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14 September 2016

Doing business in Russia: five cases involving new political risks for business

How the fundamentals of the effective functioning of the state and the economy are being broken

Recent events surrounding the Renova Group and the top management of VimpelCom Ltd. have become yet another source of shock for the public and the business milieu: former and incumbent heads of the T Plus energy company belonging to Renova have been arrested. Mikhail Slobodin who managed KES (since renamed T Plus) several years ago and who was the CEO of the largest telecommunications company VimpelCom until September 6, 2016 has been declared wanted. Are these merely isolated cases or is a trend taking shape? Are these political or economic disputes? An expansion of the siloviki or battles in the war on corruption? Numerous questions arise evoking fear in businessmen who work or intend to work in Russia.

A memo to the Russian investor can be composed based on recent cases of persecution against businessmen and top managers. Each case study allows the formulation of a rule which points to the existence of some new patterns in operation which dictate terms for big businesses in Russia.

Case number one – Bashneft. Vladimir Yevtushenkov, the owner of the joint-stock financial corporation Sistema was arrested in September 2014 having been accused of money-laundering in connection with the acquisition of shares in a large Bashkirian oil producer. In December of the same year he was released immediately after having agreed to relinquish the company to the state. All charges against him were dropped. Two years later, Rosneft – the main suspect in the initiation of criminal proceedings – entered the fray in pursuit of these assets despite the disapproval of both the government and the economic assistant to the president of Russia. Incidentally, the investigation into money laundering was conducted by a group of officers of the Federal Security Service (FSB) who are known collectively as the “special forces of Sechin”, the CEO of Rosneft.

This makes it possible to formulate the first rule: there are no guarantees when it comes to protection of investors and ownership rights in Russia in instances where the assets of the said investor attract the attention of an influential player from Putin’s entourage. And it is not political but purely economic gains which are at stake here. First, Putin becomes convinced of the “unjust ownership” of Bashneft before the go-ahead is given for criminal proceedings to commence. The siloviki had been pushing Bashneft’s return to public ownership since the late 2000s and political conditions for such a move were ripe in 2014: the state was vulnerable at that time against the backdrop of the geopolitical and oil crises and “statists” took advantage of these conditions. Hence we have another rule: the situation of investors and businessmen becomes even weaker given the dominance of statist logic to the detriment of market and legal approaches, given the aggravation of the crisis, sanctions and the deterioration of Russo-Western relations and the fall in global oil prices.

A criminal case against Dmitry Kamenshchik - the sole shareholder in Moscow Domodedovo Airport – followed more or less the same principle. His assets caught the eye of Putin’s friends, however, the charges against him (insufficient security measures which allegedly led to the failure to prevent the terrorist attack in early 2011) proved to be legally flimsy whereas political resources proved simply insufficient for the case to be advanced, although we have probably not yet heard the story’s denouement.

Case number two – the arrests of the former CEO of the state-owned company RusHydro Yevgeny Dod and the company’s chief accountant Dmitry Finkel in June 2016. As was detected during an investigation, the company’s top managers committed collusive grand larceny of funds from RusHydro along with unidentified accessories. At the time of his arrest, Dod served as Chairman of the Board of Directors of Quadra owned by Mikhail Prokhorov’s ONEKSIM. Despite the fact that he has paid back 73 million rubles (which he embezzled, having paid himself this sum in bonuses) and his attempts to secure bail, Dod remains in detention. Hence, comes another rule: in Russia, it is too dangerous to appoint an individual to lead a company should he have previously occupied a top managerial post at another company which is subject to competition among influential players. Initially, the RusHydro company was a bone of contention between Igor Sechin and Arkady Dvorkovich and subsequently, Igor Sechin and Igor Trutnev. Dod’s relations soured first with Sechin and later with Trutnev. As a result, he became a bargaining chip in the struggle between the old and the new curators of the company.

The special case of Mikhail Slobodin - case number three - bears many similarities. As did Dod, Slobodin became a victim of a war over an entity he was no longer connected to in any way. Mention is made of the highly problematic Vorkuta thermal power plant (TPP-1 and TPP-2). The Vorkuta thermal power plant is owned by the T Plus company, formerly known as KES Holding. It was precisely Slobodin who headed the latter between 2003 and 2010. He was replaced by Yevgeny Ol’khovik, a member of Viktor Veksel’berg’s entourage, in 2010. Yevgeny Ol’khovik held the post for two years before making way for Boris Vainzikher. Both are currently being detained as investigators believe that top managers of the energy provider paid bribes to regional authorities in exchange for more preferential operating conditions.

As in the case of the competition between the old and the new curators of RusHydro, reference is made to the new authorities of the Komi Republic who deal with the legacy of the previous authorities. Former Governor Vyacheslav Gaiser was arrested in connection with charges of establishing an organized criminal group.

In this case, VimpelCom was simply a victim of misfortune as was Prokhorov and the Quadro company headed by Dod. Apart from considering experience, professional and personal traits, HR departments at every company of size as well as the owners of which would now be well advised to take additional criterion into consideration when filling senior posts: political risks associated with a candidate’s employment history. If an aspirant to the top post in a company has ever worked for a currently disputed entity, it would be wise to eliminate them from the recruitment process. It is also worthwhile taking an investor’s political capital into account: Prokhorov and Fridman’s (co-owner of VimpelCom) political power is too insignificant to provide adequate protection. The former is informally accused by the Kremlin of financing a “radical” (say: anti-Putin) media outlet – RosBusinessConsulting (RBC) whilst the latter has also been informally criticized for his alleged financing of Navalny.

Case foursearches of the Renova company and problems with the refurbishment of the Vorkuta TPP. This is a different story and thereby illustrates a separate lesson: one should not invest in any entity whose efficiency depends on socio-political factors and moreover, whose effectiveness is not politically safeguarded at the federal level. Renova, the owner of the Vorkuta TPP, has managed to maintain working relations with the Komi authorities for several years. Although apparently, their relations were not entirely smooth: Renova demanded an increase in tariffs and the exertion of pressure on non-payers while the regional authorities countered by accusing the company of unwillingness to refurbish the plant. However, conflicts could be avoided. Besides, anyone who invests in Russian assets recognizes the importance of positive relations with the regional administration, which is ensured through various (legal or not entirely legal) means. If there is a sudden shift in power in the region and if, in addition, this is preceded by a conflict scenario as in the Komi Republic, all large and medium-sized businesses are faced with high political risks. This is especially true for entities which are problematic from a social point of view. In the current situation, the new head of the region, to be elected in September, simply engages political means while attempting to address the economic problem.

The fifth case – the arrest of influential businessman from St. Petersburg Dmitry Mikhal’chenko this April. The owner of the Forum Holding Company is accused of smuggling. Actually, the situation is more complicated: businessman Mikhal’chenko was close to the former head of the Federal Guard Service (FSO) Yevgeny Murov, targeted by the FSB for many years. They were gunning for Murov and apprehended his wing man. The head of the FSO was dismissed and the businessman remained in custody. Hence comes yet another rule: not only do one’s relations, even with the closest of Putin’s confidants, not guarantee stable employment but they may even result in criminal prosecution. Moreover, in this case, prosecution becomes not only a tool for solving “personnel issues” but also a means by which siloviki increase and cement their gravitas. Therefore, anyone who expects to be released following the dismissal of the former political patron will be disappointed.

All of the abovementioned five cases share several similarities: in all of the cases arrest is not an end in itself but a mechanism for resolving other problems. Nothing personal, business is business – as they say. Unlike the landmark Yukos case in which we witnessed the consequences of a conflict between Putin and Khodorkovsky (whereby the siloviki de facto represented the president’s interests), in all of the recent, above-mentioned cases, those accused in criminal cases were either barriers or tools used for the achievement of economic, managerial or political goals. Yevtushenkov was an obstacle to gaining control of Bashneft and Kamenshchik – of Domodedovo. The case against Dod allows Yuri Trutnev to put RusHydro’s house in order whereas the persecutions of Slobodin, Ol’khovik and Vainzikher pave the way for a new governor of the Komi Republic to be elected. And so it appears that ground-breaking changes are taking place in Russia as previously, stability and the principle of “do not wash your dirty linen in public” were highly regarded whereas nowadays another principle is employed with increased frequency: “the more enemies you slay, the greater your political capital will be”. And all of this is happening beneath a veil of statist and patriotic rhetoric and the notion of protection of the Fatherland which is precisely why the fundamentals of the effective functioning of the state and economy are being broken. 

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