With Russia Joining W.T.O., U.S. Companies Worry About Losing Business

The following is an excerpt from an article in 

The New York Times
Wednesday, August 22, 2012

With Russia Joining W.T.O., U.S. Companies Worry About Losing Business

By ANDREW E. KRAMER

MOSCOW — After two decades of negotiations, Russia will finally join the World Trade Organization on Wednesday. The lower trade barriers that come along with membership will open up new opportunities for foreign companies to do business in Russia.

But American companies are guaranteed no such advantages — and may even face higher Russian tariffs than their competitors from other countries.

Because of broader policy concerns about the Kremlin’s crackdown on dissidents and its support for rogue governments, Congress has balked at the Obama administration’s request to grant Russia permanent normal trade relation status. That status is important since the W.T.O. requires that any country that seeks to benefit from it must apply the same trade rules to all member countries.

Major American exporters to Russia, like Caterpillar, Deere and General Electric, are worried about the potential impact on their business from the Congressional inaction. Across all sectors of the economy, Russia will lower import tariffs to 7 percent, from about 15 percent today, for the 155 countries in the trade organization. Although Russian officials say they do not have any immediate intention of applying discriminatory tariffs against American companies, they could legally do so at any time.

Russia was the last major economy that was not part of the trade group, and joining is expected to be a boon for Russian consumers and businesses. Exporting companies in Europe, Asia and the United States eagerly await open access to a population of 142 million people with growing incomes and an expanding middle class.

The World Bank estimates that W.T.O. membership will add three percentage points to Russia’s gross domestic product once the new tariffs are phased in.

Russia negotiated for membership for 18 years, beginning when the W.T.O. was called the General Agreement on Tariffs and Trade. That is longer than any major W.T.O. entrant, including China, for which permanent trade status was also a battle in Congress. Presidents Clinton, Bush and Obama all supported Russia’s inclusion, and the country won accession last year, with formal membership coming this week.

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Russian Oil Wins If Embargo Hits Iran

Excerpt from an article in The New York Times
Friday, February 17, 2012

Russian Oil Industry Set to Capitalize if Embargo Hits Iran 

By ANDREW E. KRAMER

MOSCOW — For months, the Russian government has opposed the idea of Western petroleum sanctions against Iran. But new threats to Iranian oil flow could have at least one beneficiary: Russia.

The Russian oil industry was already reaping the rewards of higher global oil prices from Iranian tensions, even before Tehran raised the stakes Wednesday by threatening to cut off oil to six European nations.

Now, whether Iran carries out that threat immediately or Europe proceeds with its previously planned embargo of Iranian oil this summer, the Russian industry could capitalize more directly. Its pipelines stand ready to serve customers willing to pay a premium price — with a grade of oil closely resembling Iran’s.

“It’s pretty good for Russia right now,” Jesse Mercer, a senior oil analyst based in Houston with PFC Energy, said in a telephone interview.

Russia is now the world’s largest oil producer, pumping about 10 million barrels of oil a day, slightly more than Saudi Arabia. Of this, Russia exports seven million barrels a day. Most of it goes to customers in Europe and Asia, although small amounts from Siberia make it as far as the West Coast of the United States.

For Russian oil companies like Rosneft and Lukoil and the Russian-British joint venture TNK-BP, the international tensions that began over Iran’s nuclear development program last autumn have meant a windfall. Analysts estimate that Iran jitters have added $5 to $15 a barrel to the global price of oil, which means an extra $35 million to $105 million a day for the Russian industry. And the taxes the Russian government has received from those sales have been a political windfall for Prime Minister Vladimir V. Putin as he campaigns to return as Russia’s president. The extra money has helped further subsidize domestic energy consumption, tamping down inflation.

Electronic Security & Digital Espionage

Excerpt from an article in The New York Times
Saturday, February 11, 2012

Electronic Security a Worry in an Age of Digital Espionage 

By NICOLE PERLROTH

SAN FRANCISCO — When Kenneth G. Lieberthal, a China expert at the Brookings Institution, travels to that country, he follows a routine that seems straight from a spy film.

He leaves his cellphone and laptop at home and instead brings “loaner” devices, which he erases before he leaves the United States and wipes clean the minute he returns. In China, he disables Bluetooth and Wi-Fi, never lets his phone out of his sight and, in meetings, not only turns off his phone but also removes the battery, for fear his microphone could be turned on remotely. He connects to the Internet only through an encrypted, password-protected channel, and copies and pastes his password from a USB thumb drive. He never types in a password directly, because, he said, “the Chinese are very good at installing key-logging software on your laptop.”

What might have once sounded like the behavior of a paranoid is now standard operating procedure for officials at American government agencies, research groups and companies that do business in China and Russia — like Google, the State Department and the Internet security giant McAfee. Digital espionage in these countries, security experts say, is a real and growing threat — whether in pursuit of confidential government information or corporate trade secrets.

“If a company has significant intellectual property that the Chinese and Russians are interested in, and you go over there with mobile devices, your devices will get penetrated,” said Joel F. Brenner, formerly the top counterintelligence official in the office of the director of national intelligence. Theft of trade secrets was long the work of insiders — corporate moles or disgruntled employees. But it has become easier to steal information remotely because of the Internet, the proliferation of smartphones and the inclination of employees to plug their personal devices into workplace networks and cart proprietary information around. Hackers’ preferred modus operandi, security experts say, is to break into employees’ portable devices and leapfrog into employers’ networks — stealing secrets while leaving nary a trace.

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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