Russia is on the verge of becoming a WTO member, but practitioners with in-depth, first-hand experience of the country’s legal, political and business infrastructure believe it is rotten to the core
It is Russian Business Week 2010 and students in a crowded lecture hall at the London School of Economics (LSE) are on the edge of their seats as Roger Munnings, chairman of Russia’s Audit Committee Institute, stands up to deliver his keynote speech.
Before he begins he asks any Russian members of the audience to raise their hands: 200 hands shoot straight up. He then asks how many people wish to return to Russia to work after completing their studies: 190 hands quickly disappear.
Munnings carries on with his speech regardless, but when it finally comes to a close, one member of the audience cannot resist standing up and passing comment.
Maybe you weren’t paying attention when you asked for a show of hands,” he says, “but only 10 of 200 Russian LSE students want to return to Russia. These are the best and brightest students that Russia has to offer and they don’t want to go back home. Just what good news and a true picture of Russia are they supposed to be spreading?”
The audience member was none other than Jamison Firestone, managing partner of both Moscow law firm Firestone Duncan and London-based FD Advisory. His probing comment earned him an overwhelming ovation from the student body.
While impressed by Firestone’s determination to question authority, it is possible that few in the auditorium were aware of exactly who Firestone is and how significant his words really are.
Killed in action
A respected US lawyer practising in Moscow, in 1993 Firestone first made headlines around the world when his university friend Terry Duncan, the co-founding partner of Firestone Duncan, was killed near Ostankino Television Centre during a standoff between supporters and opponents of the erstwhile Russian president Boris Yeltsin. After having already dragged 12 wounded Russians to the safety of ambulances, 26-year-old Duncan was fatally wounded by gunfire as he tried to help a US photo journalist from The New York Times who had already been shot twice.
In November 2009 Firestone was once again thrust into the limelight in the most horrific of circumstances when the head of his firm’s tax practice, Sergei Magnitsky, died mysteriously while detained in custody in a Moscow prison cell. Magnitsky was detained by the Russian authorities after he blew the cover of a huge embezzlement scandal by Russian state officials following initial allegations of fraud lodged against his client, UK-based investment fund Hermitage Capital Management.
The Magnitsky case (see ‘Magnitsky’ box) took the world by storm and has gathered considerable momentum in recent months, with the US Congress finally bowing to pressure by campaigners to name and shame those involved in the Magnitsky ordeal and similar human rights violations in Russia.
As a result, the Sergei Magnitsky Rule of Law Accountability Act of 2012, which has already passed several major hurdles in the US Congress, is scheduled for the floor vote when Congress reconvenes after the summer recess.
Firestone, who has long campaigned for those implicated in Magnitsky’s death to be held accountable, believes that the act may finally bring justice for his colleague.
“When Sergei found officials stealing from the government, he genuinely believed that if he turned them in the government would do something about it,” recalls Firestone. “To Sergei it was inconceivable that the government wouldn’t put them in prison.
“However, beyond a shadow of a doubt, the Russian government is out to protect its own members and seize control of major assets in Russia. If you attempt to block this they’ll kill you and protect everyone involved.”
Firestone, who spent 18 years living and working in Moscow before he was forced to flee the country at the end of 2009, is hopeful that the latest legislation will be a turning point for his beloved Russia.
“Life in Russia’s like a Grisham thriller. What’s happened to Russian law is terrible: when money and politics aren’t involved it’s fine; but when they are you’re absolutely screwed.
“Sergei did something incredible. He thought it was normal and never for one moment thought it was dangerous, but this is part of his legacy. I hope that something meaningful will come of it and his children can say that his death has actually changed things.”
One other man who has played an instrumental role in bringing Magnitsky’s plight to the attention of the US Congress is Hermitage founder Bill Browder.
“Magnitsky’s case has probably been the most well-documented human rights abuse case to come out of Russia in the past 35 years,” notes Browder. “As a result it’s been very hard for people not to react to such a compelling case.
“Many years ago human rights abuses in Russia were committed for ideological reasons, but now these abuses are perpetuated for kleptocratic reasons: they throw people in jail, torture them and steal their property.”
Browder has already named 60 Russian officials he believes to be involved in the fraud and the subsequent detention, torture and death of Magnitsky and is also encouraging other Western countries to impose asset freezes and issue visa bans on these individuals.
In the UK, Conservative MP Dominic Raab is campaigning for the UK Government to introduce its own version of the Magnitsky Act and sponsored a parliamentary motion earlier this year, which was backed by five former foreign ministers and which received unanimous approval from the House of Commons.
Browder is convinced that the Magnitsky Act will reap considerable results.
“The Magnitsky law will be effective and will have consequences, as [Russian President Vladimir] Putin will no longer be able to guarantee impunity for his underlings, who are perpetrating human rights abuses,” he contends. “They’ll have to start thinking twice about whether the cost is worth the benefit of following evil orders. The new laws will not solve all of the problems in Russia, but it’s the only leverage we have in the West.”
He adds that the law has also clearly caused the Russian government to finally sit up and take notice.
“We’ve seen just how shrill the reaction has been from the Russian government about this law. When Putin himself was inaugurated earlier this year he declared fighting against Magnitsky sanctions as one of his most important foreign policy goals,” continues Browder. “If this was a game of battleships, it was a direct hit.”
The Magnitsky Act comes at a crucial time for Russia as it gears up to become the 156th member of the World Trade Organisation (WTO) on 22 August. It is part of a bill to repeal the Jackson-Vanik amendment to the Trade Act of 1974, which the US introduced to prevent the former Soviet Union, and other countries that restricted the emigration of their citizens, from enjoying permanent normal trade relations (PNTR) with the US, and which has continued to blight US-Russian trade relations ever since. WTO rules stipulate that member states must grant each other unconditional trading rights and consequently this repeal is highly desired by US companies, which, after 22 August, will trade with Russia at a disadvantage to other WTO members until PNTR is granted.
While Firestone acknowledges that Russia’s accession to the WTO is an important move for the country, he is wary of how it will fare in the organisation.
“The government’s pulled out all the stops to get Russia into the WTO and unfortunately the thing that’s really wrong today in Russia is politics, which is driven by a corrupt regime,” he asserts. “On the one hand, by bringing Russia into the organisation it doesn’t alienate them and pulls them more into line; but if the organisation allows them to blatantly break rules then it poisons the system.
“The only thing that Putin’s government wanted was to be respected in ‘the clubs’, but if Russia’s caught lying or cheating and if it isn’t thrown out of the clubs, it poisons the system.”
Back door law
The act also comes as the Duma, Russia’s lower house of parliament, rushed to pass several laws before it broke for the summer on 13 July. The laws that have been passed so far relate to the internet, defamation and non-governmental organisations (NGOs), and there is a further bill in the pipeline that will affect volunteers.
The new laws have been met with a high degree of scepticism and Firestone believes the way they have been enacted is telling of the government’s intentions.
“What’s happening in Russia is that an entire legal framework has been rammed through the Duma in less than a month. The writing’s on the wall: whatever Putin wants to do, he can do, under the guise of legality.”
The internet law, which in Firestone’s words is “masquerading as an anti-pornography law”, is one of the most concerning developments.
According to one Russian finance lawyer, the internet law will grant the government an increasingly worrying amount of power.
“The new laws affect internet sites, feigning as a means to fight against drug abuse, suicide, pornography and other issues,” explains the lawyer. “But essentially, the way it’s been described leaves it very open for the government to clamp down on any website it doesn’t like.”
“The translation from the hardcore language of the new legislation means that some unknown state entities under some unknown procedure will include the information in
a unified register of information,” adds Dmitry Chernyy, a partner at Muranov Chernyakov & Partners in Moscow. “This register includes domain names, indexes and web addresses, which will allow these state entities to identify internet sites containing information prohibited for distribution across the Russian Federation. All of the internet providers must immediately limit public access to such information and those who disobey can be punished – possibly by the same state entity – to the extent that their licence may be withdrawn.”
Chernyy stresses that as long as the wording of the new legislation remains ambivalent, it will make it easier for corruption to prevail.
“It’s obvious that those who control the state decide whether the business of every individual Russian internet provider survives or not,” he states. “The name of that entity and the rules for filling in the register are still unknown, but the more opaque it will be the more corruption opportunities this will create for those who control it.
“The question is in what particular cases and against whom the fines are used. It’s the police who decide these things and there’s no practical mechanism that can prevent the abuse of such power.”
The law on recriminalising defamation has also given strong grounds for concern as it targets citizens who dare to speak out against Putin and his government. Opposition demonstrations have spread like wildfire across the country this year and last as thousands of Russians stepped out in protest against alleged vote-rigging in the recent presidential elections, which saw Putin reinaugurated for his third presidential term in May this year.
“Putin has a problem in that there are lots of people who are extremely unhappy with him, and this is worrying for foreign investors as the lack of security’s concerning,” notes Firestone. “When corruption filters down to the level of the police officers in the street there’s no recourse. They can be rude to you and even beat you and the anger filters up, and this is the problem at the moment.”
As a result Putin has made it his mission to clamp down on protesters, whether this means large numbers of demonstrators at rallies across St Petersburg, a series of Russian doll ‘protesters’ set up by activists in Barnaul in Siberia, or when feminist punk rock band Pussy Riot stormed Moscow’s Cathedral of Christ the Saviour in February earlier this year (see ‘Legal challengers’ box).
“Putin’s proved that he can’t change and he won’t be able to change things – he’s a kind of prisoner of the situation,” adds Firestone. “Now, with the protest law, demonstrators will be issued a huge fine, the value of which is often more than a Russian can make in a year.”
Under the new law those citizens who are found to have organised unsanctioned protests will receive a maximum fine of RUB1m (£19,800) and participants will be fined RUB300,000.
“The only thing that normal people in Russia have that’s worth that much is their flats: what’s the government going to do, seize their flats?” he asks incredulously.
The net works
Twitter and Facebook have done much to galvanise the protest movement across Russia and activists have been heavily influenced by protest movements that took place in many other countries last year.
According to one Russian corporate lawyer, protests further afield have acted as a wake-up call for Putin.
“Putin’s become aware of the power of social networking and crowd sourcing, both in Russia and further afield in London during the riots last summer, and other countries like Israel, where a huge Facebook campaign to boycott the sale of cottage cheese gathered momentum last summer after rising food prices made it impossible for Israelis to purchase something that’s part and parcel of their everyday staple diet,” he comments. “As a result Putin’s realised how powerful the internet can be and this is why he wants to control the sustainability of online media and social networks.”
“Russia’s approaching China-like status now,” contends Firestone. “The government’s created a framework that, if a website seems illegal and if it wants to, it can take it down. It’s one thing to block Novaya Gazeta, but completely another to block access to Facebook, Skype or Twitter.”
The third law requires NGOs in Russia to register any sources of foreign funding and for those engaged in political activity to declare themselves as ‘foreign agents’. In fact, the wording of the law had to be revised rapidly after the first reading, when it became apparent that both the Russian Orthodox Church, which regularly receives charitable donations from abroad, and the state-funded and pro-Kremlin television channel RT (formerly known as Russia Today), which receives some money from foreign advertisers, would both have been classified as foreign agents under the proposed legislation.
Another proposed law that aims to restrict voluntary activity in the country will also give considerable cause for concern, says Firestone.
“The law on volunteers will make it illegal to volunteer for emergency relief services unless it’s already authorised by the government authorities,” he notes. “The government thinks that if a volunteer does something efficiently, then it makes the state look stupid.”
A clear example was during the recent scenes of flooding across the Krasnodar region in southern Russia, which claimed around 144 lives. The actions and quick thinking on the part of volunteers helped to save hundreds of lives, but the government was bitterly criticised for failures by local authorities to act in time.
For Firestone, though, all of these laws are just the latest manifestation of a country in decline.
“There’s no rule of law in Russia,” he says. “Rule of law works in Russia when nobody’s paying attention. At every level people want to interfere with power or money and most of
us lawyers have no problem, but sooner or later we come up against one case that we can’t win. Corruption and bribery are so prevalent it’s unbelievable.”
What concerns him even more, though, is the number of people who continue to allow the government to pull the wool over their eyes.
“I’m still surprised by how many times people try to talk themselves into the idea that it’s not so bad: we’ve watched [Putin] rig the Khordokovsky trial, we’ve watched him steal the election and have a sham presidency. There’s money to be made in Russia, but let’s be honest about it and stop talking about Russia getting better.”
As Firestone points out, most lawyers in Russia are afraid to be at all outspoken about the current government.
“Most of the lawyers I know are either taking part in the demonstrations or are highly sympathetic to them, but they don’t want to scare foreign investors off, nor do they want to scare off clients or irritate the government,” he says. “Sometimes in Russia it’s hard to look at yourself and be a lawyer.”
Firestone, though, is the first to admit that practising law in Russia can be extremely tough.
“Sometimes you can get into a situation where a client takes a position that annoys the powers that be, and most lawyers would run in this kind of situation, but we don’t,” he asserts. “In a normal functional society lawyers don’t have to worry about taking on a particular client, but in Russia, if the government doesn’t like your client, then the easiest way to attack the client is to attack their lawyer.
“Russia has the best government that money can buy and it’s vital for Westerners to understand that the political and legal situation in Russia is rapidly devolving, and if they’re willing to get involved they have to be careful about which sector they choose to work in. For everything that you can win, you have to know that you can lose it all and that it’s an incredibly tough market to work and operate in.”
This is partly why Firestone, who still manages Firestone Duncan’s Moscow office from London, took it upon himself to set up FD Advisory earlier this year to advise UK law firms and businesses on Russian issues and on working in the Russian market.
While he reckons that around 90 per cent of his work is advising businesses on fairly basic matters such as low-level M&A transactions and market entry issues, Firestone highlights the importance of what he believes he and his colleagues can do to increase his clients’ awareness of how to get by doing business in Russia.
“A good lawyer’s job is to inform clients where Russian law works and where it doesn’t and to do their best to protect a client in a less than ideal legal environment,” he notes. “Most of my work’s concerned with trying to bring business to Russia, so it’s important that my clients understand what they’re getting themselves into. Most of my clients are and can make a lot of money in Russia, but terrible things do happen there. The key to success in the Russian market is to stay small and to not do anything of potential interest to the authorities.”
Firestone spends a great deal of time assisting UK law firms with contracts related to the high volumes of litigation that continue to flood into London from Russia.
“Russian law’s continued to devolve, and while this isn’t good for Russia, it’s very good for UK litigators, who have an assured supply of Russian-related cases brought by Russians in the UK to avoid the legal system they created,” he stresses.
Rather than the infamous oligarch cases that dominate London’s High Court, most of Firestone’s cases concern what he terms ‘minigarchs’.
“We mainly work on minigarch cases and are helping UK firms to understand what’s really going on in a Russia-related case so their litigation or negotiation position is stronger here; and of course we help UK companies enter or exit the Russian market,” he explains.
Firestone’s team also continues to work in helping to contain Russian issues in Russia in order to mitigate the potential for them to be used against their clients abroad. Meanwhile, Sergei Shkurin runs Firestone Duncan’s office in Moscow, where his team continues to provide advice on Russian commercial law and issues related to market entry and M&A transactions.
Firestone is sad to say that he is pessimistic about Russia’s immediate future.
“Moscow wants to become a leading financial centre, but it’s never going to happen while bribery’s still the norm,” he remarks.
While there has been considerable controversy surrounding the laws that have just been rushed through the Duma, the recent changes to the Russian Civil Code are also continuing to prove extremely divisive, notes Katerina Haslam Jones, a partner at UK-based Padva Haslam-Jones & Partners, which specialises in UK-Russo trade advice.
“The latest changes in Russian law are purporting to incorporate common law concepts into the Russian civil law system,” she notes. “These changes seem to be driven by a desire both to incentivise investors and lenders to use Russian law in documentation in investment transactions and to claw back contentious matters from English courts to Russia – including the so-called ‘oligarchs battles’.
“These changes are the most fundamental since the adoption of the Russian Civil Code in the mid-’90s after the collapse of the old Soviet system. Some of the provisions, despite the fact that they were approved at the first Duma reading, are still being heavily criticised. Therefore, I don’t believe they’re final and it’s likely that we’re going to see more development in this area.”
As Firestone notes, the Russian government has failed to incentivise investors.
“Under 12 years of Putin’s government Russia hasn’t been able to manufacture a single thing that’s unique to the world, so businesses don’t want to invest a huge amount of money in Russia as there just isn’t the incentive,” he claims. “I don’t like what’s happening to Russia. It has great potential to be such a wonderful place and has such opportunities at its disposal, but the government’s squandering all of this by turning the country into a dictatorship.”
While each of the new laws passed by the Duma has attracted considerable attention in the Russian and Western press, the new laws on defamation and the internet are the ones that may be the cause of most concern, according to Jana Kobzova, a policy fellow and wider Europe programme coordinator at the European Council on Foreign Relations.
“I think a clear distinction needs to be made between the NGO [non-governmental organisation] law and the new internet law and defamation laws,” she asserts. “I think the latter two are much more serious in terms of the effect they’ll have on Russia, especially when it comes to the regions, as it’s a [new] way for the government to cut off activity to citizens in the regions.”
These new laws will help Russian President Vladimir Putin curb the swelling tide of opposition sweeping across Russia, adds Hermitage Capital Management founder Bill Browder.
“Putin’s successfully governed a kleptocratic regime for the past 12 years and controlled the message via television and used fear for anyone who didn’t buy his message,” he comments. “However, last year the opposition movement went viral and Putin could no longer sustain his level of control.
“Around 30 per cent of the population got their information from the internet and people had lost their fear. With the new laws he’s now trying to regain control and reinstil fear.”
The timing could not be more telling, as a trial has just got underway in Moscow where three women stand charged of taking part in an unsanctioned protest in Moscow’s Cathedral of Christ the Saviour. The women are members of feminist punk rock band Pussy Riot who in February this year donned neon-coloured balaclavas, stormed the cathedral and sang a ‘punk prayer’, calling for the Virgin Mary to “throw Putin out”.
The stunt was politically motivated and organised in protest against an appeal to churchgoers by Patriarch Kirill, the head of the Russian Orthodox Church, to vote for Putin during the recent presidential elections. Kirill has condemned the protestors’ actions as blasphemous. And although the stunt lasted less than a minute before the police closed in, should they be convicted the women could face up to seven years in prison.
Sergei Magnitsky was initially detained in November 2008 on suspicion of assisting his client, UK-based investment fund Hermitage Capital Management, to evade around $17.4m (£11.08m) in taxes. Although the original allegations were lodged against Hermitage, throughout the course of the investigation Magnitsky came upon what he believed to be a cover-up for Russian state officials to embezzle an estimated $230m from the Russian Treasury.
In June 2007 Russian police raided the offices of Hermitage for files and records. It is believed that these documents were used to steal ownership of three companies from Hermitage and to arrange sham court judgments against the global investment adviser.
Magnitksy did not survive to stand trial. He died in custody in November 2009 at the age of just 37.
In February this year the Russian authorities announced plans to reopen the case and try Magnitsky posthumously alongside Bill Browder, the founder of Hermitage. A trial date has yet to be set.
Browder, however, is confident that once the US Congress passes the Sergei Magnitsky Rule of Law Accountability Act of 2012 it will have considerable impact.
“The Magnitsky law is the new technology for dealing with human rights abuses in a kleptocratic regime,” he asserts. “It addresses in a very targeted way what people who commit human rights abuses most covet – their ill-gotten gains.”
While Jana Kobzova, a policy fellow and wider Europe programme coordinator at the European Council on Foreign Relations, doubts that the act will provoke profound change, she believes that the repeal of the Jackson-Vanik amendment to the Trade Act of 1974 to make way for the Magnitsky Act has been an extremely positive move for US-Russian trade relations.
“In one sense it’s not going to change much, as it involves a relatively small list of people,” she says. “But it’s been instrumental in abolishing Jackson-Vanik, which should have happened a long time ago. Jackson-Vanik and the Magnitsky Act are really two sides of the same coin, and the act will be one of the few tools that the US has to pressure Russia now.”