After a decade of robbers, the year of Putin (an excellent read)

Multinational corporations and Russian oligarchs should be making bonfires out of their external-relations strategies in Russia over the holiday season. Russian consumer markets, which have been growing at more than 40 percent annually since 1999, are beginning to cool off and changes in the regulatory environment seem to have taken many companies off-guard.

So many companies and their advisers had based their strategies on defiance and disrespect for the law, sponsoring corruption and funding political opposition that Russia under Putin, a country with laws, seems an alien place they will have to get used to fast. Russian corporate public-relations agencies and executives who took on the role that the electorate deprived the Yeltsin power-elite of by voting it out will have to assume lesser roles of being corporate executives with commercial aims only. Anything more, any political games, meddling with sovereign affairs, fuelling of anti-Russia fires will put businesses to immeasurable risks.

The Russian government, after a series of legal manoeuvres, privatized a major oil company, Yugansneftegaz, which had been taken control of by a group accused of serious crimes by Russian prosecutors.

State-controlled Rosneft will pay nearly $9 billion for the company to cover part of the taxes the government claims Yukos owes. Yugansk, which provides nearly 60 percent of Yukos’ reserves and nearly 17 percent of Russia’s total oil reserves, was privatized for a meagre $350 million a decade ago, by the persons who have been behind bars with charges of fraud, forgery and tax invasion. To most Russians it would seem like police walking into the homes of robbers, catching them red handed and returning the loot to previous owners, with interest. Russian prosecutors have gathered and taken to court formidable evidence of what they call "running criminal gangs" against the former owners of Yukos. Opposition to Russian prosecutors has been strident from the U.S. government, diplomatic circles and pink press.

Companies that have based their Russian strategies on calculations that President Vladimir Putin and the Kremlin would buckle and cede sovereignty to foreign powers on strategic economic issues like the regimes of past decade will find they have miscalculated.

The nationalization of Yugansk and court cases against the owners have sent shudders down the spines of Russian oligarchs -- the people who were knighted to oligarchy by Boris Yeltsin after they stole national sub-soil assets during the scam privatizations in mid-1990s.

Russian oligarchs are in a grim mood this holiday season. Many of them have been handed past-tax bills from 2001 that run into the hundreds of millions of dollars. The Russia Journal has reported that the oligarchs will be asked to hand over the money to treasury that Putin suspects they have avoided paying using illegal tax shelters, transfer pricing and corrupt relations with previous governments.

The access that Russian oligarchs and their Western partners enjoyed in the Russian White House and the Kremlin is a thing of the past, especially since Putin’s re-election. The Russian cabinet of Prime Minister Fradkov is no longer beholden to the "family" and, while it listens to all, it acts on instructions from the Kremlin, which has been imbued with a new sense and strategy on what is in the Russian national interest.

While the Russian legal framework has become increasingly business-friendly, proving a tax-incentive-filled environment favoring business over bureaucracy, Putin is likely to be unrelenting in his assault to ensure that those who fail to pay taxes on the super profits made during the commodity-price windfall will lose control of their companies.

Foreign corporations have often depended for their Russian strategies on international accountants, auditors and law firms. Their strong presence and principle business activity has been disbursing advice and certification of accounts of Russian companies that have siphoned off nearly $200 billion from the country over the past decade, according to estimates from international banks.

Accounting firms that have been tainted in the corporate scandals of Enron, Parmalat, Fannie Mae and the downfall of other giants of U.S. and European business have not been charged publicly of any wrongdoing in Russia. There have been accusations of wrongdoing from minority investors and the latest class-actions suits in New York will force them to tone down their aggression and creativity in enabling Russian natural resource monopolies to blatantly strip the country of its assets.

If the Russian government and its financial watchdogs, restive but poorly trained and lacking in resources, fail to diminish financial planners’ creativity in devising ways of tax avoidance, class-action suits in the United States will. Russian prosecutors however, may not wait for either and will pursue criminal charges against all those that avoid taxation.

Two major Western accounting and auditing firms are known to have been investigated in recent years in Moscow. Incriminating evidence of their wrongdoing in the United States and Europe is closely followed by Russian watchdogs, who will bring pressure on the firms to show respect for Russian law and the rights of minority shareholders.

At Russian economic forums, accountants will have to be careful not to solicit business on promises of tax minimization -- economic security and sustainability will be atop of foreign investors' minds. Russian business strategies post-2004 will have to consider commercial aims and economic security being risked by accounting and legal advisers who fail to extract their clients from trouble at the hands of a government unwilling to compromise.

The law firms and public-relations agencies that have taken the role of political opposition to Putin should be getting the message that business must not overstep its bounds. Mikhail Khodorkovsky and his public-relations managers, as with other oligarchs, have been running their own image-building campaigns on themes of their paymasters being diehard entrepreneurs in "bad Russia, under bad Putin." Many of them have run parallel foreign policies, not always in tune with Russian national interests. They paint themselves as entrepreneurs and free-market promoters and fighters who are pitted against a government and state stifling business. The government is intent on pulling down the falsehoods of this façade.

The US think tanks that sold the criminality of the Yeltsin years to the West and have been vocal in opposition to Putin carry no weight in Moscow. Businesses will find that Western lobbying groups and think tanks cannot return Russia to the days of Byzantine customs, tax and corporate codes that could be exploited through their links with corrupt politicians and bureaucrats. Instead, Putin has given a framework of lowered taxes, straightened and simpler legal codes, simplified customs procedures designed to outwit the corrupt and corrupting. New Russian strategies will have to be in compliance with the law and engagement in constructive dialogue for change.

The PR agents of Moscow that have fed anti-Russia, anti-Putin bile to the handful of Western reporters stationed in Moscow will have to eat their words. Companies will find that their PR agents can be a drag on their own reputations and the baggage of past affiliations they bring, although severed, can have negative implications. PR agencies’ ability to plant stories may be undiminished but such plants generate cynicism and attract notice of law enforcers. Corporate executives will demand that PR agencies distance themselves from politicians and do not compromise their commercial interests by indulging in political and power play which has been the hallmark of the Moscow public-relations profession.

Khodorkovsky made his bravado stance at the residence of U.S. Ambassador in the summer of 2003 before he was dragged off a plane by FSB agents in Siberia and sent off to prison. Foreign companies and Russian oligarchs have now recognized that there is no diplomatic protection from financial crimes. The days when banks could operate inside Baltic embassies and take diplomatic immunity for money laundering are long gone. Political activism and interference in Chechen affairs from European ambassadors has caused lost opportunities for companies closely tying themselves to their governments’ policies. Corporations will have to distance themselves from individuals and institutions that show disdain for sovereignty of foreign nations in times of crisis.

Global oil giants struck some deals with Russian oligarchs and came to realize that Kremlin sanction was essential for all such deals. Weeks before his arrest, Khodorkovsky had arranged for then-prime minister Mikhail Kasyanov to give a green light to the sale of strategic stake in Yukos to an American oil firm. Since then, two major oil deals involving Lukoil-Chevron and Total -Gazprom have been approved, each by Putin. Oil majors will learn that while the Kremlin will welcome strategic investments to develop new fields and generate new finds –the sale of Soviet-era finds at best valuations to Western companies will be off the agenda.

U.S. companies, and some Europeans with them, find this a new circumstance incomprehensible after years of dealing with Russian ministers and members of Yeltsin coteries that were willing to sell nearly anything to anyone. American lobby groups with access to high offices in Moscow are finding themselves irrelevant. Business lobby groups such as USRBC of Washington, D.C., find that they have no influence in Moscow and their friends in Washington are not able to call the shots they could until five years ago. Their endorsements can cause problems rather than quick facilitations.

Harvard University, whose former employees have been accused of wrongdoing in Russian privatization, had been the host of a celebrated Russian forum for many years. The forum decorated George Soros, a man who has made himself as unwelcome in Moscow as in the White House before falling into irrelevance when Russians stopped making more than a cursory presence. The American Chamber of Commerce in Moscow held its Christmas eve networking event at a Turkish-owned supermarket pointing to a new low in its status. The pressure will be the greatest on U.S. companies to find new channels of communication and build new strategies in Russian market.

For over a decade, the balance of foreign business in Russia and bulk of external commercial activity has focused on dealings with oligarchs. Now many of them are being chased by international arrest warrants. Private banks and investment funds will have to commission new diligence processes of their Russian clients whose billions no longer keep them safe from prosecution in Russia.

The new assertive style of President Putin is equally hard on internal corruption, which bred during years of oligarchy. Putin is now going forward with administrative reform and exclusion of bureaucracy from business processes that are better regulated by the market. Putin has changed Russia and its government fundamentally and steered it away from the years of blatant looting and corrupt rule. The extent of change may not be visible on surface and the outcome yet uncertain but the direction Russia will take in the next four years is now certain.

Putin has repeatedly called for business to be more responsible toward the community. A call, directly contradicted by some in Russian oligarchy and given vocal opposition by Pyotr Aven of Alfa bank, who has countered the corporate citizenship proposed by Putin. Oligarchs who have paid self-imposed taxes and thrown some small change at sports and charity so far can no longer expect diversion of scrutiny by obtaining diplomas of good behaviour from audit firms. One of the big-four audit firms is offering an audit certification of charity and corporate citizenry by companies in Russia for a six-figure sum. Such obtainments will not save the companies from facing up to real challenges of corporate social responsibility.

The task of Putin's perestroika is by no means complete -- but Putin has preference for fundamental change rather than revolution. In this new assertive Russia, an increasingly business friendly country, foreign companies find an all-new challenge of formulating and adhering to high ethics, corporate citizenship and external relations.

Putin has done far better than Yeltsin's crowd regarding the establishment of a rule of law, BUT, there is STILL no definition of 'property', at law, in Russia.

Until that definition becomes established and accepted, it's still who gets there firstest with the mostest (if I may paraphrase Gen'l N. B. Forrest).

This latest business w/Yukos is just yet one more example of same.

This is a nice find...it is obvious to me - DON'T WANT TO BRAG, BUT I DID STUDY 16th-18thH-cent. Russian history and aristocracy - that the U.S. and Britihs, and Western...and yes a lot of the Russian press, too, all see this One Man vs. Democracy struggle...come on! The Russian absolutism of the 17th-18th century was mostly oligarchy...Catherine II didn't rule simply by proclaiming decrees...she consulted and then, after checking other's views, promulgated the laws that would be obeyed - she checked in adavance. So with the Tsars of the 16th-17th centuries.... Putin is not some one man gang...his policy has support in the more broad-minded sections of the elite in Russia...and of course there are struggles in the elite...just like during the 16th-18th centuries...certainly these do not harm Russia as they did in the 1990s.... Ivan IV, Peter I, and Stalin were all anomalies to the more consensual and oligarchic Russian political tradition. Now, however, with the some of the billionaire controlled newspapers, as well as views-for-hire in the F Times, WSJ, and NYTimes...some of the groups are able to "take the trash out of the log cabin" unlike their Muscovite and Imperial predecessors.

By the way, I heard that now there's a commission, currently unofficial, that collects info on all the dirt and bile some PR firms and newspapers are piling on Russia...so then if a certain company that wants to do business in Russia has associated with this tabloids too much...it might just not get the go ahead.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.