anybody has paid attention to the fact that the term of imprisonment for those who were found guilty to economic crimes remained very severe, nontheless.
The verdict in question was another blow to Mr. Medvedev’s image. Most observers, both in Russia and overseas, have been anticipating a verdict of guilty of course, but there were hopes for its relative lenience. In December 2010, Mr. Medvedev weighed in on an indirect debate with Mr. Putin, who had tagged the YUKOS executives criminals. Mr. Medvedev in his turn noted that he did not want to comment on the matter until the pronounced verdict, thus exercising pressure on the court. In an interview to Bloomberg already post-verdict, Mr. Medvedev asserted he had no right to comment on it, as that would otherwise hurdle the advancement of the judicial system. Meanwhile, during his Qs and As session in Davos, he explicitly endorsed the verdict and drew some parallels between Mr. Khodorkovsky and Mr. Madoff: “…No one reflects on the fact the prosecution has the right to raise additional charges against those who are behind bars, no matter how this could be perceived.. Investor must comply with the law. Otherwise he might get what Khodorkovsly and Madoff got”.
Against the backdrop of various hints some presidential staff (N. Timakova, A. Dvorkovich) dropped regarding what Mr. Dvorkovich put as Mr. Medvedev’s “willingness” to run, while in Davos Mr. Medvedev voiced what every barber has long come to know in Russia – that is, he might not seek re-election: “…As for me, I will make up my mind this year, no doubt, as to what I shall do… If I believe this is the right thing for the country, for the political system, and, first and foremost, for citizens of our state, I will participate. If I think otherwise, I will tell it openly and will tell what in my view is better for the society and the state”.
In fact, once in December 2011 in compliance with the law Mr. Putin clinched his nomination as the United Russia’s candidate, the best strategy for Mr. Medvedev would be not to run. Indeed, the incumbent RF President has no right to seek an automatic nomination, nor there is a parliamentary party that would nominate him. Mr. Medvedev sure might try to change the situation in the country, for significant cadres decisions are in his hands. For example, the RF President can dismiss the Prime Minister without the Parliament’s consent. Should he realize his powers, the official party of power would no sweat accept the new reality. But time works against Mr. Medvedev: in less than a year to go, he has no campaign team, nor, in contrast with Mr. Putin, has he a substantive program. Plus, the status level of his backers is clearly far from the national elite.
At the Davos Economic Forum in January Russia boasted a high-profile delegation led by Mr.
Medvedev and the First Vice Prime Minister I. Shuvalov. Meanwhile, they practically fell short of voicing any earthshattering or at least groundbreaking ideas. They talked at length of Russia’s openness to investment and business, about modernization, the Skolkovo innovation center, and plans to create an international financial center - in short, about all the issues that have recently formed the official “meaningful” agenda. Notably enough, against the backdrop of the terrorist attack on Domodedodov airport some statements, such as an international financial center, which the government plans to somehow establish by administrative means, or attraction of investments to the North Caucasus, sounded pretty bizarre. Against the routine practices of the Forum, Messrs.
Medeved and Shuvalov found themselves in a barrister’s shoes and faced a squall of questions.
They were grilled on Khodorkovsky case, the visible absence of changes in the judicial system, Skolkovo’s opacity, and uncertainty of when the promised large-scale privatization would kick off.
An expelled from Russia investor reminded of Magnitsky case. The Russian delegation responded in the following vein: “…We must focus on the positive trend in our country. Rome was not built overnight. There are many things we must change, and we do not like them. My task is to change day and night, this is my job. If the people say it is getting better, then I win home. We must cut the share of the state and learn how to manage corporations in a new way. We understand what needs to be done and our agenda is clear”. But what underlines the agenda remained unclear.
In all fairness, the Russian delegation put forward one pathbreaking proposal. Mr. A. Dvorkovich, the presidential aide, announced that Russia was to establish a sovereign fund to co-invest public resources in Russian and foreign investors’ business projects and share risks with them. One of the founders of the Fund is going to be VEB, which essentially has already exercised similar functions.
THE POLITICALAND ECONOMIC RESULTS OF JUNUARY Mr. Dvorkovich’s idea should be construed a fairly interesting one, providing the Fund should fundamentally differ from other public institutions, like public corporations, with information of its operations, as well as selection criteria for its prospective partners, subject to public disclosure.
Respective government documents will make it clear whether this is plausible.
On 24 January 2011, Domodevovo airport in Moscow was shattered by a huge terrorist attack, which followed blasts in the Moscow subway in less than one-year span. Amid a bunch of welcomers, a terrorist committed an own goal by exploding a self-made bomb stuffed with metal projectiles equivalent of up to 7 kg TNT. As many as 35 people were killed in the blast and over 120 others were hospitalized. In contrast to the subway bombing in March 2010, North-Caucasian Islamists have not yet claimed responsibility for this terrorist act, there is small doubt it was they who staged it. The authorities also ascertained this.
The tragedy exposed visible gaps in the airport security. Procured in the aftermath of two blown up planes in 2004, metal detectors at the entrances were switched off, and quite legally, as no law or normative act provided for the obligation to service them. Mr. Medvedev for no reason accused the airport’s owners of negligence and threatened with criminal charges against them.
Some local police officers were dismissed. Admittedly, the market does not foresee any problems for the airport owners - a couple of years ago they had won a longstanding trial against public agencies over proprietary rights for the key asset – the long-term leasing contract on the airport site. Plus, Mr. Medvedev made a bizarre statement that the terrorists’ ultimate goal was to thwart his participation in the Davos Forum.
The terrorist attack shows that the situation in the North Caucasus is far from stabilization. A certain improvement of the operating environment in Ingoushetia after the capture of leaders of the local underground is compensated by a drastic rise in terrorist activity in Kabardino-Balkar Republic (for instance, right on the eve of the New Year holidays terrorists killed a local mufti who had condemned them) and particularly in Dagestan. The situation in Chechnya has remained steadily difficult. As concerns technical security measures, they need to be improved, and the remedy often is on the surface, as it was in the case of metal detectors in the airports.
The month of January 2011 proved to be a fairly interesting one for Russian businesses. While in Davos, on January 26, the Russian public company “Rosneft” signed a framework agreement on strategic cooperation with BP. It will rest upon a swap of 9.5% of Rosneft’s equity for a 5% stock package in BP. It was also announced that the companies would establish a joint venture to carry out geologic exploration and development of three promising oil-and-gas fields on the shelf of the Kara Sea. Given the FAS’s approval of PepsiCo’s acquisition of JSC Vim-Bill-Dann, a huge national manufacturer of juices and dairy products worth a total of USD 5.4 bln. (including stock redemption from minority shareholders on the market), the deals have become the first foreign companies’ acquisitions in Russia for a long time. Before these deals, the tendency had been an opposite one: last year, Chevron sold its 20% stock in LukOil back to the Russian oil giant, while E.On sold back to Gasprom some 4% of its stock; as well, the operator of the Schtokman field, in which foreign investors have a 49% stake, halted its operations for an indefinite period.
Investing in the Russian food-processing sector with its relatively low entry barriers appears a logical move against the background of a favorable price dynamic for energy sources and the population’s demand (notably, the previous large acquisition made by a foreign business in Russia was also noted in the food-processing sector: in just a few months prior to the 2008 crisis PepsiCo had bought JSC Lebedyansky, another manufacturer of juices. By contrast, the situation with the Rosneft-BP deal does not seem that bright. First, BP has encountered a hostile behavior of the Russian co-owner, AAR consortium. Spearheaded by Mr. M. Fridman, the consortium is notorious for its extremely aggressive manner of doing business and enjoys the Russian administrative and judicial systems’ warm. As a reminder, back in 2008, all the executives of the BP’s representative office in Russia, including the then Chairman of the Board of TNK-BP, were compelled to leave Russia, as their work permits were revoked. The compromise was reached in the autumn of 2008:
BP refused its original right to nominate the Chairman of the Board of TNK-BP and it was agreed that henceforth this would be done upon both parties’ consent. Two years after the conflict, however, under various pretexts AAR has not yet approved a new nomination, thus retaining operational control over the company. So, the alliance with Rosneft is not a new good-will investment for PB, RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES but a logical consequence of the corporate conflict. Interestingly, AAR keeps braving the fortune by bringing to the High Court in London a claim to arrest the work on the BP-Rosneft deal. In so doing AAR claims the deal is contrary to the shareholder agreement between TNK and AAR. If the deal is closed notwithstanding these challenges, Rosneft would gain not only economic benefits (hardly computable at the moment, though), but political ones, as having a world-class corporation among its shareholders would diminish Rosneft’s political risks in developed countries associated with YUKOS’s assets and ongoing trials on the subject in different European countries.
The State Duma passed in the third, final, reading the presidential Act ‘On Police”. For the first time ever before its submission to the Parliament the bill had been posted for a broad public consideration, particularly on the Internet. This positive development, however, was counterbalanced by the fact that the bill initially was clearly anti-legal and totalitarian by its nature. The discussions resulted in crossing out the most notorious provisions, and the final document on the whole appears pretty similar to the former Act “On Militia”, bar its title. The new Act fixed the detainee’s right for a phone call, however, this does not apply to those on the wanted list. The debated provisions on the right of penetration into residence ultimately took the following form: prior to entering a residence, the policeman shall be obligated to explain on which grounds he is going to do this (except for the situation where “the delay engenders a direct peril to citizens and police’s lives and health and may result in other grave consequences”). The list of the grounds for penetration into residence now lacks the possibility for the police to enter it “in order to establish circumstances of the offence”; however, there was retained the possibility for the police to enter residence to examine circumstances of the accident. The notorious provisions stipulating the police’s right “to request and obtain” from commercial organizations any kind of information – an attempt to restore the solemnly abolished in 2008 provisions of the former Act - were crossed out.