Business Raiding and Asset Grabbing in Russia

Floor Speech

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Mr. SMITH of New Jersey. Mr. Speaker, I'd like to bring to my colleagues' attention an illuminating report on corruption and corporate dispossession in Russia. Written by Dr. Louise Shelley and Judy Deane of George Mason University's Terrorism, Transnational Crime and Corruption Center, ``Reiderstvo: Implications for Russia and the West,'' concisely lays out the systematic tactics, fraud and corruption of business raiding and asset grabbing in Russia.

The most well-known case is that of the Yukos Oil Company, which not only saw its Russian founder Mikhail Khodorovsky imprisoned for ten years in a Siberian gulag while his $22 billion company was dismantled under the guise of $22 billion in unpaid tax claims. A corporate entity, Yukos shares were confiscated and assets sold off at rigged auctions, without any regard for even its international--including U.S.--shareholders. As some of you may recall, I held a hearing last fall on the Russian government's violations of the rule of law, which examined the challenges these investors faced in enforcing the Permanent Court of Arbitration's $50 billion finding of unlawful appropriation against the Russian government. It turns out Yukos is only the tip of the iceberg.

The reiderstvo report neatly encapsulates a Russian phenomenon that both contributes to, and is accelerating as a result of, Russia's economic decline. According to the authors, Russian corporate raiding practices, facilitated and even directed by the Kremlin, are ``contributing to Russia's current unfriendly business climate and to declining investor confidence in the country.'' Russia's uniquely destructive practice of corporate raiding not only has dire ramifications for the Russian people and any remaining foreign investors, it has long term implications for Russian stability.

Reiderstvo (literally ``raiding''), an ominous and violent practice in Russia since the early 1990s, is vastly different from U.S. corporate ``raiding''--that is, hostile takeovers by outside shareholders. Reiderstvo represents both private acquisition of business assets and public expropriation through a series of illegal bullying tactics that allow raiders to sell off a company's assets, often to a state controlled entity, and rapidly launder the proceeds, making massive profits and destroying businesses in the process.

This particular report is noteworthy for its documentation of two aspects of reiderstvo. First, reiderstvo and asset grabbing is far more widespread and imbedded in Russian business culture than most people outside of Russia have thought. Astonishingly, Russian President Putin himself said that the number of current arrests for economic crimes suggests that tens of thousands of companies of all sizes in Russia continue to be harassed, intimidated, robbed, and outright stolen.

Second, the study analyzes major cases of corporate raiding, and identifies the most common raiding tactics. These tactics include malicious prosecutions (false charges), malicious tax inspections, regulatory harassment, misuse of shares and shareholder protections, misuse of the banking system, abuse of international law enforcement, ``Dark PR'' campaigns, and even violence. In any given raid against a business, it is likely that several of these tactics will be used simultaneously. From their case studies the authors extract four stages of the reiderstvo process: preparation, negotiation, execution, and legalization.

In the case of OGAT, Ltd., one of the largest and most successful transportation companies in Russia, raiders used fraudulent documents to sell off company assets. In the case of TogliattiAzot, Russia's largest ammonia company, the company underwent 120 tax inspections in 18 months and was assessed $150 million in alleged unpaid taxes in order to try to force the company into bankruptcy, making it easier and cheaper to acquire. Yevroset, a highly successful mobile phone operator, was the victim of three raids in which $1.4 million worth of cell phone handsets were taken, tax charges levied against one of its suppliers, and searches made of the homes of top managers, all to force owners to sell the company to a raider.

It is easy to draw parallels from these cases to the more famous cases of Hermitage Capital and the Yukos Oil Company and demonstrate the state's own growing role in corporate raiding.

Mr. Speaker, as Chairman of the Human Rights subcommittee and of the Helsinki Commission, I have focused much of my congressional work on fighting for human rights--for all human rights, throughout the world. And countless times I have seen the connection between human rights violations and governments that engage such grotesque forms of corruption. One connection, of course, is that rampantly corrupt governments commit human rights violations in order to cover up their crimes, or those of the mafias that dominate them. Such was the famous case of the heroic Sergei Magnitsky. The kind of government corruption we see in Russia today, manifesting itself in the ruthlessness of reiderstvo, is that which imperils the human rights of the Russian people.

Mr. Speaker, this report is a much needed and critical assessment of Russian corruption at the highest levels of authority and has important implications for U.S. foreign policy in the dimensions of human rights and rule of law and commercial relations.

The report may be found at www.reiderstvo.org. I strongly urge my colleagues to read it.

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