- The Washington Times - Monday, November 23, 2009

MOSCOW | The Hotel Moscow, an icon of Soviet architecture, is today a monument to another pervasive aspect of Russian reality: crony capitalism.

Seven years ago, the city government decided to demolish and rebuild the towering, thousand-room structure just off Red Square, and awarded the contract to a U.S.-registered developer. But the deal was annulled under murky circumstances, investigators say, in favor of business interests well connected to officialdom and organized crime. Financial irregularities have since delayed the project’s completion.

The fate of the hotel is emblematic of Russia’s troubling business culture. A string of similar high-profile cases in which bureaucrats, police and justice officials are suspected of using their authority to pressure or swindle foreign companies has caused an increasing number of investors to pull out, with potentially dire consequences for a flagging economy.

Foreign investment is down 22.9 percent compared with last year, according to the Noviye Izvestia newspaper. In the second half of 2008 alone, an estimated $7 billion in foreign capital exited Russia.

Russia also was ranked 146th out of 180 countries last week in Transparency International’s annual survey, which measures corruption in government and business - a drop of nearly 30 places since 2002.

The watchdog group estimated that bribery costs Russia $300 billion a year, or about 18 percent of its gross domestic product.

“With the current level and volume of corruption … we cannot move forward,” Transparency International said in a statement last week. “If corruption stays as it is now, it will continue to eat up the resources” that Russia could invest in its future.

President Dmitry Medvedev has acknowledged the problem, lamenting the “legal nihilism” that has rotted the system. In a major speech earlier this month, he said corruption needed to be tackled from many directions but that a solution would take time: “We won’t solve the problem in a single bound, but we have to dig in.”

Russia analysts say implementation of promised reforms has been scant.

Dmitri Simes, president of the Nixon Center, a Washington think tank, and a frequent visitor to Russia, said that “senior government officials do not hide their wealth” and can be seen wearing watches worth tens of thousands and even hundreds of thousands of dollars.

“This systemic corruption makes it very difficult to introduce meaningful political change,” Mr. Simes said at a recent forum on Russia.

In July, Robert Dudley, the chief executive officer of a joint venture between BP PLC and Russian oil company TNK, left the country in the face of harassment. Masked agents raided the company headquarters, BP staff members suddenly were denied visas on dubious grounds, and Mr. Dudley faced threats over what appeared to be bogus labor law violations.

The week after his departure, Russian stocks plummeted 12 percent. JP Morgan lowered its stock rating from “neutral” to “below market,” citing the risk of state interference.

When Ikea, the Swedish retailer, began opening stores across the country, it faced extortionate rates from utility companies. Rather than pay, it rented private generators to power its stores, only to find that the Russian executive in charge of the generators was inflating prices.

Ikea claims it lost nearly $200 million over two years and has suspended all investment in Russia.

One of the most notorious cases involves a criminal lawsuit under way in a Moscow court, in which government employees are accused of defrauding Russian taxpayers of a half-billion dollars and, adding insult to injury, using the legal system to punish those who sought justice.

According to Bill Browder, head of the Hermitage Fund, a hedge fund that was once the biggest foreign investor in Russia, scammers within the government have taken over companies that have paid taxes, then created fake losses to retroactively reclaim taxes as a rebate.

Last week, an attorney for Mr. Browder’s hedge fund, Sergei Magnitsky, died in a Moscow prison hospital. He had been in pretrial detention for nearly a year, during which he claimed that police made offers to release him if he testified against Hermitage.

“He entered prison as a healthy 37-year-old and exited the prison dead,” Mr. Browder told the Associated Press by telephone. He said Mr. Magnitsky had developed pancreatitis in jail and was repeatedly denied medical attention.

Attempts by The Washington Times and the AP to contact authorities for comment on the case were unsuccessful.

Mr. Browder, who now lives in London, has been blacklisted as a “threat to national security.”

His attorney’s death is likely to deepen Western concerns about the risks faced by anyone who challenges the authorities in Russia. Several independent journalists and human rights activists and lawyers have been victims of unsolved slayings in recent years.

Analysts say corruption is so widespread that even those determined to combat graft don’t know where to start or whom to trust.

“Nothing will change with this case,” Yulia Latynina, a prominent investigative journalist who tracks state corruption, said of the Hermitage Fund situation. The government’s “response has been crude and fantastic. It’s quite evident that the people behind this are high up in the system.”

In the case of the Hotel Moscow, politics and crime meet, with a twist.

Investigators say businessmen with close links to the city government were given a majority stake in the reconstruction contract after the contract had been issued to another company, Decorum Corp.

The businessmen adopted a variation of the same name, Dekorum, prior to assuming control, and partnered with the Moscow Development Co. to form a new company called Dekmos. Among the main stakeholders was Ashot Yegiazaryan, a veteran banker and member of parliament suspected of having ties with criminal networks.

One investigator, a former Western intelligence officer who monitors Russian organized crime and asked not to be named because he works in Russia and does not want to compromise his investigations, said that for the past two decades Mr. Yegiazaryan has colluded with Moscow government officials to secure properties illegally and development rights at a fraction of their real value.

In the early 1990s, Mr. Yegiazaryan founded Moscow National Bank, where, according to the Novaya Gazeta newspaper, a leading independent daily, he used high-level official contacts to divert tens ofmillions of dollars in state funds. It soon became one the largest banks in Russia.

Mr. Yegiazaryan departed as the bank’s fortunes soured, and subsequently moved on to co-own Unikombank. Within several years, the bank declared bankruptcy. By then, he had also left that company.

To finance the Hotel Moscow project, associates at Dekorum took out an $87.5 million loan from Deutsche Bank, according to Novaya Gazeta. However, the overextended company was hit with heavy losses during the economic downturn and eventually defaulted.

The city government intervened to cover the loan, on the condition that Dekorum transfer an additional 25.5 percent stake to the city, which has yet to happen.

In mid-June, Mr. Yegiazaryan’s offices were raided by police. Investigators suspect that the loan and failure to repay may have been planned from the outset.

Mr. Yegiazaryan is now keeping a low profile and could not be reached for comment. Dekorum’s offices are closed.

Reports have circulated in the media that he may be stripped of his seat in the Duma, the lower house of parliament, and with it, immunity to prosecution. Moreover, a new anti-mafia law signed earlier this month by Mr. Medvedev aims to punish those who leverage their ties to organized crime.

Mr. Yegiazaryan “was always considered one of the most corrupt,” said Ms. Latynina, the investigative journalist. “For sure, he was never a model businessman.”

The city construction department, meanwhile, has taken control of the Hotel Moscow project.

On a recent afternoon, empty scaffolding ringed the vast exterior. Only an artist’s rendering of the completed building on a billboard affixed to the chain-link security fence suggests its realization.

City authorities say doors will open sometime in 2011, years after the overhaul began. That may be optimistic.