2012 Presidential Campaign Launches in Russian Style – Part II

Posted on April 11, 2011 by

[TRM's second installment on recent events in Russia]

Medvedev made quite a few headlines two weeks ago with a series of moves that signaled a renewed push to ‘improve the investment climate’ in Russia.  This is, of course, not a new issue for Medvedev, and I have criticized him in the past for his administration’s highly technical, legalistic approach to bringing about change.  But this time Medvedev appears to be thinking big and is aimed at practical goals.  Medvedev summarized ten of these goals at the Commission on Modernization and Economic Development.  And while these measures do not threaten the ‘power vertical’ structure of the Russian state, some do strike at the intertwining of state and capital also known as “Kremlin, Inc.” 

The ten steps are:

  1. Lower compulsory social insurance payments by January 1, 2012
  2. Creation of procedure to examine complaints on state agencies’ action/inaction that include allegations of corruption
  3. New powers to the Ministry of Economy to review regulations and provide the Ministry of Justice with a list of overly burdensome regulations for repeal
  4. By May 2011 each federal district will receive a ‘special investment ombudsman’
  5. Privatization of large government shareholdings and removal of government ministers responsible for regulation in particular sectors from sitting on boards of directors of companies operating in a competitive (i.e., non-monopoly) environment
  6. Increase rights of minority shareholders of public companies to access to information
  7. Establishment of a Russian investment fund by mid-summer with the purpose of attracting foreign direct investment (note: previously reported that it would attract portfolio investment as well)
  8. Submit a draft law by May 15 to narrow the jurisdiction of the Commission on Foreign Investments in Strategic Sectors
  9. Appoint Deputy Prime Ministers to ‘process’ agencies like customs, registration offices, work permit providers, etc.  If the quality of an agency’s work does not improve, the head of the agency will be replaced
  10. Establishment by beginning of May 2011 of mobile reception offices of the President of the Russian Federation in every region of Russia to receive and review complaints about the authorities

Medvedev discussing his 10 steps:

Liberal Vertical

One notable characteristic of many of the steps is that they are wholly consistent with the ‘power vertical’ structure that Putin established and then perfected during his second term in the wake of the Beslan Hostage Crisis.  Then, the threat was from foreigners coming into Russia.  Now, the threat is from foreigners who don’t want to come into Russia.  The strategy is the same – establish more top-down control over the regional and federal structure.  Granted, Medvedev is not cancelling elections of governors or anything else that infringes on ‘local sovereignty’.  Rather, he is betting that a lot of investors’ problems stem from having nobody to contact when they have a problem.  There is some precedent for this – the Kaluga Region is widely known as the best investment destination in Russia, with investors explaining that Gov. Artamonov gives them his personal cell number.  So in short, this does not represent a serious departure from the current structure of government in Russia.

The Money – Kremlin, Inc. Under Threat?

Many observers in the Russian and international media have concluded that the privatization of government shareholdings in major companies and, most important, removing Ministers from government boards of directors constitute a direct attack on Kremlin, Inc. generally and Dep. Prime Minister Igor Sechin in particular, who sits on the boards of Rosneft, Rosneftegaz, and INTER RAO UES.  Some people smarter than me have argued that weakening Sechin is actually Putin’s initiative, because has never quite been comfortable with the silovik horse to which he hitched his presidential cart (he did quit the KGB to work for Sobchak, after all).

My own view is that these actions do not, on their own, constitute an existential threat to the system of Kremlin, Inc.  Indeed, the ‘privatization’ of most of these government companies is with the caveat that a ‘golden share’ will remain with the state.  And when it comes to companies, control is all that matters.  These aggressive moves by Medvedev do, however, seem to be a shakeup at the individual or group level of the beneficiaries of Kremlin, Inc.  Indeed, a lot of Sechin’s power comes from his role in INTER RAO and Rosneft.  Foreign firms wishing to do business on these companies’ ‘turf’ usually find themselves having to broker deals directly with Mr. Sechin, because his dual-role as board-member and minister make him the de factor primary stakeholder.  As a mere deputy PM, Sechin will have a lot less reasons to be conducting such business meetings.

The Tandem – Putin Power Under Threat?

An additional, stranger conclusion was made out of Medvedev’s speech: that he undercut the power of PM Putin ‘without asking’.  A Vedomosti article last week claimed that Medvedev’s proposal regarding the Strategic Sectors Law (step #8 above) had this effect.  Specifically, the article states that Medvedev proposal is aimed at narrowing the law’s coverage so that it does not include deals by offshore entities that are de facto controlled by Russian citizens/companies.  I have two interpretations of this issue.

First, is that Medvedev’s handlers mistakenly included a ‘reform’ that is already included in the draft amendments pending in the Duma.  In particular, I am referring to the loophole in the current legislation that expands the Strategic Sectors Law’s jurisdiction to any ‘group of companies’ to which a foreign investor belongs (which I have covered here and here).  The pending correction to this loophole seems to fit within Medvedev’s statement, especially because it was mentioned in the same breath as ‘deals in which international financial organizations are participating’ (another ‘reform’ in the pending amendments).  So it could just be a big screw-up (kind of liking VVP getting the FDI numbers wrong over and over), and I really don’t think we can overestimate the incompetence of the people running Russia.  But what if Vedomosti got it right, and Medvedev meant excluding offshore companies that are ‘de facto’ owned by Russian companies?

The second interpretation is that perhaps Putin wants to distance himself from these sorts of transactions, but doesn’t want to be the one responsible for doing so (leaving no fingerprints, so to speak).  The problem is that investments via Russian oligarchs’ Cypriot, BVI, etc. offshore entities (offshorki) have become one of the most common kinds of deals occupying the Commission’s time.  Aside from the embarrassing fact that such deals do not represent real FDI but rather repatriated Russian capital, Putin may have another reason to not want these deals to receive such public treatment.

For example, at the most recent meeting of the Commission, Putin approved Omirico Ltd.’s (Cyprus) purchase of Novoport Ltd. (BVI).  Both of these companies are the worst kind of offshorki – so-called ‘one-day companies’ (odnodnevki) that compliance lawyers warn their Western clients about.  So who’s behind Omirico?  State-owned Transneft and Summa Capital.  Behind Novoport?  Kadina Ltd., which is owned by none other than Putin judo buddies Aleksandr Ponomarev and Arkady Rotenberg, and LDPR deputy Aleksandr Skorobogatko (which literally translated means ‘quickly rich’ – you cannot make this stuff up!).  The object of the deal was the Novorossiysk Commercial Sea Port (NMTP).  NMTP was owned by Novoport (50.1%), Rosimushchestvo (20%), Sberbank (18.63%), and an LSE float.

Transneft/Summa, via Omirico, wanted to purchase a controlling stake in NMTP (via Novoport).  But the deal was structured somewhat strangely.  First, a condition precedent of the deal was that Omirico sell the Primorsk Commercial Port (PTP) to NMTP – yes, sell an asset to the asset which it is acquiring.  This was done for just over $2 billion, and Sberbank was even nice enough to finance a large portion of the purchase.  Second, Omirico purchased (likely with the proceeds of the sale of PTP) Novoport for [reportedly] $2.5 bln, far above the holdings’ value of $1.38 bln.  So Transneft sells PTP to NMTP for $2 bln, and then buys a controlling stake in NMTP for $2.5 bln.  If you take a step back, which you can do with the handy chart I made (click image below), you can see that this is essentially the transfer of over $1 bln in Russian taxpayer funds to Putin’s judo buddies, without any business/market explanation.
Obviously, these are not the kinds of deals that Putin wants to give his personal blessing to, especially with sharks like Aleksey Navalny swimming around Transneft’s financial records (kind of surprised Navalny hasn’t pursued this story).  Thus, if Vedomosti interpreted Medvedev’s words correctly, the goal may be to insulate the premier from deals that hit a little too close to home.

Posted in Business, clans, compliance, corruption, Foreign direct investment, foreign investment, goskorporatsii, Government of Russia, Kremlinology, ldpr, Medvedev, oligarchs, PM Putin, power vertical, President Medvedev, Putin, Putin's Plan, rule of law, russia, Russian economy, siloviki, state corporations, strategic industries, tandemocracy, Vedomosti, Vladimir Putin | Tagged , , , , , , | 3 Comments

2012 Presidential Campaign Launches in Russian Style – Part I

Posted on April 1, 2011 by

A number of recent events in Russia show that the 2012 Russian presidential election campaign is in full swing.  In keeping with true Russian style, this campaign is aimed not at a mass Russian audience, but rather the political/economic elites involved in the soap opera-like battle for Russia’s wealth and power.

The Power – Who May Enforce the Law?

Unlike Libya, Russia does not carry out missile strikes against civilians who are opposed to the regime.  Instead, the Russian government elects for a ‘death by a thousand cuts’ strategy, which is planned and managed by law enforcement bodies.  Most important is the ability to bring prosecutions against individuals and companies in Russian courts that are notoriously supportive of prosecutors.  The stakes are even higher now that Medvedev’s team of legal nerds have added teeth to portions of the criminal code and other statutes.  But who will be targeted?

For some time, Russia only had a General Prosecutor’s Office, and it alone was responsible for initiating criminal investigations and prosecutions.  That was until early 2007, when then-Pres. Putin decided to create the Investigative Committee (SK or Следственный Комитет), which would take over some of this authority and whose chief would be selected by the President (currently Putin law school chum Aleksandr Bastrykin).  The result has been a divided structure between the SK and Prosecutor General, with periodic hints at the creation of a single ‘super-agency’ with sole investigative/prosecutorial authority.

This week, the conflict between the two sides spilled out into the open after a series of aggressive moves, culminating in accusations from SK that Chaika’s son – Artyem Chaika – is involved in the illegal ‘underground’ casinos that have recently come under fire.  Upon hearing this, Chaika reportedly went straight to Medvedev and requested a meeting.  According to meedia reports, Medvedev sat the two sides down yesterday and insisted that the conflict stay out of the public eye and that the junior Chaika be left alone (all very Putinesque).  Notably, the Chaika case is likely to end ‘only’ with the firing of the Moscow prosecutors who initiated the case, because “their last names came out during the scandal.”

Some analysts in Russia have suggested that the scandal could result in the firing of both Chaika and Bastrykin.  If Medvedev were to take such a step, it would be a significant demonstration of his power and raise his profile going into 2012.  Medvedev is not close to either Chaika or Bastyrkin, and there isn’t really anyone on deck for Team Medvedev and could fill the role of Russia’s top prosecutor (though Chuichenko, Konovalov, and Vinnichenko come to mind).  So letting each side punch each other out is also good for Medvedev.

The last time there was a similar dust-up between the siloviki factions was 2007, when it was the FSB vs. Federal Narcotics Service vs. Investigative Committee vs. Prosecutor General.  Then (and now), the tensions boiled over due to the uncertainty of the post-Putin transition (this was before Putin announced his choice).  In the midst of the conflict, Putin named Viktor Zubkov as Prime Minister, which turned out to be a wildly successful move – it was inconsequential enough to not affect any interests, yet strange/unexpected enough to convince the warring parties that they all had the same amount of information (zero).

So is it Medvedev’s turn to play a wild card like Zubkov?  Maybe.  But the current situation differs because the question is whether it will be Medvedev or Putin, and their Odd Couple routine seems to be losing its magic.  So the only reasonable option is to unexpectedly introduce a third individual in a way that would keep open the question of Medvedev or Putin or the new guy.  For example, Medvedev could buy time this way if he appointed Putin to an ‘inferior’ post but replaced him with someone like Igor Sechin.  In any case, I continue to believe that Medvedev will probably stay on for a second term and that Putin is cooperating or even directing the ‘signalling’ to the various factions.

Posted in Bastrykin, Chaika, clans, criminal law, Dmitry Medvedev, elections, konovalov, Kremlinology, Medvedev, PM Putin, politicians, power vertical, President Medvedev, prosecutor general, siloviki, vinnichenko, Vladimir Putin, Zubkov | 2 Comments

Strategic Sectors Law Update – Draft Amendments and First Meeting of 2011

Posted on March 30, 2011 by

Strategic Sectors Law Amendments

On February 17, the Russian government submitted amendments to the Strategic Sectors law.  The only substantive change the amendments address is the ownership issue I covered here – i.e., that the law currently applies to any group of companies that includes a foreign entity.  In fact, the bill does nothing else of any significance – some of the changes are already the existing practice/interpretation by FAS.  Banks are exempted, but this has been the policy since the crisis began.  So really, this is a housekeeping bill to (i) eliminate the laughable ‘catch-all’ definition of groups of foreign investors and (ii) codify what is by now habitual practice.  FAS has tantalized foreign investors with the prospect of much more substantive reforms in the near future that may *gasp* reduce the number of industries designated strategic.  Last week, the Duma passed the amendments in the first reading.  There is a small hope that this set of amendments can be ‘tweaked’ to reflect the opinions of foreign investors, though it is a very small hope.

First Commission Meeting of 2011

Last week also saw the first 2011 meeting of the Government Commission on Monitoring Foreign Investment (I may have not covered the last 2010 meeting – FYI).  Twelve applications were reportedly reviewed during the session.  As of now, the Russian press has reported that the following deals were addressed during last week’s meeting:

  • Alstom-Transmashholding – France’s Alstom and Russia’s Transmashholding‘s (TMH) plans to develop and reequip the Tver Carriage Building Plant (Тверской Вагонстроительный Завод or TVZ) and Bryansk Engineering Plant (Брянский Машиностроительный Завод or BMZ) were approved.  These plans apparently resulted in Alstom acquiring a 25%+1 stake in TMH.  Note that under the law, control is numerically defined as over 50% control.  Control may also be found if other tests are met, including sufficiently high board representation, right to control corporate decisions, etc.  The deal likely triggered the law based on one of these non-numerical factors (possibly the appointment of an Alstom Transport representative as TMH’s deputy managing director).  Another interesting legal aspect is that state-owned rail company Russian Railways will retain a blocking interest in TMH, which seems to undermine any claim that Alstom will obtain control over TMH as a result of this deal.  The plants are involved in railcar production.  The deal is the product of a two-year-old strategic partnership agreement between Alstom and TMH.  Interestingly, TVZ used to be majority-owned by some strange company named OOO Sapfir (ООО “Сапфир”), until bought them out earlier this year.  I cannot find any information on Sapfir (meaning, ‘sapphire’ in Russian).  TMH has always owned a 100% stake in BMZ.  TMH is the largest manufacturer of locomotives and rail equipment in Russia, and is wholly-owned by Dutch Breakers Investments (vehicle for oligarchs Iskander Makhmudov and Andrey Bokarev).  Makhmudov, by the way, allegedly used to belong to an organized crime outfit based in the Urals, though I do not know of any proof substantiating these claims.  Less is known about Bokarev, though he seems to belong to the group of oligarchs that rose to prominence in the post-Yukos era (e.g., Vagit Alekperov). 
  • Kupol Ventures Ltd. (Kinross)-Chukotka Mining and Geological Co. – subsidiary of Canadian gold mining giant Kinross – Kupol Ventures Ltd. – received permission to purchase the remaining shares in the Chukotka Mining and Geological Company from the State Unitary Enterprise of the Chukotka Autonomous Okrug.  Kinross currently owns 75% of Chukotka Mining and Geological Co., with the other 25% held by the State Unitary Enterprise.  This is another interesting deal from a legal perspective.  Normally, the law would not apply to such a deal because the foreign investor already owns more than 50% of the ‘strategic’ company in question (Article 4.4).  But Article 4.4 includes a parenthetical exception for companies working with subsoil deposits of ‘federal significance‘.  The definition includes gold mines with 50 tons or more of reserves, and the Kupol deposit appears to have at least 100 tons, if not more.
  • Omirico Ltd.-Novoport Ltd. – this is a typical deal involving typically opaque offshore entities that are a national pastime in Russia.  Omirico, a Cyprus company, received approval to obtain 51% of the shares in Novoport, which owns 50.1% of OAO Novorossiysk Commercial Sea Port or NCSP (ОАО “Новороссийский Морской Торговый Порт“). NCSP is actually traded on the London Stock Exchange (symbol: NCSP).  The company’s primary activity consists of operating the Port of Novorossiysk, a deep-water port on the Black Sea and number one in Russia and number four in Europe measured in terms of cargo turnover.  So who is Omirico?  The offshore entity that ‘represents the interests’ of state-owned pipeline company Transneft and oligarch Ziyavudin Magomedov of Summa Capital.  It is not at all clear why a state-owned, Russian company like Transneft is using an offshore Cypriot entity to purchase another Russian company.  Indeed, if Transeft had structured the deal with itself as purchaser, it would have been able to avoid the Strategic Sectors Law altogether, as the law does not apply to Russian Government-owned entities.  After doing research, this deal turned out to be much too interesting to confine to a bullet point.  Thus, I will devote a post to it soon.

Putin Does Reforms, Still Sucks at Math

At the Commission meeting, Putin also did his typical routine of emphasizing the need to improve Russia’s investment climate and exhorted his minions to make it so.  He once again misstated the level of FDI inflows during 2010, putting the number at $40bln (it was $14bln according to Rosstat).  Other Commission members – including Finance Minister Kudrin – clearly know the real number and are quoted providing the correct number.  So it seems to be an ‘emperor wears no clothes’ scenario, which by itself can give readers an idea of how this regime works.

This time, however, Putin threw investors a bone by proposing a concrete change to the Strategic Sectors Law: raising the threshold for when the law applies to investments in the subsoil sector.  Currently, any transaction resulting in a foreign investor controlling 10% or more of a subsoil company with strategic significance is covered by the law and requires approval.  Putin proposed raising this number to 25%.  Remember though, the numeric basis for finding ‘control’ is only one of several options available to the Russian authorities. So, FAS and the Commission could always conclude that a foreign investor is obtaining ‘control’ over a strategic subsoil company even if the percentage ownership were to fall below the threshold (see the Alstom case above).  In this light, the proposed reform is certainly not the type of amendment that would result in greater transparency/predictability, and is unlikely to attract investment.

What Changes Should Russia Make to the Strategic Sectors Law?

What investors really want are changes like: less sectors covered by the law (e.g., fishing, telecom are low-hanging fruit here); firmer deadlines for the review of applications and incentives put on the government to finish by a date certain (e.g., presumptive approval beyond a given time period); including the necessary bases for the right of judicial review currently found in the law (e.g., clearer definitions of legal concepts like control and security, guidance to judges on how to approach this unique area); and a formal opinion request procedure to FAS, under which FAS would provide non-binding answers/interpretations to real-world questions about the law and publish the answers on its website (minus the requestor’s identity).

As always, we end with Vladimir Vladimirovich:



Posted in Business, Foreign direct investment, foreign investment, Government of Russia, Law, legal update, legislation, moscow, oligarchs, PM Putin, Putin, reform, reserves, russia, Russian economy, strategic industries, Vladimir Putin | 1 Comment

Tip of the Spear – Can Big Business Battle Corruption in Russia?

Posted on March 26, 2011 by

Last year, there was a minor stir in the Russian and Western press when major European/American businesses and business associations involved in Russia signed an integrity pact pledging not to pay bribes in that country.  Many were skeptical at the time – me included – especially because some of the effort’s most prominent members were involved in past/ongoing corruption investigations linked to their activities in Russia.  While I am not sure about the status of this particular initiative, one year on it is clear that industry-led anti-corruption initiatives are here to stay and that may be a good thing.

One of the newest examples of this phenomenon is the Russian Energy Compliance Alliance, organized by the Center for Business Ethics and Corporate Governance.  As the name suggests, RECA’s membership includes both Russian and foreign companies active in Russia’s energy production sector.  I like the idea of industry-specific initiatives, and this industry is a great place to start.  First, it has major growth potential in Russia, as inefficient state-run enterprises are privatized and Russia’s Soviet-era energy infrastructure is refurbished/replaced.  Second, this sector involves a lot of contact with government entities (e.g., public procurement, is heavily-regulated), which raises a company’s corruption risks in Russia (remember IKEA’s problems arose in its interactions with state-run utility Lenenergo).

RECA’s platform involves both intra-industry training and idea exchanges and industry-government interactions aimed at minimizing regulatory uncertainty and risk reduction.  This is where the value of collective action is apparent – market players know what their peers are doing – and hence the standards by which they will be judged – and can approach regulators with a united message (nobody wants to be the only company to tell agency X to stop being so corrupt).  Finally, RECA plans to have civil society organizations “certify” a company’s compliance with the standards developed by RECA’s member-companies.

RECA’s strategy includes a defensive element to it – namely, to show law enforcement bodies that its members are making a good-faith effort to not violate anti-corruption and other laws while doing business in Russia.  The U.S. authorities appear to be taking note.  Assistant Attorney General Lanny Breuer – head of the Justice Department’s Criminal Division Division – spoke at RECA’s most recent meeting last week in Moscow (attended by TRM).

Aside from avoiding prosecution back home, it is my sense that both Western and Russian companies are simply exhausted with waiting for Pres. Medvedev’s ‘war on corruption’ to make doing business in Russia even marginally easier.  Many see Russia’s investment potential but perhaps are holding back because the risks outweigh the benefits.  Initiatives like RECA are a way for companies to take the lead in reducing these risks and improving Russia’s business environment.

Posted in anti-corruption legislation, bribery, bureaucracy, Business, Business and Economy, compliance, corruption, fcpa, Foreign direct investment, foreign investment, RECA

Fareed Zakaria Doesn’t Know Anything About Chechnya

Posted on January 27, 2011 by

I normally do not respond to specific articles that I think misunderstand Russia.  But I just cannot resist responding to Fareed Zakaria’s latest piece in Time, which purports to explain to readers this week’s Domodedovo bombing.  I like Zakaria.  I think GPS is the only Sunday show worth watching.  Even the episodes on Russia are unusually sophisticated and thoughtful.  That is why I feel the need to call out Zakaria’s ignorance here.

According to Zakaria, “Russia created its own Islamic Terrorism problem” basically because Russians have brutalized the Chechen population since the days of the Russian Empire.  No argument there.  But Zakaria’s history lesson collapses when it gets to the 1990s.  Zakaria writes, “In 1990, as the Soviet Union was collapsing, a national convention of all Chechen political groups united in a call for immediate independence from Moscow. In response, the Russian government invaded Chechnya. Over the course of the past two decades, it has fought two ferocious wars, killed tens of thousands of Chechen civilians and razed large parts of the republic, flattening its capital, Grozny” (emphasis mine).  Notice how those two wars seem to just flow together, as if the two sides agreed to take a breather in between the two.

What Zakaria’s lesson omits is that the First Chechen War ended in 1996 with the Khasav-Yurt Accord, which provided for full Russian withdrawal by December 31, 1996, gave Chechnya autonomy and paved the way for independence of the ‘Chechen Republic of Ichkeria.’  So when and why did the Second Chechen War start?  Well, in the 1996-99 interim period, Chechnya essentially descended into Somalia-like anarchy, with warlords taking control of various pieces of territory.  In March 1999, the Parliament was shut down and Sharia law was introduced (you know, like the Taliban), in order to appease Islamic militants. But Chechnya’s independent, so no Russian response.  A tipping point came in the summer of 1999 when Chechen Islamic militants invaded neighboring Dagestan (i.e., Russia).

Just imagine, Mississippi secedes from the United States, descends into chaos, and imposes Sharia law.  Islamic militants in the Republic of Mississippi then invade the neighboring state of Alabama.  What would Zakaria, or any sane person, recommend as the appropriate response?  Yes, Russia’s methods – including the leveling of Grozny – have been deplorable.  But the idea that post-Soviet Russia has pushed Chechens into a corner where the only rational choice is to self-detonate in crowded Moscow locations is ludicrous.

Finally, I would point out that Zakaria was a key ‘liberal’ cheerleader of the Iraq war.  When he spoke at my college in March 2003 – in a speech with the unintentionally ironic title, “Why do they hate us?” – Zakaria said he “reluctantly” decided to support the Iraq war.  Huh?  Based on what?  Certainly not an Iraqi invasion of a U.S. state.  And I seem to remember a few civilians dying during the Iraq War.

This is the insane thing about American commentary on Russia – even someone who clearly has no standing to oppose another country’s fight against terrorism can completely fabricate historical narratives to support his point.  This double standard feeds into Russian paranoia over a secret desire among the American elite to see Russia crumble into multiple pieces that can be played against Moscow.

So next time, Fareed, get your facts straight – you should know better already.

Posted in terrorism, Zakaria | 34 Comments

2010 – Russia’s Wasted Year for Foreign Direct Investment

Posted on January 4, 2011 by

Marx once said that history repeats itself once as farce, and twice as tragedy.  I am not sure what level we are at now, but I have been feeling a strange sense of deja vu reading the news out of Russia recently.  I caught a glimpse of a fellow Metro rider’s Wall Street Journal – an article entitled “Russia Moves to Woo Investors.”  The article quotes Russian metals oligarch Vladimir Potanin (shown to the right as Darth Vader), who is deeply pained that the Russian leadership’s pronouncements on foreign investment are just talk and would “like to see deeds follow those words.”  This itself is farce, given the level of state protection and bailout funds received by Potanin’s Interros group.  If there ever was a beneficiary of Russia’s piss-poor investment climate, it was folks like Potanin.

Same Old Story

The WSJ article goes on to outline the same sad story of Rossiya Inc. – lots of raw materials, no innovative capacity, etc etc.  It then segues to a quote from Medvedev about the need to improve the investment environment, and then some specific proposals regarding Russia’s law on investment in strategic sectors of Russia’s economy.  This is where I started thinking back to a year ago, when I wrote a post on how Russia should use 2010 to show that it was serious about improving its investment climate.  I noted that the “first test” of this resolve would be amendments to the strategic sectors law, which my sources indicated would occur in early 2010.  Of course, the amendments were never even officially released, much less introduced to the Duma or signed into law.  The one set of amendments provided to interested parties in Russia – and which I published here – were not much more than superficial changes that codified existing practice.  Since they were unofficially released, we have heard continual hints from FAS and other officials that a second, much more interesting set of amendments is also in the works, which will address substantive criticisms of the law (e.g., the designation of fish as strategic).  As far as I know, nobody has seen a copy of these amendments.

Putin + Math = FAIL

Even more eerie, was PM Putin’s incomprehensible statement last week that the volume of foreign direct investments into Russia during 2010 amounted to $40 billion.  Note that last year, Putin claimed Russia received $35 billion in FDI inflows, which I pointed out was about $25 billion too much.  And this year, according to Rosstat the actual FDI inflows for January-September 2010 amounted to approximately $8.2 billion (versus $10 billion over the same period last year).

2010 – Results

So, at the end of 2010, what are our results?  Still no amendments to the strategic sectors law, Putin still has no idea about the differences between the various types of foreign investment, and foreign direct investment inflows (by my humble calculations) dropped by approximately 20 percent, despite a general resumption of investment flows to emerging markets.


Posted in Foreign direct investment, foreign investment, Medvedev, PM Putin, Potanin | 1 Comment

But Wait, There’s More! IKEA Russia Corruption Misery Continues

Posted on December 22, 2010 by

Readers of this blog will know I have closely followed IKEA’s corruption problems in Russia, which have unfolded over the past year.  Coincidentally, these posts have invariably proven to be some of my most popular (measured by traffic).  I have my own theories about this – which I will share below – but I feel almost a sense of public duty to continue reporting on updates to this case.

Turning the Corner

The end of 2010 started out well for IKEA in Russia, even though it halted new investment in the country.  In October, the company named a new General Director in Russia – Per Wendschlag – presumably ending the leadership vacuum since the firing of two of its top managers over corruption issues in February.  The company settled its legal battle with a power generation company it paid to power its St. Petersburg mall until late last year.  IKEA was in such a good mood, it even promised to throw in a few roads, what with the traffic problems in Moscow.  Most importantly, earlier this month IKEA founder Ingvar Kamprad personally announced his “distress” over the results of an internal investigation into the company’s Russian operations (by no less than 3 of the big 4 accounting firms!).  As a result of the investigation, Wendschlag promised to “build up a strong IKEA Mos from IKEA values.”

[Re]new[ed] Allegations

Within a week of Kamprad’s announcement, however, the Swedish tabloid Expressen – the abominable fly in IKEA’s Russian ointment – revealed fresh allegations of ethical lapses at the furniture vendor’s Russian operations.  Indeed, no less than a dozen former managers of IKEA Mos have come forward claiming to have been fired after they tried to fight against corruption at the company (Russian-language coverage here).   Most of the new allegations concern private fraud in the company’s relationship with third party service providers.  For example, one of the fired managers cited a $100,000 invoice for snow removal by a Turkish contractor that IKEA Mos received in July.  One of the only fired managers to be named in the news report – Jarmo Lipsanen – claimed that IKEA managers paid inflated invoices to these third parties, and the overages were split between the third parties, government officials, and the IKEA managers.  This is not incredibly new, as it is the same basic scheme that IKEA alleged was occurring with the power generators in St. Petersburg.

A Private Problem?

The allegations are, of course, only that – allegations.  Still, if even a small percentage are true it appears to indicate that IKEA’s leadership is still grasping for ways to deal with this problem (worst case scenario is they don’t care).  I personally think this is a function of the company’s private ownership structure, which leaves its internal operations and problems away from the penetrating gaze of regulators.  I doubt you would see many listed companies spend a year dealing with a corruption issue this serious and [more importantly] public, only to come out the other side with a fresh round of allegations one week after the owner announces the conclusion of the internal investigation.          

Posted in corruption, IKEA, russia | 1 Comment