The collapse of a BP share-swap deal with Russian state oil company Rosneft is just one of a string of failures which show that Russia is "uninvestable", according to William Browder, once the country’s largest portfolio investor.
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BP’s proposed tie-up with Rosneft fell throughafter an agreement could not be reached with Alfa Access Renova (AAR) — a consortium of local billionaires who had a pre-existing joint venture with the oil giant, TNK-BP – to break an earlier contract.
BP had been hoping to work with the state-owned company to explore and develop assets in Russia’s arctic regions.
"What this story shows is the long and sad tale of BP in Russia, and how they’ve basically encountered problems at every single turn in their quest to get Russian oil reserves," Browder told CNBC.com.
Citing the trail of western businesses which have encountered difficulties in Russia, including Ikea, Telenor and Shell , Browder said that investors should be aware of the risks of working with a country that has endemic corruption issues, no matter how attractive its assets may appear.
"If you ever go fishing in the lakes where you have to throw the fish back, you sometimes encounter fish whose memory is so short that after 30 seconds they’ll bite on the same hook again. That’s what BP looks like in this whole situation with Russia," Browder said.
After the deal fell through, some analysts, including TNK-BP’s largest shareholder, Mattias Westman of Prosperity Capital Management, told CNBC.com that it collapsed because BP had misunderstood how much pressure the Russian government was able to put on AAR, and how strong the contracts would prove to be.
Westman said: "In many ways, this is a victory for the rule of law in Russia, rather than the opposite."
Browder rejected this. "There is basically no predictable course of action in Russia," he said. "The whole system is based on arbitrary, individual, generally criminal motives. And so you end up in a situation where you can’t make any kind of reliable plans for the future."
"Sometimes I tell people how dangerous it is to do business in Russia, and they say, ‘well, we’re staying away from strategic industries’. My answer to that is that every industry is strategic if it makes money. What happens there is that it becomes strategic the moment it’s profitable, the moment that someone wants to steal your cashflow or your assets," he added.
Corporate Corruption
An activist fund involved in the Russian market from the early days after communism, Hermitage ran into trouble when it openly talked about corporate corruption in the country.
In 2006, Browder was barred from entering Russia. In 2007, Hermitage’s offices were raided and several of its portfolio companies were appropriated.
Sergei Magnitsky, the company’s lawyer, investigated and uncovered evidence of tax fraud by the Russian officials who had seized the companies. This, Browder said, is a systematic feature of Russian government.
"The way it works is that if a Russian official has the power to arrest, fine, or in any way seize somebody’s assets, then they use that power for their own personal gain," he said.
"Different government ministers and law enforcement officials have that power, and they look around to see what assets there are to seize, people to arrest and businesses to extort, and then between themselves they make an agreement as to who has access to extort who," he said.
Tragically, Magnitsky found that there was little tolerance for those who uncover official corruption. After being held without trial and tortured for almost a year, Magnitsky died in custody in November 2009.
Since then, Browder has been pursuing those he believes are responsible through international legal mechanisms.
Ignoring the Bad?
On May 19, the US Senate introduced the Sergei Magnitsky Rule of Law and Accountability Act of 2011, which targets individuals believed to undermine the rule of law and human rights in Russia.
Swiss authorities have frozen assets linked to the alleged perpetrators of Magnitsky’s killing.
The European Parliament has asked European Union member states to impose asset freezes and visa bans, and a similar motion will go before Canada’s parliament.
"The Magnitsky case is… the clearest case study of how the whole system has been criminalized in Russia, of how officials steal from their own country, how they then murder people who stand in their way, and then how the whole system protects them when they get caught," Browder said.
“This goes on thousands of times a year. It’s just that in our case, several unusual things happened. First was that Sergei was so brave that he wrote it all down in the form of 450 complaints while he was incarcerated, so we have a full documentary record of everything that happened to him," he said.
“The second is that Sergei's friends and colleagues are outside the country, and we have been able to effectively publicize what happened to him in a way that the whole world now knows. Sergei Magnitsky's story is a window into all the terrible things that happen in Russia every day," Browder said.
Up until the end, Browder made good money in Russia, but his experiences have demonstrated to him that the country is not a safe place to invest.
"Our fund went up 35 times over ten years in Russia. But in the end, corrupt and politically motivated officials tried to steal our money, steal the taxes that we paid from their own government and then they killed my lawyer when he tried to stop them. So Russia is not just a place where you can lose money. People get killed. That’s just not investable," he said.
“The macroeconomic environment in Russia looks good because of oil, but the Russia story is like an onion with 16 layers. The outside looks good, but you don’t have to peel more than one layer down before you see the truly ugly problems. Anybody who says that the Russian investment climate is good right now is either unaware or deliberately ignoring the plain facts," Browder said.