Report Slams Moscow No Justice for Business in Russia

A harsh new Council of Europe report focuses on the Yukos Oil and Hermitage Fund cases as it slams Russian criminal justice system abuses.

By Jason Bush

Russian President Dmitry Medvedev has singled out reform of Russia's legal system as the biggest challenge facing the country. Medvedev, a former law professor, has coined the expression "legal nihilism" to describe widespread legal abuses-a problem, he says, that seriously hinders Russia's development.

Russian President Dmitry Medvedev speaks talks to international business leaders and bankers at the 13th St. Petersburg International Economic Forum.

Russian President Dmitry Medvedev speaks talks to international business leaders and bankers at the 13th St. Petersburg International Economic Forum.

But a new report, published on June 23, is likely to prove embarrassing reading for the Russian President. It comes from the Parliamentary Assembly of the Council of Europe, a Strasbourg-based international organization promoting human rights, democracy, and the rule of law in Europe. Titled Allegations of Politically Motivated Abuses of the Criminal Justice System in Council of Europe Member States, the report examined alleged abuses in four member states: Britain, Germany, France, and Russia. Much of the document focuses on Russia, detailing several recent cases that "give rise to concerns that the fight against 'legal nihilism' launched by President Medvedev is still far from won."

More Bad News for Investors

That is perhaps putting it mildly. Among its observations, the Council of Europe report alleges that Russia's justice system is characterized by "pressure on judges," frequent "intimidation and reprisals" against defense lawyers, "irregularities in the investigative process," and "political interference in the criminal justice process."

The report's recommendations aren't binding on member states. But the findings are likely to influence other countries' perceptions of Russia's legal system. And that is likely to reinforce increasingly negative opinions of Russia's legal climate among international investors. For potential business partners, it's especially troubling that two of the cases singled out by the Council of Europe report as "emblematic" of Russia's problems are both high-profile business cases.

Yukos Oil

The first is the prosecution of Mikhail Khodorkovsky and Platon Lebedev, two former managers of Yukos Oil. They have been imprisoned since 2003 and are serving eight-year sentences after being convicted in 2005 of tax evasion and fraud. Long the subject of controversy, the case is once again in the public spotlight after Russian authorities brought fresh charges against the two accused, which would potentially lead to them serving many more years behind bars. Critics have argued that the charges are politically motivated.

Prosecutors accuse the ex-Yukos managers of embezzling 350 million metric tons of oil, equivalent to Yukos' entire oil output for six years. Defense lawyers and several independent legal observers have expressed bewilderment at the new claims. They note that in their previous trial, the two managers were convicted of underpaying taxes on this same output, implying that it was legal business activity. The alleged embezzlement occurred when Yukos was Russia's largest oil company and one of its most visible companies overall.

Now these concerns have been echoed by the author of the Council of Europe report, Sabine Leutheusser-Schnarrenberger, a former German Minister of Justice. "The legal justification of the new criminal cases against Mr Khodorkovsky and Mr Lebedev has me perplexed," she writes, adding that "any accusation must fulfill minimum standards of logic."

Hermitage Fund

The other case examined in detail is perhaps even more troubling for would-be investors. It relates to the international investment fund Hermitage Capital, once the largest foreign investor in the Russian stock market, along with its trustee, the leading British bank HSBC. The case, described by the Council of Europe as "almost unbelievable," concerns the expropriation of three Hermitage subsidiaries in Russia by organized criminals, and the subsequent theft of $230 million (€163 million) in taxes from the Russian government, allegedly with the participation of Russian police officials. More recently, Hermitage lawyers responsible for exposing the frauds have been arrested or have fled the country.

In its analysis of the case, the Council of Europe pulls no punches. The report states bluntly that "The Hermitage Fund has become the victim of the corruption and collusion of senior police officials and organised criminals." The report also draws attention to the incoherence of Russia's top law enforcement bodies in responding to the allegations.

Leutheusser-Schnarrenberger writes that the responses by senior Russian officials to her enquiries "have not been satisfactory" and "do not seem credible." For example, when she approached Russia's Investigative Committee of top lawmen for information about the detention of one Hermitage lawyer, the Committee apparently denied that the lawyer had ever been detained. (In fact the lawyer, Sergei Magnitsky, has been detained without trial since last November.) Most sensationally, the Council of Europe's rapporteur concludes that because of the Russian government's "complete failure…to react" to the serious fraud allegations, she suspects that "this coordinated attack must have the support of senior officials."

According to the Council of Europe report, such scandals are symptomatic of a more general failure of Russia's criminal justice system. It remains to be seen how the Russian government will react to these criticisms. But until there is serious action to investigate the alleged abuses, few investors are likely to be convinced by Medvedev's much touted campaign to clean up Russia's severely maligned legal system.

Bush is BusinessWeek's Moscow bureau chief.


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