Review of the report, Reiderstvo 2.0: The illegal raid pandemic in Russia
On August 5, Michael Calvey, one of Russia’s top foreign investors, was convicted of embezzlement in a case that became “Emblematic of the country’s reputation as an often dangerous place to do business”. Earlier this summer, similar conclusions were drawn in a report titled “Reiderstvo 2.0: The pandemic of illegal raids in RussiaWhich was prepared by the Center Against Terrorism, Transnational Crime and Corruption (TraCCC) at George Mason University. IMR reviews the report, which highlights the “devastating effects” of reiderstvo on Russian companies.
The founder of the Baring Vostok investment fund, Michael Calvey, is in a courtroom in Moscow. Photo: Alexandre Zemlianichenko | Photo AP.
Reiderstvo and the Russian government
Building on a previous report and research, “Reiderstvo 2.0: The Illegal Raiding Pandemic in Russia” provides an analysis of new trends, most common methods and tactics in recent raid cases, and their links to corruption and other types of criminal activity in Russia. .
The Russian word reiderstvo is derived from the term “corporate raid”. The acquisition of a business by reiderstvo is made for short-term gain, often for the purpose of stripping the business of its assets. Technically, the acquisition may be legal, but the methods of transfer are often semi-legal or outright illegal and may include corrupt collusion with state institutions and law enforcement. The current trend, which has become more evident over the past five years, was characterized in the report as a “pandemic of illegal raids” due to the substantial increase in cases of illegal raids and criminal prosecutions against contractors. This report follows the TraCCC 2016 report, “The rise of Reiderstvo: implications for Russia and the West.“
The raids are having “devastating effects on Russian businesses, already weakened by financial and social disruption caused by COVID-19 restrictions and lockdowns,” an effect the report calls “a double burden.” Russian leaders are well aware of the damage done to the business climate in Russia, but in many cases they are either the beneficiaries or the active participants in illegal raids.
With the rise of illegal raids and frequent links with state institutions and law enforcement agencies, distrust of law enforcement and courts continues to grow in Russia, the vast majority of entrepreneurs (more of 80 percent) considering that justice is neither independent nor objective. The vast majority of entrepreneurs say it is dangerous to do business in the country. In 2019, according to the report, the Office of the Russian Ombudsman Boris Titov received “more than 24,000 complaints from entrepreneurs regarding violations of their rights by the Russian authorities, which constitutes a 24% increase from 2018. ”The Federal Guard Service of Russia, an executive body headed by President Vladimir Putin who is responsible for communications policies and information provided to the government, conducted its own survey in 2019, which found that “70.7% of respondents did not trust the Russian justice system, while 66.7% of them did not trust the police either ”.
→ Read about Russia’s legal arbitrariness here: How Russian authorities are using selective law enforcement
To some extent, the Russian political elite have shown their willingness to tackle lower and middle rank corruption and illegal raids, including the adoption of the 2010 anti-corruption law package, selective arrests of corrupt officials, the establishment of the Russian Ombudsman for Affairs and the 2016 and 2020 temporary bans on regulatory inspections of small and medium-sized enterprises. In 2016, Putin created a task force of federal leaders and business associations that crafted Criminal Code amendments to prevent unwarranted criminal prosecutions of contractors and illegal raids. The report states that these attempts have had “some limited success,” but, despite these efforts, the number of complaints from companies of illegal raids and the number of cases of economic crime continued to increase.
This hostile business environment is hurting the Russian economy, as many Russian entrepreneurs have left the country and now live and work in voluntary exile. Among them is Yevgeny Chichvarkin, who has resided in London since his company Yevroset, Russia’s largest cellphone retailer, was raided and he was charged with extortion and kidnapping (the company was ultimately liquidated in 2020). Although all charges against him were dropped in 2011, he refuse to return to Russia under the current political regime. Another prominent Russian entrepreneur who lives in voluntary exile is Pavel Durov, the founder of Telegram Messenger and VKontakte (VK), Russia’s most popular social network.
Recognizing this problem, Boris Titov, a politician who ran for president in 2018 on a ticket that promised economic growth, launched a campaign called “Titov’s List” to repatriate Russian businessmen based in the foreigner in exchange for an amnesty. One hundred and thirty-six people would have has expressed interest in returning. However, the first person on Titov’s List to return to Russia, Andrei Kokovkin, director of a company called Torgovy Dom Grif, was arrested on his arrival and ultimately given a suspended sentence. Titov ended this initiative because of fears that more businessmen will be arrested on their arrival.
In addition, raids against well-known Western investors contributed to the reluctance of foreign investors to do business in Russia. Michel calvey, which recently resulted in a guilty verdict (the sentence is due to be announced soon, the prosecution request a six-year suspended prison sentence), has been one of the most high-profile cases. The verdict is not surprising: the same judge who understood the Sergei Magnitsky the case was appointed to preside over the Calvey case. In 2008 Magnitsky, tax advisor, exposed a $ 230 million fraud involving Russian tax officials, for which he was arrested and died after eleven months in police custody, during which he was severely beaten.
Calvey, the founder of the Baring Vostok investment fund, was arrested in Moscow in February 2019, along with five colleagues, for allegedly defrauding a Russian businessman Artem Avetisyan, an associate of Putin. Calvey argues that the real reason for the arrest was his successful trial against Avetisyan in a separate trade dispute in London, which resulted in the latter using his connections with the government in revenge. With Calvey’s conviction, Avetisyan is poised to raise millions of dollars. Calvey’s arrest in 2019 caused a uproar in the Russian business world, representing “criminalizing a trade dispute” and signaling the country’s indifference to foreign investment.
With Russia’s integration into the world economy, the reiderstvo problem is no longer contained within Russian borders. As the report points out, the illicit financial gains resulting from the raids are “laundered in the international financial system, and this influx of dirty money contributes to the corrosion of financial and political institutions in recipient countries.” Russian raiders often abuse legal process in Western courts and arbitration by seeking legal actions against victims of raid attacks based on Russian court rulings. It is then up to Western judges to decide whether these foreign judgments were valid. However, the report stresses that “the ability of raiders and corrupt officials to exploit legal proceedings in Western countries depends on judges’ knowledge of corruption in Russia and other authoritarian countries.”
Western efforts to punish Russian officials involved in illegal business raids, corruption and human rights abuses have escalated in recent years. The Sergei Magnitsky Rule of Law Accountability Act of 2012 and the Global Magnitsky Human Rights Accountability Act of 2016 have proven effective in targeting some of the senior officials by freezing their assets and barring them from entering the United States. illegal activities far exceed these efforts.
Until the Magnitsky affair, illegal trade raids in Russia were viewed by the outside world primarily as a domestic Russian problem. Yet, as raiding cases increasingly come to foreign courts and arbitration bodies for litigation, the report underscores the importance “for Western experts to learn to identify the ‘red flags’ of a country. raiding affair ”and argues that understanding reiderstvo should be a much higher international priority, given its impact on today’s increasingly globalized financial and legal world.
Three experts in the field of terrorism, crime and corruption contributed to the TraCCC report:
- Yulia Krylova, postdoctoral researcher at TraCCC and author of Corruption and the Russian economy: how administrative corruption undermines entrepreneurship and economic opportunities (Routledge, 2018).
- Judy Deane, Deputy Director of TraCCC, retired foreign service officer specializing in Central Europe and Eurasia, who has served in Poland, Czechoslovakia, Mongolia and Russia and worked in the Europe and Central Asia division of the Bank global.
- Louise Shelley, professor at George Mason University, founder and now director of TraCCC, and author of Dirty Entanglements: Corruption, Crime and Terrorism (Cambridge, 2015) and Soviet society police (Routledge, 1996). She also served on the World Economic Forum’s Global Agenda on Illicit Trade and Organized Crime Council.