Khodorkovsky verdict: Business views

Don't dismiss Russia because of Khodorkovsky, investors say

Mikhail Khodorkovsky, once Russia's richest man, has been found guilty of fraud and tax evasion and sentenced to nine years in prison, in one of the most high-profile court cases in post-Soviet history.

The trial has aroused enormous interest - especially outside Russia, where critics have seen it as evidence of President Vladimir Putin's anti-democratic inclinations.

Among businesspeople, views are more mixed. Here, two of Russia's leading investors give their reaction to the verdict.

Eric Kraus, Sovlink Securities

The conviction of Mikhail Khodorkovsky on charges of fraud and tax evasion is the unfortunate but entirely predictable outcome of President Vladimir Putin's campaign to break the political power of the "oligarchs" - that small group of vastly wealthy, totally unscrupulous individuals who built their fortunes upon the ruins of the Soviet Union.

Although the crimes of the 1990s privatisations have been effectively amnestied, this amnesty is conditional - contingent upon them renouncing their political ambitions and refraining from further economic mischief.

After the catastrophic failure of the well-intended but totally misguided attempts at the wholesale import of Western models in the 1990s... Russian public opinion now supports a more nationalistic approach

The Russian Government is perhaps disingenuous in its claims that Khodorkovsky and his associates are being prosecuted for fraud and tax evasion - other oligarchs guilty of the same crimes have been pardoned after settling some fraction of their back taxes.

Khodorkovsky is in trouble for having attempted a hostile takeover of the Russian state - gaining control of a block of Duma (Russian parliament) deputies sufficient to block any legislation not to his liking, in particular the taxation of windfall oil profits, as well as seeking to bend Russian economic policy for his own benefit.

As regards Russia, the West suffers from a very short memory span, as well as some difficulty in seeing the world from a Russian perspective. In the 1990s, the oligarchs were roundly excoriated for the brutal, criminal tactics with which they built their empires, as well as for their daylight robbery not just of their own countrymen, but also of Western investors.

Certainly, the minority investors in Yukos "daughter companies" who wasted years of fruitless litigation in courts controlled by their adversaries will be sceptical of claims by these same oligarchs to have supported Western-style transparent business practices in Russia.

There is one current of thought which defines "democracy" as doing what Washington wishes for one to do - with those who march to a different drummer are variously catalogued as "authoritarian", "nationalistic," or in extreme cases, members of some "Axis of Evil."

ABOUT THE AUTHORS Bill Browder (left) is founder and chief executive of Hermitage Capital Management, the biggest public equity fund dedicated to Russia Eric Kraus is chief strategist for Sovlink Securities, an independent Moscow brokerage and investment bank

In fact, as counterintuitive as it may sound, Vladimir Putin is far more "democratic" than were either of his predecessors - after five years in office his popularity ratings remain in the high sixties, as opposed to the high single-digit approval ratings of both Boris Yeltsin or Mikhail Gorbachev. This can be explained not just by the huge increase in economic prosperity during his presidency, but also, by the fact that - unlike the men who led Russia out of the Soviet period - Mr Putin plays primarily to a domestic audience.

After the catastrophic failure of the well-intended but totally misguided attempts at the wholesale import of Western models in the 1990s - which saw Russia weakened, impoverished, and humiliated - Russian public opinion now supports a more nationalistic approach: an independent foreign policy and the exploitation of Russia's vast natural resource base for Russia's own benefit.

Western companies continue to be welcomed in Russia; unlike the case in China, the overwhelming majority of ventures have proved highly profitable.

Except for a handful of resources designated as strategic, the playing field is relatively level - that is, Westerners are confronted with the same hurdles faced by their Russian competitors: poor infrastructure, venal bureaucrats and a problematic court system. Sanctity of property rights, on the other hand, is not a problem.

Of course, they also benefit from 7%-plus economic growth, soaring personal incomes, weak competition, low taxes, abundant resources, as well as the absence of macroeconomic or political risk. Over the past five years, Russia can boast the world's best performing equity and debt indexes; any major European company ignoring her does so at its own risk.

Bill Browder, Hermitage Capital

Russia has never been the world's safest place to invest. As a result, the Russian market offers oversize returns to those foreign investors willing to brave the local hazards.

Seen in this context, the Khodorkovsky trial doesn't represent a dramatic departure from what was otherwise an idyllic investment case, but rather a reminder of the risk of investing in a country with a weak judicial system and historically weak shareholder rights.

Recent gestures from President Putin seem to show that he is aware of the damage done to investor confidence by the Yukos affair and - more importantly - that he wants to restore it

The Khodorkovsky case is often described as a fight between good and evil, with the assignment of blame depending upon whether one asks a Yukos shareholder or a Kremlin official.

As is often the case in Russia, however, the reality is not so black and white. Whatever the shortcomings in the government's prosecution, Mr Khodorkovsky is no martyr. He has left in his wake aggrieved investors too numerous to count and is widely credited with masterminding much of the financial trickery that plagued the Russian capital markets throughout the 1990s.

Moreover, Mr Khodorkovsky was exceptional among oligarchs for the shrewd use of his personal fortune to amass political power to a degree that would be difficult to tolerate in any country.

What does this mean for foreign investors? The decision to invest and commit capital to a country is at heart a forward-looking exercise. The key question is how the legacy of the Khodorkovsky trial and the Yukos affair will impact shareholder rights and investment valuations in Russia going forward.

The ongoing saga has battered down Russian equity prices to the point where Russia now has the cheapest stock market in the world and trades at a 40% discount to China.

Most investors seem to be operating under the assumption that another Yukos is just around the corner. This perception is almost certainly not true. Given the extreme punishment inflicted upon Khodorkovsky, the likelihood of another oligarch choosing to follow his example is exceedingly small.

Increased federal tax receipts from oligarch-controlled companies across Russia indicate that good corporate citizenship is now a sought-after virtue. Moreover, recent gestures from President Putin seem to show that he is aware of the damage done to investor confidence by the Yukos affair and - more importantly - that he wants to restore it. His proposal in late March to place property rights acquired during the 1990's privatisations beyond the power of judicial review is a case in point.

There is unfortunately no single gesture that can soothe investor anxieties overnight. Investors correctly recognise that talk is cheap. They are waiting for Mr Putin to demonstrate with concrete actions that he values their involvement in the Russian economy. The challenge will be for him to ensure that his plan for the country is not distorted at the implementation level by overzealous lower-level bureaucrats.

Things in Russia are never as good as they seem, nor are they ever as bad as they seem. Successful foreign investors in Russia will be those that can dismiss both the doomsayers and the pollyannas in equal measure.