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KGB (pg. 3)

By Bill Powell, senior writer
Last Updated: September 10, 2008: 8:42 AM EDT

Hermitage's ordeal was just beginning. Investigators soon launched a hunt for its assets at four different banks at which it held accounts in Moscow: Citibank, HSBC, Credit Suisse, and ING. The company then discovered that its ownership of three Russian subsidiaries was wiped off the government's official share registry. The only way that can be done in Russia is to have, among other documents, the original corporate seal. The Interior Ministry, thanks to its raid on Hermitage's law firm, had taken that and all the other documents necessary to effect such a change.

It got worse. After the fact, Hermitage learned that a company it had never heard of, Logos Plus, filed a lawsuit accusing Hermitage of bilking it out of $376 million in a sham transaction involving Gazprom shares. Three lawyers, saying they represented Hermitage, showed up at a St. Petersburg court and essentially admitted guilt. They were impostors - they had nothing to do with Hermitage. But the judge promptly ordered that Logos Plus be paid the $376 million. Hermitage later learned that 15 such claims had been brought across the country, resulting in awards of $1.26 billion to the plaintiffs.

The shakedowns follow familiar patterns. Vladimir Nekrasov, former CEO of Arbat Prestige, a successful retailer that owns a significant amount of hugely valuable real estate in Moscow, is in jail, having been arrested earlier this year on charges of tax avoidance. Nekrasov's attorney, Aleksandr Dobrovinsky, claims that shortly after his client's arrest, a "senior official" from Putin's government - he will name no names - visited him and made an offer. The government would pay Nekrasov $3 million for his compan y- it's worth ten times that, perhaps more - and let him out of jail. Dobrovinsky declined, and Nekrasov remains in jail.

***

Dmitry Medvedev, Russia's new President, has a phrase he likes to use to describe the "old" Russia, where the rule of law carried no weight: "legal nihilism." But legal nihilism isn't a thing of the past. "Property rights, in fact, have not improved much, if at all, since the Yeltsin years," Renaissance's Nash acknowledges. Nash believes Medvedev is serious about trying to make them mean something. In July, Medvedev pointedly stressed how important it is for Russia to have stable and transparent capital markets. It was a clear response, Kremlin watchers say, to Putin's threat against Mechel and its CEO. But it's fair to question just how much clout Medvedev and the economic liberals remaining in the government really have. After all, in early 2007, at the World Economic Forum Meeting in Davos, Switzerland, Medvedev had assured Browder he would intervene on Browder's behalf. Medvedev was first deputy prime minister then. He's President now, and Browder still can't get back into the country. In fact, there's little reason, for now, to think that Medvedev has the political clout to take on his Prime Minister - the man who effectively elevated him. (Medvedev declined to be interviewed.) Browder, for one, isn't holding his breath, and he thinks his case has repercussions for Russia's global ambitions. "It was one thing, in the 1990s, to invest here - whether as a foreigner or as a Russian - when the stock market was trading at two times earnings," Browder says. "Despite the risks, it was pretty much a no-brainer." Now, however, the cost has gone up - the Russian market trades at about eight times earnings - and the risk hasn't diminished a whit. "They need to get a grip on this stuff, plain and simple, and, as Medvedev says he wants, implement the rule of law," says Browder.

But the KGB graduates who now run Russia are getting just the kind of grip they want - an ever-tightening one on Russia's strategic assets. In early August, Putin intervened in what had been a bitter struggle in Russia's huge, strategically vital metals industry - a fight between two '90s-era oligarchs who had both survived the transition to the Putin era. Oleg Deripaska had been making a run at Norilsk Nickel, the country's biggest nickel miner and a company that is part of Vladimir Potanin's empire at Interros, a Moscow-based conglomerate. Putin, industry analysts believe, wants Russia to create a single global competitor to the Anglo-Australian giant BHP Billiton (BHP), and he'd had enough of the industry's fractiousness. So, Moscow sources say, he "recommended" that Potanin appoint a new CEO at Norilsk. His name is Vladimir Strzhalkovsky, and up until now he has been the head of Russia's state tourism committee. And if that little data point on his résumé doesn't necessarily inspire confidence in his ability to run a global mining giant, consider another: He spent 11 years in Leningrad, as St. Petersburg was known in the Soviet era, working - surprise, surprise - for the KGB.  To top of page

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