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When President Trump meets Vladimir Putin in Osaka next week for the G-20, he should remember that for all its international bluster, Russia is sliding into a black hole of crime, corruption, and illegality—and that more and more Russians are taking note. This was nowhere more evident than in the protests that erupted in Moscow earlier this month after local police planted cocaine and other drugs in the apartment of investigative journalist Ivan Golunov, who exposed high level corruption in the Moscow burial business and among the relatives of a Moscow deputy mayor.
Due to the protests, Golunov was acquitted and case closed, but the story does not end there. Corruption in law enforcement and in courts is choking Russia’s economic growth.
This is no exaggeration: Russia’s GDP growth is anemic. Its economy is saddled with Western sanctions. And Russia allocates less and less funding towards critical high-tech areas like space and artificial intelligence (AI)—the opposite of competitors like China and the United States. However, unlike a real black hole that swallows all matter, this one allows capital to escape—Russia’s freezing business climate is simply too harsh for investors.
In 2018, $68 billion fled Russia—twice as much as the year before. Since 1994, over $750 billion left Russia, Bloomberg estimates. Millions of educated young people emigrated to the UK, Silicon Valley, and Israel.
Furthermore, Russia’s higher-ups are implicated in the largest money laundering scheme in history, which was disclosed at the end of 2018. Run via Danske Bank out of Tallinn, Estonia, the operation is alleged to have laundered over $200 billion, much of it originating from within the Russian Federation. Latvian and Moldovan banks are alleged to have participated as well. Putin’s cousin Igor is allegedly connected to the scheme, at least according to OCCRP, a Washington, D.C.-based anti-corruption watchdog.
If the United States and Russia are to repair the frayed relationship, Trump can and should offer Putin technical assistance in restoring the rule of law, the absence of which invites corrupt state officials and oligarchs to destroy shareholders’ value, cause massive industrial companies to accrue crippling debt, abuse state-subsidized credit, and engage in corporate raiding, Russian style— known colloquially as reiderstvo.
Russian corporate raiding is a well-known phenomenon. Emerging in the 1990s, it mutated into a genuine dark art form in 2003-2005, when Igor Sechin, the current CEO and Chairman of the Management Board of the state-owned oil behemoth Rosneft, raided Russia’s independent Yukos oil company. Former Yukos shareholders were eventually awarded over $50 billion to compensate for their loss in the Yukos affair. They continue to seek justice as their case reaches a critical stage in The Hague, with a trial in September.
In 2014 Rosneft raided Bashneft, a successful oil company owned by AFK Sistema, the apolitical businessman Vladimir Yevtushenkov’s holding company, by involving Russian authorities. As a result, he lost Bashneft, paid $2.3 billion in compensation to Rosneft, and Sistema’s stock declined from $23 in 2014 to $2.80 last week.
Anders Åslund, a senior fellow and my colleague at the Atlantic Council, writes in his excellent new book “Russia’s Crony Capitalism“, that Gazprom, another national champion, is the top value destroyer of Putin’s realm. Gazprom sold natural gas below market price to the U.S.-indicted, allegedly kickbacks-paying Ukrainian businessman Dmytro Firtash, for resale at a discount to Ukrainian oligarchs. It paid tens of billions of dollars in inflated prices to Kremlin cronies in massive pipeline construction projects. Gazprom’s value fell by staggering $419 billion from 2009 to 2016.
They might just as well have made these pipelines out of gold.
Back in the 1990s, the United States and the West offered Russia legal, regulatory, and corporate governance technical assistance—an effort that I was proud to be a part of. But, to paraphrase the Harvard historian Edward Keenan, Russia swallowed these reforms up and spat them out—just as it did with capitalism, social democracy, parliamentary government, and individual rights.
Today, reiderstvo is alive and well: A number of oligarchs made their names in reiderstvo wars. One of them the majority owner of worldwide fertilizer heavyweight Uralkali and sister company Uralchem is Dmitry Mazepin. A native of Minsk, Belarus, with alleged connections to its authoritarian ruler Alexander Lukashenkо, Mazepin served in Afghanistan as a military translator—often an intelligence affiliation give-away—and is now expanding his business in Africa.
A classic example of Russian corporate raiding practices is Mazepin’s currently ongoing siege on Tolgliatti Azot, a massive producer of nitrous fertilizer. In Kafkaesque court proceedings ongoing in Samara, a judge named Andrey Kirillov allowed anonymous witnesses, permitted the use of faked evidence, barred the defense from calling witnesses, and threw out the earlier-agreed court schedule, allegedly to suppress defense evidence and testimony. He also denied interpreters for non-Russian speaking witnesses.
Moreover, it is now coming to light how deep new economic corruption runs in Russia. In violation of the double jeopardy principle, entrepreneurs across the country are being pressured with charges of criminal conspiracy under Article 210 of the criminal code. An article designed to combat organized criminal gangs, 210 is now applied to any perceived economic crime against companies and their leadership who have become targets of investigators, says Tatyana Mineeva, the Moscow City business ombudsman. And now this same tactic is being employed in the TogliattiAzot saga.
As a lawyer, I am always shocked and depressed when I observe Russian court room proceedings, something I have done on numerous occasions. If Mr. Trump had a sensibility about the rule of law, he would recognize it as Mr. Putin’s ultimate vulnerability. As long as corporate raiders continue to run unchecked, receiving credit and government support on the highest level, Russia will be a land from which money flees and companies die; a place where, as the ancient maps used to say, “there be dragons” – in the business sense.
Ariel Cohen, Ph.D., is a non-resident Senior Fellow at the Atlantic Council, and Director, Energy, Growth and Security Program at the International Tax and Investment Center.
The views expressed in this article are the author’s own.