Russian Graft Goes Legitimate in London

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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Thanks to a London court, influence-peddling in Russia has now become an internationally recognized business arrangement. The consequences could be far-reaching, both for Russian billionaires and for corrupt officials in the government of President Vladimir Putin.

In Russia, it's common for businesspeople to have a "roof:" A powerful person, often a government or law-enforcement official, who defends their interests and protects them from predators in return for a piece of the action. The concept, known in Russian as a "krysha," came to the notice of London's Commercial Court thanks to a high-profile legal battle between former Russian oligarch Boris Berezovsky and current Russian billionaire Roman Abramovich.

Berezovsky claimed that Abramovich had coerced him into selling stakes in Russian oil and aluminum companies, and demanded more than $5.6 billion in compensation. Abramovich countered that Berezovksy had never owned the stakes, but had received income from them in return for his services as a krysha during the presidency of Boris Yeltsin, under whose rule Berezovsky had gained great influence. After the ascendance of Putin, who saw Berezovsky as his number one enemy, the payments ceased.

The judge agreed with Abramovich. More importantly, she enshrined the notion of the krysha, noting that political patronage "was indispensable to the construction of any major business in the conditions of the 1990s," and that "the evidence established that the arrangement between the parties was that Mr. Abramovich would provide payments … in exchange for Mr. Berezovsky's assistance, protection or krysha."

The judgment sets an important precedent. It suggests that any regime change in Russia will jeopardize all informal agreements in which government officials are unofficially granted shares in business assets in exchange for their services.

Berezovsky couldn't back up his claim that he had owned 43 percent of the oil company Sibneft (now Gazpromneft) and 25 percent of the predecessor companies of the aluminum giant Rusal, reponsible for 12 percent of the world's aluminum output. He said that he had made verbal arrangements with Abramovich, according to which the latter would hold these stakes for him. To the outside world, Abramovich would be the legal owner, but he would transfer dividends or sale proceeds to his invisible partner.

Flimsy as the arrangement sounds, it's how business is still often done in Russia when the help of a government official or facilitator is needed. I have personally seen such schemes in action. A private businessman, who is to all intents and purposes the owner of a business, takes on a raking bureaucrat as a silent and undocumented partner. The bureaucrat is not allowed to own his stake officially. He relies on his influence to guarantee that the businessman won't ignore the arrangement.

There are two legal reasons why influence peddlers seek to enforce their hidden partnerships in London: English law sees verbal agreements as binding, and the courts will accept jurisdiction because the informal arrangements may have been made in the UK. Of course, the krysha providers are not likely to sue until they’re out of power and hence have nothing left to lose. Not surprisingly, the cases currently before the London court tend to be from the 1990s.

Russian billionaire Oleg Deripaska, the principal owner of Rusal, must have heaved a huge sigh of relief on hearing of the London judgment. Mikhail Cherny, once considered to be Deripaska's partner in the aluminum business, has sued him, demanding compensation of 730 million pounds sterling for a 20 percent share in Rusal. Like Abramovich, Deripaska claims that Cherny had never owned the stake but was merely receiving payments for krysha services. As a spokesman for Deripaska put it: “Deripaska welcomes the High Court's decision recognizing the notion of 'krysha' and the imposition of 'krysha' on business.”

If the Berezovsky vs. Abramovich judgment does serve as precedent for the Cherny vs. Deripaska litigation, Deripaska may be helped by the fact that Berezovsky botched his case. The judge plainly declared him an unreliable witness, stopping just short of calling him a liar: “I regret to say that the bottom line of my analysis of Mr. Berezovsky’s credibility is that he would have said almost anything to support his case.”

The Kremlin rejoiced at the disgrace of its archenemy. “It is always nice when slander is called by its proper name,” said Putin spokesman Dmitry Peskov. Berezovsky, in despair, likened the decision to Russian court verdicts “written by the presidential administration.” Indeed, the verdict looks like a vindication of Putin's purported efforts to clean up the relationship between government and business in Russia. To many Russians, Berezovsky is a personification of the crony capitalism that emerged under Yeltsin.

Still, the legal recognition of the krysha augurs ill for Putin-era officials.

Putin's sudden rise to power in 2000 was tantamount to a revolution for Russia's big business. The so-called “siloviki,” people from the special services and police, unseated influence peddlers from Yeltsin's era. Business owners had to make new arrangements, in many cases of the same ethereal nature as those now being aired in London courts. If and when Putin loses power, he and the siloviki could find themselves in the shoes of Berezovsky, once one of Russia's richest men and now rumored to face financial difficulties which the trial failed to resolve.

“If there is a trial in London in five years, it will end in a similar judgment,” commentator Yulia Latynina wrote in Novaya Gazeta. “It will say that Vladimir Putin is a man of great integrity who has no stake" in the businesses of his billionaire friends.

(Leonid Bershidsky, an editor and novelist, is Moscow and Kiev correspondent for World View. Opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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