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. Last Updated: 07/27/2016

Lawyer Says Arbat Target of Raiders

MTCustomers browsing shelves of perfume at an Arbat Prestige store on Prospekt Mira on Wednesday afternoon.
Just a few months ago, the Arbat Prestige store on Prospekt Mira was so jammed on Friday evenings that women had to wait 20 minutes in line to make a purchase. But on a recent visit, Yekaterina Pavlova was stunned by the barren shelves and the lack of customers.

"It is striking to see so few people in this store," said Pavlova, 28, a manager who spends $500 per month on cosmetics.

Indeed, only half the store was open to customers, while the rest was fenced off with advertising billboards because "there are not enough goods to put on the shelves," said Maria, a store employee who declined to give her last name.

Things could soon get worse for the embattled retailer.

Arbat Prestige -- one of Russia's oldest and largest cosmetics chains -- could shut down for good in the next few weeks, said company insiders and the lawyer of its jailed owner.

The company's dark times began in January when Vladimir Nekrasov, its owner and general director, was arrested on suspicion of large-scale tax evasion.

Those accusations are absurd, say experts, Nekrasov's lawyer and sources at the company. Instead, they believe that obscure corporate raiders, working with the help of corrupt officials, orchestrated Nekrasov's arrest to seize Arbat Prestige's assets, including half a billion dollars worth of prime Moscow real estate.

"This is an ordinary raiders' seizure," Alexander Dobrovinsky, Nekrasov's lawyer, said in an interview.

According to Dobrovinsky, the legal attack on Nekrasov is an unusually high-profile case of "raiding," a phenomenon that some experts describe as the worst problem afflicting the Russian economy.

In the West, corporate raids are run-of-the-mill affairs: A stronger company legally takes over a weaker one, and the issue is usually one of price paid, not pressure exerted. Not so in Russia, where raiders use their links to corrupt officials to illegally seize businesses, often with the aim of acquiring real estate.

In the case of Arbat Prestige, the alleged raid could lead to the demise of a popular retailer that had recently been considering an IPO.

If Nekrasov is not freed in the near future, the company will only survive a few more weeks, Dobrovinsky said. Two other company insiders agreed that the chain was on the verge of closure, speaking on condition of anonymity because they were not authorized to talk to the media.

The Arbat Prestige press service declined to comment for this report.

"Arbat Prestige has always been a one-man show, and Nekrasov's arrest was like decapitating the company," Dobrovinsky said. "How the company is continuing to exist is a kind of mystery. If the situation doesn't change soon, Arbat Prestige can survive for a few more weeks."

Nekrasov was arrested along with Semyon Mogilevich, a suspected organized crime boss wanted by the U.S. Federal Bureau of Investigation. Nekrasov is accused of evading taxes totaling 50 million rubles ($2 million) from 2005 to 2006, while Mogilevich, also known as Semyon Shnaider, allegedly masterminded a strategy for him to avoid taxes.

Dobrovinsky believes that Mogilevich was arrested in a "well-calculated move" designed to distract media attention from Nekrasov's arrest.

"This is typical of a raider attack," the lawyer said. "Mogilevich is a well-known and odious person, and he would have attracted the media's attention. When the police said they had arrested Mogilevich, everyone forgot about Nekrasov."

Dobrovinsky said those who ordered the raid knew that Nekrasov and Mogilevich were friends because they had tapped Nekrasov's telephone for one year.

Some Russian media outlets have reported that Mogilevich is a co-owner of Arbat Prestige, but Dobrovinsky said Nekrasov owns 100 percent of the company.

Last year, the Troika Dialog investment bank sold its 40 percent stake in the company to Nekrasov for $400 million, putting its value at around $1 billion.

A few weeks after Nekrasov's arrest, Dobrovinsky said, a man came to him with an offer: All the accusations against Nekrasov would be dropped and the businessman would be freed the next day if he agreed to sell Arbat Prestige for $3 million -- a tiny fraction of the company's valuation.

"I asked Nekrasov, and he, of course, refused the offer," Dobrovinsky said.

About half the company's value is in real estate, including some stores in prime locations in central Moscow, and this is what the raiders are seeking, Dobrovinsky said. "What else would they want?" he asked.

The cosmetic chain's turnover last year was $472 million, up from $346 million in 2006, according to the company's web site.

Arbat Prestige has 64 stores in Russia -- 21 on real estate owned by the company, and the rest in rented spaces -- located in Moscow, the Moscow region, St. Petersburg, Kazan and Voronezh. There are also 28 stores in Ukraine.

Arbat Prestige owner Vladimir Nekrasov seen in his office in March 2007.
Dobrovinsky said he did not know the identity of the man who approached him with the $3 million offer. He also said he had no idea who the raiders were, although he said they were people "with good links to highly placed officials."

Experts say thousands of businesses are taken over in illegal raids every year. The number has increased in recent years to become "the main problem afflicting the country's economy," Igor Bunin, head of the Center for Political Technologies, said last week at a news conference devoted to the problem.

Raiding is an even bigger problem than inflation because it undermines the concept of private property, Bunin said.

According to experts, raiders often include former intelligence officials, policemen, lawyers and people with ties to well-placed officials. On their payroll are judges, prosecutors and bureaucrats at all levels. Through them, the raiders can order the arrest of a businessman or the search of a business; they can gather information about a business owner and falsify documents in order to take over the business.

There are no exact figures for how many raider attacks occur annually. State Duma Deputy Gennady Gudkov, who headed a working group that tracked the issue in the previous Duma, said it had registered about 1,000 cases per year in Moscow and a similar number in the Moscow region. But the real figure is probably four to five times higher, he said. Expert, a respected weekly business magazine, has put the nationwide figure at around 70,000 raids annually.

"Accusations of tax evasion -- sometimes absurd ones, like in the case of Arbat Prestige -- are now among the instruments that raiders use," Bunin said.

A spokeswoman for the Prosecutor General's Office refused to comment about Arbat Prestige on Wednesday, referring questions to the Investigative Committee. A committee spokesman asked for questions to be sent in writing. A faxed request for comment had not been answered as of press time.

Investigators say three fictitious supplier companies that delivered products to Arbat Prestige did not pay their taxes and that Nekrasov's relationship with these companies was conspiracy to commit tax evasion.

Dobrovinsky called the accusations "ridiculous," saying Arbat Prestige dealt with more than 300 suppliers and could not check whether each one paid its taxes or not.

At a news conference last week, Tatyana Petunova, the former owner of Original, one of the companies that allegedly did not exist, denied that her company was fictitious and said she had provided authorities with proof of her tax payments.

Dobrovinsky said his client has not even been questioned since his arrest in January. "He doesn't understand what's happening to him," the lawyer said. "Everyone seems to be waiting for something."

Raiders often jail people and accuse them of serious crimes to scare them into signing over their property, said a former security services officer familiar with the situation.

"Raiders usually order the arrest of someone, and this person is kept in jail until he is frightened and stressed out," said the officer, who spoke anonymously for fear of reprisals. "Then he is ready to sign whatever document they want."

One businessman, who was arrested two years ago and forced into an isolation cell, said he was released only after he signed a contract transferring ownership of his company's office to the raiders.

"I felt so depressed in that cell that I was ready to sign anything they wanted only to be free again," he said, asking that his name not be published because he feared reprisals.

"It is terrible because you feel that the people against you are so powerful that you cannot do anything to fight back," he added.

While people are in jail, their businesses go to rack and ruin. The raiders are typically not interested in the business itself, only in real estate that can be easily sold and turned into cash, the former security services officer said.

Arbat Prestige's accounts are frozen since they are all in Nekrasov's name, and the company's bills cannot be paid without his signature.

Dobrovinsky said Nekrasov wanted to give him power of attorney, but the documents they prepared for that "are stuck somewhere" and cannot be obtained. As a result, Nekrasov cannot pay back the tax claims the authorities want. Nor can he pay the company's regular taxes or manage its accounts.

Last week, Nekrasov appointed Roman Khomenko, a former Yukos executive, as the new CEO of Arbat Prestige, but Dobrovinsky said he has limited powers because he has no access to the company's accounts.

Since Nekrasov's arrest, Arbat Prestige has been facing shortages because many suppliers have cut off deliveries for fear that the company will be unable to pay, a company source said.

Moreover, suppliers are now demanding that the company pay up front, whereas before Arbat Prestige could pay them after all the goods had been sold. "We have fewer and fewer brands everyday," said the source, who asked not to be named because he was not authorized to talk to the media.

Citing an unnamed company source, Kommersant reported earlier this month that the number of brands sold at Arbat Prestige had dropped from 100 to 37 since Nekrasov's arrest.

To save the company, Khomenko is considering selling off all of its Ukrainian stores and some of its Russian stores, he told Kommersant on Wednesday.

Arbat Prestige has also registered its first drop in revenue. In March 2008, its revenue was $29 million, or 32.7 percent less than in March 2007, according to the company's web site. March is usually one of the busiest months for cosmetic retailers in Russia, as people buy presents to celebrate International Women's Day on March 8.

At the Prospekt Mira store last Friday, many of the shelves featured candles and other knickknacks instead of cosmetics. Pavlova, the manager, called it "a failed attempt" to cover up the shortage of goods.

"There is almost nothing to buy," she said.