Corporate Raiding Underlines Dismal State of Russia's Legal System

Vladimir Pastukhov, a longtime Hermitage adviser, has fled to London.
Vladimir Pastukhov, a longtime Hermitage adviser, has fled to London. "I'll never step into another courtroom again as a Russian lawyer," he said. (Photos Courtesy Of Hermitage Capital Management)
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By Philip P. Pan
Washington Post Foreign Service
Thursday, August 13, 2009

MOSCOW -- When three of Russia's finest lawyers agreed to represent the investment fund Hermitage Capital, they thought they were taking on a routine tax case.

Then they uncovered evidence of a breathtaking crime: Top police and tax authority officials appeared to have quietly seized ownership of Hermitage firms and used them to arrange a $230 million tax refund.

Now, the lawyers themselves are in legal trouble. One has been jailed. The two others have fled the country. All three face charges that seem intended to discredit Hermitage and divert attention from the enormous theft.

Their plight highlights the hazards of practicing law in Russia's corruption-ridden courts despite nearly two decades of reforms supported by hundreds of millions in U.S. and European aid. Prosecutors and police continue to dominate the judiciary as they did in the Soviet era, but unrestrained by the institutions of the old Communist system or the checks of a genuine democracy, the opportunities for abuse have grown.

No crime illustrates the state of the legal system better than what is known as "reiderstvo," or raiding -- the takeover of businesses through court rulings and other ostensibly legal means with the help of crooked judges or police. The practice is so widespread that local media have reported what raiders charge: $10,000 to alter a corporate registry, $50,000 to open a criminal case, $300,000 for a court order.

Hermitage, once Russia's largest foreign shareholder with more than $4 billion in holdings, says it encountered a bold variation on reiderstvo: When raiders failed to seize its assets, they looted the Russian treasury instead, then went after the lawyers who caught them.

President Dmitry Medvedev, a lawyer himself, has called "legal nihilism" the main obstacle to growth in Russia and has condemned raiding as "shameful." But neither he nor his government has responded to Hermitage's pleas for help or the protests of the Moscow bar association and international legal groups.

In a statement last month, the Interior Ministry touted its success in solving the tax theft. But the money has not been recovered, nor have any officials been arrested. Prosecutors have charged only a convicted killer named on documents as Hermitage's new owner.

Courts in Cohorts

For years, Hermitage targeted corruption in the state enterprises in which it invested. In 2005, it upset someone in power, and its British chief, William Browder, was barred from entering Russia. As a precaution, the fund sold its Russian assets and moved most employees overseas.

Then, in June 2007, police raided its Moscow offices and those of its Moscow-based law firm, Firestone Duncan. Brandishing warrants for material about a Hermitage affiliate suspected of tax evasion, they confiscated much more. When one lawyer objected, police beat him so badly that he was hospitalized for two weeks, said Jamison Firestone, the American head of the law firm.

Three days later, Hermitage hired the prominent Moscow defense lawyer Eduard Khayretdinov.

A taciturn former cop and judge, Khayretdinov, 50, was among a pioneering generation who joined the bar in the early 1990s as lawyers first began to operate independently of the state. It was a hopeful move, he recalled, made as then-President Boris Yeltsin's reformers were trying to build an impartial judiciary.

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