Business Trip

What Medvedev's U.S. visit was really about.

"My goal is to see how everything works here," Russian President Dmitry Medvedev said on his arrival in the United States this week, referring to his plans to build a Russian analog of Silicon Valley in Skolkovo, just outside of Moscow. "This is not a tour."

It often seemed like one -- like a delirious good-will mission. On arrival, Medvedev met with California's action hero turned governor, Arnold Schwarzenegger. "Many residents of our country know you from an earlier stage of your career and of course it generates interest in you," Medvedev told the governor in a looser version of his usual legalese. He had dinner with George Shultz, secretary of state under Ronald Reagan, who greeted a laughing, romping Medvedev on the tarmac in San Francisco, in Russian. He visited Cisco Systems, which waited for his visit to sign a $1 billion agreement to provide networking equipment to Skolkovo. He went to the headquarters of Twitter, where the founders, Evan Williams and Biz Stone, helped him set up his own Twitter feed. With the cameras rolling, he entered his first tweet: "Hello everyone! I am on Twitter, and this my first tweet." The Russian had a typo in it, which, Williams said, made the tweet especially authentic. Everyone applauded.

Medevedev then went to the headquarters of Apple, where Steve Jobs gave him a personal tour -- and the new iPhone, a day before it went on sale. (Back home, Russians joked that this was the sole purpose of the visit.) He visited the American outpost of Yandex, the biggest Russian search engine and darling of the Russian tech industry. He met with native Russians working in the Valley. With characteristically Russian largesse, he had oilman Viktor Vekselberg, head of Skolkovo, agree to pay the $1 million per year necessary for the upkeep of Fort Ross, an early 19th-century Russian fort that is now a state park north of the Bay Area. At Stanford, dressed in jeans, he read his warm remarks off an iPad. He sopped up the San Francisco scenery, tweeting a picture of the view from his hotel room and telling Schwarzenegger, "It's hard to work in such a city."

And the city welcomed him with open arms, applauding, toasting, and smiling at the Russian president. Even with the Belarus gas crisis unfolding in the background, the trip was a lovefest, and the coverage of it in Russia portrayed it as such. Russia Today, the Kremlin's propaganda channel for Western consumption, which often takes a dim view of America, spoke of "the enduring nature of the U.S.-Russian relationship."

The visit to Washington was equally delightful. The State Department sent an early welcome present, finally putting Chechen militant Doku Umarov -- who claimed responsibility for the recent Moscow subway bombings -- on its list of designated terrorists. "We stand in solidarity with the Russian people," Daniel Benjamin, in charge of counterterrorism at the State Department, said in a statement. The two presidents agreed to speed along Russia's long-stalled bid to join the World Trade Organization and closed a deal that would allow the United States to resume poultry exports to Russia. And Obama took Medvedev out for burgers, a testament to their vibrant relationship. (At this writing, Medvedev was only following three people on his new Twitter account: himself, the White House, and Obama.)

"The meeting of two presidents is always a big event," says Masha Lipman, a longtime political observer with the Carnegie Moscow Center. "But this one was planned and talked up in advance as a successful one. There are still lots of divisive issues, just as there are between any two countries, but they were not discussed.

So what, exactly, was the point of this three-day blitz?

One word: investment.

The trip's laid-back tenor, the image of a laughing Russian president that struck such a contrast to his earlier, shyer self and to that of his slouching, snarling predecessor, and the swirl of news back home about an avalanche of new reforms, was there to show international investors one thing: that this was a new Russia. In fact, that's exactly what Medvedev told thousands of Western and Russian business leaders who gathered last weekend for the St. Petersburg International Economic Forum, the Russian analog of Davos. "Russia has changed," he said.

The depth of the world economic crisis has come as a massive shock to the Kremlin, which had been buoyed for years by high oil prices and cash from risk-tolerant foreign investors. Back in 2005, with oil prices at $60 a barrel, the Kremlin -- and foreign investors -- barely blinked at the troubling signs, such as when rogue elements inside the federal tax service forced William Browder and his Hermitage Fund, the biggest foreign investor in Russia, out of the country in a suspicious and violent campaign at the time There was simply too much money sloshing around. The Kremlin was drawing up budgets based on $160 barrels of oil and Russia, then President Vladimir Putin said, was "an island of stability" in a financial world that was already coming apart at the seams.

Those were different times. When world markets collapsed in the fall of 2008, so did oil prices and foreign investment in Russia. GDP growth went from 8 percent to nearly -10 percent. And though Russia managed to steer through the dark days of the crisis with impressive deftness, the depth of the fall -- and the fact that oil still hasn't bounced much above $70 a barrel -- has left leaders in Moscow jittery. "The crisis really opened our eyes," says Ivan Ivanchenko, the global head of investment strategy for VTB, a banking behemoth owned mostly by the Russian government. "It showed us that all these gains were the doing of external factors."

In an effort to get foreign investment flowing again, modernization and innovation became the new buzzwords, and Medvedev's speeches began to focus on diversifying the economy away from oil. But the projects that the Kremlin was dreaming of -- a government search engine, nanotechnology, even a homegrown Silicon Valley -- were all extremely capital intensive (industry insiders say that the $100 million the Kremlin wanted to dump into the search engine wouldn't be nearly enough). "Russia needs a real investment boom" in order to achieve its modernization goals, Medvedev says, reflecting the new, frank tone when the Kremlin speaks to the West. But oil is still relatively cheap and the tens of billions of dollars of foreign capital that left the country in 2008 have yet to return. (In fact, foreign investment in Russia fell by over 40 percent last year alone.)

And so, for the last several months, the Kremlin has been trotting out its young liberals to speak frankly to foreigners about Russia's challenges -- the endemic corruption, the layers of bureaucracy, the government interference -- as well as its potential and its human capital. At the St. Petersburg Forum, Anatoly Chubais, the man who privatized the Soviet Union's massive holdings in the 1990s and now heads Rusnano, the state nanotechnology investment fund, exemplified the stance. "It's well known that consistency, obedience, and aptitude for long and tedious work aren't our strong points," Chubais told the Wall Street Journal. "Maybe you find those qualities in Europe, in Germany or in China, but definitely not in Russia. Instead, we have creativity -- the ability to think up and implement the most unlikely solutions in the most difficult situations. In that sense, I disagree with people who say that the Russian mentality means innovation can't work here."

At the conference, which in 2007 Putin had used to call for an alternate WTO, Medvedev and his young liberals announced a raft of changes: slashing the number of "strategic" -- i.e., crucial to Russian economic security -- companies by a factor of five. (Foreign companies have been reluctant to invest in sectors where the state is more likely to interfere. ) Finance Minister Alexei Kudrin suggested purging the bloated bureaucratic corps of 20 percent of its staff, a change he said would save the Kremlin nearly $1.2 billion annually. And, with the world financial system on firmer ground and the appetite for investment increasing, according to attendees, the foreign investors ate it up.

But while much of Medvedev's modernization agenda is still in the planning phases and tangible changes are still scant, the atmosphere has become a bit freer. Arbitration has become more fair. The Kremlin has eased up on companies like Yandex, once seen as outsiders because of their fiercely apolitical stance. "I feel a thaw," Arkady Volozh, Yandex's CEO, told me. "They are finally proud of us."

"Maybe I'm breathing the same pixie dust, but there's real momentum for this," says Esther Dyson, a longtime tech investor in Russia, and one-time member of the Skolkovo advisory board. She was present at some of the events in Silicon Valley and was struck by Medvedev's level of engagement and bonhomie. "He is so sensible, he understands the issues," she said. "He's responsive, thoughtful, not at all bombastic. He gets the culture. You could stick him in a cubicle at Google, and no one would notice. But the issues persist, so the question is, can his mentality be expanded to everyone?"

And the issues are plentiful. There are no longer direct flights from Moscow to San Francsico, making cross-pollination difficult. The strict visa requirements that United States and Russia impose on each other's travelers don't help either. There is still rampant corruption, lack of transparency in both government and business, and the specter of businessmen ruined by the state, like jailed oil tycoon Mikhail Khodorkovsky and Evgeny Chichvarkin, the self-made cell phone king now hiding out in London whose mother was found beaten to death in Moscow on Easter morning.

There is also the question of whether a thriving sector based on human creativity can exist without an open political system, and whether Medvedev's enthusiasm and competence can translate into real and effective decisions. He is, after all, still part of a diumvirate. "Medvedev is perfect for this [Silicon Valley] audience; Putin's perfect for the old audience," Dyson says. "But when the decisions are made, who makes them?" (Unfortunately for the Silicon Valley hopeful, most everyone is sure that, while  decisions are made together, Putin still has final say.) 

And can something like Silicon Valley and an innovation-based economy be copied, imported, and implemented from the top? Russians are deeply skeptical, seeing this as yet another boondoggle for the Kremlin elite. The Western and Russian press are no more optimistic about what is, in essence, a government campaign to change the worldview of its citizens.

"I think you'll find a lot of skepticism because in Russia, every time they've taken on a project of this size, they've fucked it up," says Ivanchenko, the banker, who got his MBA in London. "So often, it ended up with people just stealing dough, so there is little faith in this."

But, he adds, that doesn't mean that all hope is lost. "They've posed the right questions, found good people, they're moving in the right direction," Ivanchenko says. "Without a doubt, we will still have lots of Potemkin villages. We don't know how do things efficiently in Russia, but maybe we'll get some of it right. Peter the Great was a despot, and building St. Petersburg was a highly inefficient project. It was built on a swamp, on bones and blood. But it still became a global cultural capital. Even if Skolkovo is imperfect, even if we just learn how to build low quality cars for own citizens, or learn to produce substitute imports, that's also modernization. It's still moving the country forward."

There is still a lot of defiant talk of Kremlin-led modernization as well as strident skepticism for much of the population, but more muted -- and more informed -- voices are starting to emerge, reminding the public that even with waste, graft, and inefficiency, the end result, however far from its quixotic goals, even if it is yet another incarnation of the old Russian archetype of reform-oriented and mild autocracy,  it might still be a better alternative to the present.

In Callifornia, the doubts, if there were any, were kept far from the public cheeriness. Everyone was just too happy to have a friendly Russian president in town, a president who seemed as into their techie lifestyle as they were. When he bid Schwarzenegger a good night, Medvedev did so with the man's own lines. "I'll be back," Medvedev laughed. "Hasta la vista." He winked. "Baby," he added. "Hasta la vista," the governor replied, and promptly tweeted it.



Law and Order: Oligarch Unit

The Mikhail Khodorkovsky trial gets even more absurd.

The Russian judicial system isn't generally thought of as a venue for humor, but the laughs emanating lately from the small courtroom on the banks of the Moscow River where former Yukos CEO Mikhail Khodorkovsky is being tried would make any standup comedian envious. They erupt from the gallery, as if on cue, each time the state prosecutor, Valery Lakhtin, opens his mouth. Even if he weren't facing the intimidating task of prosecuting the country's most famous fallen oligarch, the gangly, intellect-challenged bureaucrat representing the Russian state would have a tough time. He appears to lack an understanding of the simplest economic principles -- not to mention legal arguments. Challenging an objection from the defense this week, he countered with the unimpeachable point: "Prosecutors can't lie!"

The past week, however, after 16 interminable months of Khodorkovsky's latest trial, on charges of embezzlement and money laundering, saw some interesting developments. For the first time since the fallen mogul was arrested in 2003, top Russian officials have taken the witness stand. Even more striking is that their testimonies have supported Khodorkovsky's defense. The question on everyone's lips, then, is whether this is a sign that the Kremlin is softening its stance, or simply a new twist to Russia's most infamous show trial.

Khodorkovsky, one of modern Russia's original robber barons and the former head of Yukos, is nearing the end of an eight-year sentence on charges of fraud and tax evasion. Prior to his imprisonment, he was one of the wealthiest men in the world and a persistent thorn in the Kremlin's side, doling out tens of millions of dollars to opposition parties and pro-democracy organizations. In October 2003, however, he finally pushed then-President Vladimir Putin too far and was summarily arrested. Ever since, he has kept up a constant stream of criticism from his jail cell, corresponding with foreign and Russian journalists via smuggled letters. He is due to be released in October 2011 -- just five months before Russia's next presidential election. That might be a bit awkward, so he's now facing a further 22 years in a Siberian prison, accused of ordering the siphoning off of 350 million tons of oil and laundering nearly $25 billion in proceeds from 1998 to 2003.

Khodorkovsky, who maintains a six-person defense team but questions witnesses himself, frequently reminds the court that evading taxes (the first charge) on embezzled oil (the second) is not only illogical but impossible. The judge, like clockwork, strikes every such statement from the record.

On June 21, however, Khodorkovsky finally won a key argument when German Gref, the state-appointed head of Sberbank, Russia's largest bank, and long-serving economy minister during Putin's presidency, took the witness stand. Gref, associated with the "liberal" clan of the Russian elite that also produced current President Dmitry Medvedev, appeared at ease, tan, and calm, as he faced questions from Khodorkovsky.

But after three hours of technical back and forth on oil-pricing mechanisms, tax policy, and the relationship between subsidiary firms, Gref admitted that the evidence against Khodorkovsky was weak. "If such embezzlement had been discovered, I would have been made aware of it," he said.

The following day, Trade Minister Viktor Khristenko, whose portfolio included energy under Putin's presidency, was called before the court. He, too, conceded a critical point during his questioning. "The physical theft of oil from the system is possible," said Khristenko, "but I'm not aware of the theft of a million, or millions of, tons."

The very fact that high-ranking Russian officials were even allowed to appear is striking. The court has long denied Khodorkovsky the right to question the officials who witnessed or took part in his downfall. The court has refused repeated defense requests to call Putin, now the prime minister, as well as Igor Sechin, his deputy, whom Khodorkovsky has accused of orchestrating the campaign against him. (Rosneft, the state-owned oil company that Sechin chairs, emerged the big winner from Yukos's downfall, taking over its production assets at knockdown prices after the company was forced into bankruptcy.) Alexei Kudrin, Russia's powerful finance minister, has also refused to appear.

Putin's spokesman, Dmitry Peskov, denied any orchestrated effort to keep government officials from testifying. "When you are called to court, you have to go as a citizen," he said. Yet few think that Gref and Khristenko would have agreed to take the stand without checking with the Kremlin first. These unusual admissions -- from the two men directly involved in government oversight of Yukos's activities -- should bode well for the defense. In a U.S. court, the prosecution might well concede. But this is Russia.

"Nobody believes that this trial is about a fair competition between the prosecution and the defense," Masha Lipman, an analyst at the Carnegie Moscow Center, said in an interview. "This is a political trial and the decision has got to be political."

With elections just over the horizon, the sooner this decision comes, the better. Medvedev and Putin have both said they have yet to decide who will run for president in 2012, and members of Russia's siloviki clan -- those with security services backgrounds who favor strong state involvement -- are said to be nervous about the country's newfound liberal streak.

An April study by the Levada Center, an independent Russian pollster, found that despite zero coverage on state-run television, 44 percent of Russians were aware of Khodorkovsky's trial -- up from 33 percent one year before. Khodorkovsky, who amassed enormous wealth during Russia's shady post-Soviet privatizations, is not loved in Russia. But neither is Russia's politicized justice system, which Medvedev has vowed to reform.

"[The state] has painted itself into a corner," Lipman said. "Either they have to end this farcical trial with a complete travesty of justice and sentence him to a crime that seems totally absurd, or make a decision and let him walk. This is a difficult decision to make, but the time of reckoning is getting closer."

For now, the former tycoon's supporters are cautiously optimistic. In what will be taken as another encouraging sign, prosecutors on June 24 dropped a separate case against Vassily Aleksanyan, a former Yukos vice president and close Khodorkovsky ally who was detained three years ago on charges of money laundering and embezzlement. Sick with cancer and AIDS, he was released on $1.7 million bail in January last year, following an outcry from rights activists. Still, imagining a free Khodorkovsky -- a man for whom Putin is widely thought to harbor a personal hatred -- seems impossible.

Inside the trial, the absurdity continues, as it has nearly every day for the past 16 months. On June 22, it ended with Lakhtin, the prosecutor, screaming like a petulant child: "Khodorkovsky is bothering me as usual! He's not letting me ask any questions!"

Khodorkovsky responded with a rare show of anger, growling that the prosecutor was "directly lying." The judge rolled his eyes. Khristenko, the trade minister, stared at the ceiling, in seeming disbelief at what he had gotten himself into.