When the financial crisis struck in 2008 it seemed that the end of capitalism was nigh. The biggest corporations collapsed, sovereigns seemed to follow and even the survival of the euro was questioned.

To splash out on investments seemed ludicrous at the time. Yet with even cash in the bank under threat it paid to be brave: my bonds in Citi and other banks would soon soar and my tiptoeing into the Russian market, acquiring deposit receipts of industry behemoth Gasprom, seemed contrarian enough to be profitable. Shares in the world’s biggest natural gas exporter were valued at less than six times yearly net profits. Europe, and powerfully emerging China, would still buy gas from Russia even if the world goes under, was my thinking at the time.

As retail investors lured by similar deliberations will know, I was dead wrong. At the time of writing Gasprom is valued at a petty 2.9 times earnings. Priced at $4.85 per share, its total market value, $57.5 billion, is what Apple earns in three months.

Gasprom’s ADRs, or shares, meandered between $3 and $9 in the last five years, reflecting geopolitical tensions with Russia more than any meaningful evaluation. Over the years, trying to add at lows, I managed stubbornly to further increase my losses. The Georgia campaign, the Crimea annexation, civil war in the Ukraine, the Syria intervention, American election meddling, the poisoning of the ex-Soviet spy Sergei Skripal… embargo followed embargo and with every new dispute my Gasprom shares, as all other Russian shares for that matter, nosedived. That Russia was using Gasprom and its money for geopolitical aims did not help either.

When the Mueller report, which had examined President Trump’s possible collusion with Russia’s election interference, seemingly established Trump’s innocence, a sigh of relief went through Moscow’s stock market. New IPOs were announced, bonds recovered and Gasprom ticked up an inch or two. It was hard to tell if optimism had returned, or if banks and corporations were just trying to take advantage of a brief window of respite from further embargoes: my shares, alas, still lingered in loss territory.

What I had ignored at the time, as had many much more sophisticated investors over the years like IKEA, Shell, BP or George Soros, the financier who lost $1.7 billion on a telecoms investment, is the fact that Russia perhaps looks like a country and may have all the stage props attributed to statehood but is in truth a unique hybrid, between a private corporation and the executive branch of government.

This has nothing to do with a lack of democratic institutions. Many autocratic regimes are capable of managing the economic affairs of their peoples with skill. Singapore, China and Monaco come to mind. Russia does not. Russia is a condition, not an economy.

As the Russian politician and minority party leader Grigory Yavlinsky explains in his recently published book The Putin System, Russia does not just lack the checks and balances of power we – perhaps mistakenly – take for granted in our own countries. It does not just lack accountability of its administration on every level. It has failed from the very beginning to contemplate the concept of private property.

This is probably a legacy of 75 years of communism, or may perhaps date back even to Tsarist times. But more importantly, when the Soviet Union collapsed and a ‘new’ Russia emerged from the ruins, its political elites – educated in Marxist-Leninist doctrines – never bothered to discuss constitutional principles like privacy, citizen rights or private property. The hope was that things would fall into place, eventually.

We are in awe of the power and wealth of Russian oligarchs, yet do not comprehend that their fabulous riches are granted by the Tsar and can be revoked by him any time. When Russians channel their money to the West, when they acquire Maltese or other nations’ passports, they do so because they do not know how long their success story will last. Or more precisely: they know that it will not last.

When Russians acquire Maltese or other nations’ passports, they do so because they do not know how long their success story will last

Nowhere is the lack of constitutional safeguards more apparent than at court. Judges, trained in a Stalinist system of obedience towards State power in general and the security services in particular, are pliant instruments in power games involving State authority.

Bill Browder, by any measure the most successful investor in Russian shares, tripped when his good-governance campaigns against the State-owned enterprises he had invested in – like Gasprom, Sberbank and Russian Rail – were no longer aligned with Vladimir Putin’s rather personal aims of a corporate clean-up. Browder was refused entry into the country, his Hermitage Capital Management had to close shop and his lawyer Sergei Magnitsky, who had uncovered a massive tax fraud by people linked to the security services, was killed while in custody.

Magnitsky died in the same prison where Michael Calvey, an ex-EBRD banker and another hugely successful private equity investor in Russia, has now been incarcerated since February. Calvey was a cautious investor, focusing, as Bloomberg wrote, “on industries and companies unlikely to attract the attention of Russia’s authorities”.

Investing $2.4 billion, his Baring Vostok Capital was an early investor in Ozon.ru, Russia’s equivalent of Amazon. It put money in Borjomi mineral water and it invested $5 million in the internet company Yandex, an investment now worth $4 billion. Calvey stayed on when the Rouble crisis struck (1998); he stayed when the financial crisis brought Russia to a standstill; and he did not shy back from suing – successfully – his business partner Artem Avetisyan, co-shareholder in the troubled lender Bank Vostochny, for a couple of million at a London arbitrage court.

It was Calvey’s undoing. Avetisyan sits at the epicentre of Russia’s law bending. As the head of the ‘Agency of Strategic Initiatives’, he is not only close to Putin, who he sees on a regular basis, he is also best friends with Dmitri Patrushev, the son of the former long-time head of the FSB (formerly known as KGB), Nikolai Patrushev, a close Putin friend and the permanent secretary of Putin’s Security Council.

No matter how trumped up the charges against the American Calvey, his chances for a fair trial are not any higher than those of Mikhail Khodorkovsky, formally the richest man in Russia, who spent 10 years of his life in solitary confinement without visitors in a prison in the Far East of Russia.

Calvey must have calculated that for Putin, the protection of a small-time trickster like Avetisyan would not be worth a further blemish on Russia as a destination for badly-needed foreign investment. He badly miscalculated. For Putin’s survival the flow of foreign investment, anyhow diminished to a trickle by recent embargoes, is irrelevant. The unwavering support of the security services is not.

Judgments in Russia are co-authored by the FSB. Judges shrug this off as a matter of fact, not at all conflicted by any such wish list. This is what they did for centuries after all. The will of the State has to be respected, not any risible citizen rights.

I have seen this first hand, if at a more modest level. My Russian opponent at court, a man who capriciously refused to honour his debts irrespective of what had been agreed in the contract, asked a close friend from college for help, a high ranking FSB officer. This officer’s intervention at court was worth more than any lawyer and certainly more than any contractual evidence. Court hearings at the relevant district court were postponed three times, but only officially, and only for me. In my absence, my absence was ruled against me. I have since appealed – without much hope.

Russia – a country where the administration is arbitrary at every level and if anything only accountable to the centre of power; a country where the rule of law is not even a desired concept – should not be considered an investment destination, whether for big corporations, investment funds or retail investors like us.

Yet we are ever lured by the hope that Russia, culturally so close and an inseparable part of European history, will “normalise”. We are attracted too by potential profits, which in many cases, as in a pyramid scheme, do materialise.

It takes a sober mind to sell Gasprom, no matter how promising the valuations, no matter how high the losses.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.



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