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NEWS: Mounting Russian Investment Risks Highlighted by Death and False Imprisonment of Leading Businessmen

November 20, 2009

Transparency International released its 2009 Corruption Perception Index (CPI) and again Russia’s low ranking, 146th out of 180 countries, demonstrates it needs to do more to reign in corruption and strengthen its legal system.

This annual survey shows that concern among business people and analysts over state corruption and legal abuse deters direct foreign investment and harms Russia’s economic health. President Medvedev himself has repeatedly stated his commitment to ending “legal nihilism” and spurring a new era of foreign investment.

Yet, Mikhail Khodorkovsky, once Russia’s most successful businessman, remains in jail on a second round of fabricated charges, further eroding business confidence. Mr. Khodorkovsky recently passed the six-year mark of his imprisonment and faces another 22 years in Siberia if convicted in this second trial. This is taking place as capital outflows totaled over $169 billion, approximately 10% of Russia’s 2008 GDP, between October 2008 and March 2009 according to U.S. State Department statistics. Multinational companies, such as IKEA and Carrefour, have announced plans to withdraw or reduce investment in Russia due to extortion and lack of judicial independence.

Pressure on business is building following the recent death while in custody of leading Russian corporate counsel Sergei Magnitsky, 37, a key witness in another absurd legal battle over alleged tax fraud between the Kremlin and Hermitage Capital, once Russia’s top investment fund. The International Bar Association and the U.K. Law Society decried Magnitsky’s death as did Firestone Duncan Managing Partner Jamison Firestone who said the government ignored calls by business and legal leaders to release his former colleague.

“There is no law in Russia at the highest level,” Firestone said. “The higher you go the less there is law. Any lawyer who tells you he can protect you in Russia is a liar.”

Risks to the financial system mount as Russian President Vladimir Putin backs energy deals with German and Italian corporations and moves for the state to take a stake in the controversial initial public offering of the embattled aluminum giant UC Rusal. As Finance Minister Aleksei L. Kudrin seeks government bond financing from London bankers, the Kremlin Deputy Chief of Staff Vladislav Surkov warns Russia risks collapsing into chaos if officials try to fix the political system by adopting liberal reforms.

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