Russian Tycoons Find Tougher Times as Money Flees

The New York Times (The New York Times Company)
Added on Sunday, December 11, 2011

Russian Tycoons Find Tougher Times as Money Flees 
By ANDREW E. KRAMER

MOSCOW

NIKOLAI MAKSIMOV, one of the richest men in Russia, was sitting in a grimy jail cell in the Ural Mountains.

Through the murk, Mr. Maksimov saw his cellmate — a man, he says, who appeared ill with tuberculosis, a scourge in Russian prisons. “I had the feeling that I was put in this cell on purpose,” Mr. Maksimov, now free on bail, recalled recently.

Mr. Maksimov, who was arrested in February on suspicion of embezzling hundreds of millions of dollars, is hardly the only Russian tycoon who has run into trouble. Among the six men who have topped the Forbes rich list here in the last decade, one, Mikhail B. Khodorkovsky, is in prison, and another, Boris A. Berezovsky, is in exile. They, like Mr. Maksimov, maintain their innocence.

Even before the authorities here acted last week to quash protests against the government and Prime Minister Vladimir V. Putin, Russia’s rich were growing agitated, too. Evidence is mounting that conditions are deteriorating for the maintenance and investment of their vast wealth — and while this development may gladden populists, it may become an economic threat.

Post-Soviet privatizations shifted state-owned factories into the hands of a coterie of well-connected businessmen — the oligarchs. Partly as a result, Russia has 101 billionaires, behind only China, with 115, and the United States, with 412, according to Forbes.

Only now, capital flight, a problem in the 1990s, has re-emerged. Money is flowing out of Russia faster than it is flowing in. The net outflow is expected to reach $70 billion by year-end, and the figures suggest that the bulk of that will be from large investors.

Yaroslav Lissovolik, chief economist for Deutsche Bank here, notes that “the scale of capital flight has more than compensated for the rise of oil prices.”

Even if oil output is maintained and crude prices stay relatively high, according to Russian finance ministry estimates, the nation’s current account will slip into deficit by 2014. Then Russia’s economy, like that of the United States, will depend on an inflow of investment, economists say.

The Russian government has recently made modest gains in attracting foreign investment. The problem is that for every foreign company that invests — from Exxon on the Russian Arctic Shelf to Cisco Systems in a high-technology park going up outside Moscow — far more Russian entrepreneurs head for the exits, gauging the risks too great.

Officials understand that oil can take Russia only so far and are eager to lure investment from all quarters. “The amazing thing is that they are doing far better with the foreign investors than the locals,” says Clemens Grafe, chief economist at Goldman Sachs here.

It’s hard to know how big a role cases like Mr. Maksimov’s have played. Mr. Maksimov, 54, is withering in his criticism of the authorities. The suggestion is that his business enemies enlisted the police to try to persuade him to resolve a dispute.

“I was on the Forbes list; now I’m going to jail,” he says. “It’s normal. It’s Russia.” His troubles began three years ago, when he sued Vladimir S. Lisin, another steel tycoon, touching off the dispute that eventually led to Mr. Maksimov’s arrest.

The two had made a deal, which quickly soured, for Mr. Lisin to buy 50 percent plus one share of Mr. Maksimov’s company, the Maxi Group. Maxi was estimated at the time to be worth $1.2 billion after debts. Mr. Lisin’s company, Novolipetsk, paid Mr. Maksimov an advance of $317 million. It was to pay the remainder after an outside auditor estimated the extent of the company’s debt, within 90 days.

Executives of Novolipetsk declined to pay. In an interview at its headquarters here, lawyers for Novolipetsk accused Mr. Maksimov of transferring large sums out of the Maxi Group to the bank account of his girlfriend. He denied the accusation, saying he had been buying out shares that his girlfriend, who was also a business partner, owned in business subsidiaries.

Whatever the case, such disputes were supposed to be settled by an international arbitration panel under the terms of the agreement. By February, Mr. Maksimov felt that he was close to winning. He said he had rebuffed informal discussions of a $100 million settlement and was holding out for the full balance, $287 million. He called a news conference at the Marriott Hotel in downtown Moscow on Feb. 14.

Along with the media, men toting Kalashnikovs showed up.

“Russia is always interesting,” Mr. Maksimov says. He was whisked out of the hotel in a Russian version of a “perp walk.” Soon enough, he was handcuffed to a chair in a dingy police station on the city’s outskirts.

FORMALLY, he was held on charges related to the payment to his girlfriend, which had in any case been repaid to the Maxi Group. But Mr. Maksimov says the investigator also discussed with him the arbitration with Novolipetsk. As Mr. Maksimov recalls it, the investigator sat on the edge of the table during the questioning and asked: “’You were offered $100 million. Why didn’t you take it?”

Mr. Maksimov says he was then escorted to the airport to fly to a prison in Yekaterinburg, in the Urals. Awaiting the flight, he says, he was again urged to make a deal with Novolipetsk.

“You won’t like people in jail,” he says he was told. “They aren’t your type.”

Anton Bazulev, director of external relations for Novolipetsk, said in an interview that it had never made a settlement offer to Mr. Maksimov and denied that it had orchestrated his arrest. Mr. Bazulev said Novolipetsk handed evidence to the police of possible fraud and was obliged to do so under Russian law as a publicly traded company.

Five days after his arrest, Mr. Maksimov was released on bail. A month later, in March, a Moscow International Commercial Arbitration panel awarded him $287 million in a ruling that, under terms of the chamber, is final and not subject to appeal.

When capitalism and democracy arrived in Russia in the early 1990s, many people thought a new industrialist class would become a pillar of the state, substituting for the Communist Party, the Red Army and the K.G.B. But under Mr. Putin, a K.G.B. veteran, the security services resurged as a force in society and business. Last Sunday’s poor election showing for his party, United Russia, suggests some Russian voters are cooling toward Mr. Putin, who intends to wage his own three-month campaign to return to the presidency.

In 2000, when he first ran for president, he vowed to eliminate the oligarchs “as a class,” but that didn’t happen. Some who seemed to clash with him directly, like Mr. Khodorkovsky, lost fortunes.

A loose system of patronage, in which security services and big business overlap, is still pervasive.

In one prominent case, a hedge fund called Hermitage Capital, once the largest foreign money management firm in Russia, accused several dozen midlevel police, tax inspection and judicial authorities of abusing their offices to steal $230 million in a fraudulent tax refund. After the fund’s lawyer, Sergei L. Magnitsky, testified in the case, he was arrested and held 10 months in dank cells before dying, possibly of a heart attack or pancreatitis.

Novolipetsk says it has litigated the failed deal with Mr. Maksimov in 141 separate cases in Russian state courts, winning 90 times. Such a proliferation of hearings is common in Russian business law, as all sides typically jurisdiction-shop for sympathetic judges by filing similar lawsuits in dozens of courts.

Importantly, lawyers for Novolipetsk have obtained rulings suggesting that even if contract parties specify arbitration to resolve disputes, Russian courts can claim jurisdiction, a precedent that could damp foreign investment, too. Russian civil courts have refused to enforce the arbitration panel’s ruling.

After the favorable ruling in March, Mr. Maksimov’s lawyers successfully appealed to courts in the Netherlands, Luxembourg and Cyprus to freeze shares in six European steel mills. Novolipetsk has appealed on jurisdictional grounds and won a ruling against him in Amsterdam in November, though the court left in place the restriction against selling the European assets.

Mr. Maksimov has put what remains of his wealth into a British-domiciled holding company.

WHILE his money has escaped from Russia, it is less clear that he will himself. The police are now investigating him in a separate fraud case. They argue that because Russian courts do not recognize the arbitration panel ruling, presenting that ruling, even to a foreign judge, is fraudulent — even if a European court accepts its validity.

“We understand this as blackmail,” says Vladimir Melnikov, a lawyer for Mr. Maksimov. “If you receive the money in Holland, you go to jail in Russia.”
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