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The Times: Hermitage Capital: Russia’s dangerous heritage

April 4, 2008
David Wighton: Business Commentary

The attempted fraud against Hermitage Capital, the leading foreign portfolio investor in Russia, is another reminder of the risks in doing business in one of the world’s fastest-growing economies.

Hermitage alleges that individuals connected with the Russian Interior Ministry, were involved in a scheme to extort $367 million (£184 million) from three subsidiaries of the Hermitage Fund it manages. The plot failed only because the assets held by the companies had already been moved offshore.

The attack on the fund comes after a long campaign against Hermitage Capital and its chief executive, William Browder. In 2005, the authorities refused to renew Mr Browder’s visa after his attempts to expose corruption in Gazprom, the Russian energy giant.

Outspoken though he was, even Mr Browder never suggested that the rule of law was so flimsy that ownership of companies in Russia could be lost at the stroke of a bureaucrat’s pen. That appears to be what was attempted last year by people using documents seized by Interior Ministry officials.

Western business executives who are bullish about Russia tend to dismiss such examples as special cases.

The Yukos affair, in which a successful company was dismembered and its assets sold at bogus auctions, was a “political” battle, a row between the President and a powerful opponent.

The forced sale of a majority stake in Shell’s Sakhalin project was a “special situation”, relating to Russia’s sensitivity over key natural resources.

BP’s Russian affiliate is being harassed by various government organisations because . . . well it’s really not clear.

The Hermitage case adds to the growing evidence that the Russian Government has lost control of parts of its administration that are pursuing their own agendas.

Russia’s incoming president has hinted that he wants an end to the culture of “raids”. Western businesses should be hoping it becomes more than a hint.

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