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Investors Shorting Russia—and Reset

4:00 PM, May 31, 2011 • By DANIEL HALPER
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Moscow’s Domodedovo Airport had been planning to provide an initial public offering to investors this week, allowing folks from around the world to buy shares in the currently private company that operates the facility. Suddenly, over Memorial Day weekend and in the middle of the night, Domodedovo sent out a statement saying that it had canceled its plans and pulled the IPO. Why, and why so suddenly?

The official reason from the company is that “current market conditions” suggest that it wouldn’t be able to pull in “a fair value” price. The Financial Times finds the official explanation a little suspicious: 

Analysts and investors say they are sceptical that the increased pressure against the airport at home had nothing to do with the decision to postpone the listing.

“Investors are not ready to pay fair value for a company which could face some risks with the state,” says one analyst, who did not wish to give her name because of the sensitivity of the matter.

“I don’t exclude the possibility that Domodedovo will change its shareholder structure very soon.”

Investors know what happens when a Russian company, public or private, “faces some risks from the state.” Billionaire Yukos CEO Mikhail Khodorkovsky was arrested in 2003, and has been imprisoned ever since. Although he was arrested on charges of fraud, there’s little doubt it was Khodorkovsky’s politics, and his financial support for the opposition, that landed him in a Siberian prison.

The New York Times reports today that a “European Court Partially Backs Kremlin in Khodorkovsky Prosecution,” but the actual decision scored 8 counts in favor of Khodorkovsky and also awarded him court costs and damages. It was a rare win for Khodorkovsky, whose appeal was denied by a Russian court just last week.

Last December, the White House issued a statement expressing “[deep concern] that a Russian judge today has indicated that for a second time Mikhail Khodorkovsky … will be convicted.” The president’s press secretary continued: “We are troubled by the allegations of serious due process violations, and what appears to be an abusive use of the legal system for improper ends … The Russian government cannot nurture a modern economy without also developing an independent judiciary that serves as an instrument for furthering economic growth, ensuring equal treatment under the law, and advancing justice in a predictable and fair way.” The statement concluded: “President Obama has spoken frequently with President Medvedev about this case and others as part of their ongoing conversation about President Medvedev’s important campaign to strengthen the rule of law and modernize Russia’s political and economic system. We will continue to monitor closely the next stages in this case, including the fairness of the sentences and the review by higher courts during the appeals process.” 

Finally the appeal came down last week. And the White House was … silent. Not a word. Not a single peep, even as President Obama met with Russian president Dmitry Medvedev last week. And, again, not a word was uttered when the administration announced its intention to appoint Michael McFaul as our new ambassador to Russia.

Last week, even the politically left wing human rights group Amnesty International declared Khodorkovsky a prisoner of conscience. “Whatever the rights and wrongs of Mikhail Khodorkovsky and Platon Lebedev’s first convictions there can no longer be any doubt that their second trial was deeply flawed and politically motivated,” Amnesty’s director for Europe and Central Asia said in a statement. “For several years now these two men have been trapped in a judicial vortex that answers to political not legal considerations. Today’s verdict makes it clear that Russia’s lower courts are unable, or unwilling, to deliver justice in their cases.”

So even as the White House remains silent in the face of continuing corruption and oppression in Russia, investors are voting with their feet. They are running from the Russian market, which has collapsed in the first quarter of this year as major multinationals like BP see deals fall apart over politics.

The Obama administration is moving forward with a “commercial reset,” seeking to integrate Russia into the world market and international organizations like WTO. But until the Kremlin starts respecting the rule of law, protecting private property, and allowing the Russian people to exercise their basic human rights, only the politically well connected will be willing to risk their money in Putin’s Russia.

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