With Friends Like These, Who Needs Enemies?

For many years, William Browder has been one of the most enthusiastic advocates of investment in Russia, bullish and confident even while others have recoiled in the face of increased state interference. Once a well known supporter of President Vladimir Putin, he was also known for his occasional (and naturally in my opinion, misunderstood) public attacks against my client Mikhail Khodorkovsky. But despite his goodwill, Browder now finds himself on the other side. After some quiet protestations about minority shareholder’s rights and published research about asset stripping and corruption in Russia’s state-held companies, Browder committed the unspeakable offense of criticizing opacity and poor management at Gazprom (even though in 2004 he described Gazprom’s locally traded stock as “the single greatest investment in Russia“), turning him into a most unlikely victim.

In 2005, Browder was refused entry into Russia without explanation, and two subsequent requests were rejected. Then last June, the authorities launched an implausible criminal tax evasion investigation into a Hermitage affiliate, raiding their offices with the police to seize documents and computers, ratcheting up the pressure. This Thursday, Kommersant carried a front page story that an arrest warrant had been issued for Browder and general manager Ivan Cherkasov, but these reports were later denied by official sources.After years of diplomatic patience, this week Browder is boldly fighting back.As reported in the Financial Times, Browder has filed a complaint with the Russian prosecutors accusing the government of an attempting to carry out a “large scale criminal conspiracy” to defraud both Hermitage and HSBC of hundreds of millions of dollars. The complaint claims that following the police raids of the Hermitage offices, “assets of companies were stolen through a series of frauds consisting of the falsification of evidence in court proceedings and manipulation of data.“It turns out that the “tax investigation office raid” by Russian prosecutors was not to collect evidence (for a crime that doesn’t exist), but rather a cover-up for these individuals to steal Hermitage’s corporate seal, tax registration, and charter, allowing the state to commit “corporate identity theft.” Bloomberg reports that in the summer of 2007, Hermitage was represented by lawyers it had not hired in a St. Petersburg tax case they were not informed of. Hermitage and HSBC were lucky in that the assets that the Interior Ministry officials attempted to steal had already been moved offshore.Hermitage also circulated a 61-page dossier entitled “Criminal Justice – Russia Style”, which detailed and refuted the personal attacks against Browder, and even included photographic evidence a related police beating of a lawyer.This case of harassment against Hermitage and HSBC is disappointing and tragic on many levels, and Bill Browder deserves all our support, despite past disagreements. Having experienced myself the cruel, surreal sensation of trials without lawyers, tax investigations that actually destroy exculpatory evidence, and Kafka-esque bureaucracy covering up state theft, I would wish it upon no other individual of integrity. As a shareholder activist, Browder has bravely stood up for the principles of transparency, openness, and minority rights, when he very easily could have remained silent while enjoying swelling returns. What the Kremlin is doing to him and his group is an outrageous and egregious violation of Russian and international law, and is extremely counter-productive for Russia’s growth as a reliable investment destination.It is overwhelmingly in Russia’s own interest that people like Browder, the largest foreign holder of Russian stocks, should be welcomed, encouraged, and treated with fairness and hospitality. Instead, the most satisfied customer of Russian securities has been turned into an adversary.The Yukos-ification of Browder (and TNK-BP, for that matter) comes at a particularly inconvenient time, as president-elect Dmitry Medvedev is working to establish his own base of support both within the Kremlin and in the international community – without which his reformist promises would be impossible. The presidential transition is clearly leading to a panic among the siloviki, who are eager to staple down all assets within reach before the party is over.There are some important lessons to observe here. First, we can see that the procuracy is no longer even pretending that any of these tax claims have any legitimacy any more – the tax authority is not a normal regulatory body, they understand, but rather a powerful instrument of acquisition. This abuse of regulatory authorities cannot and should not occur in a functioning legal environment. The second lesson for all foreign investors in Russia: that loyalty, kowtowing, and political subservience to these authoritarians does not earn one respect nor safety, especially when at the end of the day, we are dealing with thieves, not politicians. How can rule of law ever improve in Russia if everyone continues to ignore these lessons? How can the judiciary ever become independent when people still seem to think that Yukos was just a one-off exception from the norm?