No Justice for Business in Russia

(page 2 of 2)

Now these concerns have been echoed by the author of the Council of Europe report, Sabine Leutheusser-Schnarrenberger, a former German Minister of Justice. "The legal justification of the new criminal cases against Mr Khodorkovsky and Mr Lebedev has me perplexed," she writes, adding that "any accusation must fulfill minimum standards of logic."

Hermitage Fund

The other case examined in detail is perhaps even more troubling for would-be investors. It relates to the international investment fund Hermitage Capital, once the largest foreign investor in the Russian stock market, along with its trustee, the leading British bank HSBC (HBC). The case, described by the Council of Europe as "almost unbelievable," concerns the expropriation of three Hermitage subsidiaries in Russia by organized criminals, and the subsequent theft of $230 million in taxes from the Russian government, allegedly with the participation of Russian police officials. More recently, Hermitage lawyers responsible for exposing the frauds have been arrested or have fled the country.

In its analysis of the case, the Council of Europe pulls no punches. The report states bluntly that "The Hermitage Fund has become the victim of the corruption and collusion of senior police officials and organised criminals." The report also draws attention to the incoherence of Russia's top law enforcement bodies in responding to the allegations.

Leutheusser-Schnarrenberger writes that the responses by senior Russian officials to her enquiries "have not been satisfactory" and "do not seem credible." For example, when she approached Russia's Investigative Committee of top lawmen for information about the detention of one Hermitage lawyer, the Committee apparently denied that the lawyer had ever been detained. (In fact the lawyer, Sergei Magnitsky, has been detained without trial since last November.) Most sensationally, the Council of Europe's rapporteur concludes that because of the Russian government's "complete failure…to react" to the serious fraud allegations, she suspects that "this coordinated attack must have the support of senior officials."

According to the Council of Europe report, such scandals are symptomatic of a more general failure of Russia's criminal justice system. It remains to be seen how the Russian government will react to these criticisms. But until there is serious action to investigate the alleged abuses, few investors are likely to be convinced by Medvedev's much touted campaign to clean up Russia's severely maligned legal system.

Bush is BusinessWeek's Moscow bureau chief.

Business Exchange

Track and share business topics across the Web.