A cautionary tale

Some may look into his eyes and see the soul of democrat, and others may see something far more sinister. Regardless of their general impression of President Vladimir Putin as an individual, each U.S. presidential candidate needs to make a careful reckoning of the enormous foreign policy challenge posed by Russia. Each must come forward with innovative proposals to constructively engage the former Cold War adversary on everything from terrorism and nuclear proliferation to basic adherence to the rule of law and human rights.

So far, this wide field of candidates remarkably has been disappointing and unspecific on Russian policy with advisors cautioning to speak only about foreign policy issues like Iraq and Iran.

But while we’re asleep at the wheel, Russia quietly is becoming more volatile, especially in terms of the global security and economic stability. The Kremlin has embarked on an aggressive state-sponsored “velvet reprivatization” of key assets, creating an unprecedented and strong government corporation able to use business as a political lever. Now with the upcoming transition of Mr. Putin to the role of prime minister while a close ally is appointed to the presidency, the trend is not likely to abate.

Indeed, Mr. Putin’s use of Kremlin Inc. largely is based upon a lawless methodology of theft. The first and most important expropriation was the illegal takeover of the successful oil giant Yukos, including the false imprisonment of the company’s former CEO, Mikhail Khodorkovsky, back in 2004. Following the muted reaction in the West to this maneuver, Mr. Putin and his corporate accomplices around the world were emboldened to continue the attack on free enterprise and society under the cover of a new legalism a la carte.

Such continued broadsides against foreign and domestically owned business operations can be seen in the strong-armed bureaucratic harassment of Royal Dutch Shell and BP to give up majority stakes in key production facilities. Now pressures are mounting on Exxon-Mobil to drop plans to build a gas pipeline to China for hefty sales of natural gas that state-owned Gazprom wants for itself.

With Time magazine naming Mr. Putin as its “Person of the Year” there can be no excuse for the U.S. presidential contenders to pretend they are unaware of this potential major crisis. America’s foreign policy in the next administration must grapple with the Russian bear’s methodical and undemocratic practices at the expense not just of companies but also neighboring states and the European Union.

The crisis extends far beyond those conducting business in Russia and includes national security issues for the international community related both to energy independence and political stability in such hot spots as the Middle East.

From a U.S. corporate social responsibility perspective, the candidates need to take a stand and challenge our own values in doing business with a repressive system. Though there are many success stories involving foreign investors in Russia such as McDonald’s, Ikea and PepsiCo, when business makes the mistake of competing with state-owned (or state-controlled) firms, then the pattern of selective legalism, manipulation of tax and regulatory agencies and outright government bullying clearly can be seen.

The resulting outcomes have been swept under the rug by too many Western and American CEOs and politicians too eager to court Mr. Putin’s Kremlin cronies. Some argue that the Yukos affair was just a “one-off” phenomenon, and that Russia is back on track as a stable and reliable place to invest. However, when rules are bent and broken, Mr. Putin’s Kremlin cabal is only encouraged to pursue its own political, personal and economic interests.

Look at the growing list:

• Royal Dutch Shell and BP were threatened by regulatory authorities without grounds and ended up surrendering majority stakes.

• Motorola endured a government-sanctioned impoundment of an entire planeload of mobile phones that that were declared to be “harmful” to the Russian people.

• Starbucks recently has had to deal with local abuses of patent and trademark laws that, had they been challenged, would have required costly legal fees in a corrupt judicial system.

• Peter Hambro Mining lost nearly $200 million dollars in market value overnight as a result of government threats to revoke its license.

• A Barrick Gold subsidiary is facing similar pressures to relent to government-sponsored transfer as a result of tough inspections of its mining license, which the environmental ministry has recommended revoking.

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