Cost of Doing Business in Russia Can Be Prison

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April 30 (Bloomberg) -- Back in Soviet days, trading for a profit was considered a crime. If government prosecutors have their way in the case of opposition activist Alexei Navalny, Russia -- purportedly a market economy -- could be imprisoning someone for such “speculation” again.

The first of two criminal cases against Navalny, whose campaigning against official corruption has made him a nemesis of President Vladimir Putin, entered the trial stage in the city of Kirov last week.

Prosecutors have charged Navalny and a businessman named Pyotr Ofitserov with stealing 16 million rubles ($530,000) worth of lumber from a now-bankrupt state-owned company called Kirovles in 2009. Navalny was then working as an unpaid adviser to the Kirov governor with a brief to root out corruption. The felony charge carries a maximum prison sentence of 10 years.

Ofitserov, an acquaintance of Navalny’s, set up a company in Kirov called VLK, hoping to make money selling lumber. The 16 million rubles is the entire amount of VLK’s sales for the duration of its brief history. The prosecutors claim that Navalny used his job with the governor’s office to channel Kirovles sales though VLK, forcing the state-owned company to sell at a loss to enrich the intermediary. There is no evidence, however, that VLK was getting the timber for less than the going market rate. The defense has submitted evidence that VLK paid Kirovles 14 million rubles for the lumber.

Navalny and his brother Oleg, a postal official, face similar allegations in another case that has not yet gone to trial. A cargo-delivery company set up by the Navalnys received 55 million rubles ($1.8 million) for services rendered to the Russian branch of the French cosmetics company Yves Rocher, but outsourced the work to a different operator for 31 million rubles ($1 million). Investigators say that the profit was made illegally, because Oleg Navalny used his job with the Russian postal service to drum up business for a firm that had no resources to do what it promised.

The cases have attracted attention both for their political motivation and for their troubling portrayal of the normal business activities of an intermediary as a felony. “It is time for the people on the Forbes rich list to take to Red Square with signs saying ’The Navalny Case Is a Case Against Me,’” Maxim Mironov, an economist at the IE Business School in Madrid, wrote on “If one looks at them closely, both the Kirovles case and the postal case regard as a crime the principle ’buy cheap, sell dearly.’ And this is the basic principle of the market economy.”

Russia’s billionaires have not picketed Red Square yet, if only because the court decisions in the cases against Navalny are widely believed to be predetermined. Putin made his opinion known during a 5-hour call-in session last week, in comments the trial judges are highly unlikely to have missed: “People who fight against corruption must be absolutely honest themselves, otherwise this turns into mere self-promotion and political campaigning. Everyone must be equal before the law, and no one should have the illusion that if one yells ’Stop thief!’, then he himself is allowed to steal.”

Even to some Putin loyalists, the cases against Navalny are uncomfortably anti-business. “We are looking at a civil-law contract: Goods have been supplied and paid for,” former finance minister Alexei Kudrin, who regularly advises the president on economic matters, wrote on his site. “The prosecution’s case casts doubt on the foundations of Russia’s market economy, including the right to make deals freely. The case gives off a sense of time travel. It’s as if we were not living in 2013 but in a Soviet planned economy.”

Navalny had a chance to flee Russia before the trial started, but has chosen to stay and go to prison if convicted. Navalny’s stated goal is to run for president one day, and he believes emigration would destroy his long-term chances at a political career.

For lumber trader Ofitserov, who has no political ambitions, the case is a career-ending disaster. All he can hope for is regime change. “Thousands of entrepreneurs are in jail on trumped-up charges, and they do not even know any opposition figures,” Ofitserov wrote on Facebook. “Anyone, even you, could be put on trial like me. Being law-abiding will not help.”

Last year, Putin announced that he wanted Russia to rise from 118th to 20th place in the World Bank’s Doing Business ranking, which rates countries by business climate. He even signed a decree setting this ambitious goal for 2018 and specifying that Russia was to be in 50th place by 2015. Russia advanced to 112th place in the 2013 rankings.

Putin’s goals are clearly overly optimistic. A single case like Navalny’s, by criminalizing normal business activity, can negate any progress Russia might make in improving its tax system or regulatory practices. Who cares about the ease of doing business when one can be sent to jail for the very act of making a profit?

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

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