Putin's Russia: Exile Businessmen

Sergey Konkov / AFP-Getty Images

Yevgeny Chichvarkin once took London by storm. Bounding onto the stage at the Russian Economic Forum four years ago in red sneakers, graffiti-sprayed jeans, and a top that proclaimed that he was MADE IN MOSCOW, the 34-year-old Russian businessman told the elite gathering how he'd grown his Evroset mobile-phone company into a billion-dollar empire in just five years, and that a "new generation of young businesspeople" was "ready to integrate Russia into the world economy."

Now Chichvarkin is back in London, no longer a poster boy for Russian investment but instead a fugitive. Two of his business partners are in jail, his company has been sold off after a series of raids by Russian police, and his mother died under mysterious circumstances in April. Chichvarkin himself is wanted on charges of kidnapping and extortion, which he insists were cooked up by a gang of "werewolves in uniform"—bureaucrats and police who use the law to shake down and steal businesses.

Chichvarkin has joined Russia's Generation Exile, a tide of businessmen, lawyers, accountants, and bankers who have fled their country after being robbed and threatened by Russia's corrupt law-enforcement officials. Transparency International, an NGO, estimates that fully one third of Russian businesses have been targeted in attempted corporate raids by police. An anti-raider hotline set up by the Moscow city hall reported a 10-fold jump in complaints, from 200 to more than 2,000, over the last year. And while it is hard to calculate exactly how many of the estimated 300,000 Russians living in London are the victims or beneficiaries of police-backed shakedowns, the number of business exiles afraid to return to their homeland for fear of arrest is certainly in the thousands. According to a survey last year by the Moscow-based Levada Center, many more may exit voluntarily: 13 percent of 1,600 respondents said they wanted to leave Russia, the same percentage as in 1992, a year after the collapse of the Soviet Union.

The economic impact of the brain drain—and the bureaucratic racketeering that drives it—is startling. In the decade since Vladimir Putin first came to power, Russia fell from 52nd to 63rd on the World Economic Forum's Global Competitiveness Index, despite massive oil-funded state spending and an ambitious--sounding modernization program. On property rights, Russia came 119th, right down there with Malawi and Nicaragua; on judicial independence, 116th; on reliability of police services, 112th; and on professional management, 77th. Despite steady macroeconomic growth driven by rising oil and gas prices, there are few signs that it is developing beyond oil. "Only free, independent, and enterprising people are capable of being the driving forces behind modernization, but those are exactly the people whom the state is persecuting," says Vladimir Ryzhkov, a leader of a prominent opposition party, Another Russia. "How can Russia attract Western investors when the country's most successful businessmen are forced to flee the country for fear of arrest?"

At the heart of the problem is an unholy alliance between Russian law enforcement and the criminal world—a combination that over the last decade has created "an alloy of almost unbreakable force," says lawyer Vladimir Pastukhov. Instead of enforcing the law, a large chunk of Russia's police, secret police, and government bureaucrats spend their energies on looking out for vulnerable businesses that can be targeted for a corporate raid, Russian style. Unlike the Wall Street version, a Russian hostile takeover almost invariably involves a violent raid by armed and masked police using a warrant issued on flimsy charges, followed by the confiscation of company documents, computers, and archives with a view to stealing the business and intimidating its lawful owners. The pattern was established in 2003 when the Kremlin dismembered Russia's biggest oil company, Yukos, and jailed its head, Mikhail Khodorkovsky, and a slew of executives and lawyers based on dubious evidence. "Russian bureaucrats figured, if Putin can do it, so can we," says a lawyer connected to Yukos who is contractually forbidden from speaking to the press.

Pastokhov saw the fallout firsthand in 2007, after police raided one of his clients, Hermitage Capital Management, quickly reregistered its ownership to a convicted criminal, and used the companies to make a fraudulent $230 million tax rebate. When Hermitage complained to the authorities, the police retaliated with arrest warrants. Pastukhov found himself charged with malpractice for the Kafkaesque reason that he had filed complaints in the name of Hermitage and not the companies' new, illegitimate owners. "I am a professor of law and an adviser to the chairman of the Constitutional Court, but nothing can protect you when you come into conflict with what passes for authority these days in Russia—the criminalized law-enforcement agencies," says Pastukhov, who fled along with Hermitage's managers and lawyers to London. Few businessmen dare appeal to Russian courts, which rarely grant bail before trial and have an overall conviction rate of 99.5 percent.

London is a favorite refuge because British courts have a track record of rejecting Russian extradition requests and offering protection to political--commercial exiles such as media tycoon Boris Berezovsky, who fell afoul of Vladimir Putin and fled to Britain in 2001. Britain is also home to bona fide Russian criminals and purely political exiles, but most are business exiles like Chichvarkin.

Often, Russian raids have a political twist. Having a boss linked to opposition politics is especially dangerous. Chichvarkin was taken down after he joined Right Cause, a Russian liberal--democratic political party, in late 2008. Three leading business supporters of opposition leader Boris Nemtsov have been forced to flee to Israel, London, and the U.S. "Under Putin, big business has been tortured by investigations, threats to take over their businesses, by attacks by corporate raiders," says Nemtsov. "There is only one option left for them—to escape Russia and wait for regime change." Even the criminals don't feel safe. "We are seeing the outflow of the most active part of our society, both the best and the worst, the raiders and the raided," says Pastukhov. "It is not safe to have property in Russia," adds lawyer Alexander Dubrovinskiy, whose client Vladimir Nekrasov lost his Arbat Prestizh chain of cosmetics retailers and was jailed after refusing to sell the company in 2008 to corrupt police for a fraction of its value. That's profoundly bad news for Russia, of course. Hermitage banker Ivan Cherkasov says that the talented young entrepreneurs who dominated the Russian business scene in the 1990s have been supplanted by bureaucrats who are "consumers of other people's wealth." He predicts that "soon real businessmen will be as rare as tigers in Siberia." Even Chichvarkin, who once carpeted the floor of his Moscow office in euro notes to demonstrate his support for the Russian ruble, has lost his patriotic optimism. "I only see a tiny part of this iceberg of corruption, but it has become a significant obstacle to Russia's development.

Russian President Dmitry Medvedev agrees—in theory at least. Last year after reading a report on corporate raiding, he angrily warned Russia's bureaucrats to "stop terrorizing business" and blasted Russia's culture of "legal nihilism." He also recently legislated an amnesty for economic crimes. But his bold speeches against corruption are largely ignored, in a system still dominated by Prime Minister Vladimir Putin, who preceded Medvedev as president and continues to call the shots in Russia. With so many exiles in London, New York, and Tel Aviv, Russia joins the ranks of countries like Iran, Cuba, Syria, and North Korea, whose best talent prefers to make a future outside their native land. Generation Exile holds a stark mirror to the reality of Russia—which for all Putin's talk of greatness has little chance of success if it's losing its most talented people.

With Anna Nemtsova in Moscow