United Russia Proposes a Bill to Seize Property Belonging to Residents of Countries That Introduced Sanctions Against Russia

On October 15, the online edition of „Profile“ magazine published an interview with United Russia’s State Duma representative Evgeniy Fedorov, author of the bill proposing to nationalize foreign assets in Russia in response to the international sanctions targeting its state officials and businessmen. Once nationalized, the assets would be sold to compensate for any damage that the Russian state officials and businessmen might have suffered. Fedorov was at odds to explain how exactly would the government choose the foreign assets to be nationalized: he merely stated that the bill represents a „mirror reflection“ of the western sanctions against Russia and its citizens. Fedorov sees the western sanctions as a violation of the sanctity of private property: „The United States of America and its allies have practically declared that the people in Russia are of a lower class and have no right to private property. Our bill responds accordingly: we are just like you, and if you think that the people in Russia have no right to private property, that means your citizens don’t have this right, either.“

Fedorov called the right to private property „sacred“, to which the interviewer asked how could someone with such a position put forward a bill that proposes to seize private assets. However, Fedorov saw no problem here and continued to assert that the bill would actually strengthen the institution of private property, as it would make foreign governments think twice before freezing Russian assets abroad. Fedorov seems to propose to randomly choose which foreign assets in Russia will be nationalized in response to freezing of Russian assets in the West. When asked to describe what happens in a hypothetical case when U.S. authorities freeze the property of a certain Russian citizen, he said that a Russian court will decide which U.S. assets in Russia will be seized. “Which of the U.S. citizens will end up being lucky or unlucky – this is for the court to decide,” Fedorov stated. Consequently, while the freezing of Russian assets in the West represent a consequence of their owner’s support for the Putin’s regime, the seizure of foreign assets in Russia might end up resembling a sort of a lottery. The interviewer was puzzled by this explanation, but Fedorov remained unfazed: he believes that a Russian court will be able to identify a foreign investor in Russia most deserving to have its assets seized in return for western sanctions. Economic climate is of no concern to Fedorov, either. As a matter of fact, he believes that his bill provides an incentive for foreign investors to invest in third countries through Russia, thus becoming eligible for compensation from the pool of foreign assets in Russia should their investments in those countries become jeopardized.

In addition, Fedorov thinks that foreign investments are not that important for the Russian economy. “As a matter of fact,” he says, “foreign investments come from our money, only transferred through the dollar and the euro”. Instead, Fedorov says, the Russian Central Bank should look to its U.S. counterpart and pump more rubles into the domestic economy, which would lead to a 15-20 percent growth. Fedorov is right when he says that Russia would benefit from an all-out mutual seizure of assets, as there are more western investments in Russia than Russian assets in the West. He estimates the “Anglo-Saxon” FDI stock in Russia at USD 700 billion. The interviewer doubted if such a scenario could be called beneficial for Russia, as it will lead to complete isolation and loss of all economic ties. Fedorov’s response is noteworthy: “With whom? With 10 percent of the world, while the remaining 90 percent will applaud Russia and follow its example. It is them [America and England] that will become isolated.“

Evgeniy Fedorov was elected to the State Duma four times (1993-1996 and since 2003) and is the President of the Parliamentary Committee for Economic Policies and Entrepreneurship. He is known for numerous allegations against the Russian artists, businessmen and the media that he considers to be a part of a “fifth column”. Not surprisingly, he isn’t too interested in the difference between freezing and seizing, just as he doesn’t recognize that the sanctions are a consequence of Russia’s military involvement in Crimea and Eastern Ukraine. Apparently, he truly believes that the bill proposing arbitrary seizure of U.S. investors’ assets in Russia will at the same time serve as an incentive for them to invest in third countries through Russia.

However, Fedorov is right about one thing, and that is the Russian Central Bank policy: in 2014, it increased its reference rates by approximately 50 percent, hoping to stem inflation and prevent the capital outflow. Experts from the Center for Macroeconomic Analysis and Short-term Forecasting found that increasing the Central Bank’s base rate did neither and only acted as a further drag on the economy.

Russian economist Sergei Guriev: I just want to avoid risking loss of freedom

In his recent interview to radio-station Echo Moskvy, renowned Russian economist Sergei Guriev, known as the Rector of the Moscow’s New Economic School (www.nes.ru), explained his reasons for leaving the country after the Russian Investigative Committee launched an investigation that might lead to a third indictment of a Russian businessman Mikhail Khodorkovsky. Guriev was a member of an independent expert group tasked by the former President Dmitry Medvedev to examine the last case against Mikhail Khodorkovsky, who was convicted for embezzlement and money laundering that took place while he served as the CEO of a Russian oil giant Yukos. Since the independent group of experts found in 2011 that the indictment and the sentence in the second trial of Mikhail Khodorkovsky were groundless, Russian authorities searched the premises of three out of six Russian members of the group (Guriev became the fourth one). After the Russian Investigative Committee questioned Guriev in February and April, the court issued a search warrant and seized his personal e-mail correspondence on suspicion that the members of the expert group received financing from Yukos’ ex-officials and were thus motivated to issue an opinion supporting Khodorkovsky’s innocence.

In his interview with Echo Moskvy, Guriev simply stated that he wants to avoid any risk of losing freedom and being separated from the family (his family lives in France). He added that he has no issues with the current Russian President Vladimir Putin or the former President and current Prime Minister Medvedev, but that he prefers to live in a country where his personal safety is not threatened. While he is bound by the order of non-disclosure, Guriev explained that he felt disturbed by the attitude of the Russian Investigative Committee, which seemed to indicate that Gurivev might become a suspect. Guriev said that one of the investigators mockingly remarked that he fared much better than Andrei Sakharov – the “father” of the Russian hydrogen bomb and a Nobel peace prize laureate who was exiled from Moscow in 1980 for his dissident views and advocacy for human rights. In addition, during his last departure from Russia, Guriev realized that his movements were under special scrutiny. As the investigators increased the pressure, Guriev decided it would be safer for him to stay out of the country. Asked about his plans to eventually return to Russia, Guriev stated that he doesn’t see how his personal freedom could be guaranteed under current conditions. He finds it difficult to believe that the case against Khodorkovsky will be dismissed (Guriev didn’t specify whether he was referring to the possibility of reversal and remand of the second indictment or the discontinuation of current investigation, apparently undertaken in preparation for a third case against Khodorkovsky) and that he would be released, which would eliminate the risk of possible charges against Guriev. Although Guriev asked not to be included in the list of candidates for the Supervisory Board of Sberbank, where he served since 2009, he was re-elected to the position immediately after his departure from the country, having gathered the largest number of votes among all other candidates; interestingly enough, the Russian Central Bank, Sberbank’s largest shareholder, voted for Guriev to be included in Sberbank’s Supervisory Board.

While some other members of the expert committee that issued a dissenting opinion regarding the Yukos case were exposed to more pressure than Guriev, he sees no reason for panic, as this is a peculiar case and other economists usually don’t experience such inconveniences. One of the reasons he quit his position at the New Economic School is that he doesn’t want to expose the school or his former colleagues to any risks stemming from the investigation.

Latvian bank awarded a temporary injunction against Russian debtor

Business daily Vedomosti (http://www.vedomosti.ru/companies/news/10131851/arest_polatvijski#ixzz2NsXXvP78) reported that the Commercial Court of the Yamal-Nenetsk region ordered a preliminary injunction against a Russian company Severneft, based on a lawsuit filed by a Latvian bank Reverta after Severneft’s decision to liquidate. The Latvian bank is attempting to collect a loan of USD 75 million approved to another Russian company, Severorgsintez, for which Severneft acted as a guarantor. The latter company offered one of its oil and gas extraction licenses as collateral, but in 2011 it transferred the license to one of its daughter companies, which it subsequently sold to a Russian company Eurohim. While Severneft disputes the existence of such a guarantee, Eurohim already received the preliminary injunction order.

Eurohim believes that the court’s decision is based on misunderstanding and stated that it merely prevents the disposal of the aforementioned license, which is a measure that will not affect company’s operations in any way. Eurohim also has the right to annul the deal and claim USD 403 million paid for Severneft’s daughter company plus interest should it turn out that Severneft withheld essential information – such as third parties having rights over its daughter company’s assets.

At the same time, Severneft is confident that the sale of its daughter company to Eurohim was legal and is preparing its own suit, disputing Reverta’s right to file for temporary injunction as the bank was not formally registered as a creditor at the time. Reverta did file for its inclusion in the list of creditors on February 1, but Severneft disputed its filing and the inclusion is postponed until the court hears the case on March 25. A representative of Kinson International Corp., another large Severneft’s creditor with an exposure of USD 160 million, refused to comment on the case.

One of the Russian lawyers commented that the Russian bankruptcy law allows the deals concluded by a party undergoing bankruptcy to be disputed. Russian commercial courts tend to side with the plaintiffs in such instances. The central question of the dispute between Reverta and Severneft is whether the latter formalized its guarantee – it isn’t clear that the company’s manager at that time (Zhan Hudoinatov, coincidentially a brother of Rosneft’s Vice-President Eduard Hudoinatov) ever signed any such document. Should the existence and the validity of the guarantee be proven, Severneft’s creditors will be allowed to compensate their claims in accordance with their seniority. Reverta also filed a lawsuit against Hudoinatov, accusing Severneft’s former manager of fraud and deliberate bankruptcy.

Does the Yukos case precedent jeopardize freedom of businesses to form prices?

Today’s business daily Vedomosti.ru comments on the dictum accompanying the Moscow municipal court’s December dismissal of the petition by Mikhail Khodorokovsky and Platon Lebedev to overturn the first-instance ruling on the second “Yukos” case. Mikhail Khodorkovsky (former Chairman of the Yukos oil company) and Platon Lebedev (former CEO of the Menatep Group, a holding company that had a controlling interest in Yukos) were charged of defrauding Yukos’ daughter companies involved in oil extraction. Russian State Attorney claimed that the price at which Yukos purchased oil from its daughter companies was below the prevailing market price. The defendants argued that the daughter companies were not defrauded, as the price at which Yukos purchased their oil was higher than the cost of extraction. In 2010, the Khamovniki municipal court in Moscow found Khodorkovsky and Lebedev guilty of stealing 200 million tons of oil and money laundering and sentenced them to 14 years in prison.

Commentators are concerned with the Moscow municipal court’s interpretation of the term “defrauding” (to be more precise, the term in question is “acquiring without compensation”), as it found that any transaction that doesn’t involve “adequate” compensation (market price) should be considered as theft. The article goes on to quote an excerpt from the dictum: “The analysis of the mechanism developed by the defendants to determine prices for oil extracted by Samaraneftegaz Inc., Yuganskneftegaz Inc., Tomskneft-VNK Inc. (Yukos’ daughter companies)… demonstrates that, as a rule, the prices were lower than the real market prices… and that the sums paid (by Yukos)… barely compensated the costs of extraction.”

Legal experts stated that the Supreme Court of the Soviet Union considered unequal exchange whereby the value of one exchanged item is lower than the other as theft; however, such interpretation in a free market environment could threaten any and all commercial activity in the country. Some experts see this as a new tendency, as the recent case against the state-owned defense company “Oboronservis” is based on the presumption that the management sold company’s assets below the market price. Former defense attorney for Platon Lebedev criticized the Moscow municipal court for disregarding the Russian Constitutional Court’s interpretation, stating that the price in commercial transactions is determined by consenting parties alone. One party could be accused of defrauding another only if it employed deliberate deceit or misrepresentation of essential facts. One of the commentators is concerned that the current interpretation of the Moscow municipal court could introduce the term “adequate price” as a measure for compensation and allow the law enforcement institutions to decide what it should be.