‘It Is Completely Naive To Think Anything Will Change After Russia’s Election’

Business Insider

We interviewed a bunch of experts about the significance of Russia’s March 4 election.

Bill Browder is the head of Hermitage Capital Management, which one controlled almost $4.5 billion worth of investments in Russia. He was barred from entering the country in 2005, and the death of Hermitage lawyer Sergei Magnitsky in a Russian prison in 2009 led to international condemnation. His comments are below.

“It is completely naive to think anything is going to change after this election.

“First of all, Putin has been in power for the last 12 years. Anyone who made the mistake of thinking Medvedev was in power, at this point, it’s pretty obvious that he wasn’t.

“If you go back and read any of Putin’s speeches, he said all sorts of things that looked good on paper. But none of them have ever been implemented, and it’s very clear why: because implementing real reforms would mean that Putin and the people around him could not be able to engage in all these financial crimes, which have made them so wealthy.

“The Russian government doesn’t function to serve the national interest by collecting taxes and providing services as most governments do.

“The current regime collects taxes so that the people in the government can steal that money. They steal it either directly, as Sergei discovered when he came across a $230 million tax rebate fraud involving government officials, or they steal it through other means, like enormous kickbacks from building roads and pipelines, and kickbacks from buying equipment for hospitals.

“In the end, most of the money that’s supposed to be spent on the people of Russia just doesn’t get spent on the people.”

A: So I guess we should start with the news that came out today was in regards to Sergei Magnitsky, the report that his prosecution would go on. Were you surprised by that at all?
B: No, what Hermitage Capital has discovered is that the entire apparatus of the government and the law enforcement system in Russia is circling the wagons in order to protect a number of officials involved in Sergei Magnitsky’s false arrest, torture and death. The way in which they’re doing that is by exonerating the guilty officials and then attacking the Innocent victim, and in this case the victim is dead.

In the history of Russia, there has never been a prosecution against a dead man, but they’re doing it nonetheless, and no matter how bad it looks from the outside, in their own twisted logic, this seems to be the way in which they intend to justify their actions internally. Perhaps their motivation is also to make a point to other people not to fight for justice in situations like this.

A: From your experience in Russia, do you think this case — although it received a lot of international attention — is day-to-day business; is this a particularly severe example?
B: No, this case is the tip of a very large iceberg, and the only thing unusual about this case is the mountain of documentary evidence available. When Sergei was incarcerated, he wrote 450 complaints in 358 days of detention, and as a result, we have a record of everything that happened to him. Whereas most other human rights abuse cases have no record at all.

The other aspect of the Magnitsky story is that he worked for a Western investment company. The moment we learned that he had been murdered, we shared all of the evidence of his torture and murder with the international media. However, this kind of corruption and murder goes on all the time in Russia, and if you ask anyone who has any experience in Russia, they’ll all tell you similar stories, maybe not quite as harrowing as what happened to Sergei, but certainly in terms of the corruption and the cover-up and the threats, all that is pretty much standard operating procedure in Russia.

A: The documents you’ve already released show massive corruption in the tax system, with the police, in the interior ministry… do you think this level of corruption is condoned or even actively encouraged by the executive level: the Kremlin and the Prime Minister’s Office?
B: This case clearly goes right to the very top. You can’t have a fraudulent $230 million tax refund being approved in one day without the signature of a cabinet minister. You also wouldn’t have the entire high level government apparatus involved in a murder cover-up if the President and Prime Minister weren’t giving the instructions.

What is even more remarkable about this cover-up is that it is taking place in the face of damning international sanctions. It is hard to imagine that the Russian government would allow the country to pay such a high price in terms of losing their international reputation, scaring foreign investors, and inflaming opposition activists just to protect 60 Russian officials unless there was a clear decision taken from the top.

A: Hermitage Capital began investing in Russia in 1996. How do you feel the climate has changed for both investors and businessmen, and the average person since then?
B: When I first arrived in Russia, the valuations were much lower, and there was a wild west feel to the whole thing. You had chaos and potential danger from disorganized crime, but it was sporadic and not pervasive. You could become the victim of fraud and a host of other problems, but it was disorganized, and the valuations were so low, that any slight improvement would allow you to make a lot of money there.
But now in a world where valuations are much higher, and we now have what I call highly organized and targeted crime. It is organized at a very senior level in the government, and it is focused on any business that makes any profit. Because of that, there’s no way to avoid it if you operate a successful business in Russia. If you go to Russia, it is a near certainty that you’re going to be shaken down, forced into very compromising situations by the government officials, and either you can fight it, and then you can end up like Hermitage and Sergei Magnitsky, or you can go along with it and you become a criminal in the West where you’re breaking the law by bribing government officials.

By operating in Russia, you’re forced into a compromising position one way or another’ you either compromise yourself by becoming a victim of their lawlessness, or you become a part of their lawlessness, then you’re breaking the law in the West.

A: Do you think the shift from disorganized crime to organized crime coincided with the arrival of Putin to the Kremlin, to the presidency in 2000?
B: Putin is absolutely responsible for that. When Putin came to power, it was all chaos. In the 1990s, the chaos was driven by the oligarchs, the 22 oligarchs who stole 50 percent of the country from the state, and the rest of the 143 million Russians lived in destitute poverty.

When Putin came in, his promise to the people was that he was going to disenfranchise the oligarchs from the economy, and the state would then function in the national interest. Instead, of disenfranchising the oligarchs, he basically took out the biggest oligarch, Mikhail Khodorkovsky, the former head of Yukos, and then scared the other oligarchs into submission.

Putin then became the biggest oligarch himself along with some of his law enforcement colleagues. And they’ve now consolidated their position to such an extent that Putin is likely to be one of the richest men in the world.

A: Am I right in thinking initially you were relatively supportive of Putin? You thought he was probably going to be a good thing for Russia, is that correct?
B: Yes I was. At first it looked like he was doing a good job and acting the national interest. If you’d lived in Russia in the 1990s, and you saw how terrible it was with the chaos and the oligarchs, I and everybody else was hoping for someone to change that system. When Putin came in and promised that he would, and for the first couple of years, it looked as if he was doing that, and actually doing a good job.

It was only after he arrested Khodorkovsky and he made the oligarchs subordinate to him that he went off the rails and it became clear that he wasn’t acting in the national interest, but he was acting in a personal, financial interest.

A: So this upcoming election… there’s obviously been a lot of protests beforehand, Putin has appeared to take on some of that in the articles he’s published, he’s sometimes been speaking in a kind of conciliatory tone. Do you think there’s going to be any real change?
B: Not at all. It is completely naive to think anything is going to change after this election. First of all, Putin has been in power for the last 12 years. Anyone who made the mistake of thinking Medvedev was in power, at this point, it’s pretty obvious that he wasn’t. If you go back and read any of Putin’s speeches, he said all sorts of things that looked good on paper. But none of them have ever been implemented, and it’s very clear why: because implementing real reforms would mean that Putin and the people around him could not be able to engage in all these financial crimes, which have made them so wealthy.

The Russian government doesn’t function to serve the national interest by collecting taxes and providing services as most governments do. The current regime collects taxes so that the people in the government can steal that money. They steal it either directly, as Sergei discovered when he came across a $230 million tax rebate fraud involving government officials, or they steal it through other means, like enormous kickbacks from building roads and pipelines, and kickbacks from buying equipment for hospitals. In the end, most of the money that’s supposed to be spent on the people of Russia just doesn’t get spent on the people.

A: There have been significant protests, and you can see members of the opposition gaining traction, or at least appearing to gain traction. Do you see positive signs there?
B: The most important thing that has happened in the last four months, is that the fear of publicly criticizing Putin has disappeared. Putin has been able to get away with a lot of unbelievably bad things by keeping everybody in absolute terror and fear. After what he did to Khodorkovsky, after what happened to Anna Politkovskaya, after what happened to Sergei Magnitsky, after what happened to a lot of people, nobody else wanted to suffer the wrath of Putin.

So as a result, people lived in fear, nobody said a word about the truly bad things that were going on. But what has changed so dramatically in the last four months, is that 130,000 people went into the streets and shouted “Putin is a thief,” “Putin should be removed,” These 130,000 people who no longer have that fear, and it’s extremely important and very symbolic that people have stopped fearing Putin.
One of two things can happen next: he will be able to successfully re-institute that fear, or this protest movement is going to continue to grow and grow and grow until he loses his job. But what is going to happen, nobody knows. I don’t know, he doesn’t know and the protesters don’t know. Only time will tell.

A: In what concrete ways do you think Russia needs to change?
B: It all comes down to law. At the moment there’s no law in Russia, there’s no property rights, no law enforcement, and the courts aren’t independent. As a result, it’s an arbitrary place where anything can
happen to anybody — whether I, being an investor, can lose everything, or a regular citizen could be killed — there’s no functioning way of controlling or rectifying that situation. So it’s an impossible place todo business, and really, an impossible place to live.

The only way Russia can become a civilized place is by becoming a country where there’s real rule of law, where judges are independent, where the police catch criminals rather than carry out crimes, and where property belongs to you if you own it. At the moment, that’s not the case, and nothing has been done in the last 12 years to improve that situation.

A: Hermitage is often described as an “activist fund”. Is that something you can elaborate on?
B: This is one of the reasons we had all our problems in the first place. In the 1990s, when we first got started, we discovered all sorts of bad things going on in the companies we were investing in, and we figured out that the best way to stop those bad things was to do forensic research into how they were happening: how money was being stolen by the companies, how assets were being stripped out of companies, showing who was conducting the stealing and how they were doing it, and then sharing that
information with the international and domestic media.

And when we did this — our activism program ran from about 1998 to 2005 — it did have a remarkable effect on the situations where we were active. For example, we exposed large scale assets being stolen out of Gazprom, and on the back of that, the CEO of Gazprom was fired. We identified an enormous asset-stripping scheme that was being conducted at the National Electricity Company and we were able to block it before it happened by changing the charter of the company. We identified a backdoor way in which companies were diluting minority shareholders and got the law changed so they couldn’t do that anymore.

The activism was a great financial tool for improving the valuation of companies we were investing in and it was also very morally satisfying. The main problem was that as our firm was the largest shareholder activist… it was in direct conflict with senior government officials involved in the fraud and so they retaliated. In November 2005, I was stopped at the border, detained at the airport detention center and then expelled from the country because I had become, in their words “a threat to national security”.

A: You haven’t been back to Russia since then?
B: I haven’t been allowed back into Russia from that moment on. I was permanently barred.

A: Do you think at some point you’d be allowed back?
B: I hope so. I am certain that the regime will eventually fall, whether it falls in two months to two years or five years, I can’t tell. But when there’s a new regime, I imagine that I’ll be one of the foreigners most welcome to come back into Russia because I was one of the ones who has publicly challenged the corruption of this regime. I want to go back. I had a great fondness for Russia, and for Russian people, I just don’t have a great fondness for this regime.
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