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Friday, June 10, 2011

If This Were Russia, Nancy Pelosi Would Own Google (But There Would Be No Google)

In my many conversations with Russian entrepreneurs, they repeatedly told me: “We cannot become too big or too profitable. If we do, ‘the structures’ will notice us and gobble us up.” Instead of rewarding success in business, Putin’s Russia offers entrepreneurs “deals” they cannot refuse. The “deal” is that powerful state and state-connected officials will take their share of your success.

I used to dread flying into Moscow’s Sheremetova airport, consistently rated the worst international airport in the world. There were no lights, the lines were endless, and restrooms were disgusting. In a word, it was terrible. I then learned to fly into Domodedova (airport code DME).

Under the private management of East Line Group, DME was transformed from the dismal hulk I flew out of in 1993 to a brightly-lit, passenger-friendly airport scarcely distinguishable from any other international airport. There were some 90 check-in counters, manned by friendly personnel. International carriers got the message: They switched operations to DME. DME’s revenues rose to $1 billion per year – one of the few success stories of private business in Russia.

East Line Group decided last May to go public with an IPO. It was time to cash in and to raise more capital for expansion.

Not so fast. The prosecutor general initiated an investigation that declared East Line’s offshore ownership “unacceptable,” designed “to hide the real owners.” Offshore ownership is standard in Russia and is a favorite tool of the Russian nomenklatura. We have no idea who owns the multi-billion dollar shadow offshore companies through which top government officials (including Putin himself) hide their considerable wealth.

With the threat of government reprisal, East Line shelved its IPO. Who would pay good money for a company that may share the fate of Khodorkovsky’s Yukos?

All hope is not lost. It turns out that a former energy minister under Putin and special deputy of Medvedev has come forward as a potential “peacemaker” between the government and the airport’s owners. His group of investors (imagine who they might be) will purchase a big chunk of East Line Group for pennies on the dollar, and in return they will call off the prosecutor.

Such a shakedown would make the New Jersey mafia proud. They could not have done it better. The difference is that, instead of thugs threatening murder and mayhem, this mafia is “respectable” state servants in business suits. The result is the same.

The outcome is obvious: East Line Group must cave to the state mafia. The return from its entrepreneurship will go to the bureaucratic mafia in business suits and they will be allowed to carry on.

What is going on at DME is the equivalent of Nancy Pelosi deciding she needs a 20 percent stake in Google for pennies on the dollar as a payment for shutting down an anti-trust suit.

Any U.S. company considering doing business in Russia must consider the East Line case. Any potential Russian Bill Gates, Steve Jobs, or Sergei Brin should think twice about founding any company, investing any capital, or taking any risk. The result: There will be no Microsofts, Apples, or Googles in Russia, despite the high-tech city that Medvedev and Putin are building in Skolkovo.

For more on this, see Joe Nocera, “How to Steal a Russian Airport,” NYT, June 6, 2011.

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