The attribution dilemma


There is something perplexing in Russian legal history. We can hardly ever say with confidence whether the law stands for what is right or it is just a sword in the hands of the powerful. For Vladimir Lenin, a feckless lawyer who founded the Soviet state, the law, stripped of its own moral grounding, was an instrument of control used by the ruling class. For the Russian tsars the system of selective prosecution, opala, was a means to punish those who had fallen out of favour and to clear the way for new favourites.

Elena Baturina, the richest woman in Russia and wife of a former Moscow mayor, is now under investigation and is likely to face criminal charges in the very near future. Police raided her company last Thursday – armed men with automatic guns searched the offices of one of Russia’s largest construction companies. Later that day the press service of the Interior Ministry's Investigative Committee said that Baturina was being probed as part of a $440 million embezzlement.

In the summer of 2009 a company controlled by Baturina, sold 58 hectares of land in the southwest of Moscow to Premier Estate, a company set up just three months before the deal. Premier Estate was then acquired by a British private equity group.

According to investigators ‘some unidentified officers of the Bank of Moscow’ had fraudulently granted to Premier Estate, a company with charter capital of only $300, a loan of $440 million which subsequently appeared on Elena Baturina’s personal account. The value of the land provided as a security, the police claim, was overstated; the company never intended to repay the loan.

Shortly before the deal the bank received a cash injection from its shareholder, the Moscow government.

The barrage of news stories and comments that few people really understand have created a widespread sense that the richest woman in Russia has been caught red-handed and will be held to account at last. The facts, however, suggest a more complicated picture.

The land was initially owned by Elena Baturina and there is nothing wrong that the money ended up in her account. She sold the land, got the money, paid taxes. This transaction was carried out openly and was widely publicized in the media.

It seems that the investigators do not have a case.

Premier Estate is not a small, fly-by-night company but a SPV, a special purpose vehicle, of the kind that are often created for development projects in order to separate the project’s assets from those of its originators. The charter capital of a SPV is simply irrelevant - it could be $100 million, $100 or even $1. Any talk of the charter capital just misses the point.

The land according to the appraisal of an international consulting company is worth $560 million, a sufficient security for the loan of $440 million. Even so the price of land is of secondary importance – in project financing the loan is paid from cash flow generated upon project completion rather than from its assets, usually of insufficient value.

So far it seems that the investigators do not have a case.

If the police start criminal probes against project finance companies where assets, taken in isolation from future revenues, seem inadequate, no construction or development projects would ever be possible. What is more, any project can be aborted or taken over under the pretence of protecting the interests of the public.

What we have had in effect is a taxpayer-subsidsized construction industry: privileged companies take the profits, do not invest their own money and shift the risks on to the public pocket. This is a real scandal. Neither Baturina’s company, nor the bank, nor the equity fund have made any substantial contributions to the project, but have retained their interests. If the project fails none of them would make serious losses. If it succeeds they would make off with the profits.

To say, as the police apparently imply, that Baturina has orchestrated the swindle would be an oversimplification and probably downright wrong. The infusion of public money into the Bank of Moscow was approved by the Moscow Government and the City’s Legislative Assembly. Too many people were involved to make it possible to believe that there were just one or two persons behind the scene.

The terrifying truth no one wants to face is that all development business in Russia may work in the same way. Some people undoubtedly benefit but the problem lies in the system itself rather than in any particular individual.

Against this background it is difficult to distinguish between a genuine desire to bring order and fairness into a troubled market and a way of attacking those who have fallen out of favour in order to get their business on the cheap.


February 20, 2011
picture: NatalyArt -

This article first appeared in The Moscow Times



The Baturina case: is there one?