After Khordokovsky verdict, taking stock of business and corruption in Russia

There will be no new year's present for Mikhail Khodorkovsky, who parlayed Communist Party connections and well-placed friends into Russia's largest post-Soviet fortune before crossing Vladimir Putin seven years ago and ending up in a Siberian labor camp.

Yesterday, Mr. Khodorkovsky and his business partner, Platon Lebedev – who have both spent the past seven years behind bars on fraud and tax evasion charges – were convicted of embezzling $27 billion from Yukos, the oil company they cobbled together from Soviet-era assets that made their fortunes, and are now facing another six years in jail.

The politically-tinged case against the men has drawn international ire, perhaps nowhere more so than from the US. Secretary of State Hillary Clinton issued a statement yesterday saying the latest conviction brings up "serious questions about selective prosecution – and about the rule of law being overshadowed by political considerations." Germany called the conviction a setback for Russian democracy.

All this had Moscow lashing out in turn today, with the Russian Foreign Ministry saying everyone should "mind his own business, both at home and in the international arena... We are talking about serious allegations of tax evasion... In the US, by the way, they earn life sentences in prison."

That the two men would be convicted again had long been expected in Russia, and that the judiciary isn't exactly independent is hardly news.

But the Khodorkovsky case brings together three of the crucial strings that have guided Russia's political development since the collapse of the Soviet Union in 1991 and, economists say, have hamstrung its economic progress: The rise of the so-called Oligarchs, men like Khodorkovsky who amassed huge fortunes thanks to the chaotic and often-corrupt privatization of Soviet assets; a flourishing culture of corruption that has hampered Russian growth while feeding impunity from prosecution for police, politicians and many businessmen; and a steady retrenchment of the democratic gains made in the 1990s, with those who speak out against the government, from tycoons to NGOs, facing prosecutions.

An object lesson

The case against Khodorkovsky was developed after he bucked the establishment by using the wealth generated by Yukos (a company that he paid the government $350 million for in 1995 but was soon valued at $30 billion) to back pro-democracy groups and opposition candidates distasteful to Mr. Putin, now Russia's prime minister who ordered their prosecution when he was still president. His legal travails have long been taken as a pointed object lesson for other Russian businessmen.

"Khodorkovsky decided to get involved in something that he didn't have to, and our bureaucratic class had him beaten up," says Yevgeny Butovsky, who runs an agricultural business. "It was a kind of demonstrative flogging."

Like most Russian businessmen, Mr. Butovsky sees Khodorkovsky's case as an outlier in its extremity, but says that the daily toll of corruption and state interference that it symbolizes is harming Russia's economic prospects. "The business climate has been worsening all the last 15 years," he says. "Sometimes there are some small things but they add up and the result is atmosphere that is no good for business."

Corruption up, transparency down

How much worse? Transparency International's latest corruption index -- which surveys investor opinion about every country – placed Russia among the 20 most corrupt countries on earth, tied with countries like Kenya and Cambodia and just below Yemen, Libya, and Haiti. That was down eight spots from the year before, when President Dmitry Medvedev promised a "war on corruption."

The InDem Foundation in Moscow estimates that Russian businesses and individuals pay $318 billion in bribes every year, and in a survey released this fall by Pricewaterhouse Coopers 71 percent of foreign and local businesses reported being victims of "economic crime." That's double the rate reported in large, emerging market peers of Russia like China, Brazil, and India.

The price of doing business

While Khodorkovsky's cause has been taken up vocally internationally, within Russia his problems are often seen of his own making – the case of a man who played with fire and got burned. Corruption is generally seen as a fact of life that simply needs to be worked around.

"I wouldn't mix Khodorkovsky's case with the ... investment climate," says Pavel Salin, an analyst with the independent Center of Political Assessment in Moscow. "If a businessman doesn't go into politics, he can do well here. Corruption is a kind of institution here ... if a businessman accepts the rules of the game he can succeed. All who work here in Russia take part in it. Otherwise it is impossible to go on."

A US diplomatic cable last December and recently released by WikiLeaks, captures the difference between foreign and local views. "Despite the case's wide implications, it continues to be a cause celebre only for foreigners and a minority of Russians," the US Embassy wrote. "It is not lost on either elite or mainstream Russians that the [government] has applied a double standard to the illegal activities of 1990s oligarchs; if it were otherwise, virtually every other oligarch would be on trial alongside Khodorkovskiy and Lebedev... Most Russians believe the Khodorkovsky trial is politically motivated; they simply do not care that it is."

And while there has been much international hand-wringing about the Khodorkovsky case driving away foreign investment, analysts point out that in areas where Russia is stronger -- oil and gas in particular -- there is still much money to be made. Instead, the problem lies in how the legal and political environment stand in the way of creating a diversified economy that would create more jobs, take more of the national wealth out of the state's hands, and prepare Russia for the day when the oil runs out.

"Businesses oriented to natural resources and relying on the strong power of the authorities do not mind Khodorkovsky's case. They can get on well with an authoritative regime," says Alexey Makarkin, deputy general director of the Center for Political Technologies, a non-government think tank. "But for investors who want to invest into innovations and high technologies industries, things are different. They want transparent business and clear rules."

Mr. Makarkin says it's the corruption of petty bureaucrats and competing government power centers that are the biggest problems for investors. "For business to go on normally doesn't only mean not getting involved in politics," he says. "It is important to get on well with the authorities. The problem is that once they come to terms with one group of authorities, there is no guarantee that their competitors might not come over and make problems. The rules of the game are changing every single day."

He gives President Medvedev, who many expect Putin will seek to replace in next year's presidential election, high marks for trying to "change the system" and end "arbitrary legal proceedings" but calls the Khodorkovsky sentencing a step back. "Khodorkovsky's case reduces the effect of Medvedev's efforts to imrove the situation," he says.