Corporate Raiding, Russian Style

The Huffington Post
May 16, 2016
By Ariel Cohen

At the London anti-corruption summit last Thursday, Secretary of State John Kerry said that corruption destroys nation states. He is right – look at Russia. Institutionalized corruption, the systemic merger of organized crime with law enforcement, and the practice of aggressive asset grabbing known as “reiderstvo“ ― hostile corporate takeovers – are the bane of Russian business. The recent exposure of the Panama Papers has revealed a murky world of offshore corporations from the Caribbean to the Jersey Islands to Lichtenstein, and their multi-billion dollar connections to the highest circles of power in Moscow.

For the last two decades, Russian-style corporate raiding has been on the rise, with the tactics used coming straight out of The Sopranos TV series. In a new report, “The Rise of Reiderstvo: Implications for Russia and the West,” George Mason scholars Louise Shelley and Judy Deane document how corrupt judges, prosecutors, police and government officials collude to rob many Russian businesses from legitimate owners.

Reiderstvo has brought down the controlling shareholders of such prominent corporations as YUKOS, Russneft and Bashneft in oil and gas; Stolichnaya Vodka in beverages; Evroset in retail electronics; VKontakte in social media, and many others. These victims not only lose their wealth, they and their loved ones often experience physical harm and may be forced to flee their homeland.

At first, the targets of reiderstvo were opponents of the ruling regime, such as YUKOS oil company founder, Mikhail Khodorkovsky, and later Pavel Durov, founder of the popular VKontakte social network. Next, they came after juicy assets such as the Stoli international brand built by Yuri Shefler.

In 2014 Putin political loyalist Vladimir Yevtushenkov was arrested in an attempt to force him to give up control of the attractive oil company, Bashneft. These days, the notion of the rule of law and property is dead – even for regime supporters – any minority shareholder can illegally take over a company by applying the ubiquitous and underhanded tools and tactics.

The fact that doing business in Russia is tough is old news. What is new, according to Shelley and Deane, is that reiderstvo in Russia follows a clear and systematic pattern that can be identified early on. By understanding how raiders pull from a well-established toolkit , or “playbook”, to efficiently target businesses, investors, lawyers and prosecutors can fight back.

Often, Russian politically powerful biznesmeni pay off tax authorities, police, attorneys, and corporate registrars and commit fraud in the process of criminal takeovers. Paid-for “dark PR” campaigns are carefully planned and executed, sometimes over the course of years.

Violence and the threat of violence, as well as “lawfare” are additional tools in the kit. Khodorkovsky spent nine years in jail on trumped up charges of tax evasion and theft – of his own oil.

Criminal cases against Evroset founder Yevgeny Chichvarkin were launched, then dropped, but it is still dangerous for the flamboyant businessman to return to his homeland. His mother was mysteriously murdered, but no criminal case was launched to investigate her death.

Russneft founder Mikhail Gutzeriev was declared an international fugitive through Interpol, and his son died in a bizarre traffic accident. Later, Gutzeriev was allowed to return to Russia – and to rebuild his oil business.

In an ongoing case cited by Shelley and Deane, Russian ammonia producer, TogliattiAzot (ToAZ), provides a current example of a company in which criminal raiders followed the playbook to a tee. Since 2005, ToAZ has fallen victim to a series of attacks, which include violence, intimidation, “black PR”, corporate fraud and forgery.

The latest raiding attempt, is led by a minority shareholder known internationally for bankrupting companies and stripping assets to fund future ventures. . Although a previous case was thrown out of a London court, a questionable set of international arrest warrants called Interpol Red Notices were taken out against the company’s leadership, effectively hamstringing the company and playing into the raider’s hands.

The Shelley-Deane George Mason University report on reiderstvo exposes a system that is dark and destructive. International businesses and financial institutions; law enforcement; the legal profession; and the expert community should pay heed to the systemic and corrosive problems exposed in the report.

Communism may be gone, but asset value destruction in Russia is thriving. By failing to stop or curb asset grabbing, by allowing senior state officials to become part and parcel of these predatory practices, the Russian regime – through reiderstvo and corruption ― is destroying Russia’s chances for economic development, global market integration, and a future as a rule-of-law country. By failing to counter the criminal patterns exercised in Russia’s corporate raids today, the Western governments, banks, and international agencies are complicit in the largest robbery of the century.