Khodorovsky Case Speaks Truth to Globalization

(Russia-U.S. business relations, Khodorkovsky story, updated for Khodorkovsky's six year sentence)

NEW YORK ( TheStreet) -- Seated in the Krushchev-era apartment of my great aunt a few years back, looking out on another bleak winter day in St. Petersburg, Russia, I wondered just how bleak the mentality of the Russian remains in the "democratic capitalist" era, as my great aunt gave me a piece of toast and homemade jam and said matter-of-factly, "Russians, they need to be ruled with an iron fist."

It was as if she wasn't a Russian herself -- or, if so, that she knew as well as every other Russian that every other Russian couldn't be trusted, and the state needed the iron fist to keep a grip on things, even far removed from the actual iron grip of a ruthless dictator like Stalin. The comment from my great aunt, all four feet five inches of her, came in lieu of my very New-York-Times-Op-ed-page-eque questioning of Russia's imprisonment of Mikhail Khodorkovsky.

With this week's news that Khodorkovsky was given a new guilty verdict and six-year sentence by the Russian courts for embezzlement -- i.e., whatever the Russians pulled from the index-card box of trumped-up charges on this occasion -- the usual lip service from the usual players was delivered, and it's time to watch closely to see if the verbal condemnations result in any changes to economic policy or trade agreements with Russia.

Hillary Clinton, U.S. secretary of state, said the verdict would have a "negative impact on Russia's reputation," that it would raise questions about the "investment climate" in Russia, and that it raised "serious questions about selective prosecution -- and about the rule of law being overshadowed by political considerations."

The U.K. government, likewise, blasted the latest Russian sentence of former oil tycoon Khodorkovsky.

But let's not mince words like the politicians and diplomats. You want the weather report on the investment climate in Russia? It's raining corruption with a biblical plague of graft and extortion in the 10-year forecast.

It might not be a coincidence that in the week leading up to the latest Khodorkovsky show trial verdict, Russian President Dmitry Medvedev was all over the Russian news with a new decree that any Russian politicians who couldn't prove where their wealth came from would face corruption allegations.

It was internal lip service to match the external lip service from Secretary of State Clinton, when the only true lips speaking of the state of affairs in Russia were my great aunt and Mikhail Khodorkovsky himself, who wasn't speaking at all but through his silence said more than anyone to accurately describe the situation.

According to press reports, Khodorkovsky wasn't even paying attention while the Russian judge read the verdict, quietly reading a book and expecting the inevitable, that he will live the rest of his life in jail.

In a country where the legal code is guilty until proven innocent, and where defendants sit in a metal cage during their trials, and where little old ladies who you want to help cross the Street defend the need for a Vladimir Putin's idea of democracy and justice, it's not an overstatement for Khodorkovsky to expect to die in jail,

And yet the headlines all over the press this week have been playing up another miscarriage of justice in Russia, and the Clinton-like rebukes of Russia as a place to do business, and through it all, the chastising of the Russian system that isn't moving as quickly on democracy as it is on some perverse form of a market economy.

To anyone who has been to Russia, the Russian mentality quickly avails itself. I once tried to buy a potato in a market, got my Russian numbers mixed up and asked for two when I meant three, and the nice little lady selling the kartoshkas gave me a look as if the only rational thing for her to do, after I made her turn around and grab another potato, was to shove the potato down my throat and watch me suffocate.

Some countries have as proverbs: "a penny saved is a penny earned" or "don't count your chickens before they hatch," whereas in Russia, one is more likely to hear the worldly wisdom, "sometimes you milk the cow, and sometimes the cow milks you."

Especially for anyone who has done business in Russia, the fact that Russia already ranks as the most corrupt place to do business in the world is very old news, not even befitting a Pravda headline from 2003.

Here's a typical example. Someone I know was once working for a law firm in Russia, putting together some M&A papers on a mining industry deal. The American law firm representing one side of the merger had some questions about the documents drawn up by the Russian side of the deal, and so they called the opposing counsel.

When the person I know inquired over speaker phone about the documents not being "in order," the opposing counsel said, "Would you like to speak to the judge?"

"I don't think it's necessary to bring the judge into this at this point," the person I know responded.

The Russian counsel responded, "No, I mean the judge is right here, right now, sitting next to me, smoking a cigar."

The lead partner of the American firm immediately turned the phone off speaker phone and told the paralegal to get rid of the transcript, as the Americans lawyers could have been disbarred simply for taking part in that conversation.

Yet in Russia, that's par for the course, and for a country that had to endure almost a century of brutal dictatorship, one can't blame the Russian mentality for being a little ruthless -- whether it comes to buying a potato at market or mergers of mining firms, or acquiring assets in the ramshackle road to capitalism that typified the break- up of Soviet assets at the time when Khodorkovsky built Yukos.

What's hard to take is the lip service about the rest of the world pretending to care, instead of doing business out of the pragmatic needs of the glorious "globalized" economy.

There actually was a time when Russian miscarriages of justice made their way to the White House and had actual repercussions. A quick review of the Carter and Reagan administration Soviet engagements shows that the White House used the Soviet political dissident issue as a serious wedge in talks over arms reductions and economic aid for the struggling Soviet Union. There was a time when the Jew sitting in a Siberian prison like Natan Shcharansky actually had the attention and backing of some of the world's most powerful governments. Then again, Russia was our enemy then. As a billionaire who got rich in the big giveaway after the Soviet Union crumbled, Khodorkovsky isn't the most sympathetic figure to many Russians, and he may not be a Shcharansky or Sakarov -- though Sakarov's widow has said as much, that he has become a political prisoner and should be treated as such.

Yet there didn't seem to be much outcry about Khodorkovsky last week when President Obama's recent SALT treaty with the Russians passed the Senate.

Indeed, when SALT passed, the President & CEO of the U.S.-Russia Business Council, Ed Verona, praised the deal, saying "The ratification of New START sets the stage for the year ahead, during which USRBC expects to see further progress on Russia's accession to the World Trade Organization (WTO). In conjunction with the conclusion of that process, we also anticipate Congressional action to lift application of the Jackson-Vanik amendment to Russia and establish permanent normal trade relations (PNTR), a move that will enable U.S. companies to enjoy the full benefits of Russia's eventual accession to the WTO."

Jackson-Vanik, for those of you not students of 1970s U.S.-Soviet history, was a legislation introduced by famed Washington Senator Henry Scoop Jackson to link any economic aid and trade relations with the Soviets to improvements by the Soviets in human rights, and specifically, with allowing Soviet Jews -- many of whom were in prison for wanting to leave the country -- to emigrate. There's one former Soviet Jew, named Mikhail Khodorkovsky, who won't likely be leaving a Russian prison any time soon. At one time, President Nixon and Henry Kissinger fought a losing battle to defeat the Jackson-Vanik legislation, which they saw as unnecessary meddling in more important global affairs.

Just this week, General Electric ( GE) formed two new joint ventures in Russia focused on health care and energy.

Back in June, corporate bigwigs led by Alcoa ( AA) CEO Klaus Kleinfeld met with Presidents Medvedev and Obama. Kleinfeld, who also serves as Chairman of the U.S.-Russia Business Council (USRBC), said at the time, "Strong economic ties breed strong political relationships and expanded trade and investment will be the foundation upon which security cooperation can be sustained. In less than a year, we have seen progress made on all fronts."

Indeed, but no talk of progress on the legal system or human rights, so we'll see what Secretary of State Clinton does now as the U.S.-Russia Business Council pushes for normalized trade relations and Clinton publicly gives Russia slap on the wrist for the Khodorkovsky trial.

I guess one could argue that Secretary of State Clinton did slam the Russians in public on Monday, which is more than Kissinger would have done, but we'll see how far that goes in the end -- in the classic divide between words and deeds when it comes to political rhetoric -- and we won't forget that Nixon and Kissinger lost the battle to defeat the Jackson-Vanik legislation.

Taking a page out of the classic Cold War playbook, the Russians put forth their Foreign Minister on Tuesday to counter-attack the Western front that had formed, at least in words, to condemn the latest Khodorkovsky court verdict.

"Attempts to apply pressure on the court are unacceptable," the Russian Foreign Ministry said in a statement. "We are counting on everyone to mind his own business -- both at home and in the international arena."

The only thing the Russian Foreign Minister didn't add, and which used to be a staple of Cold War rhetoric, was to point out the U.S. doesn't have a leg to stand on when it condemns the iron fist, given the discriminatory nature of U.S. institutions, especially related to race. Updating the Soviet counter-attack logic, the Russian Foreign Minister stated, "We are talking about serious allegations of tax evasion and the laundering of proceeds of crime ... In the US, by the way, they earn life sentences in prison."

There seems to be little reason to suspect that Medvedev's recent talk about cracking down on corruption in Russia -- he's always the good cop to Putin's bad cop -- will amount to anything much.

After all, they are already cracking down on corruption. Why, just look at the latest Khodorkovsky verdict for allegedly stealing $25 billion. It will probably also serve as a convenient excuse for Medvedev and Putin to manufacture charges against other enemies as well, or decide to pursue corruption charges against anyone who dares to challenge them and who they know amassed wealth in less than pure ways.

Some foreign policy experts had suggested before Khodorkovsky's six year sentence was handed down on Thursday that the Russian court would go lighter than expected in sentencing in an attempt to appease international critics and for Russia to show that Medvedev's soft touch was for real, and the country wasn't still under the grip of Putin. Khodorkovksy and his lawyers weren't banking on that, though, and the experts who suggested that outcome obviously have never tried to buy a potato at a Russian market, or had tea with my great aunt accompanied by a discussion of the way Russia operates.

In any event, if we have long ago left behind the Cold War and entered the age of globalization, it's pretty clear that globalization means turning a deaf ear to serious human rights and legal rights issues for trade partners like the U.S., Russia and China, or at least often being hard of hearing. When the Russian Foreign Minister warns the world about minding its own "business", does he just mean it in the general sense of the proverb, or is he referring with a subtle threat to the world of business?

When a tycoon rots in prison because he was getting too powerful, maybe too democratically minded, or when a Nobel Prize winning political dissident is serving a long sentence and his family barred from going to Sweden to accept the Nobel on his behalf -- and yet the major U.S. move in relation to China is to win a dispute at the World Trade Organization over the unfair support of China for its automobile tire manufacturers -- that's the lips speaking truth to the way the powerful act in the age of globalization, as opposed to the lip service that once again overflows with blabber as Khodorkovsky quietly read his book in the metal cage of the Russian court room.

We'll say thank you very much for that cheap plastic mobile for our baby's crib, China, and, thank you very much for the oil that's not coming from those unstable Arabs, Russia, and forget about Khodorkovsky until this six year sentence is up and the Russians need to find a way to extend it again, and we'll let Chinese democracy die a silent death. And of course, when it comes down to it, we'll hem and haw and we'll say it's not our place to interfere in the internal affairs of other countries -- except of course, when it's the internal affair of manufacturing car tires.

The Russian grandmas, at least, tell it like it is: if one wants to speak truth to power when it comes to Khodorkovsky, the U.S., Russia and China, in the era of globalized markets, it's not Adam Smith's invisible hand that illustrates the most important market principal, but powerful hands tied being behind their backs, willingly so, as the iron fist continues to do what it's supposed to do.

-- Written by Eric Rosenbaum from New York.

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