You’re hearing a lot now about Trump’s building project in Moscow back in 2016. I doubt we’ll ever get the full details of the project, but the financial situation in Russia turns this type of thing into a snare for big-time foreign investors. The Kremlin abides by a very simple rule on this count: “Make it easy to invest in Russia and impossible to get the money out.”
What’s it like in the Russian real-estate business? Let’s say Trump decided to build a skyscraper full of upscale housing in Moscow City, the new business area of town. For that purpose, he’d need to get dozens of signed authorizations: from Moscow’s local government, from the federal government, and from all the countless state ministries and departments. To get the necessary authorizations and compliance documentation might have taken several years. Aside from the direct costs of preparing the construction and engineering documents, he’d have to pay bribes proportional to the project cost, no less than 15-25%. In this case, a bribe of$500-700 million. It’s important to remember that these bribes are paid to hundreds of different officials. Even if you managed to strike a deal with the boss of the Kremlin, you’d still have to pay off dozens of other people. That’s how the system works. Everyone’s taking bribes and nobody cares about the end result.
Let’s say Trump managed to strike a deal with everyone. He got approval for construction and a lease on the ground for a period of one or two hundred years. He put the authorization documents through the most exhaustive legal analysis possible. Now he can begin construction. He’s already put in a few billion in direct expenses. What happens next? Next comes the interesting part. Halfway through construction, when Trump’s expenses are already adding up to a several billion dollars, it turns out the long-term land lease is invalid and the land belongs to somebody else. How is that? It seems that one of the documents was filled out incorrectly. Or that the land always belonged to a different owner than the one who signed the lease, and now everything that was built there belongs to him. Now you’ve got to make a deal with that owner. How much will that cost? A few billion dollars more.
Have there been stories like this in Moscow before? You bet there have. Just such a thing happened with Mercedes’ Moscow headquarters. The Germans ended up paying for it twice. So Trump really lucked out that the deal fell through early on. It’s possible he was thinking the whole thing out differently. Trump could have simply sold the right to use his name for a bit of cash and not touched the real-estate project at all. With his experience, that would be the smarter way to go.
(The following is an excerpt from the upcoming book How Business Is Done in Russia: Secrets of a Russian-American Executive.)
The Backward Side of Laws
The practice of how laws are applied in Russia shows that, if authorities find it necessary, the law can carry retroactive force. If authorities want to take away a successful business that was doing right by current law, they change the law. They bring in demands that hadn’t been there before, and apply them to events of the past. In such cases, the business has violated laws that did not exist at the time. That’s how they can destroy any business, as, for example, they destroyed the oil company Yukos in 2003. Everything depends on the strength and authority of the person who needs it done.
Retroactive force of law is a major cash cow in the able hands of Russian bureaucrats. Proving the illegality of some action that was entirely legal in the past doesn’t even require a change of law. It is enough to declare the violation of some completely unknown intra-departmental instruction or document. For example, an office center or shopping complex is built on a plot of land. Enormous money has been spent. The plot had been bought or rented out for decades prior to construction. The paperwork has been put together in complete accordance with existing law.
How can you overturn all of that? Very simply. You state that the permits for sale or rent were illegal. Why? Because the bureaucrat who signed and agreed to them had overstepped their powers. Perhaps they were signed by a deputy minister who didn’t have the right to sign such documents. Or he had the right, but at that moment his mandate to sign such documents had expired. Or something else, equally meaningless, but indisputable and impossible to disprove.
Case Study: “A Plot of Land in Moscow”
The German company Mercedes had decided to build its office and service center in downtown Moscow. It had looked exhaustively for the right plot of land for the building and confirmed all the documents permitting construction. Permission for a long-term lease of 100 years was granted by the mayor of Moscow and by the Minister of Defense, whose department owned the land. The documents went through exhaustive legal scrutiny in both Germany and Russia.
The construction documents went through the necessary checks and scrutiny, and the company obtained dozens of permits. The cost of construction added up to more than a hundred million dollars.
After that, once half of the building had been constructed, it became clear that allowing construction on the plot had not been legal. One of the bureaucrats at the Ministry of Defense who had given permission to rent the land had exceeded his authority. He had been denied the right to sign permitting documents several years after he had signed them.
In court, the bureaucrat declared that he had acted in good faith and did not know he lacked the right to make such decisions. The judge determined that the building’s construction was illegal. Everything that had been built must belong to the plot’s previous owner.
Naturally, the question of leasing that plot of land was determined outside the courthouse. The sides found common ground and a mutually advantageous method of resolving the dispute. The sum paid in compensation is unknown, but it undoubtedly added up to a significant amount.
Coincidentally or not, a few years later, Mercedes found itself enmeshed in a very loud scandal linked to the payment of bribes in Russia. The German company had been selling its cars to government agencies and had paid bribes in the millions for the contracts. The scandal ensnared government bureaucrats at the highest levels of power.