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Knights of the Vine RUSSIA

The Way It Is

Russia’s Public Relations Dilemma
Art Franczek

Art Franczek,
President of The American Institute of Business and Economics

s I walk around Moscow I am constantly reminded of Russia’s transformation in the last 20 years. I see a Starbucks or other coffeehouse on almost every corner. Every Metro has a McDonalds that is crowded with customers. In fact McDonald’s profits increased 42% in 2010. Wendy’s fast food outlets have come to Moscow and it plans to open 190 restaurants in Russia. Foreign industrial companies are also thriving in the Russian market. Coca-Cola in Russia is one of the company’s most profitable in the world. Pepsi-Cola has recently expanded its operations by acquiring Wimm Bill Dann Juice Company. Aeroflot has recently ordered eight planes from Boeing. John Deere has greatly expanded its operations to take advantage of Russia’s developing agricultural sector. There any many more international companies who are quite successful in Russia’s developing market.

Russia’s IPO market is at a record high with companies like Mechel preparing to list on the London Stock Exchange. Moscow is preparing to become a leading financial centre while it develops Skolkovo as Russia’s Silicon Valley. President Medvedev has said Russia must diversify its economy from its dependence on oil that generates 50% of budget revenues. Medvedev has also stated that the domination of state-controlled companies has led to low entrepreneurial and investment activity which was threatening the loss of the Russian economy’s competiveness. Medvedev’s plan for modernization and innovation is designed to reverse the trend toward centralization. Recently, it was announced that the plan for $50 billion of privatization would allow giving up majority interest in companies such as Rosneft. Russia is also hosting such international events as the 2014 Winter Olympics and the 2018 World Cup. On the surface all of this provides Russia with material for a public relations campaign to attract foreign investment and tourists.

A recent article in Foreign Affairs cogently describes factions that exist in the Russian government. The statist camp believes that modernization should come from a top-down approach with the state as a primary agent. This camp believes that democracy is less important than stability and also believes that investors are better served by an authoritarian regime than by democratic chaos. Modernization should proceed slowly. As Putin has said, “We don’t need any kinds of leaps.” In Russia, the potential victims of modernization are many: state bureaucracy, inefficient enterprises and the many that thrive on them, the Russian economy’s numerous monopolies, and the sizeable part of Russian society that has an instinctive resistance to innovation. This is not to mention the members of the political elite, who have a personal interest in maintaining the status quo.

The other camp favours deep modernization and believes that the state bureaucracy is not capable of guiding and directing resources toward innovation, nor have Russian capital markets shown much interest in innovative technologies. This camp argues that a critical mass of foreign investors meanwhile will not come to Russia until they feel reasonably confident and protected by the law. The Andropov model of top-down bureaucratic reform may have had its uses combating hooliganism in the streets, but will not promote the kind of creative thinking needed in a modern information society. So far Skolkovo has been primarily a state project.

 Russia has a major problem with corruption. It ranks 154th out of 178 countries on the Transparency International Corruption index. The country also has a well-deserved reputation for a stifling bureaucracy. In a World Bank survey of the process required, in 182 countries, to obtain construction permits Russia was found to be the second most difficult in the world. Stories of corruption are legendary and include such companies as Siemens, Hewlett Packard and Daimler. Illegal payments are over $400 billion. This is much more than a Public Relations issue because it costs Russia billions of dollars in lost foreign direct investments (FDI).

During the Georgia conflict in 2008 the Western media portrayed Russia as the aggressor and compared this conflict to Russia’s invasion of Afghanistan or Czechoslovakia. Georgia dominated the PR front. Within hours of the Russian intervention, the Georgian government began sending hourly e-mail updates to foreign journalists. The English-speaking Columbia-educated Georgian President, Mikhail Saakashvili, appeared live on CNN and the BBC. It seemed that 80% of the Western media coverage was pro-Georgian. Old Cold Warriors like John McCain (whose top advisor was a lobbyist for the Georgian government) suggested that Russia be expelled from the G8. Ironically, independent studies reinforced Russia’s position that Georgia started the conflict. In this case Russia failed in the PR war and this cost it significant damage to its international image and also a loss of FDI.

Michail Khodorkovsky who was convicted of tax evasion in 2003 is treated in the Western press as a martyr comparable to Andrei Sakharov. As Matt Taibbi describes in a recent article Khodororkovsky acquired the Yukos oil company for a fraction of its value in a rigged auction. His tax evasion charges were well founded under Russian law and the case against him was based on fraudulent tax exemptions from the Republic of Mordovia. Certainly, the prosecution of Khodorokovsky was politically explosive but to a large extent was brought on by his own outspokenness and obstinacy.

In November of 2009 Sergei Magnitsky a tax lawyer for William Browder’s Hermitage Capital died in Moscow’s Matrosskaya Tishina prison. Sergei had been investigating alleged accusations against officials in the Interior Ministry for fraudulently receiving tax refunds using documents stolen from Hermitage. He had been in jail for 11 months on charges that he was involved in tax fraud. During that time he was pressed by the guards to implicate Browder in the crime. When he refused he was punished, before he died the prison doctors claimed he was psychotic and he was denied medical assistance for his stomach condition.

The Interior Ministry denied an independent autopsy of Magnitsky’s body and its spokesperson denied any wrong doing by the Ministry. A few months later the Ministry accused Maginitsky of being the master-mind of a $230 tax fraud. The official investigation exonerated Oleg Silchenko the Ministry’s chief investigator of any wrong doing.

Recently, a report from the Kremlin’s own human rights commission was presented to President Medvedev. It concluded that Magnitsky’s death was the result of severe beatings by prison guards and the withholding of treatment by prison doctors. The report also blamed top officials for covering up the whole affair. The report also provided evidence that Magnitsky’s original arrest was unlawful. Medvedev has backed this report and ordered a criminal investigation of prison officials. Human Rights activists have hailed the probe as a possible sign of progress, noting that it was the first time government officials blamed anyone for Magnitsky’s death.

Holland , Canada and the EU have proposed visa bans for Russian officials involved in Magnitsky’s death. The United States Senate currently is debating a bill that not only bans these officials from receiving visas but would also freeze their US assets. The US State Department has tried to pre-empt this legislation by submitting its own black list of Russian officials. The US Senate is also considering linking the Magnitsky to repeal of Jackson Vanik, a Cold War relic that denies Russia Most Favored Nation status for trade with the US. Russia has responded by suggesting that legislation might be enacted against Americans adjudged to have harmed Russian citizens. The US sanctimoniously lectures the rest of the world on the rule of law and democracy. This is ironic when you consider the recent corruption in the US financial system and its corrupt presidential election of 2000. It seems that corruption in the US is masked by legal nuance.

The residue of the Cold War strongly exists in both Russia and the United States. Influential Russophobes in the US assail Obama’s reset policy as a ”capitulation”, a “dangerous bargain” and a policy of “see no evil”. It has even been compared to the 1939 Nazi-Soviet Pact. Ariel Cohen warns, “This is not your father’s Russia…. Today’s Russian leadership is younger and tougher…. Russia has become, in the precise sense of the word a fascist state. In Moscow harsh attacks are being directed at President Medvedev. According to the leading ultranationalist Aleksander Dugin, “The West stands behind Medvedev… No one stands behind Medvedev except enemies of Russia.” Medvedev has even been accused of treason by a prominent general.

The Georgia conflict can be largely construed as a lack of good public relations on the Kremlin’s behalf as independent reports indicated that the Georgians started the conflict. Russia had a legitimate tax fraud case against Khodorkovsky at least in the 2003 case. The charges in Khodorkovsky’s recent conviction appear to be exaggerated and politically motivated. It might be in the Kremlin’s interest to give him a pardon. Clearly the biggest public relations issue for the Kremlin is the Magnitsky case. This case represents much more than PR and is seriously impeding investor confidence in Russia. The tit for tat responses on visas between the US and Russia represent a bad dynamic that could impede the interests of both the US and Russia and lead to a New Cold War. A wiser way of dealing with this situation might be to follow the advice of Mikhail Fedotov the head of the Presidential Council for Human Rights who suggests that Russia compile its own Magnitsky list that can be enforced at the Russian rather than the US border and which could threaten those involved in the Magnitsky case with criminal prosecution.

In the final analysis, Russia must improve the substance of its legal and investment climate to improve its public relations. As Aleksei Biletsky of the Public Anti-Corruption Initiative movement has said Russia’s accession to WTO will hopefully deliver a blow at corrupt officials of law enforcement agencies and provide investors with legal protection.

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