Magnitsky and Toting Up the Deadly Price of Legal Defense

The last several years have proven dangerous for Russian lawyers. Vasily Aleksanyan, lawyer for fallen oligarch Mikhail Khodorkovsky, was jailed for two years before being released last year, stricken with AIDS and cancer. Stanislav Markelov, a lawyer who robustly challenged a Russian military officer who raped a teen-ager, was shot dead on a Moscow street early this year.

Given this playing board, why do Russian lawyers continue to involve themselves in politically charged cases in the country? And in the same vein, why do Western managers employ them rather than sticking with Western lawyers who, in a fix, at least have a foreign passport and thus a chance at protection?

The latest victim of this set of circumstances is Sergei Magnitsky, a lawyer for American investor William Browder, who was buried yesterday in Moscow after dying in a Russian prison. Browder, the head of Hermitage Capital Management and once Russia's most prominent foreign investor, has been persona non grata in the country for three years. Magnitsky, a partner with the firm Firestone Duncan, was helping Browder to build a $230 million tax fraud case.

I asked Browder for the background on how Magnitsky happened to get stuck in Russia when other associates fled, and about the wisdom of employing Russian lawyers in such cases. His emailed response:

We hired four different law firms to help us untangle the complicated fraud that we were victims of in 2007. After much investigative work by the lawyers, it became clear that the main purpose of the theft of our investment companies by interior ministry officers was to use those companies to fraudulently reclaim $230 million of taxes that we paid a year earlier. The fraudulent tax refund requests for $230m were processed in two days. After that, two of the four law firms wrote and filed criminal complaints about the theft of budget money. The interior ministry immediately opened criminal charges against those lawyers. We got those lawyers out of Russia and safely to the UK. Then the Interior Ministry started going after Magnitsky. He wasn't scared because he had never done anything wrong and he believed that the law protected him. Even after much discussion from our side to leave, he insisted on staying. His life was in Russia and he didn't want to be uprooted. He testified in October 2008 against Lieutenant Colonel Artoum Kuznetov for his involvement in the stolen $230 million and a month later, Kuznetzov arrested him and put him in pre-trial detention on spurious tax charges. Over the course of the year, the investigators kept pushing Sergey to sign papers admitting to various crimes and implicating me as his accomplice. He always refused, and they kept moving him to worse and worse conditions to try to break him. He developed medical problems and they refused him treatment unless he confessed to the false crimes. He continued to refuse, but at the same time, in October 2009, Sergey gave even more incriminating testimony on Kuznetzov to the State Investigative committee. A month later he was dead.

Magnitsky apparently somehow felt himself bullet-proof. But he wasn't. The playing board is fairly clear -- there is a mortal risk not just for lawyers, but for executives of companies that end up crossing local or federal authorities, or politically powerful businessmen.

So one poses the question: Regardless of whether Russian lawyers themselves are willing to work on such matters, should foreigners employ them?

Radio Appearance

I was interviewed about murder and death in Russia on My Technology Lawyer, a radio show hosted by Andrew Kreig and Scott Draughton.

Gazprom Comes to the U.S.

For several years, Gazprom has had surpassingly bad PR -- worse even than Exxon, which since the 19th century heyday of John D. Rockefeller has almost proudly disdained the opinion of the world at large. The main problem has been Gazprom's intrusion into the lives of its neighbors -- its routine shutoff of gas to Georgia in the 1990s, for example, and its long reluctance to lease pipeline space for the export of natural gas from land-locked Kazakhstan, both actions that happen to coincide with the desire of Moscow to keep a foot on the throat of these former Soviet republics. But this blog has also noted Gazprom's distinction of being the only energy company on the planet with a record of elevating utility disputes to geopolitical events -- its legendary natural gas rows with Russian neighbor Ukraine have shut off the winter heat to Europe three times since 2006. Though Ukraine has paid its latest Gazprom bill in full, one would be a fool to bet against the prospect of a fourth cutoff this winter, as Jerome a Paris notes over at the European Tribune; indeed, Michael Kahn and Anna Mudeva at Reuters report that central Europe is carrying out actual infrastructure changes in case the yearly dustup recurs. Recently, Gazprom has been attempting to spruce up its image with a $250,000-a-month contract with Ketchum, a skilled PR agency with offices in London and Washington.

But this isn't the news. Instead, it is an ingenious Gazprom strategy of parlaying its market power in Europe -- the company supplies 25% of Europe's natural gas -- into a beachhead in the hyper-competitive U.S. Gazprom's goal: to supply 10% of the U.S. market within a decade.

It's an audacious play, but not outlandish. Take a look at the details in a story I wrote for this week's BusinessWeek. Last month, the company's Houston office opened with the main aim of marketing liquid natural gas from Sakhalin II (recall that Gazprom strong-armed its way into a controlling share of the project in 2007), on Russia's East Coast, in California. This goal hasn't gone off so well as yet, and probably won't soon -- U.S. gas prices are simply too low, and because of a glut of shale gas, prices aren't likely to rise much at least in the medium term. So Gazprom has sold all its LNG so far in Asia.

But a companion component of the strategy has succeeded remarkably. It's in pure gas trading. Though the trading side of the U.S. market is crowded with sophisticated actors stepping on one another to find and sell the fuel, Gazprom managed to corral and sell 350 million cubic feet a day in its first month of operation. That's a fraction of its goal -- the sale of 6 billion cubic feet a day. But it's a respectable start.

How did it do so? Gazprom says it's swapping gas with companies that are long in the U.S. -- meaning they have a comparable surplus of gas here -- and want to sell it in Europe, where Gazprom is long. It's a matter of convenience, Gazprom suggests -- it has excess gas in Europe, other companies have excess gas in the U.S., and the two effectively just swap supplies.

But consider the one deal that Gazprom has disclosed -- with the French utility Electricite de France (EDF). Under the deal, Gazprom will deliver 50 million cubic feet a day of gas to an EDF operation in Britain, and in exchange Gazprom will take possession of the same volume of EDF gas in the U.S. Simple, right?

But there's a wrinkle: EDF, hungry to secure long-term supplies, is also seeking to secure a percentage in Russia's planned South Stream, a natural gas pipeline that would bypass nettlesome Russian neighbors and carry gas directly to European customers. The U.S. and some Europeans have vigorously opposed South Stream, which they say will further cement what they regard as excessive existing Russian clout in Europe. But EDF is among those that not only approve of South Stream, but want a piece of it.

So, as others have done before it with different degrees of success -- including BP and Italy's Eni -- EDF is making nice with Gazprom. As EDF CEO John Rittenhouse told Reuters, "We are looking forward to expanding our relationship with Gazprom."

Real-Estate Bubbles and Optimism on the Caspian

Oil and gas were go-go drivers of the former Soviet economy for years -- until the U.S. subprime catastrophe cut off the flow of easy Western loans. Businesspeople in Russia, Kazakhstan and elsewhere socked away their personal profits and skimmings, while relying on Western loans often coursed through local banks to finance easy loans for investment. To call the resulting real estate bubble huge would be a gross understatement.

According to an index quoted by Symbat Abilkhassimova in the Caspian Business Journal, the price of real estate in Almaty rose 10-fold in the four-year period after 2003, from $360 a square meter for residential real estate to $3,700 a square meter in 2007. That index is exaggerated, but prices definitely exploded. As a personal example, in 2002 our landlord was asking $80,000 for our five-room apartment in the Samal II complex overlooking Ramstore; we didn't buy, but two years later learned that the same apartment was going for $250,000. I saw the same phenomenon around the country -- in Astana, in Atyrau and in Aktau, all of it fueled by the same hot money from abroad. As it has around the world, the asset bubble has popped in Kazakhstan and elsewhere in the region. Clare Nuttall at Business New Europe reports that it could take two or three years for the Kazakhstan market to recover.

Optimism dies hard. The other day, two young American businessmen -- Kenyon Weaver and Mike Druckman -- stopped by the office to talk about the Caspian Business Journal, an on-line magazine venture they are launching despite the downturn. Their first issue is this month. The pair -- both of them former Peace Corps volunteers in Turkmenistan -- aims mainly to chronicle business outside the energy sector in the Caucasus and Central Asia.

That's one contrarian bet. Another is that readers must pay $30 a month from the outset -- unlike the mantra of writers like Chris Anderson, Weaver and Druckman don't believe that the wave of the future is free.

I saw Druckman again the other day at a Russia event. He said the venture is getting a good initial reception.