The Russian Decline Is Accelerating: GDP Down 4.3% In 1q 2015

Russia’s statistics agency, Goskomstat, has yet to post its official first quarter figures. We can imagine that the statistics agency is under pressure to downplay negative results. As it now stands, Russia’s recession is more than twice as deep as Medvedev had promised a month earlier.


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Camp David: G-8 Platitudes Don't Solve Anything

As pundits parse words like austerity and growth, it becomes increasingly clear that Camp David platitudes mean nothing and make no difference. Headlines speak of bold agreements: “G-8 Leaders Agree to Mix Growth, Cuts” that closer reading reveals to be hot air. When German chancellor Angela Merkel injects the word “growth” into her remarks, the press breathlessly reports a weakening of her austerity stance. Barack Obama’s insistence on both growth and “fiscal discipline” resembles calls for motherhood and apple pie. The new French President Francois Hollande pushes a financial transactions tax and mutes his election rhetoric for stimulus. His post election briefings probably convinced him that he cannot spook the bond vigilantes more than he already has. British Premier David Cameron nixes Hollande’s transaction tax post haste. Newly-inaugurated President Vladimir Putin boycotts the G-8 in a huff, sending instead his stooge Prime Minister Medvedev.  There is no more idle talk of a Russian bailout contribution. Russia is doing well to manage its own crises.

The EU crisis resembles mountain climbers, tied together by ropes, scaling a rocky cliff.  One (Greece) is balanced on a thin ledge. A few others teeter perilously (Portugal, Spain, and Ireland). They know that if one falls, others could be pulled along. One the climbers (Germany) has a knife either to cut himself free or to sever the rope of climbers about to fall. The knife-wielder fears he could end up alone on the cliff.

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Dr. Gregory's latest book can be found at Amazon.com.

Buy Shares of Russian State Companies: This Time We’ll Behave

Russia’s advertising supplement in the New York Times carries an amusing headline: “New Russian Government to Back Privatization Effort.” Apparently the new Russian government wants to sell minority shares in ten state companies, including Sberbank, United Grain, and Novorosiisk Port. The article immediately below it is entitled “Moscow Welcomes Foreign Business.” The red carpet is out for foreign investors, so it seems.

The lead article explains that First Deputy Prime Minister Shuvalov is prepared to go ahead with the sale but that “influential” Deputy Prime Minister Sechin wants to wait until the prices are higher. I think Sechin would have to wait quite a while.

Sechin might be asked why share prices of Russian state companies are so low?  Gazprom, for example, has more reserves than ExxonMobil but sells for a tiny fraction. Why? Everyone knows how corruptly and incompetently Russian state companies are run. Gazprom is among the worst. Now the new Russian government expects naïve foreign investors to forget that there are no real audits of the companies to be sold, that the true owners are masked, and that these companies are run in the interests of the insider shareholders from Putin’s inner circle. Do not forget the past history of dilution and other cavalier treatment of minority shareholders. But the new Russian government is promising that this time will be different. Let’s wait and see.

The only reason to consider buying shares of Russian state companies is to wager that the corruption and mismanagement have been more than fully discounted. Investors cannot invest for value considerations.

If any one doubts what I am saying go to Alexei Navalny’s publication on his web site of the official audit commission report that shows that the management of the state pipeline company stole $5 billion. Navalny is not citing secret documents, but publicly available documents. This news did not seem to turn any heads. This is business as usual in Russia.

Consider United Grain and Novorosiisk Port. Both engage in activities that invite corruption and embezzlement by management. Tales of the corruption of Novorosiisk port have been floating around for a decade.

We’ll see how many foreign investors will walk down Russia’s new red carpet.

Dr. Gregory's latest book can be found at Amazon.com.

Lost in the Crowd: Putin’s Business-As-Usual Inauguration

Were it not for the French, Greece, and Schleswig-Holstein elections on Sunday, Putin’s inauguration for his third term would have been the top news.

The ceremony included a tepid speech by outgoing “President” Medvedev (“Putin was elected by a majority of voters”), comic-opera marching soldiers, inspiring Tchaikovsky, marches, and the singing of the revamped Soviet national hymn. Putin marched alone down the red carpet of the Kremlin Palace in his characteristic swagger and administered the oath to himself, after which the chairman of the constitutional court, clad in mortarboard and black academic robes, declared Putin president of the Russian Federation. The Ceremony ended, Putin re-transversed the red carpet, pausing at the end to greet well wishers.

Putin’s address made no reference to reforms. Nor did it offer any conciliatory words for those who oppose him, although tens of thousands of protesters had demonstrated angrily on Moscow streets the day before. The beatings and mass arrests Putin’s forces delivered to the demonstrators spoke volumes about his intentions towards any one who stands in his way.

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Dr. Gregory's latest book can be found at Amazon.com.

Medvedev is “Dizzy From Success”?

Most older Russians know the meaning and context of “dizzy from success.” As collectivization and war against the peasants threatened to get out of hand in 1930, Stalin published his “Dizzy From Success” article in Pravda. In this piece, he criticized local leaders for excesses, which he claimed he did not intend. Encouraged peasants reduced their resistance and began to leave the collective farm. Shortly thereafter Stalin ordered a resumption of terror in the countryside.

In Krasnodar at a campaign rally, Medvedev warned party activists that if they come to  feel superior and complacent: “You get what the classic called 'dizzy with success.'" It is strange, to say the least, to refer to Stalin as “the classic.” Either Dmitry Medvedev is ignorant of Russian history or has decided to take a page from Stalin’s playbook. Let’s hope the answer is ignorance.

Oh No. Another Twelve Years of Putin

Four years of non-suspense ended Saturday. Vladimir Putin will return as president of Russia in March. This decision does not bode well for Russia, the West, or for those who wish to do business in Russia. In fact, nothing much will change. Only the election of a new president could change the status quo, and this is not going to happen.

Putin’s maneuvering within the constitution has restored the Soviet practice of lifetime tenure of the top leader. He became president at age 48. When he retires at age 72 (if he does not choose to serve longer), Putin’s quarter century tenure will match that of Joseph Stalin.

Let’s go back to the events of Saturday’s  United Russia convention: First,  Prime Minister Vladimir Putin rose to nominate protégé and current President Dmitry Medvedev to head the party list in the December parliamentary elections. As party head, he will  replace Putin as  Prime Minister. Newly lame-duck Medvedev, purportedly near tears,  then proposed Putin as the party’s presidential candidate for the March 2012 elections.  United Russia delegates approved both proposals unanimously and with enthusiasm. (All that was missing was the “stormy and sustained applause” of the Stalin era).

United Russia controls almost three quarters of the votes in the  Duma. Of the three other parties, only the Communists act as a feeble opposition. The other two are pro-Kremlin “pocket parties” that serve as democratic window dressing.

Russia’s new 2012 leadership has already been selected. Russia and the West are stuck with it, like it or not.

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Only in Putin’s Russia: Prosecute a Dead Man!

On November 16, 2009, lawyer Sergei Magnitsky died in a Russian prison. He was jailed for alleged tax evasion, but his mains sins were representing Hermitage Capital’s case against the Russian state and for blowing the whistle against crooked Russian officials. In prison, he was denied medical attention despite repeated requests and died in custody.

Magnitsky case became an international incident. The U.S. State Department has issued a list of Russian officials involved in the case whom are to be denied visas. Russian justice authorities cleared the prosecutor who handled the Magnitsky case and even awarded him a medal. Russian authorities are preparing a list of U.S. officials to be denied visas to Russia.

In a possible Kremlin rift, President Medvedev named a human rights commission to look into the case. They concluded that Magnitsky’s arrest contravened the European Human Rights Convention, the case against him was fabricated and pursued by the same Interior Ministry officials he accused of a $230 million theft from the Russian Treasury, and he was beaten immediately before his death in custody. The Russian interior ministry rejected these findings.

On August 5, the Russian Interior Ministry announced they plan to prosecute  Magnitsky for alleged tax evasion, although  he has been dead for twenty months. They justified this bizarre action as a humanitarian move to give Magnitsky’s family the satisfaction of a chance to clear his name. This  claim was rejected by Magnitsky’s mother, who said: "To put a man on trial after he was killed, when he can no longer defend himself, is an evil and base act. It goes against all human morals, and law."

How Russia is Ruled: Inights from the BP Failure

The failure of BP’s venture with Rosneft provides tantalizing hints about how Russia is governed and its 2012 Election. BP joins with Shell, Exxon, and other major international energy companies in chalking up yet another failure in Russia’s lawless investment climate. BP should have known better after losing management control of its TNK-BP venture to its Russian AAR partners. But this time, BP felt it had the right people on its side.

When BP signed with the Russian state oil company, Rosneft, to develop offshore arctic reserves, I expected this would prove to be yet another misadventure. But BP thought this deal would be different. It was negotiated with Putin’s right-hand man (Igor Sechin) and blessed by Putin himself at the signing ceremony. There was the small matter of an exclusivity agreement with BP’s billionaire-Russian partners in its TNK-BP venture, but BP thought that matter would be “taken care of” by the Russian side (a la Khodorkovsky?). Surely the Russian state would back a deal that could rejuvenate Russia’s lagging energy production and fill state coffers.

The oligarchs behind AAR -- Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries, and  Viktor Vekselberg of  Renova--  proved too formidable for BP. They also brought to the table an unusual weapon for Russian companies – a legal position that carried weight in international courts.  

Putin did not take care of the Russian side. The AAR partners took BP to court outside of Russia and won an injunction that quashed the whole deal. Fridman, Veksleberg, and Blavatnik did offer BP a “deal” early on  -- that they take half of BP’s half in the arctic venture with Rosneft.  BP first boycotted the meeting called to vote on this proposal and then vetoed it outright.

My first take was that “the Russian side” had set BP up from the very beginning. AAR, Sechin and Putin had agreed to squeeze BP’s share of the deal down to a quarter, leaving one half for Rosneft and  one quarter for the three billionaires. Maybe one quarter would be enough for a BP teetering in its recovery from its Gulf  oil spill disaster.

I was wrong. It appears there is no “Russian side.” The deal is dead. Sechin is mad  at the three billionaires and is threatening them. Rosneft has to find another partner, but what major oil company would get involved in such a mess now? BP is not out of the woods. Rosneft could sue it for damages resulting from the failed deal. This is clearly a deal gone bad for all parties. There are no winners – only losers.

BP’s saga gives us insights into how Putin’s Russia is run. Instead of  well-defined hierarchical relationships, the Russian system of governance is  comprised of swirling forces, competing against each other. Equilibrium is never reached. There are never any final victories over competitors. According to this interpretation, Russia is far from a “KGB state” of former KGB officials and allied oligarchs, who obey the “Master” Putin. Putin is the most important player, but one of many.

Bank of Moscow Bailout/Takeover: All You Need to Know About Crony Capitalism

Russian bank regulators and state-controlled bank VTB Group announced a $14 billion loan (at half a percent interest) to take effect after VTB boosts its share of Bank of Moscow to 75%. According to regulators, the bailout of Bank of Moscow was needed because it made more than half of its loans to its own businesses, including to a real-estate company of Elena Baturina, the billionaire wife of the recently fired Moscow mayor. No one outside of a narrow circle knew the bank’s loan portfolio because former Mayor Yuri Luzhkov prevented anyone from asking "unwelcome questions." The results shown to investors and the central bank, according to one banking official, were pure fraud."

In an understatement, a bank analyst stated: "We cannot rule out problems in many banks."

Bank of Moscow’s former head expressed surprise (after fleeing to safety abroad) at the size of the state aid to VTF and cited “political motivation’ as the real reason for the takeover and bailout. After all, he conducted Bank of Moscow business like any other bank.

This example shows crony capitalism in action. It is repeated daily in China, Brazil, Kazakhstan, Nigeria, and the majority of countries around the globe. A non-crony banking system is the exception rather than the rule.

Crony banking works as follows: A politician or a politically-connected figure gains control of a bank. The bank makes “friendly loans” at low rates of interest to friends, relatives, connected businesses, and to persons from whom they need business or political favors. The borrowers either earn low returns (after sharing the loan proceeds with the banker) or are unable to repay, at which time they receive another loan. If necessary, the crony bank receives new capital from municipal, state, or national authorities (that is from taxpayers) to continue the Ponzi scheme. All the while, credit worthy businesses sit on the sidelines deprived of loans.

The current round of the Ponzi scheme ends when the politician-banker falls out of favor, is fired, and becomes a convenient scapegoat. At that point, banking officials and politicians express surprise and dismay that such things were going on under their very noses. They bring in new owners, currently in political favor, to start the Ponzi scheme over again. They lend to friends, relatives, and patrons, not to real businesses in real need of finance.

Every Moscow resident knew what former Mayor Luzhkov and his wife were up to. In fact, he was popular. At least he gave a little of what he stole back to Moscow.  They probably had some feelings of regret when Putin and Medvedev decided it was time for him to go.

The story is not about Luzhkov and his bank-for-himself-and-friends. It is about how crony capitalism can ruin an economy. In an economy that is starved for capital, crony capitalism directs capital to projects that have low or perhaps no return and most capital ends up in the pockets of cronies. There is no way an economy can grow and raise its standard of living under these circumstances.

The Khodorkovsky Ruling: Something Fishy in Strasbourg?

The European Court of Human Rights ruled on May 31 that Mikhail Khodorkovsky, the jailed former owner of Yukos, had not proved political motivation in his prosecution on charges of fraud and tax evasion:

“While Mr. Khodorkovsky’s case might raise some suspicion as to what the real intent of the Russian authorities might have been for prosecuting him, claims of political motivation behind prosecution required incontestable proof, which had not been presented.”

The Strasbourg Court did rule that he had been illegally arrested and held under inhumane conditions and levied a nominal fine on the Russian government.

The Strasbourg ruling set off elation in Putin’s “power” ministries of justice and the procuracy. Although Khodorkovsky’s supporters welcomed the court’s rebuke for illegal arrest and inhumane conditions of confinement, no international court ruling was really necessary. Any picture of Khodorkovsky – a non-violent white collar defendant – held in a glass cage for months in a Moscow court was more than enough to prove this point.

The European Court of Human Rights exudes an aura of impartiality and stature. If we dig beneath the surface, however, we find it is a political institution that must consider member countries, like Russia. Suspicious is the fact that Russia blocked the court’s expedited review until it was guaranteed in January of 2010 that Russian judges would review complaints against Russia.

Up to that date, one third of complaints had been filed against Russia, and the Court had already found Russian officials guilty of corruption, torture and other misconduct.
Putin could not risk a similar ruling in the Khodorkovsky case.

Indeed, of the seven judges who wrote the Khodorkovsky decision, one was from Russia and another from a Russian ally (Azerbiajan) and another from Croatia. Decisions are by majority vote. There was no dissenting opinion issued.

Notably, the Strasbourg court did not review the facts of the case. It punted the football by basing its decision on fear of setting a precedent for others is a position similar to Khodorkovsky. I quote:

“The fact that Mr. Khodorkovsky’s political opponents or business competitors might have benefited from his detention should not have been an obstacle for the authorities to prosecute him if there were serious charges against him. Political status did not guarantee immunity. Otherwise, anyone in Mr. Khodorkovsky’s position would be able to make similar allegations, and in reality it would be impossible to prosecute such people.

The Court, persuaded that the charges against Mr. Khodorkovsky had amounted to a “reasonable suspicion” and hence had been compatible with the Convention, held that there had been no violation of Article 18 in conjunction with Article 5.”

It seems that Strasbourg declined to examine the facts for fear of a rash of other complaints concerning Russia, asserting political motivation. Their docket is already bursting at the seams.

As far as I can see, the Strasbourg Court is a court in name only. It has no subpoena power, does not appoint a prosecutor, lacks power to punish perjury, etc. It seems more a political forum, and it cannot afford to have its business held up by an angry Russia.

The Strasbourg court’s “incontestable proof” standard makes any judgment of “political motivation” impossible for Russia cases. How can anyone establish “incontestable proof” in a country whose own President declares it has no rule of law?

The Strasbourg Khodorkovsky ruling means that “serious charges” brought by a non-rule-of-law country establishes “reasonable suspicion” for proceeding against a defendant. In such a setting, “incontestable proof” of political motivation is an impossible standard. Political and legal authorities make individual and arbitrary judgments in each case in non-rule-of-law countries. Political motivation can only be discovered by examining the facts, where the political motivation will be carefully concealed.

In the Khodorkovsky case, there exists no “smoking gun” whereby Putin issues a written order to jail Khodorkovsky because he represents a political threat. Perhaps the Strasbourg court would not find even that “incontestable proof.”

At the time of Khodorkovsky’s arrest, taxes were levied arbitrarily based on connections, bribes, and political considerations. Khodorkovsky himself gamed the tax system when he was an oligarch in good favor. After Khodorkovsky fell afoul with Putin, Putin’s tax police placed Yukos’s tax liabilities in excess of annual revenues – a common strategy at the time to force bankruptcy. Indeed, Yukos was purchased on the auction bloc by a shadow company headquartered in shabby storefront that immediately resold Yukos’s assets to Gazprom. At that juncture, Yukos’s tax liabilities miraculously disappeared into thin air as if they had never existed.

Amid such chaos, political racketeering, and incredible chutzpah, who in the world can offer “insurmountable proof” of anything? It is hard enough to believe what had just gone down.

If Strasbourg reviews Khodorkovsky’s second conviction, they must confront something closer to “incontestable proof” of political motivation. Two court officials have gone public to state that the Moscow court decision was dictated to the presiding judge by his superiors, over his objections. But by the time Strasbourg gets to the second conviction, these witnesses will have disappeared or will recant their testimony to save their skins.

It seems as if Putin and his power ministry gang can rest easily. So far, the European Court of Human Rights has proven itself as paper tiger. Such a court might work for countries that have a reasonable rule of law, but it is citizens of the Zimbabwes, Russias, and Chinas of this world that require the protection of such an international court.

A Kremlin Rift?

President Medvedev chose the futuristic Skolkovo Business School campus outside of Moscow for his first-ever televised question-and-answer session last Wednesday. He was greeted by applause from the eight hundred journalists in attendance. They were hoping for the announcement. It did not come, but Medvedev did not pass up the opportunity to indirectly advance the case that he should be reelected president in 2012. Putin’s camp was less subtle. Over the weekend, “sources close to Putin” disclosed that he intended to run in the 2012 presidential election.

Over the past half year, Medvedev and Prime Minister Putin have “announced” competing platforms for the presidential “campaign.” It’s a bit different from an American political campaign. Russia’s 2012 presidential election will be resolved behind closed doors in a byzantine process that no outsider can understand. There will emerge one candidate, who will run against token opposition, and who will be Russia’s president for the next four years.

For the full article, see National Review Online http://www.nationalreview.com/author/267808/latest

Surprise, Surprise, Outrage, Outrage: Russian Supreme Court Upholds Khodorkovsky Conviction

The Russian Supreme Court today upheld former oil tycoon, Mikhail Khodorkovsky’s conviction to a second prison term. Khodorkovsky, now Russia’s most prominent political prisoner, will return to his Siberian jail cell. He will stay there at least until 2017, well into what is likely Putin’s fourth term as president. His court case out of the way, he will conveniently disappear from view. Khodorkovsky went to jail as a young man. He will emerge (if ever) an old man.

The Russian Supreme Court ignored that the Moscow court decision under appeal was dictated by the Kremlin. Two brave court insiders publicly testified to this fact. It also ignored that the charges against him had no credibility. In fact, they bordered on the ridiculous (Khodorkovsky was charged with stealing the entire output of his Yukos oil company).

Khodorkovsky committed two sins: He used his vast wealth to support democratic political parties, and he, unlike the other oligarchs who retained their wealth and empires, sought to turn his Yukos Company into a transparent Western-style company.

The Supreme Court ruling opens further distance between Putin and Russian President Medvedev. In Davos, Medvedev’s economic advisor acknowledged that the Khodorkovsky case will reduce the flow of needed foreign investment into Russia. Medvedev is also on record that Khodorkovsky’s release would pose no public danger.

Let us hope the Khodorkovsky case will not be forgotten outside of Russia. The Council of Europe, Freedom House, and Amnesty International have concluded that Khodorkovsky was charged and imprisoned in a process that did not follow the rule of law and was politically motivated.

The U.S. Senate’s Magnitsky Rule of Law Bill proposes to deny visas to Russian officials involved in the denial of human rights to Russian citizens. The bill was inspired by journalist Sergei Magnitsky, who died in a Russian prison after being denied medical treatment. The bill now includes the Khodorkovsky case as evoking “serious concerns about the right to a fair trial and the independence of the judiciary in the Russian Federation. The lack of credible charges, intimidation of witnesses, violations of due process and procedural norms, falsification or withholding of documents, denial of attorney-client privilege, and illegal detention in the Yukos case are highly troubling.”

Any company considering investing in Russia should think twice. Those companies who invested in good faith in Yukos lost everything. They were politically expropriated. Major international companies, such as Shell and BP, have suffered arbitrary treatment at the hands of Russian officials and have no recourse. Companies considering entering the Russian market are assured that such things will not happen to them. They should realize that anyone doing business in Russia could find themselves in Khodorkovsky’s shoes.

Let's face it. Khodorkovsky's only chance for release would be in the form of an act of bravery. Medvedev, as Russian President, has the power to pardon him. I doubt that Medvedev has the guts to do so.

Of Four 2012 Elections, Ours May be the least Significant

It is hard to imagine a more important U.S. presidential election. At long last, the two parties are taking strikingly different positions, and the choice will be clear to voters. The election result could change our country: Will we devote nearly half of our resources to government to fund a European-style welfare state? Or will this approach be rejected?

There are three other 2012 elections that have greater long-run significance, if one can imagine that.

1. The Eighteenth Congress of the Chinese Communist Party

At stake are 14 out of 25 seats on the Politburo, the supreme body that runs China. These 14 seats will go to the “princelings” – the children of the elite, who increasingly manage the party, state, and economy. The princelings appear to be split between liberals and Maoists. The current wave of arrests of dissidents, the removal of the Confucius statue from Tiananmen Square, and the “revolutionary programming” on television are subtle signs that the behind-the-scenes power struggle has begun. This election will determine China’s stances towards political reforms and foreign policy – whether China will move towards democracy and a less aggressive foreign policy or the reverse.

2. The 2012 Russian Presidential Election

The odd presidential campaign between Prime Minister Vladimir Putin and President Dmitry Medvedev has also begun. Only one will stand for election against minor opponents. The “nomination” campaign will be fought behind Kremlin walls, but the candidates have staked out their positions. Putin (the ex-KGB colonel) is the champion of a strong Russian state, an aggressive foreign policy, an intrusive state, and is not concerned about the lack of a rule of law. Medvedev (the lawyer) supports a rule of law, a more accommodating foreign policy, the rights of opposition political parties, and halting the repression of journalists who write things the Kremlin does not like. This election will determine whether Russia sinks deeper into the KGB state that Putin has created or begins to pull itself out of the swamp of thuggery and corruption.

3. The 2012 (2011) Egyptian Elections

We do not know the election rules and dates of the first “free” Egyptian election in a half century. This election, now scheduled for November 2011 but likely in early 2012, will be the true test of the “Arab Spring.” Will it result in a real democracy with multiple parties contending against each other with a free press informing the public, or will the election go to the only organized party (the Muslim Brotherhood), which then proceeds to use all means available (following the example of Chavez in Venezuela) to insure its permanent reelection? Or will a true democracy, in which liberal political parties are real contenders, be the result?

BP’s Travails Continue: Is Something Big Going On In Russia? (The NYT and BP Still Do Not Get It?)

The NYT’s “Misreading the Enigma” gets one thing right: BP has lacked “geopolitical acumen” in its Russian dealings. BP’s proposed share swap with Rossneft (the State oil giant) is on permanent hold. The Stockholm arbitration court says BP may have violated its shareholder agreement with its billionaire AAR partners in their private BP-TNK Russian oil venture.

It now turns out (according to confidential NYT sources within BP) that BP had disclosed the potential conflict to the Kremlin but thought that the Kremlin “would resolve any difficulties with the local shareholders” because the BP deal coincided with the Russian national interest. BP failed to understand that in the Russian KGB state, no one (including Putin) really cares about the “national interest.” The confidential BP source went on to state the obvious: “It hasn’t happened yet. It has to happen now.”

It also turns out that the presumed patron of the deal, Putin, was aware of the conflict and remarked at the signing that the AAR partners were “litigious.” Putin now claims he was “completely in the dark.” BP “didn’t say a word about this.”

Here is the proper interpretation of what is going on: When BP struck its deal in January, the Russian treasury was empty. It needed investment in arctic oil, and the world price of oil was low. Russia needed BP. BP, thinking Putting was on their side, assumed that Putin would “pull a Khodorkovsky” on the AAR billionaires. If they want to kick up a fuss against the deal, Putin had a steel cage ready for them in a Moscow courtroom, BP thought.

Putin did not put the squeeze on the AAR billionaires for any of a number of reasons: First, AAR had already bought him off to help them in their plan to get half of BP’s half of the Rossneft deal. (Putin might need a few billion more for his portfolio). Second, Putin can take on a single Oligarch (such as Khodorkovsky), but can’t take on three at once. If this is the reason, Putin is less powerful than we think. Third, Putin fears he faces a real challenge from Medvedev in the 2012 presidential election and needs the AAR billionaires and their media empires on his side.

Whatever the interpretation, things do not look good for BP, which is now looking for a “reasonable commercial solution.” That solution is the one I have been predicting for quite a while: AAR gets one quarter of the Rossneft drilling venture, “Russia” get a half, and BP is reduced from a half to a quarter.

Such is the price of misreading the geopolitical tea leaves.

Medvedev Can Restore Russian Democracy with Four Orders

Russia has been downgraded by Freedom House from “partially free” to “unfree” with good reason: regional and municipal officials are no longer elected, but appointed by the Kremlin. Opposition candidates are excluded from election lists, denied access to the media, beaten and harassed. Journalists are intimidated or killed with no repercussions. There is no rule of law.

The loss of Russian democracy is the work of Vladimir Putin and his “KGB state.” His partner, President Dimitry Medvedev, in the “tandem” that rules Russia is on public record as being opposed to these developments and promises to do better. If Medvedev is sincere, he has the constitutional authority as the duly elected president of the Russian Federation to restore Russian democracy, which he can do by issuing the following four orders:

First, fire his Prime Minister, Vladimir Putin.

The average tenure of Russian prime ministers is about a year and a half, and it is the prime minister who takes the fall when things go wrong. Medvedev can cite two reasons for firing Putin: First, Putin’s criticism of his Libyan foreign policy was an act of insubordination. Second, the Russian economy under Putin’s tutelage has suffered a crisis more severe than its neighbors and is still as dependent on oil as it was a decade ago.

Second, issue an amnesty for Mikhail Khodorkovsky.

It is clear to all that Khodorkovsky has been twice sentenced on sham charges under Putin’s direction for daring to challenge him. The Khodorkovsky case clearly reveals Russia’s lack of rule of law and discourages foreign and domestic investment. Khodorkovsky’s release signals that Russia intends to abide by the rule of law.

Third, order the Central Election Commission to allow opposition candidates on election lists and access to the media.

In previous national, regional, and municipal elections, opposition candidates have been arbitrarily excluded from election lists by illegal or arbitrary means and they have been denied access to the media. Such an order would tell the world that Russia intends on having free elections.

Fourth, order the police, militia and security forces to honor the constitutional guarantee of freedom of assembly.

Attempts to organize political demonstrations have been violently suppressed by the police and paramilitary thugs despite the explicit guarantee of freedom of assembly in the Russian constitution. A key safeguard of democracy is the freedom of assembly.

It is time to call Medvedev’s bluff. Does he only like to talk about lofty principles such as free elections and rule of law or is he willing to actually do something, even if the course is risky, to say the least. If Medvedev is brave enough to issue these four orders, he would go down as a significant figure in history.

Putin Takes an Electoral Shellacking and No One Notices

Russia’s regional and municipal elections on Sunday resulted in a shellacking of Putin’s United Russia that few noticed. Putin’s United Russia failed to achieve majorities in seven of the twelve regional elections. In Kirov and Kaliningrad, United Russia got less than forty percent. These results were overshadowed by events in Japan and the Middle East and few observers know how to interpret them.

To understand the failure of United Russia to win majorities, consider a U.S. election in which Republican candidates are banned, and Democratic candidates vie against candidates of the Green Party, the Libertarian Party, and the Mountain Party and THEY FAIL TO WIN A MAJORITY. This was the case in Russia on Sunday.

United Russia candidates contended against the shop-worn Communists and the “powerhouse” “Patriots of Russia” and the “Right Cause.” Candidates from the crippled Yabloko party and independent candidate were largely excluded from the election lists. In all, fifty percent of candidates from parties without seats in legislatures and forty percent of independent candidates were not allowed to register for elections. Only United Russia candidates were allowed in the media or granted permission to rent space for meetings. Election violations in favor of United Russia were recorded in virtually all precincts.

These regional and municipal elections are a dress rehearsal for December’s elections to the State Duma. We can expect that Putin and United Russia will intensify their election tricks to exclude serious rivals such as Gary Kasparov, Boris Nemtsov and Mikhail Kasyanov.

We know little about the “kitchen” in which Russian public opinion sampling is done, notably by the Levada Institute. Their “ratings” of Medvedev, Putin, and the Russian government are supposed to be honest. They do show Putin’s ratings falling from the stratosphere of 80-88 percent to 72 percent in January. In the last year, the disapproval rating of the “Russian government” rose from 43 to 47 percent. These are ratings U.S. politicians would die for, but they do show erosion at the top.

If these ratings are accurate, it is unclear why the ratings of Putin and the Russian government remain in the stratosphere (relative to the rest of the world), despite a recent terror attack, inflation, high unemployment, and the after effects of a severe economic crisis. Putin has always used his high ratings to justify whatever he does as the will of the people.

If we look at results not associated with personalities, we see an emerging picture of dissatisfaction, beginning in 2007. In 2006, 14 percent of Russians thought “state power was weak.” This figure fell below ten percent in 2008 and 2009 and currently stands at ten percent. Russians may be getting tired of the “iron hand” of the Russian state. In 2006, 33 percent of Russians were worried about corruption, bribe-taking, and arbitrary behavior of officials. Now, this figure approaches fifty percent. As in other countries, the main concerns of Russians are rising prices, poverty and unemployment. In any other country, the government and the national leader would be held responsible. Why is this not the case in Russia? Either the Russian people are forgiving of their leaders or the Putin/Medvedev ratings are exaggerated.

In any case, we can expect extreme brutality, fraud and intimidation in the upcoming December elections. I would not like to be in the shoes of those brave figures who stand up to Putin and his United Russia.

Truths of Putin’s Justice: A Courageous Women, the Internet, and More on Khodorkovsky

A bare conference room in a Moscow office building. A strikingly beautiful woman in her early 30s, dressed immaculately in black and white, is interviewed by a young man and woman clad in jeans and pullover sweaters. She is nervous but composed and answers their questions in a subdued but steady voice.

This is the world of Russian internet TV. As in many other places, internet TV is a last outlet where the networks are controlled by “higher authorities.” Such an interview would be too hot to handle elsewhere.

The interviewee, Natalya Vasilyeva, knows the personal consequences of this interview: firing or worse and a tough life to follow. As the press secretary for the Khamovnichesky district court of Moscow, she is an insider witness to the months’ long trial of Mikhail Khodorkovsky, whom her boss, Judge Viktor Danilkin, sentenced on December 27 to an additional seven years in jail.

Vasilyeva puts a face on a distorted justice system, which “all participants understand but no one is willing to say anything.” In political cases, such as Khodorkovsky’s, the verdicts are “ordered” from above. If any cog in this “justice” machine refuses to play their role, the best that can happen to them is that they lose their jobs. They are warned “to think about their careers and children.” When prodded to explain what is meant by “consider their children,” Vasilyeva answers that “it is up to the individual to interpret what that means.”

As the person responsible for briefing the press on the Khodorkovsky case, Vasilyeva is a frequent visitor in the judge’s chambers. She paints a sympathetic picture of Danilkin: “I must say that the whole judicial community knows that this is an ‘ordered’ case. They all sympathize and understand him, but no one can say how he can emerge from this situation as an honorable man.”

Throughout the trial, Danilkin reports regularly to his superiors in the Moscow central office. If the matter cannot be clarified by phone, he is called in. As the case proceeds, he is increasingly agitated, nervous, and depressed. In his office for instructions, the exasperated Danilkin tells her: “I can’t answer your questions. I don’t know where I’ll be tomorrow or what will happen to me.” Danilkin’s agitation rises as the sentencing approaches: “Do what you want. I don’t care anymore.” She enters his office on the third day of the reading of the sentence to find an ill Danilkin taking medicine for his heart. He assures the alarmed Vasilyeva: “I am Ok now.”

The heart of Vasilyeva’s testimony is that the sentence was not the judge’s: “Danilkin had no relationship to the verdict.” In fact, her boss’s superiors get upset that he begins writing the verdict on his own. On Saturday December 25, Danilkin is called to the Moscow central office to meet with “an important person.” Shortly thereafter “Danilkin’s” verdict is sent over. Parts of it arrive only during the actual reading of the verdict. Normal practice for the Khamovnichesky court is for the judge to write the verdict; formatting and spelling are then checked in house by court secretaries. In this case, the secretaries make the technical corrections on electronic files received from the central office.

The young interviewers close by asking Vasilyeva whether she understands the consequences. Answer: “I will be fired.” They warn that she will be accused of lying for sinister reasons. Her answer: “I am speaking out because I am disappointed. I wanted to become a judge, but, when I saw the internal working of the law, I understood it is a fairy tale that the judge carries out the law independently. The law itself has been transformed into a fairy tale. It is a fairy tale that the judge is subordinated to the law. Instead, the judge is subordinated to higher authorities.”

Natalya Vasilyeva’s brave actions will likely not change anything. She has been fired. Her former boss, Danilkin, has threatened her with a lawsuit for defamation. But sometimes courageous actions by one small person can have unanticipated consequences. People become fed up and speak out. Other regular people – all women -- are following her lead. One Svetlana Dobronravova reported to the limited-circulation “Metro Gazette” that, on the trial’s last day, she heard the following telephone conversation of the female prosecutor: “The lawyers are getting their honorariums, we have done in Khodorkovsky, but the verdict is not ready. They have not sent it over from the Moscow office.” She says she is ready to testify in court. Journalist, Vera Chelishcheva, wrote on a blog: “I can confirm what Natalya Vasilyeva has said. We all heard Danilkin shouting in his chambers at the prosecutors so loud that it could be heard at times in the courtroom.”

At a much higher level, the Khodorkovsky verdict is having uncomfortable ramifications. President Medvedev’s entourage to Davos admitted that the Khodorkovsky verdict discourages foreign investment, but Medvedev has taken no action even though he has the power to pardon Khodorkovsky. We can understand Medvedev’s reluctance to tangle with his “boss” Vladimir Putin. Putin’s answer to queries about Khodorkovsky leaves no doubt where he stands: “Thieves should sit in jail.”

For those wishing to see the Vasilyev interview, see: http://www.newsru.com/russia/14feb2011/hodorkovsky.html

Russia Needs Our Money Now, But For How Long? Medvedev in Davos

Dimity Medvedev’s Davos charm offensive was cut short by the suicide bombing at Domodedova airport. He could not afford to be seen mingling with “Davos Men” as victims of the tragedy lay dying. Vladimir Putin learned this PR lesson when he continued his vacation as the Kursk submarine sailors suffocated under water. Medvedev returned today to Davos, his agenda reduced to two events: meeting with world business leaders and delivering a keynote address. In both events, he will deliver the same message: Russia is open for business. His listeners will be told that state companies are being spruced up for sale. Only a few will remain off limit to foreigners. Goldman Sachs has been gearing up, beefing up its presence in Moscow. Goldman and other venerable investment houses will lend an air of credibility to the undertaking.

There is no mystery why Russia is again open to foreign investment. The state budget receives half its revenues from oil and gas, whose prices are no longer soaring and whose outputs are stagnant. The Russian economy has been in a funk for a few years, and tax revenues are down. The vaunted rainy-day fund from the halcyon days of the energy boom is almost exhausted. In a word, the Russian state badly needs money.

Putin and company will be actually interested in selling state companies at high prices this time around. Previous “privatizations” have brought precious little into state coffers. The most lucrative state companies have already been sold (or resold) to the Kremlin’s friends at bargain basement prices. None remain under the control of unreliable oligarchs to be confiscated as was Khodorkovsky’s Yukos. Not that much remains to be sold. Rossneft, now owned ten percent by BP, is the big prize, so to speak. Other companies on the auction bloc are less appealing, such as RusHydro and Sovcomflot.

Medvedev’s invitation is not the first, nor will it be the last. Mikhail Gorbachev counted on a huge influx of foreign investment when he liberalized rules in 1986, but no one came. The Yeltsin administration courted foreign investment, but few ventured in. There were still no laws and rules. Willing foreign investors were subjected to endless waits for finalized versions of production sharing agreements and the underlying “normative acts.” Putin came to power on a platform of offering stability and a rule of law. BP, Exxon, and Shell took the bait to be bloodied by arbitrary tax police, environmental agencies, and local oligarchs. The passive foreign investors in Russia’s best-run oil company, Yukos, saw their investments fall to zero as Putin’s tax police and courts dismembered Yukos on phony charges.

We are now assured by Medvedev that this time it will be different. Russia is truly open for business as a reliable partner. It is said that Putin himself stands behind such deals. Medvedev’s economic team is spreading further good news at Davos, such as the government’s intent to streamline rules and lower taxes. Are such siren songs to be believed?

Recent history warns that foreign buyers should be wary for a number of reasons:

First, it matters little whether Putin and Medvedev both stand behind these deals. Putin, or whoever else is in charge in the future, can always change their minds, as BP, ExxonMobil and Shell can attest. In the absence of a rule of law, whatever those in power say is the law is the law. And there are number of ways to break agreements without violating the words written in the contract.

Second, the state will likely remain the major shareholder; minority shareholders would have to search the world for a worse partner. The Russian state will continue to use companies in which it has controlling shares as instruments of state power without much real interest in creating shareholder value.

Third, potential foreign investors should be aware that, despite the participation of the world’s leading investment bankers and accounting firms, they will have to buy a “pig in a poke.” As far as I know, there has been no real audit of any substantial Russian company, despite the respected accounting firms whose names are listed in the prospectuses. A real audit cannot be conducted because it would reveal the web of corruption and related party transaction that lie buried beneath the surface of each of these companies.

The most likely outcome is that foreign money will indeed flood in (the unknown is the price, of course). Putin, Medvedev and the Russian state will behave as long as they need access to world capital markets. With the money safe in its coffers (either in Russia or Switzerland), Russia will again at some point put the screws to hapless foreign partners when the price of oil soars or some other serendipitous event occurs.

Any foreign investor considering investing in Russia for the long run must consider two metrics: Russia currently ranks 154 out of 178 countries in corruption, equal to Tajikistan, Cambodia, and Laos, lower than Pakistan. In terms of political risk, it ranks 186 out of 196. These miserable numbers are not made up. They reflect the reality of what it has been like to do business in Russia.

How Western investors accept the Medvedev-Putin invitation is yet another test for world capital markets. If bids are low enough to reflect the reality of Russian risks and corruption, it will have done its job, and Russian public finances will not be bailed out by naïve foreign investors. If foreign investors pay prices that ignore this reality, they are again like Charlie Brown rushing forward to kick the football that Lucy will snatch away at the last moment.

Khodorkovsky Verdict Delayed

Former Yukos Chairman, Mikhail Khodorkovsky's verdict in his second Moscow trial was supposed to be delivered today, December 15. Without warning or notice, the court announced that the reading of the verdict has been delayed until December 26. The reason for the delay is obvious: Western newsmen leave Moscow between Christmas and New Year. Few will be in the Moscow court room to hear the predictable guilty verdict and the new prison sentence.

The Kremlin wants as little attention as possible. The Khodorkovsky case is becoming uncomfortable. There is widespread recognition that the charges are a sham and that Khodorkovsky is being kept in jail for political reasons. As a prisoner of conscience and a well known figure, a free Khodorkovsky could be a serious challenger to the Kremlin. The Kremlin needs to keep the verdict as quiet as possible because it is now attracting attention from civil rights advocates in Europe, who increasingly assign political dissident status to Khodorkovsky.

The Khodorkovsky case also exposes as false President Medvedev's so-called campaign to establish a rule of law in Russia. How can there be talk of rule of law when the most prominent rule-of-law case is the sham Khodorkovsky trial?