Sunday, March 10, 2013

Magnitsky continues to scare investors



In this week’s blog post I will examine a particularly troublesome issue that has become a sad reality of doing business in Russia. While the death and ripple effect of Mr. Magnitsky’s death in 2009 has been widely discussed, this example is only a microcosm of Mr. Putin’s control of Russia. This week Russian authorizes have announced new fraud charges against U.S.-born investor William Browder. He is the CEO and co-founder of Hermitage Capital Management, a fund that had made millions by investing in Russia. Some of those investments included owning 131 million shares in OAO Gazprom, Russia’s most prized possession. Mr. Browder was once one of the largest foreign investors in Russia, but in 2005 he was stripped of his Russian visa on the typical charge of unspecified national- security reasons. After this, he promptly pulled most of his funds out of Russia. This week the Kremlin accused him of illegally acquiring those shares of Gazprom and the allegations state that his “illegal” acquisition has damaged the Russian government to a tune of $97.5 million. Moreover, the allegations state that Browder sought not only ‘personal enrichment’ but sought to penetrate and influence Gazprom.
            Mr. Browder acquired his shares between 1999 and 2004, at a time when special permission was required to purchase the shares and they were selling for far below their valued price. While he was a shareholder, he sought to improve transparency and the financial performance of the stock by rallying shareholders to take an activist position. He even attempted to win a seat on the board of directors, which was unsuccessful. These actions resulted in the revocation of his Visa. During the next few years the Moscow police routinely raided the offices of Hermitage capital and confiscated documents and computers. One of the lawyers who worked for Hermitage was Magnitsky.
            While all of these actions by the Russian government seem unjustified, Browder himself undoubtedly had to break the law at some point to attain a substantial number of shares in Gazprom and successfully invest in Russia. To infer that the “special permission” he had to obtain required paying certain official is not beyond the bounds of reasons.  Moreover, tax laws are routinely breeched by Russian business, creating an environment where if all the other companies are doing it Browder’s companies would not be able to remain competitive if they did not.
            This is precisely how Putin is able to control the business environment in Russia. It is quite simple and rather ingenious, he has created a system where everyone must pay bribes to officials a violate tax code to remain competitive. The catch is that people must not step out of line, such as Magnitsky in reporting the $230 million fraud. If one does decide to report officials with violating the bribery the Kremlin has a simple solution, charge the individual for a crime. This has been routine practice for Putin’s government and examples are not hard to find, such as the imprisonment of Khodorkovsky, one of Putin’s fiercest opponents. The beauty – or hopelessness of the situation depending on which side you are coming from – is that to do business in Russia an individual must toe the lines of the law. Many laws can be circumvented, and when one attempts to move out of step with Kremlin policy, Putin has the power to legally reprimand investors. As twisted as this may seem to American investors it is the present reality in Russia and will keep Putin in power for the foreseeable future.      
http://www.forbes.ru/investitsii-column/tsennye-bumagi/231115-bolnaya-spina-kak-investitsionnyi-faktor

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