Russia’s Medvedev Woos Business

He is young. He is sharp. He is energetic. When Dmitry Medvedev, the 42-year-old lawyer whom Vladimir Putin has anointed as his successor, took the stage at the Krasnodar Economic Forum in southern Russia earlier this month, he exuded optimism. Moments before, Medvedev had been fiddling with his new Apple iPhone—not officially available in Russia, but already a favorite toy of the Moscow elite—apparently to check some stats. "I checked a few figures online," he told his sycophantic audience, gathered officially to discuss investment in southern Russia. "The picture looks very positive for our country. The Russian statistics agency shows that GDP growth in 2007 topped 8.1 percent." The gathered businessmen, governors and bureaucrats applauded happily.

There's no doubt that Medvedev will win the March 2 elections; his approval rating stands at 81 percent, higher than that of Putin himself. Nevertheless, this meeting—Medvedev's first with Russian business leaders since Putin announced his backing for Medvedev last December—was an important step in his path to power. The future president promised everything big business expected: a green light and support for Russians buying businesses abroad, a reconsideration of taxes and a new look into land reform. There were even some positive noises of reassurance on the expanding nationalization of resources, a matter of concern for many businessmen who fear that the state's new enthusiasm for renationalization may encroach on their business empires. "We realize that state capitalization is a temporary thing," Medvedev said.

Russia's newfound prosperity was a key factor in the apparently painless transfer of power from Putin to Medvedev. And that suits Russia's new oligarchs just fine: the last thing they need is a real competition for power in the Kremlin, with the months of uncertainty and clan warfare that such a race would entail. Indeed, the audience was so happy and comforted by the future president's promises that they forgot the many, very real conflicts between Russian business and the Kremlin—and its junior allies.

A glaring example of the sometimes bitter conflict between business and local government was flaring just outside the conference's doors. Two days before the forum began, a group of armed men attacked the offices of InjGeo, a Krasnodar company specializing in gas and oil field research that turns over $200 million a year and employs more than 1,300 scientists. The men, who showed police IDs, forced their way into the company's headquarters, broke into the company safe and took away the shareholder documents and registration papers. Who was behind the raids? Orest Kasharaba, owner and president of InjGeo, blames "Moscow big business, backed up by politicians and the local administration" for trying to "redistribute and take away our property by simply sending armed men and breaking the locks on our company safes." Kasharaba hoped to meet Medvedev in person at the forum, tell him about the trouble his business faced and ask for protection. "We are scientists, not warriors. The presidential candidate should be informed about the high level of wild crime."

No such luck. Five hundred local businessmen—including InjGeo managers—had prepared to protest outside the forum venue with protest placards addressed to Medvedev. But the local administration called the protest off and flooded the forum area with police. "The future Russian president has a degree in law. I believe he is not aware of the wild violations taking place around a corner from him," says Kasharaba, whose company is one of the biggest taxpayers in the Krasnodar region. "We want Medvedev, a professional lawyer, to hear us and take measures to stop the crime."

Alexander Dorogokuplia, a retired police colonel and the head of InjGeo's security, had a different perspective on the tactics of the raiders, as they prepared to steal his boss's company. "First they take away all the company's papers, then crowds of inspectors come to search for a reason to take the company's shareholders to court," he says. "The city administration, prosecutors, police and courts act as one solid team. Nothing can save you if the local administration or Moscow want to steal your business." Even if Medvedev was carefully sealed off from the protests of Krasnodar's businessmen, he does seem to recognize the problem of Russia's chronic lawlessness and abuse of power by local authorities. "Russia is a country of legal nihilism," said Medvedev last month. "No other European state has a similar level of disregard for the law. This is a phenomenon rooted deep in our hoary past." Alexander Shokhin, the president of the Russian Union of Industrialists and Entrepreneurs and the host of the Krasnodar forum, made an indirect reference to the frustrated protesters outside. "Hostile attacks on business supported by bureaucrats are the most destructive model of corruption," he said. Foreign investment should be encouraged, Shokhin said, because "foreign investors demand corruption-free work." The economy in Russia is a jungle, says Vladimir Trigoda, a spokesman for Krasnodar's governor. "There is corruption, and there are hostile attacks in our region as everywhere in the country," he told NEWSWEEK. "It is natural, because the economy leads its own life."

IKEA, one of Russia's biggest foreign direct investors, has had a very different experience in the Krasnodar market. The furniture and home goods chain made an attempt to build a store in Krasnodar in 2006. According to a senior presidential administration official with knowledge of the negotiations, the local administration demanded "30 to 50 percent of the project cost in kickbacks," pushing the cost of opening a superstore to more than $250 million. "The IKEA management could not comprehend the idea of paying kickbacks," says the official, who did not wish to be named discussing corruption. Instead IKEA found a cheaper alternative just one kilometer away, across the Krasnodar region's border in the neighboring republic of Adygea. The project costs for IKEA were just $150 million; the store will have 4,500 employees. Per Kaufman, CEO of IKEA's Russian and CIS division, coyly says that it was "easier to find an affordable piece of land in Adygea" than in Krasnodar and "most important, we also found more support with Adygea administration than in Krasnodar region."

The culture of theft and kickbacks is so deeply entrenched that almost no municipal project is free of it. In 2003, for instance, Alexander Apolonov, a Krasnodar sculptor, won a contract from the Russian Academy of Art to recreate a statue of the Russian Empress Catherine II that was destroyed by the Soviets in 1920. He estimated the price at 78 million rubles ($3.2 million) for the 12-meter bronze statue; the administration formally signed an order for the statue to be built on Krasnodar's central square. But, says Apolonov, he hadn't factored in kickbacks. Instead the local officials just deducted them themselves. "The city paid me 16 million rubles ($667,000) less than they stipulated in the contract," he complains. "Instead of beating the bribe out of me, the authorities simply kept the money." Apolonov is currently suing the city administration. "The sad irony of my story is that such state fraud is commonplace in Russia," he complains. "I was too naive to believe I could have an honest agreement with authorities. My friends, Moscow sculptors, laugh at me. They say they include kickbacks in their budgets long before they start modeling."

The morning before the forum began, Krasnodar governor Alexander Tkachev took Medvedev to put flowers at the feet of Apolonov's recently erected statue of Catherine II. Apolonov doubts that his lawsuit was mentioned.

Another thing Medvedev didn't see on his visit to Krasnodar was a standing protest of workers at the gates of the ZIP scientific instrument factory on Zipovskaya Street in downtown Krasnodar. STOP CORRUPTION! STOP HOSTILE ATTACKS! LET US GO BACK TO OUR WORK! read the signs posted by more than 2,000 employees of around 100 small and medium-size businesses who have not been able to go back to their workplaces since September 2006. That was when the 81 acres of the former plant's territory were taken over by armed police working for the plant's former managers. Businessmen who signed leases with the new management found themselves physically locked out of their offices. "We are not protected by law. The state has ignored our complaints," says Andrei Perevarin, one of the owners of a business inside the ZIP complex. "It's like a military siege; they built fences to block the only approach to my office."

Igor Vdovin, the chairman of Russia's National Agency for Direct Investments and a member of the Union of Industrialists and Entrepreneurs, admits that there are serious systemic problems. He talks of "a lack of transparency and accurate information" and "the poor quality of local managers."

Russian business will never grow transparent, because the government has no respect for private ownership, says Yevgeny Zhukov, chairman of Opora, a union of owners of small and medium-size businesses. "We heard complaints from members that representatives of the Krasnodar administration have demanded up to one-third stakes in private businesses, and of cases when the city authorities ignored hostile attacks on transparent and honest taxpayers," he says. "We offer our members legal support, though a majority of businessmen feel reluctant to go to court and use legal methods to solve their problems."

Medvedev at least acknowledges that "legal nihilism"—otherwise known as complete contempt for the law—is Russia's chief systemic problem. But it's the entrenched system of vested interests and patronage that leads to the Kremlin itself that are the ultimate root of Russia's corruption. If Medvedev has the political courage to take on those vested interests, he'll have a real chance of reforming Russia.