Lawyer’s Death Sheds Light On Corruption

Photos by Hallie Golden

Sergei Magnitski broke Russia’s most important unwritten law and paid for it with his life.

This attorney for a Moscow law firm exposed the largest tax scam in Russian history, which involved government officials, businessmen and mafia capos. His reward: Magnitski was arrested and thrown in jail to die.

Languishing for 11 months in prison without trial, Magnitski was tortured and beaten until he agreed to withdraw his testimony against Russian Interior Ministry officers. Magnitski was held without bail and denied medical attention that was needed to keep him alive.

Magnitski’s case illustrates the breadth of corruption in modern Russia. Transparency International’s 2010 Corruption Perceptions Index rates Russia 154th on a list of 178 countries. That means Russia is as corrupt as such Third World countries as Kenya and Tajikistan, and even more corrupt than Libya, Syria or Iran.

In Russia, the destructive influence of corruption is so bad that President Dmitry Medvedev launched a government initiative to fight the problem in 2009. However, authorities have thrown out more cases than they have pursued.

Still, some crusaders are fighting on. One is Alexey Navalny, a Russian blogger and lawyer who uses legislation under President Medvedev’s initiative to fight business and government corruption through his online project Rospil. The government at the same time has made attempts to charge Navalny with slander. But authorities have a hard time finding sufficient evidence to make the charges stick. Navalny has been careful to stay within the bounds of Russian law, even if it often goes unenforced.

“If Navalny gets to prison, then it’s even worse than Khodorkovsky [the famously jailed oil tycoon],” says Ivan Fomin, a  PhD student in Russian politics at the Russian Academy of Sciences, and a Navalny supporter. “It would just be very discouraging for all the society because it’s the only hope for society now. It is the face for Russian civil society.”

The government, dominated by Vladimir Putin’s United Russia party, keeps tight control of media coverage of politics and politicians. That’s especially true of television, where most Russians get their news. Those who challenge Putin’s version of events are often threatened and at times arrested or even murdered, even though the Russian Constitution guarantees freedom of speech.

In a political system that Putin, now prime minister, calls a “managed democracy,” Russia lacks accountability and true representation to such an extent that Western governments have come to doubt whether the country is – or can – transition to democracy. Putin, for example, abolished regional elections and appoints most provincial officials. This is a step back from the elective system established in the 1990s under Boris Yeltsin, who ironically tapped Putin as his successor.

“This is the Putin channel.” That’s how chief reporter Alexandr Tupolev described his employer, St. Petersburg’s Channel 100. Such is the hold the government exercises over most media.

Anna Krampets, a reporter for the Kommersant newspaper, one of the few independent publications in Russia, responded “probably not,” when asked if she would expose any large government or business scandals. She stressed that she has a daughter now, and she would fear for the lives of her family members if she exposed such corruption.

Putin has been strengthening his control of media since 2000. Many media barons have been pushed aside by Putin in the last decade. One of the first to go was Boris Berezovsky, a former oil tycoon and owner of Channel One news. It gave favorable coverage to Putin in the 2000 election. That same year, Berezovsky fled to London after he began to oppose Putin, whom he felt was ungrateful for his channel’s support.

Berezovsky fled because Putin pursued corruption charges against him. Many experts considered the charges to be politically motivated. After Berezovsky’s departure, Putin’s government acquired Channel One.

Putin also acquired the national network NTV, the first opposition television network in Russian history. It was notorious for exposing atrocities on both sides during the Chechen Wars. NTV owner and billionaire Vladimir Gusinsky was briefly arrested by the government for what many believe were politically motivated charges. Gusinky, too, fled the country.

St. Petersburg’s Channel 100 has a government-financed news service that exemplifies Putin’s ever-growing hold on news and information.  When asked who controls the agenda of his channel, Tupolev, the chief reporter, eventually admitted, “oil tycoons…Vladimir Putin.”

In Channel 100’s control room, a picture of Putin hung on the wall and seemed to be eying the live 5 p.m. broadcast. Tupolev explained the restrictions that currently rein in the channel’s news programming. Business leaders are quick to sue if reporters make the slightest mistake, and do so all the time. Channel 100 lacks the legal firepower to fend off such nuisance suits, he said.

20110807-012644.jpg

In addition, Channel 100 must give the government spin on many news events, Tupolev said. “For instance, if there is a government protest in the street, and five people were beaten by the police, we have to say, ‘Five people were sent to the hospital,’” he said.

Despite Putin’s crackdown on the oligarchs in the early 2000s, Channel 100 illustrates how a small but tight group of businessmen and government officials continue to exercise iron control over media coverage. It is in this environment that the case of Magnitski unfolded. The case shows how this tight public-private network uses government to enrich itself, experts say.

In 2007, Russian Interior Ministry officials raided the Moscow office of Firestone Duncan. They seized two van loads of documents without a warrant, according to Jamison Firestone, the  managing partner of the legal, tax, accounting and audit firm. A junior lawyer who tried to protest the search was beaten so severely he was hospitalized for three weeks.

20110807-012639.jpg

Magnitski, a colleague of Jamison Firestone, exposed that the documents seized were from three companies owned by Hermitage Fund, formerly the largest foreign investor in Russia. Magnitski discovered that the Russian Interior Ministry tampered with the documents to make it appear that Victor Markelov, a man convicted of manslaughter in 2001, was the owner of the Hermitage companies.

The three companies then applied for a fraudulent 5.4-billion-ruble ($230,000,000) tax refund. The companies received this refund in one day, making this the largest tax refund in Russia’s history.

Magnitski filed complaints against those he found to be involved, including criminals, law officers and members of the government. Authorities did nothing about it.

In October 2008, Magnitski went on to testify at the State Investigative Committee against Pavel Karpov and Artem Kuznetsov, the two Interior Ministry officers who raided the Firestone office. Within a month, Kuznetsov ordered Magnitski’s arrest. He was handcuffed while dropping his children off at school. It would be the last time he saw them. Magnitski was tortured and denied medical care until he agreed to withdraw his testimony. Within the year, he died in prison.

“Regional feudalism, central oligarchy.”

Those are the four words economist Nikita Maslennikov used to describe Russian society. He said
Magnitski’s death was a product of modern day feudalism and oligarchy clashing to produce what is today called the Russian Federation.

Dima Voronenko, a 16-year-old high school student from St. Petersburg, aspires to own a restaurant business of his own. However, he does not see himself starting a business here in Russia as he believes the bribery system that exists today would prevent him from prospering. His friends share a similar view. They do not see future careers in Russia.

20110807-012634.jpg.

Maslennikov said he believes one business preventing another from opening is a big problem in Russia today.
Russians have two main methods of starting up a business in their country.

One is the Greenfield Project. That is when an entrepreneur starts a business from scratch. To do this, he or she must take out a 48-year lease for the business. Renegotiation then occurs after 48 years. “No bank in their right mind would finance this,”  Maslennikov said. “If anything, 18-20% interest, which no business will do.”

The other way is the Brownfield Project. That is when an entrepreneur buys out a local business to use its land, then constructs a new business. This system, however, has even more restrictions, as the business is in the hands of Russian bureaucrats. The owner of the business needs to be able to pay any fees and fines required by police, sanitation, fire marshals and others. “If you are not ready for that, you are in big trouble,” Maslennikov said.

Limited opportunity like this causes the youth to not see a future in their country. Aspiring business owners like Vorenenko can see the limited opportunity in society as early as high school.

“Otkat” is an important term in Russian government and businesses. It refers to instances in which businesses get an investment from the government, but the government official who initiated the investment expects money back, which they pocket. It is what people like Alexey Navalny have dedicated to fighting, and what took the life of Magnitski.

Western governments and the elite often group Russia into a category of countries that have commodity economies – a group that includes Nigeria and Iran, where rich natural resources and wealth actually burden their own citizens.

The term often used is “the Oil Curse,” and it applies to nations that have wealthy upper classes that control the resources. The curse is the effect it has on it people, allowing little competition among businesses and little economic mobility.

This is what Maslennikov, the economist, means by “central oligarchy.” Russia is arguably caught up in a scenario shared by authoritarian regimes around the world, in which richness in natural resources actually hurt those who are not wealthy.

Whether or not this is bad for Russia is a debate for its own people. Russia’s economy improved drastically under Putin, passing the Soviet production line for the first time since its collapse in 2007.

This is how Russia works. Those with power and money are not held accountable for their actions if they are a part of the country’s present regime. Opposition is known for being crushed, as there is an agenda in Russia, whether it’s driven by oligarchs, government or both. The “managed democracy” in Russia is what western governments would call a more authoritarian regime.