Streetwise Professor

April 9, 2012

Who You Gonna Believe? The Russian Economy Ministry or the Lying Data?

Filed under: Economics,Politics,Russia — The Professor @ 4:21 pm

Russia’s economy ministry estimates that capital outflow in 2012 will total $20 billion.  That’s actually pretty pathetic, for a country that should be benefitting from high energy prices, and which portrays itself as a great investment opportunity.

But the $20 billion outflow seems delusionally optimistic compared to the reality:

Capital flight from Russia accelerated in March, despite Vladimir Putin’s re-election to the presidency, which officials had hoped would allay concerns about political risk and slow the torrent of money leaving the country.

“This is coming from domestic businesspeople sending their money out of the country, either to avoid corruption or because they have no place to invest it here,” said Alexander Morozov, chief economist at HSBC in Moscow, warning that they aren’t likely to reverse this year. The outflows could be a problem for Mr. Putin as he returns to the presidency and seeks to boost economic growth and investment.

The Central Bank reported Wednesday that capital outflows reached $35.1 billion in the first quarter, nearly double the $19.8 billion seen a year earlier. The latest result was little changed from the fourth quarter of last year, when many economists blamed the outflow on concerns about political instability around Mr. Putin’s return to the presidency and the huge anti-Kremlin demonstrations in Moscow in December.

The central bank didn’t give a monthly breakdown in Wednesday’s figures, but using figures for January and February reported earlier, analysts estimated capital outflow for March at around $12.5 billion—up from $9 billion in the previous month.

So the capital outflow is accelerating despite the resolution of the political risk that had supposedly was the impetus for the outflows.

Since capital outflows are already $35 billion, to reach $20 billion it would be necessary for capital inflows to average more than $1 billion for the rest of the year.

Just what would be the basis for such a forecast? Look at the chart in the WSJ link. There have been 3-yes, 3-months of inflows since 2009.  Note further that the recent outflows have occurred when oil prices have been high-which should encourage inflows. Therefore, why should anyone expect flows to reverse from about -$10 billion/month to +$1 billion/month?

No. The Russia Economy Ministry is quite clearly MSU.

And what, pray tell, could possibly explain why capital is fleeing Russia despite the supposed stability that will accompany a Putin return? Well, maybe “despite” is the wrong word: I would suggest that the capital is fleeing because of Putin’s return, and the dreary implications thereof for the rule of law, the security of property, and the physical safety and freedom of anyone who dares to engage in the crime of entrepreneurship:

Russia’s business climate remains high-risk even for entrepreneurs with modest ambition and restrained appetites. There is a 50-percent chance that any entrepreneur doing business in Russia will sooner or later end up behind bars, a panel of experts concluded at an April 5 conference examining the country’s socio-economic development over the past ten years. Up to 16 percent of the country’s entrepreneurs have been prosecuted in the past decade and no less than two-thirds of companies that ran afoul of the law have been closed, the experts concluded.

At the very core of all business issues in Russia is a lack of trust, said the experts, who were speaking at the International Academic Conference on Economic and Social Development organized by Moscow’s respected Higher School of Economics. “There is a perception in government that business people are dishonest,” said Yevgeny Yasin, former Russian Minister for the Economy and Higher School of Economics professor. “Sadly, this appears to be the prevailing mindset.”

That mindset also appears to have been enshrined in the country’s legal code. Since 1996, the laws governing economic and financial crimes in Russia have been toughened with the addition of 12 new provisions, Vedomosti reported, each of which carry punishments of 5-10 years in prison.  By contrast, in recent years the government has adopted only two laws to ease Russia’s business climate: one that banned the pre-trial detention of people suspected of economic crimes and another requiring that a tax audit be conducted before tax evasion charges can be filed, said Viktor Burobin, head of Justina law firm.

Russia’s culture of the presumption of guilt is also reflected in the outcome of court cases involving businesses. The acquittal rate for economic crimes in Russia is just 0.3 percent, compared to up to four percent in former Soviet economies like Georgia, Poland and Ukraine, said Vadim Volkov, the scientific director of the Institute of Law Enforcement. The results are an illustration of Russia’s high incarceration rate of 600 prisoners to 100,000 inhabitants, as opposed to 300 in Ukraine and 200 in Bulgaria, said Volkov.

As they say, RTWT.

This reinforces a point made in the WSJ article: it is Russian businessmen who are sending their capital abroad.  It is not exclusively driven by foreign investors (although they are apparently sufficiently wary of the risks of sinking capital in Russia that they are not investing enough to overcome the desire of Russians to get their money the hell out of Dodgeski).  Those who know the local conditions best-Russians-are trying to get out while the getting is good.

That is Putinism.  It is also why the return of Putinism for the foreseeable future is hardly conducive to economic dynamism-the exact opposite is the case, in fact. And that is why Russia continues to hemorrhage capital, and why the Economics Ministry’s forecasts can hardly be called delusional: they are far worse than that.

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31 Comments »

  1. Well, given that the Kremlin has already admitted that economic growth will be anemic and the IMF has said inflation will return with a vengeance, it’s not hard to understand why smart money would flee Russia.

    http://dyingrussia.wordpress.com/2012/04/06/pain-and-humiliation-for-putins-russia/

    Add to the mix Putin as “president for life” and the return of a neo-Soviet dictatorship run by a proud KGB spy, after seeing Khodkorkovsky jailed and Magnitsky murdered and Browder exiled, and it’s obvious that only crazy money would remain in Russia.

    Comment by La Russophobe — April 9, 2012 @ 4:33 pm

  2. Reported statistics will only improve once an election is approaching. A better barometer of Russia’s economic health would be real estate prices in London and the South of France -.8?

    Comment by sotos — April 9, 2012 @ 6:44 pm

  3. “There is a perception in government that business people are dishonest”.

    Kinda like Jack the Ripper having a perception that the folks in the street are criminals.

    Comment by Ivan — April 10, 2012 @ 12:22 am

  4. I think it’s time to start calling you people out.

    Ivan, weren’t you telling us, let me recall… MORE THAN 6 MONTHS AGO, that Russia was already in, or fast slipping into, recession?

    Comment by Da Russophile — April 10, 2012 @ 2:12 pm

  5. LR, even the European Court of Human Rights concluded that Khodorkovsky’s conviction was soundly grounded in evidence.

    Comment by wanderer — April 10, 2012 @ 7:08 pm

  6. I wonder what raw inflow/outflow numbers really mean in reality considering:
    * cross-border structure of many large Russian companies (they have subsidiaries outside Russia)
    * investments, debt payments and debt issuance abroard either by Russian companies directly or by their subsidiaries/shell companies

    I tried to find some answers on this some time ago but without any success.

    Comment by kosmik — April 11, 2012 @ 1:34 am

  7. Regading high-risk business I doubt you can compare business style in Russia and in Europe/US.

    Just an example from a person I know who works for a venture fund management company here. One of the projects they’ve started to look at seemed very attractive and after some due diligence they decided to start funding. But before that they let another subsidiary of their company make a very small investment in that firm. It turned out that it was immediately transferred to a company director accounts and spent on new car, fur coat for his wide (which is like $20K here) and stuff like that. Basically my friend’s company was lucky they haven’t invested real money into the project.

    Basically my view is that quite a lot of business completely unrelated to any government contracts or to real estate (highly-corrupt areas) would just die in court in other countries. Here it’s just how it works.

    Comment by kosmik — April 11, 2012 @ 1:42 am

  8. And another funny example is regarding reporting from different goverment agencies here.

    Some time ago we’ve got a rise in nominal tax rate for employer’s social contributions from 26% to 34% (please note that effective rate is completely different, in my case it’s about 10% or below after the change).

    A year passed and two agencies presented completely different view on whether this change was a success or not. Labor ministry reported that they collected way more tax than it was planned. However the Ministry of Economic Development presented a different view saying that the collected amount actually declined comparing to previous year (as a percentage of GDP).

    Again, no data to support any view which just fuels both extremes of politial spectrum. Pro-putinists claim success while “the opposition” says that it was an evident failure (and that we are already paying extremely high taxes etc etc).

    Comment by kosmik — April 11, 2012 @ 1:59 am

  9. WANDER, please stop lying.

    Comment by La Russophobe — April 11, 2012 @ 4:13 am

  10. LR, you’re the liar, not me.

    “There’s even the minor matter that the Kremlin agitprop has been persistently spreading this lie in the hope that, repeated a million times, it will be perceived as truth – but it is not.”

    You wish, lying prick Ivan.

    Here’s a link to the judgement itself, on the ECHR’s website.

    http://cmiskp.echr.coe.int/tkp197/view.asp?action=html&documentId=891996&portal=hbkm&source=externalbydocnumber&table=F69A27FD8FB86142BF01C1166DEA398649

    And here’s some of the highlights of the Court’s conclusions:

    590. Having examined the materials of the case and the parties’ submissions and despite its earlier conclusions under Article 6 §§ 1 and 3 (b) of the Convention in respect of the 2000 Tax Assessment (see paragraph 551), the Court has little doubt that the factual conclusions of the domestic courts in the Tax Assessment proceedings 2000-2003 were sound. The factual issues in all of these proceedings were substantially similar and the relevant case files contained abundant witness statements and documentary evidence to support the connections between the applicant company and its trading companies and to prove the sham nature of the latter entities (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213). The applicant company itself did not give any plausible alternative interpretation of this rather unambiguous evidence, as examined and accepted by the domestic courts.

    591. From the findings of the domestic courts and the parties’ explanations, the Court notes that the company’s “tax optimisation techniques” applied with slight variations throughout 2000-2003 consisted of switching the tax burden from the applicant company and its production and service units to letter-box companies in domestic tax havens in Russia. These companies, with no assets, employees or operations of their own, were nominally owned and managed by third parties, although in reality they were set up and run by the applicant company itself. In essence, the applicant company’s oil-producing subsidiaries sold the extracted oil to the letter-box companies at a fraction of the market price. The letter-box companies, acting in cascade, then sold the oil either abroad, this time at market price or to the applicant company’s refineries and subsequently re-bought it at a reduced price and re-sold it at the market price. Thus, the letter-box companies accumulated most of the applicant company’s profits. Since they were registered in domestic low-tax areas, they enabled the applicant company to pay substantially lower taxes in respect of these profits. Subsequently, the letter-box companies transferred the accumulated profits unilaterally to the applicant company as gifts. The Court observes that substantial tax reductions were only possible through the mixed use and simultaneous application of at least two different techniques. The applicant company used the method of transfer pricing, which consisted of selling the goods from its production division to its marketing companies at intentionally lowered prices and the use of sham entities registered in the domestic regions with low taxation levels and nominally owned and run by third persons (see paragraphs 14-18, 48, 62-63 for a more detailed description).

    592. The domestic courts found that such an arrangement was at face value clearly unlawful domestically, as it involved the fraudulent registration of trading entities by the applicant company in the name of third persons and its corresponding failure to declare to the tax authorities its true relation to these companies (see paragraphs 311, 349-353, 374-380). This being so, the Court cannot accept the applicant company’s argument that the letter-box entities had been entitled to the tax exemptions in questions. For the same reason, the Court dismisses the applicant company’s argument that all the constituent members of the Yukos group had made regular tax declarations and had applied regularly for tax refunds and that the authorities were thus aware of the functioning of the arrangement. The tax authorities may have had access to scattered pieces of information about the functioning of separate parts of the arrangement, located across the country, but, given the scale and fraudulent character of the arrangement, they certainly could not have been aware of the arrangement in its entirety on the sole basis on the tax declarations and requests for tax refunds made by the trading companies, the applicant company and its subsidiaries.

    593. The arrangement was obviously aimed at evading the general requirements of the Tax Code, which expected taxpayers to trade at market prices (see paragraphs 395-399), and by its nature involved certain operations, such as unilateral gifts between the trading companies and the applicant company through its subsidiaries, which were incompatible with the rules governing the relations between independent legal entities (see paragraph 376). In this connection, the Court finds relevant the warning given by the company’s auditor about the implications of the use of the company’s special fund during the year 2002 (see paragraphs 206-209) and is not persuaded by the applicant company’s reference to case no. A42-6604/00-15-818/01 (see paragraphs 356-357), the expert opinion of its counsel (see paragraph 577) and its reliance on Article 251 (1) 11 of the Tax Code (see paragraph 376).

    594. By contrast to the Tax Assessments in issue, the respondent entity in case no. A42-6604/00-15-818/01 was not alleged to have been part of a larger tax fraud and the Ministry failed to prove that it had been sham. The courts established that the entity had some assets, employees and a bank account at the place of its registration and dismissed the Ministry’s claims. As regards the expert opinion and the company’s reference to Article 251 (1) 11 of the Tax Code, the Court finds them irrelevant as they refer to the relations of openly associated companies and not, as was the case at issue, to the use of sham entities fraudulently registered in the name of certain third parties. Thus, the Court cannot agree with the applicant company’s allegation that its particular way of “optimising tax” had been previously examined by the domestic courts and upheld as valid or that it had used lawful “tax optimisation techniques” which were only subsequently condemned by the domestic courts. The above considerations are sufficient for the Court to conclude that the findings of the domestic courts that applicant company’s tax arrangements were unlawful at the time when the company had used them, were neither arbitrary nor manifestly unreasonable.

    595. The Court will now turn to the question whether the legal basis for finding the applicant company liable was sufficiently accessible, precise and foreseeable. In this connection, the Court notes that in all the Tax Assessments (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213) the domestic courts essentially reasoned as follows. The courts established that the trading companies had been sham and had been entirely controlled by the applicant company and accordingly reclassified the transactions conducted by the sham entities as transactions conducted in reality by the applicant company.

    596. The courts first decided that the transactions of the sham entities failed to meet the requirements of Article 39 of the Tax Code defining the notion of a sales operation (see paragraphs 48 and 324) as well as Article 209 of the Civil Code describing essential characteristics of an owner of goods (see paragraph 48 and 381). In view of the above and relying on Article 10 (3) of the Civil Code which established a refutable presumption of good faith and reasonableness of actions of the parties in commercial transactions (see paragraph 48 and 382-383), the courts then changed the characterisation of the sales operations of the sham entities. They decided that these were in reality conducted by the applicant company and that it had been incumbent on the latter to fulfil the corresponding obligation to pay various taxes on these activities. Finally, the courts noted that the setting up and running of the sham arrangement by the applicant company resulted in an understating of the taxable base of its operations and, as a consequence, the intentional non-payment of various taxes, which was punishable as a tax offence under Article 122 of the Tax Code (see paragraph 400).

    597. Having regard to the applicable domestic law, the Court finds that, contrary to the applicant company’s assertions, it is clear that under the then rules contractual arrangements made by the parties in commercial transactions were only valid in so far as the parties were acting in good faith and that the tax authorities had broad powers in verifying the character of the parties’ conduct and contesting the legal characterisation of such arrangements before the courts. This was made clear not only by Article 10 (3) of the Civil Code relied on by the domestic courts in the Tax Assessment proceedings, but also by other relevant and applicable statutory provisions which were available to the applicant company and other taxpayers at the time. Thus, Article 45 (2) 3 of the Tax Code explicitly provided the domestic courts with the power to change the legal characterisation of transactions and also the legal characterisation of the status and activity of the taxpayer, whilst section 7 of the Law on the Tax Authorities of the Russian Federation granted the right to contest such transactions to the tax authorities (see paragraph 393). In addition, the case-law referred to by the Government indicated that the power to re-characterise or to cancel bad faith activities of companies existed and had been used by the domestic courts in diverse contexts and with varying consequences for the parties concerned since as early as 1997 (see paragraphs 382-393 and paragraphs 428-468). Moreover, in a number of its rulings, including decision of 25 July 2001 no. 138-0 specifically relied upon by the domestic courts in the Tax Assessment proceedings against the applicant company (see paragraphs 384-387), the Constitutional Court confirmed the significance of this principle, having mentioned various possible consequences of a taxpayer’s bad faith conduct.

    598. In so far as the applicant company complained that the bad faith doctrine had been too vague, the Court would again reiterate that in any system of law, including criminal law, there is an inevitable element of judicial interpretation and there will always be a need for elucidation of doubtful points and for adaptation to changing circumstances. In order to avoid excessive rigidity, many laws are inevitably couched in terms which, to a greater or lesser extent, are vague and whose interpretation and application are questions of practice (see, among other authorities, Sunday Times, cited above, § 49 and Kokkinakis, cited above, § 40). On the facts, it would be impossible to expect from a statutory provision to describe in detail all possible ways in which a given taxpayer could abuse a legal system and defraud the tax authorities. At the same time, the applicable legal norms made it quite clear that, if uncovered, a taxpayer faced the risk of tax reassessment of its actual economic activity in the light of the relevant findings of the competent authorities. And this is precisely what happened to the applicant company in the case at hand.

    599. Overall, having regard to the margin of appreciation enjoyed by the State in this sphere and the fact that the applicant company was a large business holding which at the relevant time could have been expected to have recourse to professional auditors and consultants (see Špaček, s.r.o., cited above, § 59), the Court finds that there existed a sufficiently clear legal basis for finding the applicant company liable in the Tax Assessments 2000-2003.

    600. Lastly, the Court observes that the applicant company made a number of additional arguments under this head. In particular, it also alleged that there was no basis in law to deny the repayment of VAT in respect of the export of oil and oil products, that the domestic courts had failed to apply Articles 20 and 40 of the Tax Code, that it should have been dispensed from payment of interest surcharges under Article 75 (3) of the Tax Code and that in respect of the year 2000 the company had been subjected to double taxation in respect of the profits of the sham entities.

    601. The Court notes that both Section 5 of Law no. 1992-1 of 6 December 1991 “On Value-Added Tax” governing the relevant sphere until 1 January 2001 as well as Article 165 of the Tax Code applicable to the subsequent period provided unequivocally that a zero rate of value-added tax in respect of exported goods and its refund could by no means be applied automatically, and that the company was required to claim the tax exemptions or refunds under its own name under the procedure set out initially in Letter no. B3-8-05/848, 04-03-08 of the State Tax Service of Russia and the Ministry of Finance and subsequently in Article 176 of the Tax Code to substantiate the requests in order to obtain the impugned refunds (see paragraphs 326-336). In view of the above, the Court finds that the relevant rules made the procedure for VAT refunds sufficiently clear and accessible for the applicant company to able to comply with it.

    602. Having examined the case file materials and the parties’ submissions, including the company’s allegation made at the hearing on 4 March 2010 that it had filed the VAT exemption forms for each of the years 2000 to 2003 on 31 August 2004, the Court finds that the applicant company failed to submit any proof that it had made a properly substantiated filing in accordance with the established procedure, and not simply raised it as one of the arguments in the Tax Assessment proceedings, and that it had then contested any refusal by the tax authorities before the competent domestic courts (see paragraphs 49 and 171, 196, 196 and 216). The Court concludes that the applicant company did not receive any adverse treatment in this respect.

    603. As regards the company’s argument that Articles 20 and 40 of the Tax Code should have been applied by the domestic courts in their case and that the Ministry’s claims were inconsistent with the above provisions, the Court notes that the Ministry and the domestic courts never relied on these provisions and there is nothing in the applicable domestic law to suggest that they had been under a legal obligation to apply these provisions to the applicant company’s case. Thus, it cannot be said that the authorities’ failure to rely on these provisions rendered the Tax Assessments 2000-2001 unlawful.

    604. Finally and in so far as the company disagreed with the interpretation of Article 75 (3) of the Tax Code by the domestic courts and also alleged to have been subjected to double taxation, the Court would again reiterate that it is not its task to take the place of the domestic courts, which are in the best position to assess the evidence before them, establish the facts and to interpret the domestic law. On the facts, the former provision only applied to cases where the taxpayer was unable to pay the tax debt solely due to the seizure of its assets and cash funds (see paragraph 402). The domestic courts established that the company had been unable to pay because of the lack of funds and not because of the injunctions and refused to apply Article 75 (3) of the Tax Code in the applicant’s case (see paragraph 216). The Court does not find this conclusion arbitrary or unreasonable. Likewise, the Court finds nothing in the parties’ submissions or the case file materials to cast doubt on the findings of the domestic courts, which specifically established that the Ministry took account of the sham entities’ profits in calculating their claims so as to avoid double taxation (see paragraph 49).

    605. Overall, the Court finds that, in so far as the applicant company’s argument about the allegedly unreasonable and unforeseeable interpretation of the domestic law in the Tax Assessments 2000-2003 is concerned, the Tax Assessments 2000-2003 complied with the requirement of lawfulness of Article 1 of Protocol No. 1.

    (b) Whether the Tax Assessments 2000-2003 pursued a legitimate aim and were proportionate

    606. The Court is satisfied that, subject to its findings in respect of the lawfulness of fines for the years 2000 and 2001 made earlier, each of the Tax Assessments 2000-2003 pursued a legitimate aim of securing the payment of taxes and constituted a proportionate measure in pursuance of this aim. The tax rates as such were not particularly high and given the gravity of the applicant company’s actions there is nothing in the case file to suggest that the rates of the fines or interest payments can be viewed as having imposed an individual and disproportionate burden, as such, on the applicant company (see Dukmedjian v. France, no. 60495/00, §§ 55-59, 31 January 2006).

    (c) Conclusion concerning the compliance with Article 1 of Protocol No. 1 as regards the Tax Assessments 2000-2003
    607. Overall, the Court finds that there has been a violation of Article 1 of Protocol No. 1 on account of the 2000-2001 Tax Assessments in the part relating to the imposition and calculation of penalties. Furthermore, the Court finds that there has been no violation of Article 1 of Protocol No. 1 as regards the rest of the 2000-2003 Tax Assessments.

    (Skip a bit, Brother…)

    (c) The Court’s assessment

    612. The Court will examine this grievance under Article 14 of the Convention, taken in conjunction with Article 1 of Protocol No. 1. This former provision reads:

    Article 14 of the Convention

    “The enjoyment of the rights and freedoms set forth in [the] Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.”

    613. Before considering the complaints made by the applicant company, the Court would reiterate that Article 14 does not forbid every difference in treatment in the exercise of the rights and freedoms recognised by the Convention (see, for example, Lithgow and Others, cited above, § 117). It safeguards persons (including legal persons) who are “placed in analogous situations” against discriminatory differences of treatment; and, for the purposes of Article 14, a difference of treatment is discriminatory if it “has no objective and reasonable justification”, that is, if it does not pursue a “legitimate aim” or if there is not a “reasonable relationship of proportionality between the means employed and the aim sought to be realised” (see, amongst many authorities, Rasmussen v. Denmark, 28 November 1984, §§ 35 and 38, Series A no. 87). Furthermore, the Contracting States enjoy a certain margin of appreciation in assessing whether and to what extent differences in otherwise similar situations justify a different treatment in law; the scope of this margin will vary according to the circumstances, the subject-matter and its background (ibid., § 40).

    614. The Court would reiterate that nothing in the case file suggests that the applicant company’s tax arrangements during the years 2000-2003, taken in their entirety, including the use of fraudulently registered trading companies, were known to the tax authorities or the domestic courts and that they had previously upheld them as lawful (see paragraphs 592-594). It thus cannot be said that the authorities passively tolerated or actively endorsed them.

    615. As regards the applicant company’s allegation that other domestic taxpayers used or continue to use exactly the same or similar tax arrangements as the applicant company and that the applicant company was the only one to have been singled out, the Court finds that the applicant company failed to demonstrate that any other companies were in a relevantly similar position. The Court notes that the applicant company was found to have employed a tax arrangement of considerable complexity, involving, among other things, the fraudulent use of trading companies registered in domestic tax havens. This was not simply the use of domestic tax havens, which, depending on the exact details of an arrangement, may have been legal or may have had some other legal consequences for the companies allegedly using them. The Court notes that the applicant company had failed to submit any specific and reliable evidence concerning such details. It further notes that it cannot be called upon to speculate on the merits of the tax arrangements of third parties on the basis of data contained in non-binding research and information reports and that therefore it cannot be said that the situation of these third parties was relevantly similar to the situation of the applicant company in this respect.

    616. The Court concludes that, in so far as the complaint about discriminatory treatment is concerned, there has been no violation of Article 14 of the Convention, taken in conjunction with Article 1 of Protocol No. 1.

    Whew….

    This looks to me like the legal equivalent of 400 guns per kilometer of front obliterating Army Group Center. And after it, there is little left of the “Yukos was a model of Western management practices and corporate governance” the Putin-haters have been pushing since 2003 as there was of AGC in 1945

    Comment by wanderer — April 11, 2012 @ 5:07 am

  11. wanderer,

    No it’s not true.

    IIRC what ECfHR ruled was:
    1. Khodorkovsky rights were violated
    2. There were no proof that the trial was politically motivated

    #2 is not exactly what you mean.

    Comment by kosmik — April 11, 2012 @ 6:11 am

  12. LR, even the European Court of Human Rights concluded that Khodorkovsky’s conviction was soundly grounded in evidence.

    Nobody disputes that Khodorkovsky’s tax affairs were not in order. In fact, nobody who has run a business in Russia – like I have – disputes that every single business in Russia is in breach of the tax laws, so contradictory they are and the inspections so subjective. This is exactly how the Russian government likes it: everyone a criminal, and thus it can pick and choose who it prosecutes.

    What is disputed is why – other than his foray into politics – Khodorkovsky was targeted when many of his peers who were equally bad or worse were not; and whether imprisonment in an icy labour camp in Siberia seemingly indefinitely isn’t a bit excessive for the type of tax evasion which is common to almost all Russian businesses of that size and era, especially when the Russian state has such a woeful record of punishing far worse criminal behaviour of its favoured sons. Also, according to several ex-colleagues of mine who worked there, Yukos was far better run than any other Russian oil company, having adopted decent management systems and operating procedures from those in the world who know what they’re doing. As soon as Rosneft took it over it all went pear-shaped, so the legalities and Khordokovsky aside, the decision to destroy Yukos was downright stupid from a technical and commercial point of view.

    Comment by Tim Newman — April 11, 2012 @ 7:10 am

  13. “Nobody disputes that Khodorkovsky’s tax affairs were not in order.”

    Not true. LR does.

    ” In fact, nobody who has run a business in Russia – like I have – disputes that every single business in Russia is in breach of the tax laws”

    As the ECHR noted above, Yukos’ legal team failed to show evidence that any other company was engaged in a substantially similar tax evasion scheme.

    “What is disputed is why – other than his foray into politics – Khodorkovsky was targeted when many of his peers who were equally bad or worse were not”

    Yukos’ legal team tried to show that, and utterly failed.

    In a court, nine years of Economist/FT/Washington Post editorials and nine years of press releases from Khodorkovsky-paid PR agencies does not amount to even a scintilla of evidence.

    Comment by wanderer — April 11, 2012 @ 8:27 am

  14. Tim,

    I personally view it as kind of Enron Russia-style. You have a univeral violation (at that time everyone was evading taxes starting from employees to the biggest corporations). How would you fix this? Jail everyone is not an option. So you pick a scapegoat. Sounds not exactly fair, but practical. And apparently it worked.

    Comment by kosmik — April 11, 2012 @ 9:04 am

  15. BTW, Tim, I really enjoyed your Russian topics on your blog 🙂

    Comment by kosmik — April 11, 2012 @ 9:06 am

  16. Tim wrote:

    “In fact, nobody who has run a business in Russia – like I have – disputes that every single business in Russia is in breach of the tax laws, so contradictory they are and the inspections so subjective.”

    The ECHR wrote:

    “610. The Government responded that the allegations that other taxpayers may have used similar schemes could not be interpreted as justifying the applicant company’s failure to abide by the law. They further contended that the occurrence of illegal tax schemes at a certain stage of Russia’s historical development was not due to failures or drawbacks in the legislation, but rather due to “bad-faith” actions by economic actors and weakened governmental control over compliance with the Russian tax legislation on account of objective criteria, such as the 1998 economic crisis and the difficulties of the transition period.

    611. At present, the Government was constantly combating tax evasion and strengthening its control in this sphere. They also referred to statistical data by AK&M and some other news agencies in 2002, which had reported that OAO LUKOIL and OAO Surgutneftegas, two other large Russian oil producers, had posted sales proceeds of RUB 434.92 billion and RUB 163.652 billion and paid RUB 21.190 billion and RUB 13.885 billion in profit tax respectively, whilst the applicant company had posted sales proceeds of RUB 295.729 billion and paid only RUB 3.193 billion in profit tax. The Government submitted that at least two Russian oil majors, OAO Surgutneftegaz and OAO Rosneft, had never engaged in such practices, whilst some, in particular OAO Lukoil, had ceased using them in 2002.

    615. As regards the applicant company’s allegation that other domestic taxpayers used or continue to use exactly the same or similar tax arrangements as the applicant company and that the applicant company was the only one to have been singled out, the Court finds that the applicant company failed to demonstrate that any other companies were in a relevantly similar position. The Court notes that the applicant company was found to have employed a tax arrangement of considerable complexity, involving, among other things, the fraudulent use of trading companies registered in domestic tax havens. This was not simply the use of domestic tax havens, which, depending on the exact details of an arrangement, may have been legal or may have had some other legal consequences for the companies allegedly using them. The Court notes that the applicant company had failed to submit any specific and reliable evidence concerning such details. It further notes that it cannot be called upon to speculate on the merits of the tax arrangements of third parties on the basis of data contained in non-binding research and information reports and that therefore it cannot be said that the situation of these third parties was relevantly similar to the situation of the applicant company in this respect.”

    Whom to trust on this, Tim or ECHR? Really hard to decide…

    Comment by Da Russophile — April 11, 2012 @ 9:12 pm

  17. DR,

    I remember the time like 15-10 years ago. We definitely had a period of time when blatant tax avoidance was almost universal and visible even on level of laypeople. Moreover it was considered perfectly normal among economic actors and among the population. The government was extremely weak at that time and tax authorities were clueless.

    I also remember first Putin elections, me and a lot of people I knew voted against him also in fear that he will put this to an end which will lead to companies pulling out from Russia, salary going down etc. I was in software business at that time and a lot of foreign companies had illegal offices here. Just rent an apartment, hire people and pay them under the table. And pay “krysha” of course which were really a normal like 15 years ago.

    Comment by kosmik — April 13, 2012 @ 9:26 am

  18. “I remember the time like 15-10 years ago. We definitely had a period of time when blatant tax avoidance was almost universal and visible even on level of laypeople. Moreover it was considered perfectly normal among economic actors and among the population. The government was extremely weak at that time and tax authorities were clueless.”

    And this is exactly why the likes of The Streetwise Professor, Tim Newman, and LaRussophobe hate Putin. A weak, clueless Russian government that gives in to every US demand is the sort of Russian government they love.

    And they were okay with the fact that Russians were dying off by the million.

    “I also remember first Putin elections, me and a lot of people I knew voted against him also in fear that he will put this to an end which will lead to companies pulling out from Russia, salary going down etc. I was in software business at that time and a lot of foreign companies had illegal offices here. Just rent an apartment, hire people and pay them under the table. And pay “krysha” of course which were really a normal like 15 years ago.”

    And the lying scum above say that Russia is now *more* corrupt. Though notice their silence about Khodorkovsky now that they’ve had their faces rubbed in the ECHR judgement.

    Comment by wanderer — April 14, 2012 @ 1:12 am

  19. DR:

    Whom to trust on this, Tim or ECHR? Really hard to decide…

    Well, when they use a sentence such as this:

    At present, the Government was constantly combating tax evasion…

    Who knows?

    But as usual, you miss the point. Sure, Yukos cannot prove that any other company is also in breach of tax laws, because as I said, they are highly subjective (I know, I’ve had a company under my management auditted by Russian tax inspectors. Can anyone else on here claim likewise?). Had it been politically expedient, no doubt Yukos’ tax affairs would have been found to be all in order – in fact, this is exactly what happened, pretty much, when Rosneft bought them (at least, what they supposedly owed was reduced by an order of magnitude). And sure enough, when it is politically expedient to declare the tax affairs of Yukos’ peers to be squeaky clean then the inspectors can interpret their rules accordingly. Until such time it isn’t, and then they interpret them quite differently.

    Incidentally, from the EHCR:

    The Court notes that the applicant company was found to have employed a tax arrangement of considerable complexity, involving, among other things, the fraudulent use of trading companies registered in domestic tax havens.

    That adequately describes almost every contractor working on Sakhalin. Even Sakhalin Energy – majority owned by Gazprom – is registered in Bermuda.

    Wanderer:

    Yukos’ legal team tried to show that, and utterly failed.

    No, they failed to convince the judge. The effect of his arrest on the other oligarchs is there for all to see.

    We definitely had a period of time when blatant tax avoidance was almost universal and visible even on level of laypeople.

    Somebody needs to learn the difference between tax evasion and tax avoidance.

    And they were okay with the fact that Russians were dying off by the million.

    You sound almost as silly as the twit who thought without Putin’s intervention, Americans would be raping Russian women at will.

    And the lying scum above say that Russia is now *more* corrupt.

    It’s certainly no less corrupt. I know that the likes of Sublime Oblivion, of whatever the fuck he calls himself these days, huffs and puffs from his lofty position in American soft academia to denounce any findings that Russia is more corrupt than Saudi Arabia, but Russia is still as corrupt as it ever was. Now I could understand people defending Putin if he had taken on the black and grey economies and put an end to the practices described by komsik, i.e. the illegal operations, tax dodging, etc. of private Russian businesses and ushered in a period of transparency and improving business practices. Instead we got a wholesale transfer of the existing practices to politically connected individuals under the protection, and often auspices, of the state, thus clobbering any chance ordinary Russians had of growing a successful business organically and entrenching the corruption, graft, and thievery at a level from which it will likely never be dislodged. Putin didn’t look at the tax evaders and go “This is not on.” He looked at them and said “I want what they have.” This exactly the same mindset – kleptomania masquerading as moralistic law enforcement – which has kept Nigeria shit-poor despite its enormous oil production; the similarities are not lost on the Russians I work with in Nigeria.

    kosmik:

    So you pick a scapegoat. Sounds not exactly fair, but practical. And apparently it worked.

    I can buy that, to some extent. But if true, the Russian government went about it in the most cack-handed fashion you can imagine (which is hardly something new), and doesn’t explain why they went on to destroy the company after they destroyed the individual (unless, which is also likely, they didn’t realise they’d destroy it by merging it with the hapless Rosneft). I’m not sure I’m prepared to give Putin the benefit of the doubt on this one, they went well beyond merely clobbering somebody for bona-fide tax evasion as a warning to others.

    BTW, Tim, I really enjoyed your Russian topics on your blog

    Thanks! 🙂

    Comment by Tim Newman — April 14, 2012 @ 12:01 pm

  20. @wanderer-your assumptions about my views about this period, and Russian tax policy in particular, are unfounded and wrong. In fact, I believe Putin 1.0 did some sensible things, most notably the reform of the tax system, particularly the imposition of a flat tax at a low rate. This had desirable incentive effects, most notably in dramatically improving tax compliance.

    Putin’s decided turn to the dark side started somewhat later.

    The career of Andrei Illiaranov provides a good way to construct the chronology of Putin’s economic policies, and democratization policies. Illiaranov was instrumental in the creation of the 13 percent flat tax and other beneficial Putin first-term initiatives. Illiaranov resigned in 2005 because he recognized that Putin’s commitment to economic reforms were waning, and that he was becoming an anti-democratic authoritarian.

    Putin’s descent to authoritarianism was quite established by the time I started blogging in January, 2006, and I did not commence blogging about Russia until some months after that. Inasmuch as this blog is primarily focused on contemporary events, my criticism of Putin reflects his actions and words from the dark period-which continues to this day, and which grows darker by the day.

    In brief, you put the ass in assumptions and jump to conclusions based on said asinine assumptions.

    The ProfessorComment by The Professor — April 14, 2012 @ 12:06 pm

  21. But before that they let another subsidiary of their company make a very small investment in that firm. It turned out that it was immediately transferred to a company director accounts and spent on new car, fur coat for his wide (which is like $20K here) and stuff like that.

    When I was working in Sakhalin, a very large and well-known American engineering company entered into a JV with a Dutch company and a local company providing maintenance services. Of course, it was the American company which stumped up the capital whilst the Russian company provided much of the labour force (I have no idea what the Dutch company contributed). I knew the director of the American company quite well, and he told me he had a blazing row with his Russian counterpart – to the point of threatening to dissolve the JV immediately – when the latter decided he was going to withdraw several tens of thousands of dollars from the company bank account to spend on himself. The Russian director seemed to think that, due to his enjoying the position of director, the JV’s accounts were his own property to be used as he saw fit.

    Comment by Tim Newman — April 14, 2012 @ 12:09 pm

  22. In fact, I believe Putin 1.0 did some sensible things, most notably the reform of the tax system, particularly the imposition of a flat tax at a low rate.

    Same here.

    Comment by Tim Newman — April 14, 2012 @ 12:13 pm

  23. Inasmuch as this blog is primarily focused on contemporary events, my criticism of Putin reflects his actions and words from the dark period-which continues to this day, and which grows darker by the day.

    The freedoms of the free peoples of free Middle Earth are at stake. The time for dallying is drawing to an end. Freedom will be free! To arms, Men of the West!

    Comment by Da Russophile — April 14, 2012 @ 2:50 pm

  24. “Yukos’ legal team tried to show that, and utterly failed.

    No, they failed to convince the judge.”

    That’s because, to a judge, nine years of politicized blather from Western editorial pages and Khodorkovsky PR
    flacks =/= evidence.

    “The effect of his arrest on the other oligarchs is there for all to see.”

    Indeed. Russia now has abundant tax revenues, which at one time was not the case.

    Comment by wanderer — April 14, 2012 @ 6:15 pm

  25. “The career of Andrei Illiaranov provides a good way to construct the chronology of Putin’s economic policies, and democratization policies. Illiaranov was instrumental in the creation of the 13 percent flat tax and other beneficial Putin first-term initiatives. Illiaranov resigned in 2005 because he recognized that Putin’s commitment to economic reforms were waning, and that he was becoming an anti-democratic authoritarian.”

    This is the guy who says that the case against Khodorkovsky is purely fabricated.:

    “One of the best known political prisoners is Mikhail Khodorkovsky who has been sentenced to 9 years in the Siberian camp Krasnokamensk on the basis of purely fabricated case against him and his oil company YUKOS.”

    Putin’s descent to authoritarianism was quite established by the time I started blogging in January, 2006, and I did not commence blogging about Russia until some months after that. Inasmuch as this blog is primarily focused on contemporary events, my criticism of Putin reflects his actions and words from the dark period-which continues to this day, and which grows darker by the day.

    In brief, you put the ass in assumptions and jump to conclusions based on said asinine assumptions.

    Comment by wanderer — April 14, 2012 @ 6:19 pm

  26. “Putin’s descent to authoritarianism was quite established by the time I started blogging in January, 2006, and I did not commence blogging about Russia until some months after that. Inasmuch as this blog is primarily focused on contemporary events, my criticism of Putin reflects his actions and words from the dark period-which continues to this day, and which grows darker by the day.

    In brief, you put the ass in assumptions and jump to conclusions based on said asinine assumptions.”

    In the light of the ECHR judgement above, any guy who says that the case against Khodorkovsky is “purely fabricated” is a blind ideologue or a liar. And since you clearly share intellectual views and methods, well, birds of a feather…

    Comment by wanderer — April 14, 2012 @ 6:23 pm

  27. That’s because, to a judge, nine years of politicized blather from Western editorial pages and Khodorkovsky PR
    flacks =/= evidence.

    Indeed. Russia now has abundant tax revenues, which at one time was not the case.

    So the imprisonment of Khodorkovsky changed oligarchs’ behaviour to the point that Russia now has far greater tax revenues…but at the same time, no oligarch other than Khodorkovsky was evading taxes? Some consistency would be nice.

    Comment by Tim Newman — April 15, 2012 @ 1:23 am

  28. Clearly, tax compliance on the part of the Oligarchs has improved. The ECHR gives a possible reason for the difference:

    “611. At present, the Government was constantly combating tax evasion and strengthening its control in this sphere. They also referred to statistical data by AK&M and some other news agencies in 2002, which had reported that OAO LUKOIL and OAO Surgutneftegas, two other large Russian oil producers, had posted sales proceeds of RUB 434.92 billion and RUB 163.652 billion and paid RUB 21.190 billion and RUB 13.885 billion in profit tax respectively, whilst the applicant company had posted sales proceeds of RUB 295.729 billion and paid only RUB 3.193 billion in profit tax. The Government submitted that at least two Russian oil majors, OAO Surgutneftegaz and OAO Rosneft, had never engaged in such practices, whilst some, in particular OAO Lukoil, had ceased using them in 2002.”

    OAO Lukoil got the message that such behavior would no longer be tolerated and improved their tax compliance. Khodorkovsky, his legal team, and his PR team chose instead to fight this out in the ‘court’ of world opinion.

    Bad move for someone who was clearly Guilty, Guilty, Guilty.

    Comment by wanderer — April 15, 2012 @ 4:59 am

  29. OAO Lukoil got the message that such behavior would no longer be tolerated and improved their tax compliance.

    Erm, you were claiming a few comments back that Khodorkovsky had “utterly failed” to demonstrate that Yukos was not the only company involved in tax evasion. Now you’re saying that Lukoil quit the practice in response to Khodorkovsky’s arrest. Like I said, some consistency would be nice.

    And again I’m repeating myself but:

    At present, the Government was constantly combating tax evasion…

    Is gibberish. How can something which is “at present” be discussed in the past tense?

    Comment by Tim Newman — April 15, 2012 @ 8:42 am

  30. “Now you’re saying that Lukoil quit the practice in response to Khodorkovsky’s arrest.”

    Not true. Lukoil quit the practice beginning in 2002, fully a year before Khodorkovsky’s arrest. Lukoil got the message that tax fraud would no longer be tolerated. Khodorkovsky and Yukos chose defiance instead of compliance.

    Their choice has had consequences.

    Comment by wanderer — April 15, 2012 @ 8:59 am

  31. And so we see that none of the Putin-phobes here can sustain a denial that, not only was Khodorkovsky Guilty, Guilty, Guilty of massive tax fraud, but that he is in jail because he continued to defy the law after Putin told the oil oligarchs in no uncertain terms to pay their taxes. We see that Lukoil got the message and started to cease dodging their taxes in 2002. Therefore, they are still in business and Vagit Alekperov walks a free, and very rich, powerful man.

    Khodorkovsky and Yukos chose defiance instead of compliance. As a consequence, Yukos is destroyed and Khodorkovsky is in jail.

    And both fates are abundantly deserved, babble about “Yukos was the best-managed oil company in Russia” and almost a decade of nonstop bleating from the Western press, Khodorkovsky’s paid flacks, and blind ideologues like Andrei Illarionov notwithstanding.

    Comment by wanderer — April 19, 2012 @ 4:02 pm

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