Stay Out of Russia Until They Fight Graft: Investor

Investors should stay out of Russia until the fight against corruption and the rule of law improve in that country, William Browder, CEO of Hermitage Capital Management, has been denied entry into Russia since 2006, told CNBC.

"I was the largest investor in Russia on a portfolio basis with $4 billion in the country. And in November 2005 they abruptly took my visa away, claiming that I was a threat to national security," Browder told CNBC.

"Since then, I've pretty much reallocated my assets out of Russia but my experience after that was quite extraordinary in that the police started raiding our offices; they tried to take away our assets; they stole the companies that we had invested through and then stole $230 million of tax money that we had paid in 2006," Browder said.

President Barack Obama spoke at a university in Moscow Tuesday for the second day of his Russian summit, calling for a true global partnership between the two former emissaries.

But President Obama also said freedom, democracy and the rule of law were ideals to be followed and condemned corruption and authoritarianism.

"People everywhere should have the right to do business or get an education without paying a bribe," Obama said, quoted by Reuters. "That is not an American or a Russian idea — that's how people and countries will succeed in the 21st century."

Legal Abuses

Browder told CNBC the principal problem-makers were Russian bureaucrats like police and tax officials, who are generally paid very little salaries officially, and therefore more open to corruption.

"Essentially the inmates have taken over the asylum there," Browder stated. "You end up having a situation where nobody is operating in their own professional capacity."

Last month, the Council of Europe issued a report on legal abuses in European countries. Russia took up almost half of the document, which said companies must contend with a litany of abuses, including "legal nihilism" (a phrase coined by Russian President Dmitry Medvedev) and judges who are pressured to deliver convictions at any cost.

Hermitage Fund was "another example of a Russian-style raid, or corporate takeover," the report said.

President Obama's visit to Russia saw over $1.5 billion of company deals unveiled. U.S. farm machinery maker John Deere , soft-drink company Pepsico and aircraft maker Boeing were among the companies keen to increase investments in Russia.

AP Russian Rouble

"For every Pepsi or John Deere or Boeing situation, you have other situations like Ikea who basically announced that they are no longer going to expand in Russia because of the corruption," Browder said.

Analysts said an increase in foreign investment to Russia would only come if the fight against corruption is stepped up.

"What is really the crucial issue in Russia is the investment environment," Beat Siegenthaler, chief strategist emerging markets at TD Securities said.

"The issue about investing in Russia is corporate governance," Liam Halligan, chief economist at Prosperity Capital Management, also told CNBC.

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